Southeastern Pennsylvania Transportation Authority v. Volgenau, et al.
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
SOUTHEASTERN PENNSYLVANIA
TRANSPORTATION AUTHORITY,
individually, and on behalf of all those
similarly situated,
:
:
:
:
:
Plaintiff,
:
:
v.
: C.A. No. 6354-VCN
:
ERNST VOLGENAU, JOHN W. BARTER,
:
LARRY R. ELLIS, MILES R. GILBURNE,
:
W. ROBERT GRAFTON, WILLIAM T.
:
KEEVAN, MICHAEL R. KLEIN,
:
STANTON D. SLOANE, GAIL R. WILENSKY, :
SRA INTERNATIONAL, INC., PROVIDENCE :
EQUITY PARTNERS LLC, PROVIDENCE
:
EQUITY PARTNERS VI L.P., PROVIDENCE :
EQUITY PARTNERS VI-A L.P., STERLING
:
PARENT INC., STERLING MERGER INC.
:
and STERLING HOLDCO INC.,
:
:
Defendants.
:
MEMORANDUM OPINION
Date Submitted: April 4, 2013
Date Decided: August 5, 2013
Pamela S. Tikellis, Esquire, Robert J. Kriner, Jr., Esquire, A. Zachary Naylor,
Esquire, Tiffany J. Cramer, Esquire, and Vera V. Gerrity, Esquire of Chimicles &
Tikellis LLP, Wilmington, Delaware, Attorneys for Plaintiff.
David J. Teklits, Esquire and Kevin M. Coen, Esquire of Morris, Nichols, Arsht &
Tunnell LLP, Wilmington, Delaware, and John C. Millian, Esquire, Justin A.
Torres, Esquire, and Eric C. Schmale, Esquire of Gibson Dunn & Crutcher LLP,
Washington, D.C., Attorneys for Defendant Ernst Volgenau.
Brian C. Ralston, Esquire and Justin Morse, Esquire of Potter Anderson & Corroon
LLP, Wilmington, Delaware, and James P. Gillespie, P.C., Robert B. Gilmore,
Esquire and Dana E. Hill, Esquire of Kirkland & Ellis LLP, Washington, D.C.,
Attorneys for Defendants SRA International, Inc., John W. Barter, Larry R. Ellis,
Miles R. Gilburne, W. Robert Grafton, William T. Keevan, Michael R. Klein,
Stanton D. Sloane, and Gail R. Wilensky.
Raymond J. DiCamillo, Esquire and Susan M. Hannigan, Esquire of Richards,
Layton & Finger, P.A., Wilmington, Delaware, and Maeve O’Connor, Esquire,
Elliot Greenfield, Esquire, and Michael T. Leigh, Esquire of Debevoise &
Plimpton LLP, New York, New York, Attorneys for Defendants Providence Equity
Partners LLC, Providence Equity Partners VI L.P., Providence Equity Partners VIA L.P., Sterling Parent Inc., Sterling Merger Inc., and Sterling Holdco Inc.
NOBLE, Vice Chancellor
This case arises from the merger between a private equity sponsor and a
former Delaware corporation.
As part of the transaction, the controlling
stockholder received a minority interest in the merged entity, a non-recourse note,
certain authority in the private entity, and, in exchange for fifty-nine percent of his
shares, $31.25 per share in cash. Minority stockholders received $31.25 per share
in cash. A former minority stockholder has brought fiduciary duty claims against
the former directors of the acquired company relating to their conduct in approving
the merger and an aiding and abetting claim against the buyer (collectively, the
“Defendants”). In addition to alleging that the controlling stockholder engaged in
self-dealing, the former stockholder alleges that the merger was consummated at
an unfair price, through an inadequate process, and in violation of the company’s
charter. The Defendants have moved for summary judgment.
At the center of the Defendants’ motion is whether robust procedural
protections were used that entitle the merger to review under the deferential
business judgment rule instead of the exacting entire fairness standard.
A transaction involving a third party and a company with a controller stockholder
is entitled to review under the business judgment rule if the transaction is
(1) recommended by a disinterested and independent special committee and
(2) approved by stockholders in a non-waivable vote of the majority of all the
minority stockholders.
1
Because of the procedural protections that were used, the Court reviews the
merger under the business judgment rule. The Court concludes that there is no
dispute of material fact that the merger-related decisions of the directors of the
former company were attributable to a rational business purpose and that the buyer
was an arms’ length bidder. The former shareholder asserts a duty of loyalty claim
against the directors for consciously disregarding a provision in the company’s
charter requiring that the controlling stockholder receive “equal” consideration as
all other stockholders in a merger. Because there is no dispute of material fact that
the former directors did not act in bad faith, and because the Defendants are
entitled to judgment on all claims asserted against them, the Court grants the
Defendants’ motions for summary judgment on all counts.
The
Plaintiff,
Southeastern
Pennsylvania
Transportation
Authority
(“SEPTA” or the “Plaintiff”), brings claims arising from the buy-out (the
“Merger”) of Defendant SRA International, Inc. (“SRA” or the “Company”) by
Defendants Providence Equity Partners LLC (“Providence”) and its related
entities.1 SEPTA asserts fiduciary duty claims against the former directors of SRA
(the “SRA Directors” or the “Board”), who include Ernst Volgenau (“Volgenau”),
1
The related entities are Defendants Providence Equity Partners VI L.P., Providence Equity
Partners VI-A L.P., Sterling Parent Inc., Sterling Merger Inc., and Sterling Holdco Inc. Verified
Second Am. Class Action Compl. (“Compl.”) ¶ 1. Some of these entities were formed by
Providence for the purpose of structuring a transaction with SRA. Transmittal Aff. of Robert B.
Gilmore to the Opening Br. in Supp. of the SRA Defs.’ Mot. for Summ. J. (“Gilmore Aff.”)
Ex. 4 (Proxy) at 16.
2
the former controlling stockholder of SRA, and Stanton D. Sloane (“Sloane”), the
former chief executive officer (“CEO”) of SRA, relating to their conduct in
connection with the Merger.2
SEPTA also asserts that Providence aided and
abetted the SRA Directors’ breach of their fiduciary duties.
I. BACKGROUND
A. An Overview of the Claims
SEPTA has asserted four claims in its Verified Second Amended Class Action
Complaint (the “Complaint”).
Count I asserts a breach of the duty of loyalty and duty of care against the
SRA Directors (including Volgenau) for approving the merger agreement,
disclosing misleading or incomplete information, and failing to disclose
material information.
Count II asserts a breach of the duty of loyalty and duty of care against
Volgenau and Sloane. Volgenau is accused of “planning, structuring and
timing the [Merger] to benefit himself . . . at the unfair expense of the
stockholders and in violation of the equal treatment provision of the
Certificate of Incorporation.”3 Sloane is alleged to have “encourage[d] and
facilitate[d] the [Merger]” and Volgenau’s self-dealing conduct.4
Count III asserts that Providence aided and abetted the SRA Directors’
breach of fiduciary duties in Counts I and II.5
2
The former directors of SRA are: Volgenau, John W. Barter (“Barter”), Larry R. Ellis (“Ellis”),
Miles R. Gilburne (“Gilburne”), W. Robert Grafton (“Grafton”), William T. Keevan (“Keevan”),
Michael R. Klein (“Klein”), Sloane, and Gail R. Wilensky (“Wilensky”).
3
Compl. ¶ 114. Arguably, the Plaintiff has alleged its fiduciary duty claim relating to the charter
against Volgenau in both Counts II and IV. The Court will address this claim in Count IV.
4
Id. at ¶¶ 113-16.
5
It is unclear whether the Complaint also alleges that Providence aided and abetted the breach of
loyalty claim set forth in Count IV.
3
Count IV asserts that the SRA Directors breached their fiduciary duties by
approving the Merger in violation of SRA’s certificate of incorporation (the
“certificate” or “charter”).
B. Procedural History
Following the announcement of the Merger, SEPTA filed its original
complaint on April 7, 2011.
Thereafter, it filed a Motion for Preliminary
Injunctive Relief based on unresolved disclosure claims, but withdrew its motion
when the Defendants made supplemental disclosures.
On June 21, 2011, the
Plaintiff filed its most recent Complaint. The SRA Defendants filed a Motion for
Judgment on the Pleadings as to Count IV, which the Court granted in part and
denied in part.6 The Court held that “SEPTA’s claim that the Merger is invalid
fails as a matter of law” under 8 Del. C. § 124. However, the Court denied the
Defendants’ motion to dismiss “SEPTA’s claim that [the SRA Directors’]
breached their fiduciary duties by approving a transaction that violated SRA’s
certificate of incorporation.”7
C. Parties
SEPTA was a stockholder of SRA at the time of the Merger. Volgenau
founded SRA in 1978.8 SRA is a leading provider of technology solutions and
6
Se. Pa. Transp. Auth. v. Volgenau, 2012 WL 4038509 (Del. Ch. Aug. 31. 2012).
Id. at *3.
8
Transmittal Aff. of A. Zachary Naylor Submitted in Supp. of Pl.’s Omnibus Answering Br. in
Opp’n to Defs.’ Mots. for Summ. J. (“Naylor Aff.”) Ex. 3 (Volgenau Dep.) at 9.
7
4
professional services, primarily to the federal government.9 SRA serves customers
in four markets: national security, civil government, health, and intelligence and
space. At the time of the Merger, Sloane was SRA’s CEO. The Board consisted
of Volgenau, Sloane, Klein, Gilburne, Grafton, Barter, Ellis, Keevan, and
Wilensky.
Providence is a private equity firm specializing in equity investments in
media, communications, information services, and education.10
D. History of SRA
Volgenau has been SRA’s controlling stockholder from its inception in
1978.
In 2002, the Company made an initial public offering.
As a public
company, SRA had two classes of common stock: Class A and Class B. The only
difference between the two classes of stock was that a holder of Class A stock was
entitled to one vote per share, while a holder of Class B stock was entitled to ten
votes per share.11 Despite owning only 21.8 percent of the outstanding equity of
the Company, Volgenau retained control of SRA through his ownership of Class B
common stock, which enabled him to control approximately 71.8 percent of the
voting power.12
9
Naylor Aff. Ex. 23 (Lenders Presentation) at 11.
Naylor Aff. Ex. 4 (Richardson Dep.) at 21.
11
Naylor Aff. Ex. 24 (Amended & Restated Certificate of Incorporation of SRA) (“Certificate of
Incorporation”) at ¶ A.2.
12
Naylor Aff. Ex. 26 (Proxy) at 78.
10
5
Under the terms of SRA’s certificate, Volgenau could convert—at any
time—each share of his Class B common stock to one share of Class A common
stock. Each Class B share was also subject to an automatic conversion at the same
one-to-one ratio upon the occurrence of certain events, such as the death of the
holder, loss of competency, and if the holder became eighty years old and was no
longer affiliated with the Company.13 The certificate also required that the holders
of Class A and Class B common stock be treated equally in the event of a merger.14
As Volgenau testified in his deposition, the “primary objective in having Class B
stock was to prevent harmful takeovers of the company, not to enrich the Class B
shareholders.”15
SEPTA asserts that Volgenau dominated and controlled SRA.16 There is no
doubt that Volgenau, even after stepping down as SRA’s CEO in 2002, exercised
considerable influence over the operations of the Company in his capacities as
13
Naylor Aff. Ex. 24 (Certificate of Incorporation) at ¶ A.6(b).
Id. at ¶ A.9. The provision states: “Upon the merger or consolidation of the Corporation
(whether or not the Corporation is the surviving entity), holders of each class of Common Stock
will be entitled to receive equal per share payments or distributions, except that in any
transaction in which shares of capital stock are distributed to holders of Common Stock, the
shares of capital stock distributed to holders of Class A Common Stock and Class B Common
Stock may differ as to voting and conversion rights, but only to the extent that the voting and
conversion rights of the Class A Common Stock and the Class B Common Stock differ in this
Certificate of Incorporation.” To amend or repeal any provision in the certificate required the
consent of 67 percent of the outstanding Class A shares and Class B shares, voting separately as
a single class. Id. at ¶ A.11.
15
Naylor Aff. Ex. 3 (Volgenau Dep.) at 14-15.
16
Pl.’s Omnibus Answering Br. in Opp’n to Defs.’ Mots. for Summ. J. (“Pl.’s Br.”) 9-11.
14
6
Chairman of the Board and controlling stockholder.17
Volgenau actively
participated in the selection of his replacement, Renato DiPentima (“DiPentima”),
and DePentima’s successor, Sloane. As the Company struggled under Sloane, he
regularly conferred with Sloane on all “major decisions.”18 Perhaps neither of
these actions is unusual for a Chairman.
But, as a controlling stockholder,
Volgenau’s influence was more pervasive.
When Sloane terminated the
employment of a valuable executive, Volgenau arranged to keep the former
employee engaged as a consultant to SRA.19 As SRA struggled under Sloane,
SRA began considering possible strategic alternatives, including a sale of the
Company. During that time, Volgenau was actively involved in the decision to
pursue a strategic transaction and in ensuring that the Company’s ethics of honesty
and service would be preserved.20
SEPTA attempts to cast a negative light on Volgenau’s insistence on
preserving the Company’s values and culture, asserting that it had a “negative
17
Naylor Aff. Ex. 25 (Draft of Volgenau’s Book) at 207-16.
Id. at 215-16.
19
Id. at 215.
20
See Naylor Aff. Ex. 3 (Volgenau Dep.) at 27-28. Volgenau created SRA with the intention of
demonstrating “that a company with high values and culture can be a business success.”
Transmittal Decl. of Kevin M. Coen (“Coen Decl.”) Ex. 36. The core values of SRA were
honesty and service. According to Volgenau, honesty means “high ethical performance, not only
complying with the law, but complying with the spirit of the law,” and service means serving
country and customers, and “tak[ing] care of one another.” Naylor Aff. Ex. 3 (Volgenau Dep.)
at 27-29.
