In re Novell, Inc. Shareholder Litigation

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EFiled: Aug 30 2011 2:22PM EDT Transaction ID 39561087 Case No. 6032-VCN COURT OF CHANCERY OF THE STATE OF DELAWARE JOHN W. NOBLE VICE CHANCELLOR 417 S. STATE STREET DOVER, DELAWARE 19901 TELEPHONE: (302) 739-4397 FACSIMILE: (302) 739-6179 August 30, 2011 Stuart M. Grant, Esquire Grant & Eisenhofer P.A. 1201 North Market Street Wilmington, DE 19801 Re: Edward B. Micheletti, Esquire Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square Wilmington, DE 19801 In re Novell, Inc. Shareholder Litigation Consolidated C.A. No. 6032-VCN Date Submitted: June 7, 2011 Dear Counsel: to its acquisition and, in a related various lawsuits were filed by Novell shareholders challenging those transactions. The Court ordered the consolidation of the Delaware actions and appointed Lou Construction Industry and Miscellaneous Pension Fund, Oklahoma Firefighters In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 2 Pension and Retirement System, and Robert Norman as co1 - They seek $3 million in fees and $116,435.53 in expenses on the basis that the consolidated actions caused Novell to make corrective disclosures. Because the Court concludes that the Application is premature, the Court will defer ruling on the Coaward of fees and expenses until their remaining claims have been litigated. I. BACKGROUND The Co-Lead Plaintiffs have been shareholders of Novell at all relevant times. Novell, a Delaware corporation, provides information technology products and services. It entered into an agreement and plan of merger on November 21, 2010, under which it will be acquired by Attachmate through wholly Acquisition 1 The Co-Lead Plaintiffs brought claims sounding in breach of fiduciary duty for (1) failing to maximize shareholder value; (2) conducting an improper sales process; (3) providing disparate false, misleading, and incomplete disclosure materials. They also brought claims against Attachmate, CPTN, and others for aiding and abetting those breaches. In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 3 led by Francisco Partners, L.P., Golden Gate Private Equity, Inc., and Thoma Bravo, LLC. In a separate agreement, also entered into on November 21, Novell agreed to sell over limited liability company, is comprised of a consortium of technology companies organized by Microsoft Corporation . Although the closing of the Proposed Acquisition is conditioned upon the closing of the Patent Transaction, the patent sale may be consummated regardless of the status of the Novell-Attachmate transaction. In Februa Schedule 13D with the Securities and Exchange Commission indicating that it held 7.1% or 24,700,000 shares representatives tock. Elliott after requesting a meeting to dis strategies binding proposal to acquire the Company for $5.75 per share in cash. On that same day, Elliott filed an amendment to its Schedule 13D indicating that it held an In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 4 additional 1.4% economic interest (in addition to its 7.1% stake) in Novell common stock pursuant to notional principal amount derivative agreements. After several meetings during which it discussed the Elliott proposal and received advice from its legal and financial advisors, the Board announced in March 2010 that the $5.75 per share proposal was inadequate. It did, however, undertake to explore the an effort which was conducted primarily by its financial advisor, J.P. Morgan, from March 2010 until August 2010. During that exploratory period, J.P. Morgan solicited interest from over fifty strategic and financial entities. Of those contacted, more than thirty entered into a non-disclosure agreement with the Company. The Board was continuously apprised of the solicitation process. In May 2010, Attachmate and two of its primary shareholders, after receiving Board authorization, submitted a preliminary proposal to Novell. Around that same time, the Board also received eight other non-binding proposals. The Attachmate proposal was for $6.50 to $7.25 per share, while the others ranged from $5.50 to $7.50 per share. Thereafter, the Board decided to pursue further discussions with five of the entities among them Attachmate that had submitted preliminary In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 5 proposals. As a result, mem made presentations to