The following discussion of the Delaware Court of Chancery’s decision to grant plaintiffs’ motion to expedite discovery proceedings in In re Ness Technologies, Inc. Shareholders Litigation was sent in by Alston & Bird Partner and Practice Center Contributor, Kevin Miller.
In an August 3, 2011 letter ruling in In re Ness Technologies, Inc. Shareholders Litigation, VC Noble granted plaintiffs’ motion to expedite discovery proceedings regarding whether the financial advisors to the Board or the Special Committee of the Board of Ness Technologies were conflicted because of relationships with Citi Venture Capital International (CVCI), Ness Technologies’ largest shareholder and the parent of the entities proposing to acquire Ness. According to the preliminary proxy statement, CVCI owned approximately 12% of Ness and had one director on Ness’s Board.
On first blush, this letter ruling appears to encourage plaintiffs to make claims of financial advisor conflicts solely on the basis of relatively standard and customary proxy disclosure intended to put shareholders on notice of existing relationships.
However, in granting plaintiffs’ request for expedited proceedings, VC Noble carefully circumscribed the relief granted “only to the extent that [plaintiffs] may take expedited, but necessarily limited and focused, discovery regarding the question of whether either the Board’s or the Special Committee’s financial advisors were conflicted because of their relationships with CVCI.”
Furthermore, VC Noble found that the plaintiffs’ other claims relating to price, process and disclosure (including the disclosure of projections and additional detail regarding the financial advisors’ financial analyses) were not colorable and denied the plaintiffs’ motion for expedited proceedings in all other respects.
Overall, the Ness Technologies ruling may ultimately be viewed favorably from the perspective of corporate defendants and their financial advisors seeking to avoid the burden and expense of plaintiffs’ fishing expeditions.
In July 2010, CVCI made an unsolicited proposal to acquire Ness for between $5.50 and $5.75 per share in cash. Following an eleven month sales process involving thirty potential bidders that resulted in a sale price that was $2.00 per share higher than the price initially proposed by CVCI and $0.65 per share higher than any other bidder was willing to pay, Ness Technologies entered into a merger agreement with CVCI pursuant to which each outstanding share of Ness Technologies common stock would be converted into the right to receive $7.75 in cash.
Plaintiffs filed a motion to enjoin the proposed merger alleging various breaches of fiduciary duty by the Ness Board (i.e., that the agreed merger consideration was unfair and the result of a flawed sales process) and that the proxy disclosure regarding the proposed transaction was inadequate.
The Court began its discussion by noting that the burden on plaintiffs seeking expedited discovery in connection with an application for a preliminary injunction is not high and that courts regularly and normally grant such requests.
“Exceptions to that norm are rare.” Although the burden is not high, a plaintiff seeking expedition must have “articulated a sufficiently colorable claim and shown a sufficient possibility of a threatened irreparable injury, as would justify imposing on defendants and the public the extra (and sometimes substantial) costs of an expedited preliminary injunction proceeding.”[citations omitted]
Relying on Plaintiffs’ complaint and the preliminary proxy materials filed by Ness with the SEC and incorporated by reference in the complaint for purposes of addressing Plaintiffs’ motion, the Court found:
The Price and Process Claims
“There is little in the Plaintiffs’ allegations to suggest that either the price of, or the process leading up to, the Proposed Transaction were unfair to Ness’s shareholders. Only in one instance have the Plaintiffs possibly stated a colorable claim. The Complaint alleges ‘potential conflicts of interest that would impair the financial advisors’ ability to render an impartial fairness opinion on the $7.75 per share consideration to be received by Ness shareholders.’ Further, the Plaintiffs have worried that ‘Jefferies did not have the interest of the shareholders as its primary interest in performing its duties for the Special Committee.’ The bases for these allegations are that the Preliminary Proxy discloses that:
Jefferies [the Special Committee’s financial advisor] in the past provided financial advisory and financing services to certain affiliates of CVCI and continues to do so and received, and may receive, fees for the rendering of such services, including, during the two-year period prior to the date of Jefferies’ opinion, acting as a financial advisor to an affiliate of CVCI in connection with a sale transaction.
[Bank of America Merrill Lynch][the Board’s financial advisor] and [its] affiliates have in the past provided, currently are providing, and in the future may provide investment banking, commercial banking and other financial services to Citigroup, Inc. . . . and certain of its affiliate and affiliates of [CVCI] . . . , and have received or in the future may receive compensation for rendering these services . . .