18
7
economic impact.”21 Whether that is true or not, Volgenau testified that “many
people believe that honesty and service increased the market value of . . . SRA.”22
At least initially, Volgenau’s views affected his willingness to consider a sale of
the Company to a strategic acquirer. In his book, Volgenau candidly admits that
he had a negative disposition to that type of buyer.
Virtually every year since our founding I had been approached by a
CEO in a company that wanted to buy SRA. In each case I declined,
explaining that we were on a special mission to create one of the
world’s great companies—a business and ethical success. . . . I don’t
think any of those CEOs and companies were unethical, but they
could not compare with SRA. I began to refer to them privately . . . as
“sausage factories” that would grind up SRA and homogenize us into
their system. Our name, values and culture would be lost forever.
Many of those companies were quite successful, but I did not want
SRA to become an Oscar Meyer [sic] wiener.23
The record reflects that the idea to sell SRA was never seriously considered
until a few years after the Company had begun to experience various problems.
Since 2008, SRA had been experiencing declining growth rates, lower profit
margins, and poorly performing acquisitions.24 As the Company’s performance
continued to falter in 2010,25 Volgenau became interested in the prospect of a
21
Pl.’s Br. 11.
Naylor Aff. Ex. 3 (Volgenau’s Dep.) at 28.
23
Naylor Aff. Ex. 25 (Draft of Volgenau’s Book) at 228.
24
Naylor Aff. Ex. 3 (Volgenau Dep.) at 61-64.
25
Gilburne testified that the Company was “beginning to lose important recompetes . . . that
historically we wouldn’t have lost before.” Naylor Aff. Ex. 10 (Gilburne Dep.) at 110. He
further testified that: “It was my concern that we were in the part of the value chain where price
was becoming the key differentiator in an increasingly undifferentiated service environment.”
Id. at 194.
22
8
leveraged buy-out (“LBO”), which would, in theory, provide stockholders with a
substantial premium to SRA’s current stock price and afford Volgenau a better
opportunity to preserve the Company’s values and culture. But, as Volgenau
acknowledged in his book, once he (and the Board) made the decision to sell SRA,
the eventual acquirer might very well be a strategic competitor.26
E. The Early Meetings with Providence
SEPTA asserts that Providence aided and abetted the SRA Directors’ breach
of fiduciary duty.
In support of this theory, SEPTA points to Providence’s
retention of DiPentima, a former CEO of SRA, Volgenau’s friend, and a paid
consultant to SRA,27 to exploit Volgenau’s trust in DiPentima to effectuate a deal.
Similarly, the Plaintiff contends that Ted Legasey (“Legasey”), also a former
senior SRA executive and friend of Volgenau, was recruited to persuade Volgenau
to sell the Company to Providence.28 In the spring of 2010, after an initial meeting
between DiPentima and Volgenau, in which DiPentima raised the idea of an
LBO,29 Julie Richardson, the CEO of Providence, and other Providence employees
26
Naylor Aff. Ex. 25 (Draft of Volgenau’s Book) at 230-31.
DiPentima was a paid consultant to SRA throughout Providence’s pursuit of SRA. Naylor
Aff. Exs. 106-109. While this conflict is perhaps troubling, there is no indication that
DiPentima’s role as an advisor to Providence conflicted with his position as a consultant at SRA.
28
SEPTA also claims that the Board was unaware that these former employees, and then-current
consultants of SRA, were working on behalf of Providence to achieve a buyout of SRA.
Providence may have also retained Wolf Den Associates, LLC, as a paid consultant to SRA, to
aid in Providence’s due diligence efforts. See Naylor Aff. Exs. 127, 144-45.
29
During this meeting DiPentima informed Volgenau that he was working as an advisor to
Providence and described a possible LBO transaction with Providence that would retain the SRA
27
9
began meeting with Volgenau and the senior management of SRA to discuss a
possible buyout.
These meetings involved preliminary discussions about the
possibility of Volgenau’s participating in the acquired company, indicative price
points, and the importance of maintaining the value and culture of SRA.30 During
this time Volgenau inquired about Providence’s ability to obtain the necessary
financing and whether a go-shop would disrupt the sale to Providence if an
agreement could be reached.31 Providence provided research to Volgenau showing
that it was highly unlikely that a topping bidder would emerge during the go-shop
period.32
SRA shared proprietary information with Providence pursuant to a
confidentiality agreement and SRA management developed various LBO
scenarios.
As discussions ensued, Volgenau was not only amenable to a
transaction with Providence, but he also seemed to have significant interest in
completing a deal with it.
name and structure, permit him to restore the culture of honesty and service, and allow him to
retain a position on the board of the new entity. Naylor Aff. Ex. 8 (DiPentima Dep.) at 65-68.
30
See, e.g., Naylor Aff. Ex. 5 (Nadeau Dep.) at 94, 101, 146; Ex. 3 (Volgenau Dep.) at 101-103;
Ex. 4 (Richardson Dep.) at 40-51.
31
Naylor Aff. Exs. 105, 126.
32
Naylor Aff. Exs. 46-47.
10
F. The Study Team
At the same time as Volgenau was in discussions with Providence, on
May 3, 2010, the Board formed a “study team” to assess the strategic alternatives
for SRA.
The study team included Volgenau, Klein, Gilburne, and Grafton.
Notably, Klein encouraged Volgenau to exploit his particular interests as a
controlling stockholder.
You are 77 years old. If you die or become incapacitated, your estate
will no longer have the Class B (ten for one) voting shares, and the
company’s disposal will be unpredictable. Wouldn’t you rather
determine its future now, while you are in good health?33
The study team hired CitiGroup to provide advice on strategic alternatives; it
opined that a significant acquisition would best maximize the Company’s longterm value because it would lead to “more technology and higher profits.”34
Consistent with that advice, SRA made a serious attempt to acquire
Lockheed Martin’s Enterprise Integration Group (“EIG”) during the summer and
fall of 2010. Although Volgenau supported SRA’s attempted acquisition of EIG,
he also had a desire to continue talks with Providence, even though the acquisition
would either postpone or preclude any deal with Providence.35 Legasey, on behalf
33
Naylor Aff. Ex. 25 at 229 (quoting Klein).
Naylor Aff. Ex. 3 (Volgenau Dep.) at 127; Ex. 50 at 2385. The Plaintiff emphasizes that
CitiGroup’s analysis predicted that an LBO would not be the most value maximizing strategy.
That analysis was based on CitiGroup’s estimation that an LBO would only generate a per share
price of $23.50 to $27, while a strategic acquisition could potentially increase the value of SRA’s
stock to as high as $32 per share.
35
Naylor Aff. Exs. 130-32.
34
11
of Providence, tried to persuade Volgenau not to pursue the EIG acquisition and
warned that Providence would no longer be interested in acquiring SRA.36
Nonetheless, SRA proceeded with its bid, but ultimately lost out to Veritas Capital
(“Veritas”), which purchased the EIG unit for $815 million.
G. The Formation of the Special Committee and Other Indications of Interest
Following the failed EIG bid, Volgenau and the Board turned its attention
again to Providence. During an October 27, 2010, study team meeting, Volgenau
indicated that Providence was the only potential bidder that had ever interested him
and that it was committed to maintain the Company’s values and culture. 37 With
Volgenau’s tacit endorsement of Providence, Klein suggested that the Board form
an independent special committee, which it did the following day (the “Special
Committee”).38 The Special Committee, which was comprised of Klein, as chair,
along with Gilburne, Grafton, Barter, and Ellis,39 was charged with evaluating,
36
Richardson testified that Providence recognized that SRA “had moved completely in a
different direction” in pursuit of EIG and that SRA “was discontinuing any work efforts or work
stream related to” Providence. Naylor Aff. Ex. 4 (Richardson Dep.) at 94-95.
37
Naylor Aff. Ex. 149.
38
Gilmore Aff. Ex. 16 (Minutes of the October 27, 2010 Study Team Meeting).
39
There is some dispute whether the Special Committee members volunteered or whether they
were selected by Volgenau. See Naylor Aff. Ex. 7 (Grafton Dep.) at 93-94. Grafton testified
that “Dr. Volgenau proposed the committee members and the chair and gave each director an
opportunity to comment . . . .” He later clarified:
I think that Mr. Klein, Mr. Gilburne, Mr. Barter and myself were proposed by Dr.
Volgenau. There was a discussion then of the committee. I think Dr. Volgenau at
that point asked the other board members whether any wanted to be on the
committee. . . . General Ellis asked to be on the committee, and Ms. Wilensky
and Mr. Keevan did not volunteer. Id.
12
soliciting third-party interest in, and negotiating potential strategic transactions.40
The Special Committee’s mandate also included an express authorization to hire its
own advisors.41
The Special Committee hired a financial advisor, Houlihan Lokey Capital,
Inc. (“Houlihan”), and legal counsel, Kirkland & Ellis LLP (“Kirkland”), to assist
it in its evaluation of potential strategic transactions. SEPTA asserts that both
Houlihan and Kirkland were hired because of their prior professional and personal
relationships with Klein. According to Klein, they were selected because they had
no prior experience with SRA and they were well qualified.42 Volgenau was also
instructed that he should not have “any further discussions with Providence [or any
other
bidder]
except
as
may
be
approved
and
coordinated
by
the
Committee . . . .”43
Although not fatal to the independence of the Special Committee, Volgenau’s selection of the
majority of the committee’s members was not “the best practice.” In re Fort Howard Corp.
S’holder Litig., 1988 WL 83147, 14 Del. J. Corp. L. 699, 720 (1988) (noting that it was not the
best practice to have the interested CEO handpick the members of the special committee).
40
The Special Committee was authorized to “(i) to evaluate, review and consider, and if the
Committee deems appropriate, solicit third-party interest in, potential strategic transactions . . .,
(ii) establish and direct the process and procedures . . ., (ii) discuss and negotiate the terms of any
potential strategic transactions . . . , (iv) recommend [or not recommend] to the Board the
approval and adoption of a specific strategic transaction . . ., and (v) take such other actions as
the Committee may deem necessary . . . .” Naylor Aff. Ex. 137 (Minutes of the October 28,
2010 SRA Board meeting).
41
Id. (“The Committee is authorized to hire . . . independent legal, financial and other
advisors . . . .”).
42
Naylor Aff. Ex. 1 (Klein Dep.) at 128-130.
43
Gilmore Aff. Ex. 19 (Minutes of the November 9, 2010 Special Committee meeting).
13
On November 22, 2010, Houlihan and Klein met with representatives from
Providence. During the meeting Klein informed Providence that SRA had decided
not to undertake a formal sale process and that Providence’s initial $28 per share
expression of interest was insufficient to start formal discussions. On behalf of the
Special Committee, Klein also rejected Providence’s request for exclusivity, but
permitted it to conduct further due diligence.44
As the Special Committee awaited Providence’s formal bid, on December 1,
2010, Serco, a strategic competitor, proposed a transaction at a higher price range
($29-$31 per share) than Providence’s initial indication of interest.
In an email
dated December 9, 2010, Klein advised Providence of the superior offer, but noted
that “Ernst has fended off numerous interested parties over the past years and had
every intention to continue to do that while we await your proposal.”45 Klein
testified that his email was intended to elicit a higher offer from Providence that
would start the process at $30 per share or more.46 However, on December 29,
2010, Providence submitted a bid of $27.25 per share.47
Not surprisingly, the Special Committee viewed Providence’s preliminary
expression of interest as insufficient to start the negotiation process with
44
Gilmore Aff. Ex. 4 (Proxy) at 20.
Naylor Aff. Ex. 65.
46
Naylor Aff. Ex. 1 (Klein Dep.) at 152-53.
47
Gilmore Aff. Ex. 26 (Minutes of the December 30, 2010 Special Committee meeting).
45
14
Providence.48
Consequently, the Special Committee determined that “it was
appropriate to explore and assess additional third-party interest . . . in a potential
strategic transaction with the Company.”49 Accordingly, in early January 2011, the
Special Committee decided to solicit five financial buyers: The Carlyle Group
(“Carlyle”), TPG Capital (“TPG”), Kohlberg Kravis & Roberts (KKR”), Veritas
and Bain Capital (“Bain”), as well as continue discussions with Serco.50 A sixth
financial sponsor—Hellman & Friedman—was later added to the mix. Although
the Board was generally aware that strategic acquirers in theory had the potential to
pay more for SRA,51 Grafton testified that the reason that the Special Committee
declined initially to solicit other strategic acquirers was in order to safeguard
confidential and proprietary information and avoid “leaks into the marketplace.”52
By mid-January, however, the markets began to speculate that SRA had
received acquisition proposals.
After Sloane cancelled his appearance at a
January 6 investor conference, SRA’s stock price rose 19 percent in one week
48
Naylor Aff. Ex. 7 (Grafton Dep.) at 130.
Gilmore Aff. Ex. 27 (Minutes of the January 6, 2011 Special Committee meeting).
50
Naylor Aff. Ex. 7 (Grafton Dep.) at 132-33; Gilmore Aff. Ex. 27 (Minutes of the January 6,
2011 Special Committee meeting).
51
While this may have been the conventional wisdom, recent history had proven otherwise: SRA
had recently lost out to Veritas, a financial buyer, in acquiring EIG from Lockheed Martin.
52
Naylor Aff. Ex. 7 (Grafton Dep.) at 133 (noting that the Special Committee was concerned
about “leaks into the marketplace that we were trying to potentially sell ourselves, as well as we
wanted to keep any proprietary or confidential company information very close to the vest, and
once you start giving it to competitors, you lose control of it.”).
49
15
based on rumors that SRA was for sale.53 Moreover, word leaked erroneously that
Serco had submitted, and SRA had rejected, a $2 billion offer to buy SRA. 54 As a
result of the ensuing publicity, much of which was negative,55 Serco withdrew its
preliminary offer and terminated discussions with SRA.