representatives of those five entities in June 2010. Around that same time, J.P. Morgan continued to solicit interest from other potential acquirors. At the end of July 2010, Attachmate having experienced difficulty in securing financing for its proposed transaction with Novell sought the Bo approval to consider additional financial partners, including Elliott. For that reason, J.P. Morgan sought to a non-disclosure agreement, under which it and the Company agreed to a sixtyday standstill provision. After considering various proposals throughout August and September 2010, the Board granted Attachmate exclusivity until September 27, 2010, based on its revised proposal to acquire the Company (excluding some portions of the enterprise ) for $4.80 per share in cash. The Board had also entered into a separate exclusivity agreement with another entity around that same that had been excluded from Attachmate atforms . In October 2010, that entity withdrew from discussions with the Board. As a result, the Board entered into a In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 6 new exclusivity period with Attachmate through October 25, 2010, during which the parties discussed a possible acquisition of Novell as a whole. The Board also explored (1) the viability of a stand-alone entity that would include the businesses and patents that Attachmate had previously not been interested in acquiring; and (2) interest from other entities in a transaction involving those businesses and/or patents. On October 21, 2010, the Board received a non-binding letter of intent from Microsoft either to license or to acquire . Thereafter, exclusivity with Attachmate was again extended until November 1, 2010. On October 28, Attachmate submitted a revised letter of intent to acquire all On that same day, the Board also received an unsolicited, non-binding proposal from another entity to acquire all of Novell for $5.75 per share. On October 29, Microsoft submitted a revised letter of intent indicating its interest in acquiring certain patents and patent applications for $450 million. The Board, with its adviso strategic options. In particular, the Board discussed pursuing a transaction with In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 7 Attachmate for Novell as a whole, exclusive of the patents encompassed by the Microsoft offer. Management later approached personnel from Attachmate to solicit its interest in an offer of that kind and, as a result, Attachmate submitted a revised $6.10 per share in cash. It conditioned that offer, however, on a patent sale for no less than $450 million, with after tax proceeds of no less than $315 million. At a November 1st meeting Board decided to pursue continued discussions with Attachmate and Microsoft. Accordingly, during the month of November, documents and draft agreements were exchanged and negotiations continued. At a November 21st special meeting, the Board approved the Proposed Acquisition and the Patent Transaction. As a result, the agreements governing those transactions were executed that same day, and the deals were announced on the following morning. Under the terms of the Proposed Acquisition, holders of Novell common stock will receive $6.10 per share in cash. Based on equity commitment letters also executed on November 21, 2010 Elliott has agreed to provide equity financing to Attachmate for the Proposed Acquisition by contributing Novell common stock to Wizard Parent, Atta In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 8 parent entity. In exchange, Elliott, unlike other Novell shareholders, will receive a post-merger equity interest in Wizard Parent. Under the terms of the Patent Transaction, CPTN will pay $450 millio patents and patent applications. From November 23, 2010 to December 16, 2010, various purported shareholder class actions were filed in this Court challenging the Proposed Acquisition and the Patent Transaction. Novell filed its preliminary proxy statement on December 14, 2010, which was later revised on December 27, 2010. Thereafter, the Delaware actions were consolidated and the Co-Lead Plaintiffs were appointed. They filed an amended complaint on January 6, 2011, and, on that same day, the Court entered a scheduling order that set February 9, 2011 as the time for argument on the Co-Lead Plaintiffs motion for a preliminary injunction. On January 14, 2011, Novell