These disclosures do not indicate how much business the financial advisors have done, are doing, or might expect to do in the future with CVCI or its affiliates; if the amount of business involved would be material to either of the advisors, the Plaintiffs might have a colorable claim. . . . the Court grants the Plaintiffs the right to engage in expedited to [sic] discovery to answer the narrow question of whether Special Committee’s or the Board’s financial advisor’s past, present, or expected future dealings with CVCI or its affiliates created a conflict of interest for one or both of the financial advisors. The Plaintiffs’ motion is denied with respect to their other price and process claims.”
The Disclosure Claims
“The Plaintiffs’ claims regarding the financial advisors’ potential conflicts of interest may give rise to related disclosure claims. If the amount of business that one of the financial advisors has done with CVCI or its affiliates is material, then the failure to disclose fully the extent of that business could violate the duty of disclosure. By contrast, if the amount of business involved is not material to either financial advisor, then the existing disclosures would likely be adequate. The discovery necessary to pursue this potential claim, however, precisely overlaps with that needed to investigate the related price and process claim.
The Plaintiffs’ other disclosure claims, which fall into three other general categories, are not colorable. First, the Plaintiffs seek additional detail regarding management’s projections of Ness’s continued performance as a standalone entity. The Preliminary Proxy provides a fair summary of these projections; the Plaintiffs have not offered a theory as to how additional detail would be relevant to shareholders’ decisions regarding the Proposed Transaction.
Second, the Plaintiffs seek additional details regarding the financial advisors’ analyses such as the reasons why different companies were selected for each advisor’s comparable company analysis or information regarding how the advisors arrived at the multiples they used for those comparable companies. Again, the Preliminary Proxy provides shareholders with fair summaries of the financial advisors’ work, and the Plaintiffs have not shown that additional detail would be material to shareholders.
Third, the Plaintiffs seek a more detailed description of the sale process that led up to the announcement of the Proposed Transaction. The Preliminary Proxy describes, over fourteen pages, the eleven-month sale process in which the Special Committee and the Board engaged. The Plaintiffs have not indicated how additional information regarding the contacts the Board had with over thirty potential buyers, the extensive negotiations with Bidder D and CVCI, or the role Jefferies played in these negotiations would affect shareholders’ decisions regarding the Proposed transaction. ‘Shareholders are not entitled to a “play-by-play” description of merger negotiations,’ but, instead, to a fair summary of the sale process. The Plaintiffs’ allegations do not state a colorable claim that the Preliminary Proxy failed to provide such a fair summary.”
Disclosure of Material Relationships with Financial Advisors
While financial advisors and their clients need to be mindful of the Delaware Court of Chancery’s increasing focus on potential conflicts of interest, this ruling does not generally require disclosure of the aggregate fees paid to a financial advisor by the target and the acquiror for any given period of time (but see In re Art Technology (Oracle) (VC Laster 2010). In that regard, it is particularly worth noting the Court’s finding that “if the amount of business involved is not material to either financial advisor, then the existing disclosures would likely be adequate.” It is also potentially significant that, according to the Court’s ruling, materiality should be measured from the perspective of the financial advisor, not the target or the acquiror, both of which may be substantially smaller than the financial advisor.
Ultimately, once the plaintiffs have had an opportunity to conduct their expedited discovery, we can expect the Court to be asked to rule on plaintiffs’ application for a preliminary injunction and, assuming plaintiffs have not discovered that Jefferies or BAML have had or expect to have relationships with CVCI that are material to either Jefferies or BAML, defendants will argue that the current, customary disclosure regarding relationships is adequate.
Disclosure of Projections
While the letter ruling does not describe the projection disclosure deficiencies alleged by the plaintiffs, it is worth noting that the disclosed projections did not include the disclosure of projected free cash flows as some have claimed is required under Maric v. PLATO (VC Strine 2010) and others have claimed is not necessarily required under Skeen v. Jo-Ann Stores, Inc. (Del. 2000) and Steamfitters Local Union 447 v. Walter, et al. (C Chandler 2010).
Detailed Disclosure of Financial Analyses
The Ness Technologies ruling confirms that a fair summary does not necessarily include granular detail. See e.g., In re Best Lock (C Chandler 2001) and Globis v. Plumtree (VC Parsons 2007). But also see Steinhardt v. Howard-Anderson (VC Laster 2011).