On January 25, 2011, SRA confirmed publicly that it had received “a series
of inquiries regarding the company’s willingness to consider offers” and therefore,
SRA had retained Houlihan to provide advice.
Although the press release
cautioned that “the retention of advisors does not reflect a decision that the
company is or should be for sale,” by then it was clear that SRA was entertaining
acquisition offers.
In light of the newfound publicity and the ensuing expressions of interest,
the Special Committee sought to open up the bidding process to other strategic
sponsors to extract the maximum possible value for SRA.56
To his credit,
Volgenau consented.57 To address Volgenau’s concerns, however, the Special
Committee established a bifurcated process in which it would exclusively address
issues of price and certainty while Volgenau would meet with strategic acquirers to
53
Gilmore Aff. Ex. 34 (January 10, 2011 news article).
Naylor Aff. Ex. 67.
55
Naylor Aff. Ex. 1 (Klein Dep.) at 152, 179-80.
56
Gilmore Aff. Ex. 39 (Minutes of the February 2, 2011 Special Committee meeting).
57
As will be discussed in more detail below, Volgenau’s view of strategic buyers seemed to
change over time as he met with various suitors. Contrary to his original opinion, Volgenau
“learned that strategic acquire[r]s could, in fact, produce, preserve, and were so inclined to
preserve the main values and culture, and for that matter, franchise value of the firm, because
they believed it had value.” Naylor Aff. Ex. 3 (Volgenau Dep.) at 73.
54
16
discuss his “humanistic concerns.”58 Thus, in February and early March, Volgenau
met alone with strategic and financial sponsors to learn more about them and to
discuss his desire that “SRA’s name, values and culture be preserved.”59
On February 4, 2011, Houlihan contacted three other strategic bidders: The
Boeing Company (“Boeing”), CGI, and Hewlett Packard (“HP”), and one
additional financial buyer: GTCR LLC (“GTCR”).60 Another strategic bidder—
L-3 Communications Holdings, Inc. (“L-3”)—also contacted Houlihan to express
interest in a potential transaction.61 During the due diligence process, strategic and
financial sponsors signed confidentiality agreements and conducted due diligence
on SRA—which included access to a confidential data room and meetings with the
senior management of SRA.62 Ultimately, for various reasons, all but two of the
potential bidders chose either not to join the sale process or to submit a formal
offer for the Company.63
58
Naylor Aff. Ex. 70.
Naylor Aff. Ex. 71 (Form 8-K) at 2.
60
Gilmore Aff. Exs. 41-44; Ex. 40 (Minutes of the February 21, 2011 Special Committee
meeting).
61
Gilmore Aff. Ex. 45.
62
Gilmore Aff. Ex. 4 (Proxy) at 21.
63
GTCR, having learned about the “business components and drivers of growth” of SRA from
meetings with Houlihan, withdrew simply because it believed that it would not be competitive on
price. Gilmore Aff. Ex. 46. Similarly, Bain, Hellman & Friedman, and L-3 also withdrew
because of their unwillingness to meet SRA’s expected valuation. Gilmore Aff. Ex. 47 (Draft of
a March 21, 2011 Houlihan Presentation). Other bidders declined to proceed for internal
reasons. CGI, based in Montreal, withdrew because it had concerns that it would be difficult to
finance the transaction, to integrate SRA while it was simultaneously digesting a recent
acquisition, and to obtain the United States government’s approval. Aff. of Claude Séguin ¶ 10.
Likewise, Boeing withdrew because of a combination of factors, including its financial
59
17
H. The Multi-Round Bidding Contest Between Veritas & Providence
With all of the remaining suitors having dropped out of the bidding process,
Veritas and Providence became engaged in a multi-round bidding contest.64 On
March 18, 2011, Providence submitted an offer to purchase SRA for $30 per share.
Two days later, Veritas made a written offer for the same amount, but conditioned
it on Volgenau’s increasing his rollover amount from $100 million to $150 million.
Volgenau agreed to do so.
He also agreed to the same rollover amount for
Providence, if it desired.65
By March 30, the $30 per share deadlock was broken when Veritas
improved its offer to $31 per share and Providence increased its offer to $30.50.
However, on the evening of March 30, 2011, Providence made two new proposals
to increase its bid to $31 per share or higher. First, Providence made an offer
“consisting of $30.50 plus a contingent amount equal to the proceeds (if any)
received from the sales of two of the Company’s subsidiaries, [Era Systems LLC
(“Era”)] and [Global Clinical Development (“GCD”)], [both of which were]
assessment of SRA and its ability to generate an attractive return in a declining government
services industry. Some bidders, such as Boeing and Carlyle, had serious reservations concerning
SRA’s future growth and profit margins. Gilmore Aff. Exs. 47, 52. Notably, Boeing’s efforts
highlight the seriousness with which it considered acquiring SRA. Boeing retained legal,
financial, and accounting advisors to conduct its due diligence. That effort included 16 diligence
calls, 7 diligence meetings, 341 diligence requests, and 119 employees and advisors accessing
SRA’s data room. Gilmore Aff. Ex. 52.
64
Both Veritas and Providence had agreed with Volgenau that he would roll approximately $100
million of his equity into the newly formed company. Gilmore Aff. Ex. 54 (Minutes of the
March 28, 2011 Special Committee meeting).
65
Id.
18
currently being marketed.”66
Second and alternatively, Providence offered to
increase the purchase price to $31 per share if Volgenau would “agree as part of
his [$150 million] rollover commitment to provide a $30 million non-recourse loan
to Providence, which loan would be repaid” only if the Company realized
sufficient proceeds from the sale of the two subsidiaries being marketed.67
Importantly, with respect to the second proposal, the Special Committee concluded
that Volgenau would not be receiving “any additional economic benefit under the
loan if the proceeds of such subsidiary sales were to exceed $30 million.”68
Volgenau consented to the second proposal even though, in Volgenau’s words, “it
was a rotten deal for me” because “there was no upside and all downside, and [Era
and GCD] we knew were risky.”69
On the same day and shortly after Providence’s latest proposals were
discussed by the Special Committee, Veritas increased its bid to $31.25 per share
66
Gilmore Aff. Ex. 55 (Minutes of the March 30, 2011 Special Committee meeting). Both Era
and GCD were two poorly performing SRA subsidiaries that were then being marketed. GCD
was a contract research organization and Era was a supplier of advanced surveillance technology
and flight tracking solutions. See Naylor Aff. Ex. 1 (Klein Dep.) at 47, 218; Ex. 5 (Nadeau Dep.)
at 64-65.
67
Gilmore Aff. Ex. 55 (Minutes of the March 30, 2011 Special Committee meeting).
68
Id.
69
Naylor Aff. Ex. 3 (Volgenau Dep.) at 170-71. Before closing, “[t]hings had gotten a lot
worse” at GCD because a “major contract got cancelled” and thus it became obvious that GCD
was going to [be sold] for “nominal, if any, value.” Naylor Aff. Ex. 1 (Klein Dep.) at 217-18.
Similarly, the bids for Era were described as “disappointing.” Naylor Aff. Ex. 4 (Richardson
Dep.) at 170. Subsequent events proved that neither subsidiary produced sufficient funds to
repay Volgenau. On September 30, 2011, SRA sold GCD for less than $0.1 million after
transaction costs. Coen Decl. Ex. 6. On November 21, 2011, SRA sold portions of Era for $13.3
million. Id. As of December 31, 2011, Volgenau had received $12 million in cash on the nonrecourse note, and SRA expected to pay only $17 million on the note. Coen Decl. Ex. 7.
19
and requested exclusivity in negotiations until the next business day. 70 During the
meeting to discuss Veritas’ latest proposal, the Special Committee voted to
negotiate exclusively with Veritas until 3:00 p.m. the following day. Efforts to
finalize the transaction documents stalled, however, as the advisors to the Special
Committee—specifically, Kirkland—identified a potential issue related to Veritas’
contractual ability to finance the transaction and to obtain the necessary partnership
approvals.71 As the exclusivity period ended, Providence raised its bid to $31.25
per share. With both bidders deadlocked again, the Special Committee requested
each bidder to submit its best and final offer by 5:00 p.m.72 Apparently frustrated
by the Special Committee’s conduct in dragging the process along, Veritas instead
withdrew its $31.25 bid, leaving Providence, which declined to make a higher
offer, as the only remaining bidder.
During the March 31, 2011, Board meeting, the Special Committee
unanimously recommended to the Board that SRA accept Providence’s offer.
Houlihan opined that the $31.25 per share offer was fair. Kirkland summarized the
terms of the proposed transaction, which included a 30-day go-shop provision, a
$28.2 million breakup fee during the go-shop (i.e., 1.5 percent of the deal value), a
$47 million termination fee after the go-shop (i.e., 2.5 percent of the purchase
70
See Gilmore Aff. Ex. 56 (Minutes of the March 30, 2011 Board meeting); Naylor Aff. Ex. 1
(Klein Dep.) at 221.
71
Naylor Aff. Ex. 1 (Klein Dep.) at 221.
72
Gilmore Aff. Ex. 57 (Minutes of the March 31, 2011 Special Committee meeting).
20
price), and a reverse breakup fee of $112.9 million. The Merger was also subject
to a majority of the minority vote that was not waivable by the Special Committee.
Except for Volgenau who abstained, the Board voted unanimously to approve the
merger agreement and to recommend the Merger to SRA’s stockholders.
During the go-shop, Houlihan solicited 50 potential bidders, including
29 strategic sponsors and 21 financial buyers.73 No bidders emerged with an
additional offer. The definitive proxy statement was mailed to stockholders on
June 15, 2011. SRA made supplemental disclosures after the Plaintiff claimed that
the proxy had omitted material information relating to Volgenau’s meetings with
four potential buyers and Houlihan’s relationship with Providence. On July 15,
2011, SRA’s minority stockholders approved the merger with 81.3 percent of the
total outstanding minority shares (99.7 percent of the total minority voting shares)
voting in favor of the Merger.74 The Merger, valued at $1.88 billion, closed on
July 20, 2011.
SRA stockholders received $31.25 per share in cash, which
represented a 52.8 percent premium over SRA’s stock price on December 31,
2010.75
73
Naylor Aff. Ex. 2 (Antenucci Dep.) at 148-49; Gilmore Aff. Ex. 61 (Go-Shop List).
Gilmore Aff. Ex. 68 (Final Report of the Inspector of Elections).
75
Gilmore Aff. Ex. 69.
74
21
II. CONTENTIONS
The Defendants contend that there is no triable issue of material fact about
whether the business judgment rule applies because robust procedural protections
were used to effectuate the Merger. Even if the business judgment rule does not
apply, the Defendants assert that they are still entitled to judgment under the entire
fairness standard. In response, SEPTA contends that there are disputes of material
fact precluding (a) the application of the business judgment rule and (b) the Court
from granting the Defendants’ summary judgment motions. First, SEPTA asserts
that Volgenau stood on both sides of the transaction.
It also attacks the
independence or disinterestedness of certain Special Committee members. SEPTA
contends that Klein was self-interested because he harbored a secret desire to
receive a significant bonus in return for orchestrating a transaction with
Volgenau’s allegedly preferred bidder—Providence. SEPTA further maintains that
Volgenau, with the help of Sloane, dominated the Special Committee process
through his initial discussions with Providence and by having unauthorized contact
with bidders after the Special Committee was formed. In addition, SEPTA argues
that the Special Committee advisors were self-interested and intentionally sought
to derail Veritas’ bid.
It further asserts that the stockholders were not fully
informed of all material facts when they overwhelmingly approved the Merger.
Second, the Plaintiff contends, and offers expert testimony in support, that the
22
Merger price was unfair.
The Defendants respond by arguing that the facts
proffered by SEPTA are immaterial and the evidence in the record shows that the
Merger price was fair. The Defendants, in addition, contend that the Court need
not resolve the differing opinions of the experts because the fairness of the Merger
price was confirmed by a robust and lengthy sale process and the Board reasonably
relied upon Houlihan’s fairness opinion.
Count III alleges that Providence aided and abetted the SRA Directors’
breach of their fiduciary duties. The Plaintiff asserts that Providence knowingly
participated in the SRA Directors’ breach of their fiduciary duties because of its
hiring of former SRA employees and its alleged “partnership” with Volgenau. In
response, the Defendants contend that there is no dispute of material fact that the
SRA Directors breached their fiduciary duties or that Providence knowingly
participated in such a breach. Count IV asserts that the SRA Directors breached
their duty of loyalty by approving the Merger in violation of SRA’s certificate.76
SEPTA contends that Volgenau received greater consideration in the Merger than
did the minority stockholders and that the Board did not even attempt to adhere to
the charter’s equal treatment provision.
The Defendants have countered by
asserting that the record indisputably shows that the SRA Directors did not
76
Compl. ¶ 122.
23
knowingly disregard the equal treatment provision or believe that Volgenau was
receiving greater consideration in the Merger.
III. ANALYSIS
A. The Summary Judgment Standard
Summary judgment is appropriate when the record shows “that there is no
genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.”77 “[E]ven where ‘colorable . . . or [in]significantly
probative [evidence]’ is present in the record, [summary judgment is appropriately
granted] if no reasonable trier of fact could find for the plaintiff on that
evidence.”78 The Court views the evidence in the light most favorable to the
nonmoving party and assumes the truth of uncontroverted facts set forth in the
record.79 “When the moving party shows that no genuine issue of material fact
exists, ‘the burden shifts to the nonmoving party to substantiate its adverse claim
by showing that there are material issues of fact in dispute.’”80 If the burden shifts
to the nonmoving party, summary judgment is appropriate “where that party fails
to make a sufficient showing on any essential element of its case.”81
77
Ct. Ch. R. 56(c).
Haft v. Haft, 671 A.2d 413, 419 (Del. Ch. 1995) (quoting Anderson v. Liberty Lobby Inc., 477
U.S. 242, 249-50 (1986) (alterations in the original except for the first alteration)).