filed its definitive proxy statement (the the Co-Lead Plaintiffs, addressed many of their disclosure claims. For that reason, after the Defendants agreed not to dispute the Cotheir request for a preliminary injunction. Subsequently, counsel for the Co-Lead In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 9 Plaintiffs identified for counsel additional purported disclosure defects based on the Definitive Proxy. On February 3, 2011, Novell issued a supplemental proxy statement , which addressed some of the Co- Lead Plaintiffs concerns. On February 17, 2 Acquisition. The Patent Sale required no shareholder vote; however, that sale cannot be consummated until its antitrust review has been completed. II. CONTENTIONS The Co-Lead Plaintiffs contend that their lawyers are entitled to a fee award because the Defendants mooted the disclosure claims asserted in this action by making two sets of disclosures specifically, those in the Definitive Proxy and the Supplemental Disclosures. Moreover, although their damages claims remain viable, an interim fee award of the sort requested is appropriate, according to the Co-Lead Plaintiffs, because the disclosures (1) achieved the benefit sought, and (2) that benefit cannot be reversed since the Novell shareholders have already voted on the Proposed Acquisition. The Co-Lead Plaintiffs further contend that the requested In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 10 benefit of putting corporate boards on notice that there is a real price to pay for flagrantly disregarding their duty of disclosure when asking shareholders to approve 2 In response, the Defendants offer various grounds as to why the Application should be denied outright or, if granted, should result in a fee award significantly less than the $3 million requested by the Co-Lead Plaintiffs. Moreover, as a threshold matter, according to the Defendants, the Application should be dismissed because interim fee awards are disfavored and the Co-Lead Plaintiffs have not offered a sufficient basis to justify deviating from that general position. Because the damages claims remain viable, the Defendants contend that the Court should not entertain the Application at this stage. 2 In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 11 III. DISCUSSION The American Rule generally requires that litigants bear the burden of paying 3 Nevertheless, Delaware recognizes certain well-established exceptions to that rule, including the corporate benefit doctrine.4 Under that doctrine, expenses to a plaintiff whose efforts result in . . . the conferring of a corporate 5 A plaintiff invoking that exception may be entitled to a fee award in instances where the lawsuit produces a substantial benefit for the corporation or its stockholders, even if no pecuniary benefit has been achieved.6 3 Goodrich v. E.F. Hutton Group, Inc., 681 A.2d 1039, 1043-44 (Del. 1996). See, e.g., id. at 1044; In re Dunkin Donuts , 1990 WL 189120, at *3 (Del. Ch. Nov. 27, 1990). 5 Tandycrafts, Inc. v. Initio Partners, 562 A.2d 1162, 1164 (Del. 1989) (citing Chrysler Corp. v. Dann, 223 A.2d 384, 386 (Del. 1966)). 6 Dover Historical Soc , Inc. v. City of Dover n, 902 A.2d 1084, 1090 (Del. 2006); see also Donuts creation a heightened level of corporate disclosure, if attributable to the filing of a meritorious suit, may Tandycrafts, Inc., 562 A.2d at 1165 (citing Chrysler Corp., 223 A.2d at 386; Allied Artists Pictures Corp. v. Baron, 413 A.2d 876, 878 (Del. 1980)). 4 In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 12 If a corporation or board of director fees may still be awarded.7 In that instance, an award may be appropriate if (1) the suit was meritorious when filed, (2) the action producing the corporate benefit was taken by the corporation before a judicial resolution, and (3) the resulting corporate benefit was causally related to the lawsuit.8 A defendant challenging a fee application in that context must demonstrate that no causal link exists between the 9 Whether to award attorneys 10 Because the Application seeks an interim fee award, the Court must first consider whether it should deny the Application as premature. This Court generally disfavors interim fee awards.11 Thus, it often denies 7 if Off v. Ross, 2009 WL 4725978, at *4 (Del. Ch. Dec. 10, 2009). United Vanguard Fund, Inc. v. TakeCare, Inc., 693 A.2d 1076, 1079 (Del. 1997) (citing Allied Artists, 413 A.2d at 878). 