In an action arising out of the proposed merger between Atheros Communications Inc. and Qualcomm Incorporated, the Court of Chancery preliminarily enjoined Atheros and its board from conducting a stockholder meeting or stockholder vote on the proposed merger which was scheduled for March 7, 2011. In Re Atheros Communications Inc. Shareholder Litigation, Consol., C.A. No. 6124-VCN (March 4, 2011). Read opinion here. Under the agreement and plan of merger governing the transaction, Qualcomm proposed to acquire Atheros for $45 per share in a $3.1 billion all-cash transaction. The Court noted that the preliminary injunction, upon application, may be lifted after there was the appropriate distribution of “curative” disclosures.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP
In 2005, Atheros and Qualcomm formed a strategic partnership and in March 2010, the possibility of a merger was raised. At the August 17, 2010 board meeting, the Atheros board was informed about the discussions between Atheros and Qualcomm. In September, 2010, Atheros’s Board selected Qatalyst Partners LP as its financial advisor to assist with the Qualcomm acquisition talks. The engagement letter, which was approved and signed on December 28, 2010, provided that Qatalyst would be paid a flat fee, of which approximately 98% is contingent upon the closing of the transaction.
Atheros and Qualcomm entered into negotiations. Atheros rejected Qualcomm’s initial offer as inadequate but the board continued to discuss a transaction with Qualcomm. It also started to look at other potential acquirers and three companies were identified as potential candidates. Qualcomm increased its offer and asked for exclusivity but the Atheros board did not agree to the exclusivity. The Atheros board then met with one of the potential candidates to provide information and to inform them that Atheros was “imminently entering into an exclusivity agreement.” No offer materialized from that entity, and after determining that there was a significant risk that Qualcomm might abandon any transaction if it did not get an exclusivity agreement, the board unanimously authorized the company to enter into such an agreement. On January 4, 2011, the board met to consider the Merger Agreement and Qatalyst’s opinion that $45 per share was a fair price to the Atheros shareholders. The board unanimously approved the Merger Agreement, which was executed on January 5, 2011.
Plaintiffs filed suit seeking to preliminarily enjoin the shareholder vote and require the board to address the disclosure deficiencies. Plaintiffs argued that the board breached its fiduciary duties by implementing an inadequate sales process and with a Proxy Statement containing material omissions.
Court Finds No Probability of Success on Price and Process Claims
The Court noted that under Revlon and its progeny, when a board decides to explore a sale that involved a change of control, the board is obligated to secure the best value reasonably attainable for its shareholders. The Court is required to: “‘(i) make a determination as to whether the information relied upon in the decision-making process was adequate; and (2) examine the reasonableness of the directors’ decision viewed from the point in time during which the directors acted.’” The Court noted that the board “in assessing directors’ conduct, there is no single sale-process blueprint to follow, and the question to be answered by the Court ‘in a sales context is whether the directors made a reasonable decision, not a perfect decision.’”
The Plaintiffs argued that that the $45 per share offered by Qualcomm represented an unfair price resulting from an unreasonable process. They also contended that the purportedly unreasonable process caused excessive benefits to accrue to the Company’s management as a result of the Transaction. The Court, however, in disagreeing with the plaintiffs, noted:
[H]ere, the record indicates no basis to question the Board’s good-faith desire to maximize shareholder value. Of the Board’s eight directors, seven are disinterested and independent, and their motivation to act in the best interests of the Company and its shareholders is unchallenged…the Board took an active role at an early point in the lengthy sales process. During that period, the Board met twelve times to discuss with management the state of ongoing discussions with Qualcomm. At those meetings, the Board provided guidance for management to follow in responding to Qualcomm’s overtures. Moreover, at many of those meetings, the Board had discussions with its financial advisor, Qatalyst, and the Company’s outside legal counsel. As a result, it deliberated on the Company’s strategic alternatives throughout the process, including the potential for other suitors to offer a higher price for Atheros, and it demonstrated its willingness to discuss a sale with other serious acquirors. Ultimately, that robust process resulted in extensive negotiations with Qualcomm and netted a significantly higher offer for the Atheros shareholders – Qualcomm originally proposed $40 per share in November 2010, Atheros countered soon thereafter at $50 per share, and the parties eventually agreed on $45 per share.
The Court also noted that “[a]s for the specific circumstances surrounding the exclusivity agreement with Qualcomm and the discussions with Company A, the Plaintiffs are unlikely to prove that the Board acted unreasonably in preserving the increased offer from Qualcomm – which was merely a non-binding proposal at that time and the only offer then available – that had resulted from a careful negotiation process. There is no suggestion in the record that the Board was biased against Company A or that it was trying to short-circuit discussions with other potential bidders.” In short, the Court found that “there is nothing in the record to indicate that the Board acted unreasonably. It was an independent board with deep knowledge of the Company’s industry and it employed a robust and sophisticated process. As a result, the Court will not second-guess the Board’s conduct, and the Plaintiffs have failed to demonstrate any reasonable probability of success on the merits of their price and process claims.”