79
In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613, at *9 (Del. Ch. Oct. 2,
2009).
80
Id. (quoting Conway v. Astoria Fin. Corp., 837 A.2d 30, 36 (Del. Ch. 2003), aff’d, 840 A.2d
641 (Del. 2004)).
81
Id.
78
24
B. A Note on In re MFW Shareholders Litigation
As an initial matter, the Court’s recent decision in In re MFW Shareholders
Litigation (“MFW”)82 illuminates many of the procedural protections at issue in
this case. For the first time, the Court addressed the question whether, and under
what conditions, a merger between a controlling stockholder and its subsidiary
could be reviewed under the business judgment rule, as opposed to the entire
fairness standard. The Court held that the business judgment rule could apply if all
of the following conditions were satisfied: (1) the controlling stockholder at the
outset conditions the transaction on the approval of both a special committee and a
non-waivable vote of a majority of the minority investors; (2) the special
committee was independent, (3) fully empowered to negotiate the transaction, or to
say no definitively, and to select its own advisors, and (4) satisfied its requisite
duty of care; and (5) the stockholders were fully informed and uncoerced.83
In concluding that this structure would benefit minority stockholders, the
Court explained:
[S]tockholders get the benefits of independent, empowered
negotiating agents to bargain for the best price and say no if the agents
believe the deal is not advisable for any proper reason, plus the critical
ability to determine for themselves whether to accept any deal that
their negotiating agents recommend to them.84
82
67 A.3d 496 (Del. Ch. 2013).
Id. at 501-02, 514-16.
84
Id. at 503.
83
25
The Court further reasoned that, because these procedural protections had the
effect of replicating an arms’ length transaction, they had a “cleansing” effect on
the transaction that justified judicial review under the deferential business
judgment rule.85
Unlike MFW, which involved a controlling stockholder on both sides of the
transaction, this case involves a merger between a third-party and a company with
a controlling stockholder. Despite SEPTA’s attempt to show otherwise, Volgenau
is not a buyer in this transaction. As a seller, his interest is generally aligned with
that of minority stockholders to the extent that he receives equal consideration for
his shares. But as this Court has observed before, a controlling stockholder may,
even in this context, inappropriately influence the outcome of the sale process:
[I]t is . . . true that [a controlling stockholder] and the minority
stockholders [are] in a sense competing for portions of the
consideration [that the third-party is] willing to pay to acquire [the
company] and that [the controlling stockholder] . . . could effectively
veto any transaction. In such a case it is paramount . . . that there be
robust procedural protections in place to ensure that the minority
stockholders have sufficient bargaining power and the ability to make
an informed choice of whether to accept the third-party’s offer for
their shares.86
Hammons sets forth the procedural protections necessary for a third-party
transaction involving a controlling shareholder to qualify for review under the
business judgment rule: (1) the transaction must be recommended by a
85
86
Id. at 501.
Hammons, 2009 WL 3165613, at *12.
26
disinterested and independent special committee, (2) which has “sufficient
authority and opportunity to bargain on behalf of minority stockholders,” including
the “ability to hire independent legal and financial advisors[;]” (3) the transaction
must be approved by stockholders in a non-waivable majority of the minority vote;
and (4) the stockholders must be fully informed and free of any coercion.87
C. The Standard of Review: Entire Fairness or Business Judgment?
As a threshold issue, the parties dispute whether the Court should review the
Merger under the entire fairness standard or the business judgment standard.
SEPTA contends that entire fairness is warranted because Volgenau stood on both
sides of the transaction. In response, the Defendants urge the Court to apply the
business judgment rule because the transaction was subject to robust procedural
protections, namely, a non-waivable majority of the minority vote and a
disinterested and independent Special Committee.
1. Did Volgenau Stand on Both Sides of the Merger?
The Plaintiff’s assertion that Volgenau stood on both sides of the Merger is
based both on Volgenau’s desire to preserve the culture and values of SRA and his
rollover of equity into the merged entity. According to the Plaintiff:
Volgenau and his interest were the reasons the sale process started. . .
By engaging as he did with Providence and then foisting it upon the
87
Hammons, 2009 WL 3165613, at *12 n. 38. The procedural protections are of no avail if the
controlling stockholder engages in “threats, coercion, or fraud.” Id.; see also Frank v. Elgamal,
2012 WL 1096090, at *8 (Del. Ch. Mar. 30, 2012).
27
Board as the only buyer that had ever interested him, he placed
himself knowingly and willfully in the shoes of a buyer in this
Merger.88
SEPTA further contends that Volgenau had a “heavy influence” on the sale process
through his selection of the Special Committee members, by steering the process
away from strategic sponsors, and by having contact with Providence, despite
explicit instructions not to do so.89 Volgenau’s relationship to Providence was
underscored, the Plaintiff asserts, by the fact that Providence, in a presentation to
lenders, referred to Volgenau as its partner and highlighted its special relationship
with him.90
The contention that Volgenau stood on both sides of the transaction is not
supported by the factual record or Delaware law. First, the record discloses no
prior affiliation between Volgenau and Providence.
In fact, they had no
relationship before the spring of 2010 when Volgenau and representatives of
Providence first met to discuss a potential transaction.91 Moreover, Volgenau’s
conversations with Providence in which a leveraged buyout was preliminarily
88
Pl.’s Br. 59.
Id. at 21, 59.
90
Id. Richardson’s reference to Volgenau as Providence’s partner occurred after the merger
agreement had been signed. See Naylor Aff. Ex. 29. Thus, this fact is not material evidence that
Volgenau and Providence had been affiliated or that Volgenau was a partner in the sense that he
stood on both sides of the transaction.
91
That Volgenau previously had prior relationships with certain Providence representatives is
not enough to establish a material affiliation.
89
28
discussed did not somehow magically transform Volgenau into an affiliate of
Providence.
Second, under Delaware law, “[w]hen a corporation with a controlling
stockholder merges with an unaffiliated company, the minority stockholders of the
controlled corporation are cashed-out, and the controlling stockholder receives a
minority interest in the surviving company, the controlling stockholder does not
‘stand on both sides’ of the merger.”92 The Hammons court rejected a similar
contention that a controlling stockholder’s retention of an equity interest and other
benefits created a “joint venture of some sort” or a “recapitalization.”93 As in
Hammons, where an unrelated entity made an offer to the Special Committee
representing minority stockholders,94 Providence, an entity unaffiliated with SRA,
made offers to, and negotiated with, SRA through a disinterested and independent
Special Committee that represented the interests of the minority stockholders.
Volgenau, who had the right to vote or not to vote his shares, did not become a
buyer in the Merger because he engaged in separate discussions with Providence
regarding his humanistic concerns.
Third, the Plaintiff’s assertion that Volgenau foisted upon the Special
Committee and the Board his preferred and only buyer, and then dominated the
92
Frank, 2012 WL 1096090, at *7 .
Hammons, 2009 WL 3165613, at *10.
94
Id.
93
29
Board to effectuate that transaction, is belied by the record. Importantly, the
Plaintiff has failed to dispute materially that the Special Committee executed a
robust process in which all interested bidders were afforded an equal opportunity
to buy SRA.
Accordingly, because there is no genuine issue of material fact as to whether
Volgenau did not stand on both sides of the transaction, the Merger will be
reviewed under the business judgment standard to determine if it satisfies the test
set forth in Hammons.
2. Was the Special Committee Disinterested and Independent?
The Plaintiff attempts to discount the independence and disinterestedness of
the members of the Special Committee by asserting that (a) Klein had a secret
motivation to deliver a deal with Providence to Volgenau—who was self-interested
in the Merger; and (b) the Special Committee was dominated by Volgenau and
Klein. Each of these contentions is addressed below.
The business judgment rule is a “presumption that in making a business
decision, the directors of a corporation act on an informed basis [i.e., with due
care], in good faith and in the honest belief that the action taken was in the best
interests of the company [i.e., loyally].”95 Accordingly, there is a presumption that
95
Goodwin v. Live Entm’t, Inc., 1999 WL 64265, at *24 (Del. Ch. Jan. 25, 1999), aff’d, 741 A.2d
16 (Del. 1999) (internal quotation marks omitted) (quoting Citron v. Fairchild Camera &
Instrument Corp., 569 A.2d 53, 64 (Del. 1989)).
30
directors are independent under Delaware law.96 To rebut the business judgment
rule on grounds of self-interest, the plaintiff must establish, first, that a director had
a “material self-interest in the challenged transaction. Evidence of mere selfinterest is not enough. Rather, there must be evidence of a substantial self-interest
suggesting disloyalty . . . .”97 Thus, directors may not “expect to derive any
personal financial benefit from [the transaction] in the sense of self-dealing, as
opposed to a benefit which devolves upon the corporation or all stockholders
generally.”98
Second, as to the self-interested directors, the Plaintiff must show that they:
a) constituted a majority of the board; b) controlled and dominated the
board as a whole; or c) i) failed to disclose their interests in the
transaction to the board; ii) and a reasonable board member would
have regarded the existence of their material interests as a significant
fact in the evaluation of the proposed transaction.99
Thus, the “mere presence of a conflicted director or an act of disloyalty by a
director, does not deprive the board of the business judgment rule’s presumption of
loyalty.”100
Independence “means that a director’s decision is based on the
corporate merits of the subject before the board rather than extraneous
96
Aronson v. Lewis, 473 A.2d 805, 815 (Del. 1984), overruled on other grounds by Brehm v.
Eisner, 746 A.2d 244 (Del. 2000).
97
Goodwin, 1999 WL 64265, at *25 (citation omitted).
98
Aronson, 473 A.2d at 812.
99
Goodwin, 1999 WL 64265, at *25.
100
Id.
31
considerations or influences.”101 To rebut the presumption of independence, a
plaintiff must demonstrate that the directors are “beholden” to the self-interested
parties or “so under their influence that their discretion would be sterilized.”102
(a) Was Klein Self-interested in the Merger?
First, the Plaintiff’s contention that Klein had a secret interest in pleasing
Volgenau is based in part on his undisclosed expectation that he would receive a
significant bonus for his work with the Special Committee. On February 3, 2011,
the Board set the Special Committee compensation at $75,000 for Klein and
$37,000 for the other members.103
At Volgenau’s urging, when the Board
approved the merger agreement during a March 31, 2011, Board meeting, it again
changed the Special Committee compensation to $75,000 for each member and an
additional $150,000 for Klein.
However, Klein declined the additional
compensation, explaining later that he did so because it was “premature.” 104 As a
result, the Board elected to make a charitable contribution of $150,000 to two
charitable organizations supported by Klein.105
On June 8, 2011, however, Klein sent Volgenau a memorandum in which he
expressed disappointment over the meager compensation offered to him for his
101
Aronson, 473 A.2d at 816.
Rales v. Blasband, 634 A.2d 927, 936 (Del. 1993).
103
Naylor Aff. Ex. 80 (Minutes of the February 3, 2011 SRA Board meeting). The Board
determined initially that $25,000 for the members and $50,000 for Klein was appropriate
compensation. Naylor Aff. Ex. 56 (Minutes of the November 9, 2010 Board meeting).
104
Naylor Aff. Ex. 84.
105
Naylor Aff. Ex. 82 (Minutes of the March 31, 2011 SRA Board meeting).
102
32
eight months of work directing the sale process and in light of the nearly
$30 million in fees and expenses paid to outside advisors for their help in
effectuating the Merger.106 Klein wrote that, based on his previous experience as
the chair of a special committee at a different company, a more reasonable amount
of compensation would have been at least $1.3 million, payable to two charities
with which Klein is affiliated.107
SEPTA contends that Klein, in addition to enriching himself, was likewise
interested in rewarding his professional associates. It points out that Klein had a
close professional relationship with Kirkland’s lead transactional attorney—
George Stamas (“Stamas”). Both Klein and Stamas had been partners at the same
law firm and both were then serving as directors on the Shakespeare Theatre
Company board.108 As the chair of the Special Committee, Klein negotiated with
Kirkland for a ten percent discount in fees in exchange for a “significant” bonus if
a “terrific economic outcome” was achieved.109 After the Merger was completed,
Klein then attempted to secure a $2 million bonus for Kirkland.110 Due to vigorous
opposition from Providence, the Special Committee eventually agreed to reduce
106
Naylor Aff. Ex. 84.
Id.
108
Naylor Aff. Ex. 59. Klein had also retained Kirkland before on behalf of another special
committee that he had chaired. Naylor Aff. Ex. 87 at SEPTA00502.
109
Naylor Aff. Ex. 60. In Klein’s view, a significant bonus entailed an amount “equal to the
billed fees or a multiple thereof.” Id.
110
Naylor Aff. Ex. 89.
107
33
Kirkland’s bonus to $1 million.111
Finally, along with Klein and Stamas,
Houlihan’s lead banker was also a donor and board member of the Shakespeare
Theatre Company.112 SEPTA similarly contends that Houlihan was incentivized to
steer the process to a completed transaction, regardless of the merits of the deal,
because the majority of its compensation was contingent upon SRA’s entering into
a deal.113
Perhaps Klein had an interest in pleasing Volgenau, as one friend might
have for another, but Klein was clearly independent of Volgenau. There is no
evidence that Klein was beholden to, or controlled by, Volgenau or that they had
any personal or business relationships outside of, or prior to, their interaction on
the SRA Board. That Klein encouraged Volgenau to determine the future of SRA
while he remained in a position to do so may be peculiar, but it does not suggest
that Klein was dominated by Volgenau.114 Moreover, although Klein informed
Providence of Serco’s superior offer, the reason that Klein did so is disputed. The
Plaintiff, of course, speculates that Klein was somehow helping Providence by
111
Naylor Aff. Exs. 77, 90.
Naylor Aff. Ex. 57. SEPTA also complains that the Special Committee allowed SRA’s longtime banker, CitiGroup, to advise Providence.