9 Id. at 1080. 10 Donuts, 1990 WL 189120, at *3. 11 Emerald Partners v. Berlin, 1994 WL 48993, at *1 (Del. Ch. Feb. 4, 1994); see also In re Art , C.A. No. 5955-VCL, at 3 (Del. Ch. May 16, 2011) -Vice Chancellor Hartnett that say we Kurz v. Holbrook, C.A. No. 5019-VCL, at 3 (Del. Ch. July 19, 2010) (TRANSCRIPT) (awarding interim fees, but , C.A. No. 45368 In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 13 12 the litigation ha because 13 Although exigent or other special circumstances may counsel in favor of awarding interim fees, the Court will generally only consider an application for after a lawsuit has concluded.14 The Cosupport of an interim fee award in this instance does find some support in Delaware case law; specifically, an interim fee award[] may be appropriate where the plaintiff has achieved the benefit sought by the claim that has been mooted or settled and that benefit is not subject to reversal or alteration as the remaining portion of the litigation proceed 15 They contend that curative disclosures were achieved in this instance by way of the Definitive Proxy and the Supplemental Disclosures, which mooted the disclosure claims they asserted. Even though a sufficient basis may VCS (D 12 Gans v. MDR Liquidating Corp., 1993 WL 193526, at *1 (Del. Ch. May 28, 1993). Id.; see also Ret. Sys. v. Citrix Sys., Inc., 2001 WL 1131364, at *3 (Del. Ch. Sept. 19, 2001). 14 Emulex, C.A. No. 4536-VCS (Del. Ch. Dec. 18, 2009) (ORDER). 15 Citrix Sys., 2001 WL 1131364, at *4. 13 In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 14 exist for the Court to make a determination on the Application ion to entertain [an interim fee request] 16 Accordingly, the Court may defer ruling on the Cothey have fully litigated the remaining damages claims.17 The Co-Lead Plaintiffs may be correct in their assertion that a fee award is appropriate based on the disclosures made by Novell in the Definitive Proxy and the Supplemental Disclosures. The Court, however, need not determine that issue at this stage. Moreover, although there is some support for the Coview that an interim fee award may be proper under these circumstances e.g. where, despite ongoing litigation, a benefit that is incapable of being reversed has been achieved there is no exigency or special circumstance that counsels in favor of immediate consideration of the Application. Accordingly, the Court will exercise its discretion to defer ruling on the Application until the remaining claims have been litigated. At that stage, the Court will be better positioned to award an appropriate 16 holders Litig., 2011 WL 2535256, at *7 (Del. Ch. June 27, 2011); see also Art Tech. Group, C.A. No. 5955-VCL, at 3 (Del. Ch. May 16, 2011) (TRANSCRIPT) 17 Del Monte Foods, 2011 WL 2535256, at *7. In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 15 fee based on an assessment of all of the benefits that have been secured by the CoLead Plaintiffs efforts. In Frank v. Elgamal,18 the Court observed that rocessing fee applications will generally delay the processing of the remaining substantive claims. Moreover, 19 In this instance, counsel for the Co-Lead Plaintiffs agreed that any attempt to parse out viable damages claims would be difficult or, perhaps, impossible.20 For that reason, to avoid the risk of awarding a fee without fully understanding the entirety of (and to be achieved), the Court will defer ruling on the Application until the Coclaims have been fully litigated.21 18 2011 WL 3300344 (Del. Ch. July 28, 2011). Id. at *3. 20 See 19 20-21. 21 for making a single fee determination once the litigation has concluded. See Art Tech. Group, C.A. No. 5955- In re Novell, Inc. Shareholder Litigation C.A. No. 6032-VCN August 30, 2011 Page 16 IV. CONCLUSION For the foregoing reasons, expenses is denied as premature. The Court will reconsider the Application after the Co-Lead Plaintiffs have fully litigated their remaining claims. An implementing order will be entered. Very truly yours, /s/ John W. Noble cc: Srinivas M. Raju, Esquire Collins J. Seitz, Jr., Esquire Stephen P. Lamb, Esquire Register in Chancery-K reason repeatedly cited by Vice Chancellor Hartnett, which is it makes sense to do everything once Emulex, C.A. No. 4536-VCS (Del. Ch. Dec. 18, 2009) (ORDER) Frank Frank, 2011 WL 3300344, at *3 n.18.

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