Court Finds Reasonable Probability of Success on Disclosure Claims
The Court did find that there were deficiencies in the disclosures in the proxy statement:
The Proxy Statement informed Atheros’s shareholders that Qatalyst would ‘be paid a customary fee, a portion of which is payable in connection with the rendering of its opinion and a substantial portion of which will be paid upon completion of the Merger.’ Not disclosed in the Proxy Statement is the amount of compensation that Qatalyst will receive. Perhaps more importantly, also not disclosed in the Proxy Statement is a quantification of the amount of the fee that is contingent: approximately ninety-eight percent. The ‘portion’ of the fee that will be paid regardless of whether the Transaction closes is roughly only two percent. Thus, the compensation that Qatalyst will receive if the Transaction closes is nearly fifty times the fee that it would receive if there is no closing.
[i]t is clear that an approximately 50:1 contingency ratio requires disclosure to generate an informed judgment by the shareholders as they determine whether to rely upon the fairness opinion in making their decision to vote for or against the Transaction. Given the late agreement between Atheros and Qatalyst as to financial advisor compensation, coupled with the contingent fee concerns set forth above, the stockholders should be afforded an opportunity to understand fully the nature and means by which Atheros will compensate Qatalyst. Thus, that would include the amount of the fee as well.
The Plaintiffs also argued that the disclosures regarding the financial projections performed by Qatalyst when it prepared its fairness opinion and that the Proxy Statement inaccurately states the discount rate Qatalyst used in its calculations. The Court rejected that argument finding that the plaintiffs’ “quibbles with a financial advisor’s work simply cannot be the basis for a disclosure claim.”
The Plaintiffs next argue that the Proxy Statement inaccurately describes the negotiations over the compensation the CEO would receive when he joined Qualcomm after consummation of the Transaction [and] that the Proxy Statement contains a materially misleading assertion that before December 14, 2010, “[the CEO] had not had any discussions with Qualcomm regarding the terms of his potential employment by Qualcomm.” The Plaintiffs observe that the Proxy Statement does not disclose that the CEO knew – at some point before that date – that he would be employed by Qualcomm after closing, and they argue that emails exchanged between Mollenkopf and the CEO in the middle of November 2010 concerning the “treatment of employee stock options and other related equity awards,” indicate that terms of the CEO’s future position with Qualcomm were discussed before December 14, 2010.”
The Court found that the language of the Proxy Statement regarding the date on which the terms of the CEO’s potential employment with Qualcomm were first discussed “is perhaps ambiguous enough to support Defendants’ reading” and that the Proxy Statement contained “robust disclosures regarding the terms of the CEO’s post-closing employment that dispel any notion that the CEO had no expectations when the Merger Agreement was finalized regarding how he would be treated by Qualcomm.” However, there was evidence in the record that “as of a date earlier than December 14, 2010, the CEO had overwhelming reason to believe he would be employed by Qualcomm after the Transaction closed. Because the Proxy Statement partially addresses the process by which the CEO negotiated his future employment with Qualcomm, the Board must provide a full and fair characterization of that process.”
Finally, the Court rejected the plaintiffs’ contention “that the Proxy Statement should have disclosed the specific prices that Atheros and Qualcomm proposed as they negotiated the Transaction.” The Court noted that “Delaware law does not require Atheros to ‘give its shareholders a play-by-play description of merger negotiations.’”
The Court found that the Proxy Statement failed “to provide the required disclosures regarding the contingent fee arrangement by which Qatalyst will be compensated, and this, if not remedied, would constitute irreparable harm to Atheros’s shareholders’ right to an informed vote on the Transaction.” In addition, the Court found an “omission of the fact that [the CEO] knew, as of a date earlier than December 14, 2010, that he would be employed by Qualcomm after closing is material in light of the Proxy Statement’s disclosure of the date on which negotiation of the terms of employment began. A failure to remedy that omission would also cause irreparable harm to the shareholders.”
Balancing of the Equities
In deciding whether to grant a preliminary injunction, the Court had to balance the equities between (a) ordering the required disclosures in order to ensure that Atheros’s shareholders have the opportunity to vote in an informed manner and (b) the risks to the Defendants or the shareholders that delaying the shareholder vote may present. The Court found that:
[i]n light of the paramount importance of enabling the shareholders to make fully informed decisions regarding the Transaction and the comparatively low risk that the eventual completion of the Transaction would be threatened by a short delay of the shareholder vote, the equities favor enjoining the shareholder vote until the disclosures necessary to remedy the deficiencies in the Proxy Statement can be made. On the other hand, any extended delay, as would be necessary if Atheros were to be required to restart the sales process, for example, could potentially put the Transaction at some risk (e.g., that Qualcomm would walk away from the deal, thus denying shareholders the premium provided in the offer price) without providing any assurance that another suitor would emerge to offer shareholders a better deal than they will receive under the Transaction. Accordingly, the equities do not weigh in favor of such an extended delay of the shareholder vote.