113
Naylor Aff. Ex. 61 (Houlihan Lokey Engagement Agreement). The Plaintiff further alleges
that Houlihan manipulated its fairness opinion to make the Merger price seem fair. Pl.’s Br. 5052. Revisions to a financial advisor’s analyses “are not inherently wrongful.” In re Novell, Inc.
S’holder Litig., 2013 WL 322560, at *12 (Del. Ch. Jan. 3, 2013). Even if the revisions were
questionable, they were not so irrational that the SRA Directors had to have known that the
fairness opinion was flawed.
114
It does suggest that Klein was looking out for the interests of Volgenau.
112
34
tipping it off to Serco’s offer. But Klein’s email to Providence does not show that
he was favoring Providence. Rather, the evidence shows that Klein, on behalf of
the Special Committee, intended to elicit a higher offer from Providence.115
More
troubling
is
Klein’s
request
to
Volgenau
for
additional
compensation.116 Although the request occurred after the merger agreement had
been signed, Klein’s email revealed that he had an expectation, based on previous
experience, that he should or would receive substantial compensation contingent
upon a completed merger and a favorable outcome.117 Because of his experience,
it is likely that Klein anticipated a possible bonus well before the merger
agreement was signed. Yet Klein never disclosed that expectation to the Board
until just a few days before the proxy was sent to stockholders.
The Defendants emphasize that Klein’s request was rebuffed and the actual
compensation he received was customary and fully disclosed. Directors serving on
a special committee are entitled to reasonable compensation for their efforts. As a
115
Perhaps the evidence that comes closest to showing that Klein favored Providence on behalf
of Volgenau was Klein’s disclosure that Volgenau intended to fend off Serco (as he had done
with all other interested parties) while SRA waited for Providence’s offer. Naylor Aff. Ex. 65.
116
See Perlegos v. Atmel Corp., 2007 WL 475453, at *16 n.119 (Del. Ch. Feb. 8, 2007)
(“[S]pecial committees have not been viewed as ‘independent’ where, . . . , members’
independence was materially affected because they stood to benefit in some form. . . .
117
Klein had clearly formed that expectation in his mind as of March 31, 2012 when he declined
the additional $150,000 offered to him by the Board for his work on the Special Committee. He
wrote later that he believed the compensation then was premature.
35
general rule, a director’s financial interest in his or her fees is not disqualifying
unless those fees are substantial.118
Klein’s subjective expectation of a possible bonus—substantially in excess
of the amount originally approved or ever contemplated by the Board—raises a
serious question regarding Klein’s motivation for completing a deal. SEPTA cites
In re Tele-Communications, Inc. Shareholders Litigation119 for the proposition that
the compensation of a special committee member that is “contingent, ambiguous,
or otherwise uncertain, raises a triable issue of material fact as to what each
member anticipated in the event the Special Committee approved the
transaction.”120
In Goodwin, two directors’ subjective expectancy of future
employment after a change in control was “sufficient evidence to generate a triable
issue of fact” regarding whether the potentially self-interested directors’
“expectations constituted a material interest in the merger not shared by the
stockholders.”121 In contrast, the Court also held that a third director’s subjective
expectancy in a future consulting agreement with the financial buyer did not create
a triable issue of fact whether the “[director] had a material self-interest in the
118
See Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1169 (Del. 1995); see also Orman v.
Cullman, 794 A.2d 5, 42 n. 62 (Del. Ch. 2002) (noting that generally directors’ fees do not
establish a material interest, but warning that the “Court’s view of the disqualifying effect of
such fees might be different if the fees were shown to exceed materially what is commonly
understood and accepted to be a usual and customary director’s fee.”).
119
2005 WL 3642727 (Del. Ch. Dec. 21, 2005).
120
Id. at *5.
121
Goodwin, 1999 WL 64265, at *25.
36
merger[,]”122 notwithstanding that the director and the buyer had negotiated over
the agreement during the sale process. In so holding, the Court explained that the
plaintiff had not alleged that the “potential sums [the director] would have received
from the consulting agreement would have, in the context of his annual income and
net worth, been of such value to have made it difficult for him to examine the
merger on the basis of its merits to [the company’s] stockholders alone.”123
Klein may have had, at all times, an unremitting focus to obtain the highest
reasonably attainable price. His desire for personal aggrandizement may not have
affected adversely his conduct as the chair of the Special Committee. Perhaps his
intention to seek a bonus formed only after he realized the significant disparity
between his compensation and the compensation of the advisors to the Special
Committee. Klein admittedly regarded his role in the outcome as invaluable and
second in importance only to Volgenau’s.124
But Klein may have also been influenced by other desires. If he believed
that a significant bonus was likely to depend upon a completed deal, he may have
been less aggressive in negotiating with Providence and Veritas.125
122
It is also
Id. at *26.
The Court also observed that the director was then a senior partner at a California law firm
and had served on boards of other companies. Id. at 26.
124
Naylor Aff. Ex. 84.
125
In re S. Peru Copper Corp. S’holder Deriv. Litig., 52 A.3d 761, 780 (Del. Ch. 2011), aff’d
sub nom. Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del. 2012) (noting that a director may
not have “consciously [given] in” but he “was less than ideally situated to press hard” given his
representation of a significant stockholder and his role as member of the special committee).
123
37
possible that Klein may have been subtly motivated to favor Volgenau’s interest
because he knew that a significant bonus was dependent upon receiving
Volgenau’s consent.
Indeed, when Klein pressed his case for why he was
deserving of a substantial reward, he specifically referred to completing a deal with
the buyer that would retain SRA’s name, values, and culture and “least adversely
affect SRA’s family of long time employees.”126
If Klein were any other member of the Special Committee, there would be
concern over whether his self-interest in the outcome affected the sale process.
Although he was not a “de facto one man committee,” Klein clearly had a
predominant role in the negotiations.
In a merger involving a controlling
stockholder, the “composition of the special committee is of central importance”
because it represents the interests of the minority stockholders.127
The
independence of each member is the “sina qua non of the entire negotiation
process.”128 Especially in a case where the special committee is composed of only
one director, the standard of independence requires that the member, “like Caesar’s
wife, to be above reproach.”129
Similarly, Klein’s independence and
disinterestedness is of central importance to the functioning and cleansing effect of
the Special Committee.
126
Naylor Aff. Ex. 84.
Gesoff v. IIC Indus., Inc., 902 A.2d 1130, 1145-46 (Del. Ch. 2006).
128
Id. at 1146.
129
Id. (internal quotation marks omitted).
127
38
Unlike in In re Tele-Communications, Inc., where the board approved a plan
in advance to “reasonably compensate the Special Committee,” 130 the Board here
never approved a plan upfront to compensate the Special Committee members on a
contingent basis, nor did it grant Klein’s request.131 In that respect, Klein’s postmerger agreement request may have been merely wishful thinking, but that does
necessarily mean that Klein’s interest in the Merger was not material to him.
The subjective standard is used when determining whether a director’s
financial self-interest in a merger is material.132
Ordinarily, the prospect of
receiving $1.3 million would be material,133 but Klein specifically requested that
the entire bonus go to two charities with which he was affiliated. Thus, in order to
find that Klein had a material self-interest in the Merger, the Court would have to
conclude that, had the bonus been distributed to Klein’s affiliated charities, he
would have materially benefited in some way from donating the money. Although
Klein serves as a board member on his affiliated charities, there is no evidence in
the record that Klein would have received any backdoor remuneration, measured in
dollars or accolades, for a donation made because of him.
130
In re Tele-Commc’ns, Inc., 2005 WL 3642727, at *5.
Klein may not have been granted his request, but it appears as if some Board members were
in favor of it. In fact, Providence’s strong objection to Klein’s bonus appears to be the reason it
was denied.
132
See Orman, 794 A.2d at 24 n.48.
133
See Orman, 794 A.2d at 31 (noting that it would be “naïve to say, as a matter of law, that
$3.3 million is immaterial”).
131
39
That Klein wrote a well-thought-out memorandum to explain why he was
deserving of the bonus would suggest that it was material to him. However, that is
not enough to raise a triable issue of material fact or rebut the presumption that
Klein is independent. The Plaintiff has failed to set forth other facts showing that
the requested bonus would have been material to him. Klein’s request that the
bonus be paid to charity, rather than to himself, strongly suggests that the monetary
payment was not material to him.134 Perhaps Klein sought the donation to obtain
accolades or enhance his prestige. That type of interest is not easily measured, and
SEPTA has not proffered any facts in support of that theory. Without more, the
Court declines to conclude that there is a dispute of material fact that Klein had a
material self-interest in the Merger.
Equally important to that conclusion is that there is no other evidence in the
record that Klein was otherwise self-interested in the Merger or favored
Volgenau’s alleged interest in a deal with Providence.
Indeed, that both
Providence and Veritas complained that the Special Committee was dragging the
process along is perhaps some evidence that Klein was not less aggressive in the
negotiations to ensure that a deal was completed. Moreover, Klein’s memorandum
134
The record reflects that Klein had been a partner in a major law firm, currently sits on the
board of two companies, had received millions of dollars from his service as a director, and,
received, in the Merger, millions of dollars for his SRA shares. Gilmore Aff. Ex. 4 (Proxy) at E2.
40
suggests that he would have likely requested a bonus regardless of whether a deal
was done with Providence or some other buyer.135
The Plaintiff has also failed to proffer evidence that Klein’s interest infected
the Special Committee as a whole. The Special Committee’s legal and financial
advisors were not tainted by their relationship with Klein or by their compensation
structure.136 They were rationally selected because of their location, competence,
and lack of any prior relationship to SRA.137
Klein’s effort to compensate
Kirkland for a job well done was not inconsistent with his fiduciary duties,
especially because Kirkland’s discretionary bonus was contemplated by the terms
of Kirkland’s engagement.138 Furthermore, Kirkland’s identification of a potential
135
Klein’s request for at least $1.3 million far exceeded what the Board had ever contemplated
and what Kirkland had advised was customary. Naylor Aff. Ex. 81 (chart prepared by Kirkland
showing special committee member’s compensation packages, none of which exceeded
$108,250). This type of request or expectation raises serious concerns about the objectivity of a
special committee member. One can easily imagine how this practice, if adopted, could be
fraught with potential abuse, especially when it is not disclosed to shareholders and directors
who might have thought such significant compensation material; if nothing else, it likely would
have generated envy.
136
See In re Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *23 (Del. Ch.
May 20, 2011) (“Contingent fees for . . . advisors . . . are somewhat ‘routine’ and previously
have been upheld by Delaware courts. Moreover, a sale process is not unreasonable under
Revlon merely because a special committee is advised by a financial advisor who might receive a
large contingent success fee, even if the special committee is considering only one bidder.”) The
Plaintiff cites In re Tele-Communications, Inc. Shareholders Litigation for the proposition that
contingent payments to a financial advisor of the special committee create a “serious issue of
material fact[.]” 2005 WL 3642727, at *10. In that case, however, the contingent fee was for
$40 million, while here, Houlihan stood to receive an estimated contingent fee of $8.4 million (of
a total $10 million in compensation) and Kirkland received a discretionary bonus of $1 million.
Gilmore Aff. Ex. 4 (Proxy) at 38.
137
See Naylor Aff. Ex. 10 (Gilburne Dep.) at 121, 124.
138
Without more, the Court declines to conclude that this is a material fact showing that Klein
was purposely trying to enrich Kirkland. It is well within the business judgment of a Board to
41
issue with Veritas’ need to obtain partnership consents to finance its proposed
merger does not imply that Kirkland or Klein was favoring Providence. Indeed,
there is no evidence in the record that the Special Committee’s concern (or
Kirkland’s concern) was pretextual. In fact, the record contains ample evidence
that the Special Committee (including Klein) would have voted in favor of either
Veritas or Providence given the value of the bids on the table.
In summary, the Court concludes that there is no genuine issue of material
fact as to whether Klein had a material self-interest in the Merger. Furthermore,
there is no triable issue of material fact that any interest of Klein did not infect the
process and deliberations of the Special Committee.
(b) Did Klein or Volgenau Dominate the Special Committee?
SEPTA further asserts that the Special Committee was dominated or
controlled by Klein or Volgenau. However, there is no basis in the record for
either assertion. With respect to Klein, the record does not imply that Klein was a
“de facto one man committee.”139 To be sure, Klein, as chair of the committee,
functioned as its leader and played a predominant role in the negotiations. Yet,
Gilburne testified that Klein “regularly reported back to the board and solicited
determine appropriate compensation for advisors. The prior relationships between Klein and the
representatives of Kirkland and Houlihan are not sufficient evidence to raise a question of
material fact as to whether Klein was willing to risk his reputation to enrich other individuals
with whom he sat on the Shakespeare Theatre Company board.
139
Pl.’s Br. 2.
42
input.”140 The record shows that the Special Committee members were involved in
the sale process and deliberations. They attended numerous Special Committee
meetings and calls, participated in discussions, and voiced their views on various
issues. To cite one specific example, all of the Special Committee members
participated in the selection and compensation of the committee’s legal and
financial advisors.
With respect to Volgenau, SEPTA asserts that he had “special interests
separate from those of the public stockholders” and those interests “were permitted
to dominate the Special Committee process.”141
There is no dispute that
Volgenau’s interests in the Merger were addressed by the Special Committee
through the establishment of a bifurcated process in which Volgenau met with
interested bidders. That decision was reasonable given that Volgenau, as the
controlling stockholder, had the right to vote his shares as he wished. In that way,
Volgenau’s interest in preserving SRA’s values and culture influenced whether a
transaction might be possible. But the Plaintiff fails to cite any material evidence
that Volgenau dominated the Special Committee process to achieve a transaction
with Providence.
As evidence that Volgenau’s influence infected the Special Committee
process, the Plaintiff points to how Volgenau had unauthorized discussions with
140
141
Naylor Aff. Ex. 10 (Gilburne Dep.) at 174.
Pl.’s Br. 64.
43
Providence after the formation of the committee.142 The record, however, reflects
that these limited, incidental contacts were harmless.143 SEPTA further contends
that Volgenau’s acceptance of a promissory note in exchange for a higher bid
favored Providence. While his acceptance of the note helped Providence match
Veritas’ bid, it was also in the best interest of the minority stockholders because,
ultimately, it forced Veritas to increase its offer.
Moreover, Volgenau had
previously agreed to increase his rollover amount from $100 million to
$150 million to allow Veritas to increase its offer.
In addition, SEPTA argues that Volgenau sought to undermine the
competing bid from Veritas by sending an unflattering article about Veritas’
chairman to Klein and the Special Committee. But this is not the type of behavior
that one could reasonably characterize as an underhanded attempt to influence the
sale process. Volgenau was merely relaying information he had obtained about
Veritas to the Special Committee. Finally, the Plaintiff contends that the go-shop
142
Naylor Aff. Exs. 133-36 (emails of Providence representatives). These emails note that
representatives of Providence had spoken with Volgenau on various occasions. However, none
of them provides material evidence that Volgenau was interfering with the Special Committee’s
process or negotiating with Providence on price.
143
Klein and Stamas met with Volgenau to discuss the “appropriate interaction [he should have]
with proposed bidders.” Gilmore Aff. Ex. 20 (Minutes of the November 9, 2010 Special
Committee meeting). Volgenau testified that: “They told me that I would – that I could not
engage in the negotiation process and that I would have limited information about what the
special committee was doing and that I could not interfere in the special committee process.”
Naylor Aff. Ex. 3 (Volgenau Dep.) at 142, 150, 164. In one instance where Providence
communicated an increased offer to Volgenau, he “dutifully related” the offer to the Special
Committee. Naylor Aff. Ex. 1 (Klein Dep.) at 168. DiPentima testified that: “Once the special
committee was formed and took over the process, Dr. Volgenau was very, very careful about any
discussions about the process.” Naylor Aff. Ex. 8 (DiPentima Dep.) at 268.
44
was, in effect, a sham because Volgenau had been assured that there were no
instances of a disruptive bid emerging from a go-shop where the company being
sold had a controlling stockholder.144 This fact, however, does not establish that
the go-shop was a sham or that Volgenau was disloyal or dominated the Special
Committee.
In contrast to the immaterial evidence and unsupported assertions proffered
by the Plaintiff, the record has ample substantive evidence that Volgenau did not
dominate the Special Committee to force a transaction with Providence.
It
bargained hard against Providence, forcing it to increase its bid from $27.25 per
share to $31.25 per share. Moreover, the Special Committee repeatedly rejected
Providence’s requests for exclusivity and even granted exclusivity to Veritas. It
solicited a plethora of other financial and strategic sponsors to participate in the
bidding process, even though Volgenau had initially expressed concerns about
strategic buyers.
In conclusion, there is no dispute of material fact that the Special Committee
functioned independently of Volgenau and Klein or that Klein was self-interested.
Thus, the Merger was recommended by a disinterested and independent special
committee. The record also establishes that the Special Committee was fully
functioning and had authority to select its advisors freely. Moreover, it had the
144
Pl.’s Br. 32.
45
authority to recommend or not to recommend any transaction. The record also
reflects that the SRA Directors were fully informed and exercised due care in
approving the Merger.145 Thus, there is no triable issue of material fact that they
did not breach their duty of care in negotiating and recommending the Merger.
3. Was the Merger Approved by a Non-waivable Majority of the
Minority Vote?
A fully informed, non-waivable majority of the minority vote affords
minority stockholders the ability to protect themselves from an unfair deal by
vetoing a transaction. When combined with an independent and disinterested
special committee that functions as a bargaining agent empowered to negotiate for
the highest price reasonably attainable, minority stockholders in a third-party
transaction are afforded robust protections justifying review under the business
judgment standard.
But in order for a majority of the minority vote to be
effective, stockholders must be fully and accurately informed. Although SEPTA
does not dispute that the Merger was subject to a non-waivable majority of the
145
In the context of a merger, the duty of care requires that a director “act in an informed and
deliberate manner in determining whether to approve an agreement of merger before submitting
the proposal to stockholders.” Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985), overruled
on other grounds by Gantler v. Stephens, 965 A. 2d 695 (Del. 2009). Director liability is
predicated on the concept of gross negligence. Id. Gross negligence has been defined as
“reckless indifference to or a deliberate disregard of the whole body of stockholders or actions
which are without the bounds of reason.” Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d
150, 192 (Del. Ch. 2005), aff’d, 906 A.2d 114 (Del. 2006) (internal quotation marks omitted).
SEPTA has not set forth any material evidence showing that the SRA Directors were uninformed
or acted with gross negligence in negotiating and approving the Merger. To the contrary, the
record shows that the Board was informed and exercised due care in approving the Merger.
46
minority vote,146 it nonetheless contends that the minority stockholders were not
fully informed.147
In response, the Defendants argue that SEPTA has waived its
disclosure claims. They further assert that the proxy was not misleading and did
not omit material facts.148
SEPTA contends that SRA omitted material information from the proxy or
made misleading disclosures therein.
First, it complains about the lack of
disclosure regarding Volgenau’s meeting with Providence before the formation of
the Special Committee, particularly, DiPentima’s role in the preliminary
discussions.149 Similarly, it contends that the proxy should have disclosed that
Volgenau knew that the go-shop was unlikely to produce a topping bid and that
Volgenau and Sloane kept Providence apprised of SRA’s bid for EIG.150
146
See Pl.’s Br. 72-75; Gilmore Aff. Ex. 4 (Proxy) at 2.
SRA submitted the preliminary proxy statement to the SEC on April 18, 2011. SEPTA
claimed that the preliminary proxy contained material omissions regarding, among other things,
Volgenau’s meetings with potential bidders and Providence’s relationship with Houlihan. Some
of the Plaintiff’s initial disclosure allegations were mooted by SRA’s definitive proxy statement,
Compl. ¶ 104, which was sent to stockholders on June 15, 2011. On July 8, 2011, SRA made
supplemental disclosures to address the Plaintiff’s additional concerns. Among other things, the
proxy contained a detailed history of the Merger and the Board’s recommendation to vote in
favor of the transaction. On July 15, 2011, SRA’s minority shareholders approved the Merger,
with approximately 81.3 percent of the outstanding disinterested shares (99.7 percent of the total
disinterested voting shares) approving the transaction. Gilmore Aff. Ex. 67 (July 15, 2011 SRA
Press Release).
148
Reply Br. in Supp. of the SRA Defs.’ Mot. for Summ. J. 19. The Court need not address the
Defendants’ waiver argument.
149
In addition, the Plaintiff contends that the substance of the meetings between Volgenau and
Providence was misleadingly portrayed by the proxy.
150
Pl.’s Br. 74.
147
47
Second, the Plaintiff asserts that the proxy fails to discuss fully Klein’s
expectation and demand for additional compensation and the allegedly
“contingent” aspect of Kirkland’s compensation.151
Third, SEPTA contends that
the proxy should have disclosed why Veritas decided to withdraw its bid. Fourth,
it contends that the proxy omitted material information relating to how the Board
determined that the Merger conformed to the equal treatment provision in SRA’s
charter or why the Board allowed Volgenau to obtain consideration different from
what the minority stockholders received. Fifth, and finally, the Plaintiff asserts
that the proxy failed to disclose that CitiGroup, which advised Providence in the
Merger, had been previously advising SRA’s study team.152
Under Delaware law, directors of a Delaware corporation “are under a
fiduciary duty to disclose fully and fairly all material information within the
board’s control when it seeks shareholder action.”153 The Plaintiff has the burden
of showing that an omitted fact is material.
An omitted fact is material if there is a substantial likelihood that a
reasonable shareholder would consider it important in deciding how to
vote. . . . Put another way, there must be a substantial likelihood that
the disclosure of the omitted fact would have been viewed by the
151
Id. at 73.
Id.
153
Arnold v. Soc’y for Sav. Bancorp., Inc., 650 A.2d 1270, 1277 (Del. 1994) (internal quotation
marks omitted). When the board makes partial disclosures, it is obligated to provide
stockholders with an “accurate, full, and fair characterization.” Id. at 1280.
152
48
reasonable investor as having significantly altered the total mix of
information made available.154
Importantly, Delaware law does not require that companies “bury the shareholders
in an avalanche of trivial information.”155 Nor does it require a “play-by-play
description of every consideration or action taken by a Board.156
First, the Plaintiff claims that the proxy contained misleading statements and
omitted material information regarding the exploratory meetings between
Volgenau (and SRA management) and Providence.
The proxy discloses an
overview of those discussions but, according to SEPTA, it lacks important details.
It is not obvious, and the Plaintiff has not explained, why disclosure of
DiPentima’s role in those meetings would have been important to a reasonable
shareholder in deciding how to vote.157 Similarly, that Volgenau was informed by
Providence that the go-shop was unlikely to result in a topping bid is not a fact that
would significantly alter the total mix of information made available. Finally,
SRA’s decision to update Providence on its bid for EIG is not particularly
surprisingly or noteworthy given that Providence had expressed an interest in
acquiring the Company. This type of play-by-play disclosure would not have been
important to a reasonable stockholder. In addition, the Plaintiff has not shown
154
Zirn v. VLI Corp., 621 A.2d 773, 778-79 (Del. 1993) (internal quotation marks omitted)
(quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
155
TSC Indus., Inc., 426 U.S. at 448-49.
156
In re Cogent, Inc. S’holder Litig., 7 A.3d 487, 511-12 (Del. Ch. 2010).
157
The fact that DiPentima is a former executive of SRA does not necessarily make his
participation in the preliminary discussions material to a shareholder in deciding how to vote.
49
what meetings were omitted or explained why those meetings or the contents of
those meetings were material.158 Thus, there is no dispute of material fact that the
stockholders were adequately informed of the early meetings between Providence
and Volgenau.
Second, should the proxy have disclosed Klein’s expectation of additional
compensation after the merger agreement was signed, even though he never
received it?
Importantly, the proxy fully and accurately discloses the
compensation that Klein actually received and notes that it was not contingent
upon the completion of the Merger.159 Under these circumstances the disclosure of
Klein’s wishful thinking is not likely to alter significantly the total mix of
information available to shareholders.160 Moreover, SRA need not disclose why it
declined Klein’s request because that plainly risks inundating stockholders with
unnecessary information.161 The Plaintiff also complains about SRA’s failure to
disclose Kirkland’s bonus, but it has failed to explain why Kirkland’s discretionary
compensation would have been material to a reasonable shareholder. Unlike the
contingent compensation of a financial advisor, who opines on the fairness of a
158
See Pl.’s Br. 74.
Gilmore Aff. Ex. 4 (Proxy) at 60.
160
If Klein’s expected bonus had been material to him, it likely would have been material to a
reasonable shareholder.
161
See In re Lukens Inc. S’holders Litig., 757 A.2d 720, 736 (Del. Ch. 1999), aff’d sub nom.
Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (noting that “requiring disclosure of every
material event that occurred and every decision not to pursue another option would make proxy
statements so voluminous that they would be practically useless.”).
159
50
transaction, which shareholders rely upon in deciding how to vote, the reasons for
disclosing a legal advisor’s compensation are not as clear. 162
Kirkland’s compensation was arguably discretionary.
In this case,
Accordingly, failure to
disclose Kirkland’s bonus did not deprive shareholders of a material fact.
Third, SEPTA asserts that the shareholders should have been informed of
why Veritas, at the last minute, left the auction process. The proxy only discloses
that “[Veritas] indicated that it was withdrawing its proposal and would no longer
participate in the process.”163
According to Veritas, it withdrew because it
believed that the Special Committee had been dragging it along by repeatedly
causing it to bid higher with the mistaken belief that the process was about to be
concluded.164 One problem with the Plaintiff’s complaint is that it would require
SRA to disclose the subjective beliefs, opinions, and statements of a third-party
involved in the bidding process.165 To require this type of disclosure generally
would risk disclosing speculative, inaccurate, and useless information. In this case,
the disclosure of this information would not have been important to a reasonable
162
See In re Atheros Commc’ns, Inc., 2011 WL 864928, at *8 (Del. Ch. Mar. 4, 2011)
(“Stockholders should know that their financial advisor, upon whom they are being asked to rely,
stands to reap a large reward only if the transaction closes and, as a practical matter, only if the
financial advisor renders a fairness opinion in favor of the transaction.”).
163
Gilmore Aff. Ex. 4 (Proxy) at 27.
164
Naylor Aff. Ex. 53.
165
See Klang v. Smith’s Food & Drug Ctrs., Inc., 1997 WL 257463, at *13 (Del. Ch. 1997),
aff’d, 702 A.2d 150 (Del. 1997) (no duty to disclose “where the omitted material was in the form
of vague allegations provided to the Board by a third party”).
51
stockholder.
Thus, the Court is not persuaded that SRA failed to disclose a
material fact or that the shareholders were not fully informed in this regard.166
Fourth, the Plaintiff contends that SRA should have disclosed “information
regarding how the Board determined that the Merger conformed to the equal
treatment requirements” in SRA’s certificate.167
This “tell me more” type of
disclosure, however, is not likely to be important to a reasonable investor because
the proxy discloses the material, pertinent facts: that the Board believed Volgenau
was receiving compensation equivalent to that received by other stockholders and
what Volgenau actually received.168
The Plaintiff’s disclosure claim here relates to its assertion that the Board
failed to adhere to the equal treatment provision. In effect, it contends that SRA
should have disclosed information that would have shed light on whether the
Board properly determined whether Volgenau’s consideration from the Merger
166
The Plaintiff also claims that shareholders should have been informed of Klein’s assessment
that Veritas would have paid more or forced Providence to do so had Kirkland not discovered the
issue with Veritas’ need to obtain certain partnership consents. This after-the-fact assessment is
not a material fact. SRA had no duty to disclose possibilities of what might have happened. See
Seibert v. Harper & Row, Publ’rs, Inc., 1984 WL 21874, 10 Del. J. Corp. L. 645, 655 (Del. Ch.
1984) (Proxy materials “need not include opinions or possibilities.”).
167
Pl.’s Br. 74.
168
Gilmore Aff. Ex. 4 (Proxy) at 57 [T]he Volgenau Rollover Trust committed to contribute,
immediately prior to the consummation of the merger, an aggregate amount of 4,800,000 shares
of our Class B common stock to Holdco (the equivalent of a $150 million investment based upon
the per share merger consideration of $31.25) in exchange for (i) certain equity securities of
Holdco with an aggregate value of $120 million and (ii) a promissory note issued by Holdco in
favor of Dr. Volgenau in an original principal amount of $30 million, repayable solely from the
proceeds (if any) of certain contemplated subsidiary divestitures by the Company.”).
52
was equivalent to what other stockholders received.
However, this type of
disclosure is generally not required under Delaware law.169
Finally, the failure to disclose that CitiGroup had previously advised the
study team and was now advising Providence did not deprive a reasonable
shareholder of a material fact. The Court is not persuaded that this relationship
poses a conflict of interest or would be of particular importance to a reasonable
shareholder in deciding how to vote on the proposed transaction.
In sum, the Special Committee was comprised of independent and
disinterested directors, and the stockholders were fully informed when they
approved the Merger in a non-waivable majority of the minority vote.170 Thus, the
Court will review the Merger under the business judgment standard.
D. Did the SRA Directors Breach Their Fiduciary Duty of Loyalty?
Count I alleges that the SRA Directors breached their fiduciary duties of
loyalty and care in connection with the sale of the Company to Providence.
Specifically, the Complaint alleges that the SRA Directors failed to conduct a
“reasonable and independent process[,]” “obtain the best price available for the
stockholders[,]” and “disclose material information” in the proxy statement.171 The
169
See In re Lukens Inc., 757 A.2d at 736 (“it is not enough simply to pose questions that are not
answered in the proxy statement”); In re MONY Gp., Inc. S’holder Litig., 853 A.2d 661, 682
(Del. Ch. 2004) (noting as a general rule that proxy materials are not required to state opinions,
possibilities, or legal theories).
170
There is no evidence or allegation of coercion.
171
Compl. ¶ 26.
53
Court has already determined that the Plaintiff’s disclosure claims raise no triable
issue of material fact. Thus, the Court need only address the price and process
claims.
Because the SRA Directors “acted with due care, in good faith, and in the
honest belief” that they were acting in the best interests of the Company, the
directors’ decisions are entitled to “great deference” and the Court will not
“invalidate the decision[,] . . . examine its reasonableness . . . [or] substitute [its]
views for those of the board if the [directors’] decision can be ‘attributed to any
rational business purpose.’”172 Thus, the “claims against the Defendants must be
dismissed unless no rational person could have believed that (1) the Merger was
favorable to [SRA’s] minority stockholders”173 and (2) the Board’s decisions
relating to the Merger were made with a business purpose.174
The Plaintiff asserts that the Merger price of $31.25 was inadequate and
unfair. In support of that claim, SEPTA offers expert opinion that the fair value of
172
Paramount Commc’ns Inc. v. QVC Network, Inc., 637 A.2d 34, 45 n. 17 (Del. 1994) (quoting
Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 954 (Del. 1985)).
173
MFW, 67 A.3d at 514.
174
The so-called Revlon duty requires that the board of directors “secure the best value
reasonably attainable for its shareholders . . . .” In re Dollar Thrifty S’holder Litig., 14 A.3d 573,
595 (Del. Ch. 2010). Even if Revlon applied, the result would be the same. See, e.g., McMullin
v. Beran, 765 A.2d 910, 920 (Del. 2000); Bershad v. Curtiss-Wright Corp., 535 A.2d 840, 845
(Del. 1987) (holding that any attempt to auction the company would have been futile because the
majority stockholder could have thwarted any effort to do so); Hammons, 2009 WL 3165613,
at *9; Mendel v. Carroll, 651 A.2d 297, 306 (Del. Ch. 1994).
54
SRA’s shares as of the Merger’s closing date was $41-$43 per share.175 It also
attempts to criticize and rebut the Defendants’ expert’s opinion and Houlihan’s
fairness opinion, both of which concluded that the Merger price was fair.
However, none of these contentions, or the facts supporting them, raises a triable
issue of material fact under the business judgment standard.
The Merger was effected at a 52.8 percent premium over the Company’s
unaffected stock price and was the highest price that any party was willing to pay
after a six month public sale process and a thirty-day go-shop.
During the sale
process, approximately ten financial and strategic acquirers signed confidentiality
agreements and conducted due diligence; five parties (three financial buyers and
two strategic sponsors) submitted formal indications of interest, and Veritas and
Providence engaged in a multi-round bidding contest. From Providence’s initial
indication of interest of $27.25 per share, the Special Committee negotiated with
Providence and Veritas for a higher price, eventually accepting Providence’s “best
and final offer” of $31.25 per share. Houlihan contacted roughly 50 potential
buyers during the go-shop, none of which submitted a topping bid. Moreover,
Houlihan, which the Board reasonably relied upon, opined that the Merger price
was fair.
Finally, 81.3 percent of the total outstanding shares not owned or
controlled by Volgenau voted in favor of the Merger. In light of these undisputed
175
Pl.’s Br. 39; Naylor Aff. Ex. 19 (Hurley Report) at 51.
55
facts, the Court can easily conclude that there is no triable issue of material fact
that a rational mind could have believed that the Merger price was fair. Thus, the
Defendants are entitled to judgment on the fair price claim.
With respect to the Plaintiff’s process contentions, there is no triable issue of
material fact that the decisions made by the Special Committee and the Board were
attributable to a rational business purpose. The Board wisely and properly decided
to form a special committee when Providence emerged as a serious bidder. 176 The
decision to bifurcate the sale process to facilitate Volgenau’s approval of the
Merger was not only rational, but practical in light of his controlling interest. For
the reasons discussed above, the Plaintiff’s criticisms of the Special Committee,
including that Klein and Volgenau dominated or controlled it, present no triable
issue of material fact. In short, the SRA Directors’ conduct was clearly rational
and guided by independent and qualified advisors. Even under enhanced scrutiny,
there is no evidence that the SRA Directors acted unreasonably or that their actions
were inconsistent with their fiduciary duties to act in the best interest of SRA’s
shareholders and to obtain the highest price reasonably attainable. Accordingly,
the Court will not substitute its judgment for that of the SRA Directors, whose
actions can plainly be attributed to a rational business purpose.
176
The Special Committee’s judgment to pursue financial buyers initially in order to safeguard
proprietary information was a rational business decision.
56
E. Did Volgenau and Sloane Breach their Fiduciary Duty of Loyalty by Engaging
in Self-Dealing?
Count II alleges that Volgenau breached his fiduciary duty of loyalty by
“opportunistically and secretly planning to take private the Company at a bargain
price.”177 Count II further asserts that Sloane, as CEO, breached that same duty
“by using his position to encourage and facilitate the Buyout.”178 The Court will
first examine the allegations against Volgenau, before turning to the contentions
directed to Sloane.
1. Did Volgenau Engage in Self-Dealing?
The Plaintiff’s allegations against Volgenau can be summarized and broken
down into four components: that Volgenau (1) would only agree to a merger with a
financial buyer; (2) orchestrated a preordained deal with Providence;
(3) dominated the Special Committee; and (4) received more money than minority
stockholders from the Merger.
First, the Plaintiff’s case against Volgenau rests in part upon his admittedly
negative disposition to strategic buyers. In response, the Defendants have set forth
substantial evidence that Volgenau was willing to sell his shares to a strategic
sponsor once he became more acquainted with them. Indeed, Volgenau testified
that his feelings toward strategic sponsors changed as it became more apparent that
177
178
Compl. ¶ 26.
Id.
57
they respected SRA’s values of honesty and service and would retain those values
following a successful acquisition. Whether there is a question of material fact
rests largely on whether Volgenau’s transformation was real and whether
Volgenau’s interest dominated the sale process.
As an initial matter, Volgenau’s interest in preserving SRA’s “name, values,
and culture” was not necessarily inconsistent with shareholder value or the duty to
act in the best interest of the Company. Delaware law recognizes that a company’s
unique culture may increase stockholder value and may warrant protection under
certain circumstances.179
Importantly, the Plaintiff has failed to point to any evidence showing that
Volgenau or his emphasis on high ethical values dissuaded a party from bidding.
In contrast, the Defendants have submitted affidavits from representatives of two
strategic bidders (Boeing and CGI) that considered purchasing SRA. The Boeing
representative reported that “Volgenau did not deter Boeing from submitting a bid
for SRA.”180
The CGI representative testified that Volgenau was “sincerely
interested in pursuing a potential strategic transaction with CGI,” and “never
179
See Paramount Commc’ns, Inc. v. Time Inc., 1989 WL 79880, at *4 (Del. Ch. July 14, 1989)
aff’d, 571 A.2d 1140 (Del. 1990); eBay Domestic Hldgs., Inc. v. Newmark, 16 A.3d 1, 33 (Del.
Ch. 2010) (noting that the corporate culture may be worthy of protection, especially where it
reasonably promotes stockholder value).
180
Aff. of John Meersman ¶¶ 12-13. The Boeing representative also averred that: “Dr. Volgenau
did not indicate that he was unwilling to sell to Boeing, and he did not attempt to dissuade
Boeing from participating in the process or submitting a bid.” Id. at ¶ 11.
58
indicated that he was unwilling to sell to CGI or any other strategic bidder.”181 The
record also reflects that Volgenau met with both strategic and financial buyers and
that the Special Committee treated the bidders equally. Moreover, the evidence
shows that all of the strategic sponsors dropped out for various reasons not related
to Volgenau, including internal factors and a concern that an attractive return could
not be achieved in light of the current market conditions in the government
services industry.
Second, there is no material evidence in the record that Volgenau
orchestrated a preordained deal with Providence that the Special Committee
merely rubber-stamped. As set forth in greater detail above, Volgenau’s early
meetings with Providence did not render a deal with Providence a fait accompli.
Quite the opposite, Volgenau had no control over the sale process once SRA
“started down the road of exploring the possibilities of selling.”182 As the Special
Committee entertained offers from other interested buyers, Volgenau agreed to
“not interfere in the issue of price” and not “impose conditions on prospective
bidders.”183
There is no evidence in the record that Volgenau violated this
181
Aff. of Claude Séguin ¶¶ 9, 11.
Naylor Aff. Ex. 1 (Klein Dep.) at 32.
183
Id. at 136.
182
59
understanding. Finally, Providence withdrew temporarily from the bidding process
in February 2011 because “we felt like we were a bird in the hand.”184
Third, as discussed above, there is no evidence that Volgenau dominated the
Special Committee. Just because a controlling stockholder has the ability to veto
any transaction does not necessarily impair the special committee process.185
Fourth, the Plaintiff asserts that Volgenau engaged in self-dealing because
he received greater per share consideration than the minority stockholders from the
Merger. The Plaintiff’s contention is based primarily on its assertion that SRA’s
purchase price was “unfair” and that a fair price of SRA was worth at least $41$43 per share.186
Under SRA’s certificate, Volgenau was entitled to receive “equal per share
payments or distributions” for his Class B shares. As Volgenau explained, “[The]
intention at the time . . . was for the Class B holders not to receive any preferential
price for their shares.”187 There is no evidence in the record that Volgenau, or the
Special Committee on his behalf, ever consciously attempted to obtain more
money than the minority stockholders from the Merger.
184
To the contrary,
Naylor Aff. Ex. 4 (Richardson Dep.) at 146; see Gilmore Aff. Ex. 75.
Hammons, 2009 WL 3165613, at *4.
186
See Pl.’s Br. 52-55. SEPTA also asserts that Volgenau received certain other benefits from
the Merger, not obtained by other stockholders. Among other things, these benefits include tagalong rights, registration rights, preemptive rights, continued employment as Chairman, and an
explicit commitment from Providence to preserve SRA’s culture of honesty and service. Naylor
Aff. Ex. 101 (Stockholder Agreement).
187
Naylor Aff. Ex. 3 (Volgenau Dep.) at 14-15.
185
60
Volgenau’s acceptance of a risky $30 million non-recourse promissory note is
some evidence that Volgenau sacrificed his economic position for the minority
stockholders.
Most importantly, it is undisputed that the Board, including
Volgenau, believed that his proceeds from the Merger were equal to or less than
that received by minority stockholders. The Board rationally made that conclusion
based on valuing Volgenau’s differing forms of compensation to equal
approximately $31.25 per share. Accordingly, Volgenau is entitled to judgment on
Count II.
2. Did Sloane Disloyally Facilitate Volgenau’s Alleged Self-Dealing?
The Plaintiff asserts that Sloane “facilitated Volgenau’s efforts to structure
an LBO with Providence”188 by, among other things, participating in the
exploratory meetings between Providence and Volgenau and keeping Providence
informed of SRA’s efforts to acquire EIG. Because Volgenau did not engage in
self-dealing or breach his fiduciary duties of loyalty and care, Sloane could not
have facilitated such conduct. Moreover, the record lacks any material evidence
that Sloane breached his fiduciary duties.
judgment as to Count II.
188
Pl.’s Br. 60.
61
Accordingly, Sloane is entitled to
F. Did the SRA Directors Breach their Duty of Loyalty by Approving a Merger
that Violated SRA’s Certificate of Incorporation?
Count IV of the Complaint alleges that the SRA Directors breached their
duty of loyalty by approving the Merger in violation of the “equal treatment”
provision in SRA’s charter. That provision reads: “[u]pon the merger . . . of the
Corporation . . . holders of each class of Common Stock will be entitled to receive
equal per share payments or distributions . . . .”189 The Plaintiff asserts that
Volgenau violated that provision in two ways: first, by receiving different forms of
consideration; and second, because he received, through his rollover interest,
greater consideration than the public stockholders. The latter assertion is based
primarily on the Plaintiff’s contention that SRA was worth more than $31.25 per
share at the time of the Merger.190
Contrary to SEPTA’s position, the plain language of the equal treatment
clause plainly permits differing forms of consideration.191 Under SRA’s charter,
the word “payments” is consistently used to refer to monetary compensation,192
while the term “distributions” typically is associated with the distribution of
189
Coen Decl. Ex. 31 (Charter) at § A.9 (italics added).
Pl.’s Br. 77-80.
191
See Benihana of Tokyo, Inc. v. Benihana, Inc., 906 A.2d 114, 120 (Del. 2006). “[C]ertificates
of incorporation are contracts, subject to the general rules of contract and statutory
construction . . . [I]f the charter language is clear and unambiguous, it must be given its plain
meaning.” Id.
192
See Coen Decl. Ex. 31 (Charter) at 13 (“payment of such expenses incurred by the
Indemnitee”), 14 (“indemnification payments to an Indemnitee” and “indemnification payments
to the Corporation”); Norton v. K-Sea Transp. P’rs L.P., 67 A.3d 354, 360 (Del. 2013) (contracts
are to be construed “as a whole and give effect to every provision if it is reasonably possible”).
190
62
securities. The common usage of these terms may encompass other forms of
consideration.193 The use of the word “or” shows that either form of consideration
is acceptable. Moreover, the word “equal” does not require identical forms of
consideration.194
This reading is also consistent with the underlying purpose of the equal
treatment clause.195 The creation of class B stock for Volgenau was intended both
to preclude him from receiving a premium for his shares and to protect against a
hostile takeover; there is no evidence in the charter or the record that it was
intended to prevent him from receiving a different form of consideration. Finally,
as the Defendants persuasively argue, this interpretation comports with the public
policy of facilitating efficient transactions.196
The second issue is a closer question.
In their depositions, the SRA
Directors could not recall if the Board ever specifically discussed whether
Volgenau’s rollover interest was equal on a per share basis to the consideration
193
See Coen Decl. Ex. 31 (Charter) at 3 (“Dividends and other distributions may be declared and
paid on the Common Stock”), (“distributions consisting of other voting securities of the
Corporation”), (“distributions consisting of securities convertible into, or exchangeable for,
voting securities of the Corporation”).
194
Merriam-Webster defines “equal” as “of the same measure, quality, amount, or number as
another.” Equal Definition, Merriam-Webster’s Dictionary, available at http://www.merriamwebster.com/dictionary/equal (last visited July 25, 2013).
195
Because the equal treatment provision is unambiguous, the Court need not examine extrinsic
evidence. But if it did, the evidence in the record supports the plain meaning of that clause.
196
Br. in Supp. of Def. Dr. Ernst Volgenau’s Mot. for Summ. J. 30-31.
63
received by the public stockholders.197 The Plaintiff seizes upon this fact to assert
that the SRA Directors acted disloyally by consciously disregarding their duty or
by knowingly violating positive law.198
However, at the time of the Merger, the Board understood that Volgenau
was receiving equal or less consideration than the minority shareholders.199 The
merger agreement was structured such that Volgenau’s rollover stock (4.8 million
shares) was equivalent to $150 million based on the $31.25 per share purchase
price that all stockholders received.200
As reflected in the proxy, the Board
understood that Volgenau’s interest in the new entity would not exceed
$150 million.
Houlihan had conducted a contemporaneous valuation that
197
Naylor Aff. Ex. 6 (Sloane Dep.) at 61-62; Ex. 10 (Gilburne Dep.) at 200-01; Ex. 7 (Grafton
Dep.) at 184-85; Ex. 9 (Ellis Dep.) at 128-29; Ex. 3 (Volgenau Dep.) at 15-16.
198
See In re Walt Disney Co. Derv. Litig., 906 A.2d 27, 66-67 (Del. 2006); Se. Pa. Transp. Auth.,
2012 WL 4038509, at *3 n.16 (“a decision to cause a corporation to take an act in violation of its
certificate of incorporation would appear analogous to a decision to cause the corporation to take
an illegal act.”). The type of bad faith necessary to qualify as a conscious disregard for one’s
responsibilities was recently addressed in Allen v. Encore Energy P’rs, L.P., 2013 WL 3803977,
at *7 (Del. 2013) (noting that this type of bad faith conduct lies between subjective bad faith and
gross negligence).
199
See Gilmore Aff. Ex. 4 (Proxy) at 57; Naylor Aff. Ex. 10 (Gilburne Dep.) at 202-03.
Q: Is it your understanding that Dr. Volgenau received more per share, less per
share, or the same per share consideration than all the other shareholders of SRA?
A: Less.
Q: Can you explain why?
A: . . . The portion of his stock that the buyers insisted he roll over into the
acquisition, he received a number of rollover shares at the same price as the cash
being paid for shares. But the $30 million he provided in the promissory note, he
got inferior consideration to the value of the shares than all the other shareholders
did, because he was getting a promissory note that was highly risky to the tune of
$30 million. Id.
200
Coen Decl. Ex. 41 (Volgenau’s Revocable Trust Letter Agreement) at ¶ 1, Ex. A; Gilmore
Aff. Ex. 4 (Proxy) at 57.
64
confirmed that $31.25 was a fair price for each share of SRA stock.
When
Providence proposed the $30 million non-recourse note to Volgenau, the Special
Committee specifically determined that Volgenau’s economic benefit from the
note would be capped at $30 million.201 Thus, despite not formally addressing the
matter, the evidence shows that the Board believed that Volgenau received equal or
less consideration than the minority stockholders.
While the actual value of an SRA share at the time of the Merger may very
well be a dispute of material fact, the Plaintiff is seeking precision in a practice
(i.e., the valuing of enterprises) that defies exactness. Consistent with this reality
and the deference typically afforded directors, the question is whether the Board’s
business judgment was both rational and made in good faith.
There is no genuine issue of material fact that the Board acted rationally
when it assumed that Volgenau’s rollover interest was equal to or less than
$150 million.202 Houlihan had opined that the Merger price was fair and, after a
201
Gilmore Ex. 55 (Minutes of the March 30, 2011 Special Committee meeting).
Volgenau also received certain rights or benefits from the Stockholders Agreement. He
became the Chairman of the new SRA and obtained a commitment from Providence to uphold
and preserve the values of honesty and service. However, most of the rights he received relate to
his minority interest in the new SRA and serve to protect that interest. Neither the Plaintiff nor
the Defendants attempted to value these benefits.
The inherent difficultly in valuing these rights would make it difficult for the Board to
determine whether Volgenau was receiving greater consideration than other shareholders. One
would be hard pressed to calculate the value of Providence’s commitment to maintain certain
values. A rational mind could have believed that Volgenau’s rights under the Stockholders
Agreement were defensive in nature, and thus, necessary to preserve his rollover interest.
Perhaps most troubling is Volgenau’s position as Chairman of the new SRA. As a significant
equity holder in the new SRA, Volgenau’s position on the board is likely a consequence of his
202
65
robust sale process, no higher bid had emerged. The Plaintiff has not pointed to
any evidence showing that the SRA Directors believed that Volgenau’s rollover
interest exceeded that amount. In fact, because the note had considerable risk and
no upside, the Board generally believed that Volgenau was receiving less
consideration. Accordingly, there is no dispute of material fact that the SRA
Directors did not consciously disregard a known duty or intentionally violate the
charter. The Defendants are therefore entitled to judgment on Count IV.
G. The Duty of Care and SRA’s Exculpatory Provision
Even if the SRA’s Directors had not satisfied their duty of care, the presence
of an exculpatory provision authorized by 8 Del. C. § 102(b)(7) in SRA’s charter
exculpates them from money damages arising from a breach of their duty of care
because they acted loyally and in good faith. Accordingly, the SRA Directors are
entitled to summary judgment on the Plaintiff’s duty of care claims on that basis as
well.203
equity holdings and a benefit to Providence (which holds two of the three seats on the board).
Under these circumstances, the Board could have rationally believed, in good faith, that
Volgenau received no greater consideration on a per share basis than what the minority
shareholders received from the Merger.
203
SEPTA has argued that the duty of care claims cannot be dismissed because entire fairness is
the applicable standard, and thus, “a determination that the director defendants are exculpated
from paying monetary damages can be made only after the basis for their liability has been
decided.” Emerald P’rs v. Berlin, 787 A.2d 85, 94 (Del. 2001). Given that the Court has held
that the business judgment rule is the proper standard of review, the Plaintiff’s argument fails.
66
H. The Aiding and Abetting Claim
The Plaintiff asserts in Count III that Providence aided and abetted the SRA
Directors’ breach of their fiduciary duties. An aiding and abetting claim turns on
“proof of scienter of the alleged abettor.”204 The Plaintiff bears the burden to show
that: (1) the SRA Directors owed a fiduciary duty to SEPTA; (2) the SRA
Directors breached that duty; (3) Providence “knowingly participated in the
breach;” and (4) the Plaintiff suffered damages “from the concerted action of the
[SRA Directors] and [Providence].”205 Because the SRA Directors did not breach
their fiduciary duties, Providence is entitled to judgment on the Plaintiff’s aiding
and abetting claim.
Even if the record contained a material fact supporting a breach of fiduciary
duty by the SRA Directors, the record does not contain facts evidencing that
Providence knowingly participated in such a breach. The following, undisputed
evidence collectively demonstrates that Providence was an arms-length bidder.206
204
Binks v. DSL.net, Inc., 2010 WL 1713629, at *10 (Del. Ch. Apr. 29, 2010).
Id. “Knowing participation in a board’s fiduciary breach requires that the third party act with
the knowledge that the conduct advocated or assisted constitutes such a breach. Under this
standard, a bidder’s attempts to reduce the sale price through arm’s-length negotiations cannot
give rise to liability for aiding and abetting . . . .” Malpiede v. Townson, 780 A.2d 1075, 1097
(Del. 2001).
206
See In re Frederick’s of Hollywood, Inc. S’holder Litig., 1998 WL 398244, at *3 (Del. Ch.
July 9, 1998), aff’d sub nom. Malpiede, 780 A.2d 1075 (“This Court has consistently held that
evidence of arm’s-length negotiation with fiduciaries negates a claim of aiding and abetting,
because such evidence precludes a showing that the defendants knowingly participated in the
breach by the fiduciaries.”).
205
67
There no evidence in the record that Providence and SRA, during their initial
meetings, hatched a plan for Providence to “opportunistically” acquire SRA
at a bargain price.207
Instead of pursuing a possible transaction with Providence, Volgenau and
the Board approved the formation of the strategic study team to assess the
strategic options available to SRA.208
SRA pursued the acquisition of Lockheed Martin’s EIG, notwithstanding the
fact that Providence indicated that it would not pursue an acquisition of SRA
if it acquired EIG.209
From July to mid-October 2010, discussions between Providence and SRA
ceased as SRA attempted to buy EIG.
The Special Committee refused to commence negotiations with Providence
at their initial indication of interest of $27.25 and $28.50 per share.210
The Special Committee’s initial strategy was to extract from Providence a
high bid that it could use as a floor to commence an auction process.211
The Special Committee repeatedly declined requests for exclusivity, causing
Providence to withdraw from the auction for a short period, and repeatedly
forced Providence to increase its bid.212
SRA entered into exclusive negotiations with Veritas on the last day before
the submission of the final bids.213
207
Compl. ¶ 2,
Gilmore Aff. Ex. 4 (Proxy) at 18; Naylor Aff. Ex. 3 (Volgenau Dep.) at 47, 50, 58.
209
Naylor Aff. Ex. 4 (Richardson Dep.) at 94, 98, 101, 105; Ex. 3 (Volgenau Dep.) at 126-32.
210
Gilmore Aff. Ex. 4 (Proxy) at 20-21; Naylor Aff. Ex. 4 (Richardson Dep.) at 120-21.
211
Naylor Aff. Ex. 1 (Klein Dep.) at 125-27.
212
Naylor Aff. Ex. 1 (Klein Dep.) at 149, 199; Gilmore Aff. Ex. 4 (Proxy) at 24; Naylor Aff.
Ex. 4 (Richardson Dep.) at 144 (“We really felt like we were sort of being used in the process, to
get higher . . . bids from others . . . .”).
213
Gilmore Aff. Ex. 4 (Proxy) at 27; Naylor Aff. Ex. 4 (Richardson Dep.) at 164-65.
208
68
The Plaintiff has not refuted this evidence or otherwise shown that there is a
dispute of material fact.214
Providence, therefore, is entitled to judgment on
Count III.
IV. CONCLUSION
As does MFW, this case serves as an example of how the proper utilization
of certain procedural devices can avoid judicial review under the entire fairness
standard and, perhaps in most instances, the burdens of trial.
Providence’s
acquisition of SRA was recommended by a fully functioning, independent special
committee that was empowered to negotiate on behalf of the minority
stockholders. It had the ability to hire independent advisors and not recommend a
transaction.
Fully informed shareholders voted overwhelmingly in favor of the
Merger in a non-waivable majority of the minority vote.
SEPTA’s challenge to the Merger falls short because there is no triable issue
of material fact as to whether the SRA Directors’ breached their fiduciary duties.
The Board’s decisions were rational (and reasonable) and made in good faith.
Accordingly, the Defendants are entitled to judgment on all counts.
An implementing order will be entered.
214
With respect to the Plaintiff’s charter claim, it has not proffered any evidence that Providence
was aware of the “equal treatment” provision in SRA’s charter, let alone that the Board was
potentially violating it. See In re John Q. Hammons Hotels Inc., 2011 WL 227634, at *7 (Del.
Ch. Jan. 14, 2011) (court found no knowing participation where purchaser negotiated at arm’slength and believed that he was paying the controlling stockholder “less per share than the $24
per share received by the minority stockholders”).
69
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