In re Ness Techs., Inc. S’holders Litig., C.A. No. 6569-VCN (Del. Ch. July 22, 2011) (V.C. Noble)
In this letter opinion, Vice Chancellor Noble denied, in large part, a motion to expedite proceedings filed by stockholders of Ness Technologies, Inc. (“Ness”) in a putative class action asserting that Ness’s board of directors (the “Board”) breached its fiduciary duties in connection with the proposed acquisition of Ness by Citi Venture Capital International (“CVCI”). Vice Chancellor Noble granted the motion only for limited discovery as to a disclosure claim to determine whether the financial advisors to the Board and Special Committee were conflicted because of a pre-existing relationship with CVCI.
On June 10, 2011, Ness and CVCI announced that they had entered into a merger agreement through which a wholly-owned subsidiary of CVCI, Jersey Acquisition Corporation, would acquire Ness for $7.75 cash per share (the “Proposed Transaction”). The Proposed Transaction resulted from an eleven-month sale process, involving over thirty potential buyers.
The sale process began when CVCI made an unsolicited bid for Ness on July 16, 2010, seeking to acquire Ness for between $5.50 and $5.75 per share. The Board promptly retained Bank of America Merrill Lynch (“BoA”) as its financial advisor, and formed a Special Committee that retained Jeffries & Co. (“Jeffries”) as its financial advisor. The Special Committee first sought a higher price from CVCI, but contacted other potential buyers after its negotiations with CVCI collapsed. Several months later, CVCI made another unsolicited bid of $7.75 per share that Ness accepted.
After the announcement of the Proposed Transaction, the plaintiffs sued alleging price and process claims, and claims that the disclosures made about the Proposed Transaction were inadequate. The plaintiffs moved to expedite discovery for a preliminary injunction hearing. Vice Chancellor Noble noted that, “[a] party’s request to schedule an application for a preliminary injunction, and to expedite the discovery related thereto, is normally granted. Exceptions to that norm are rare,” because a plaintiff need only state a “colorable claim.”
Despite this low threshold, Vice Chancellor Noble held that the plaintiffs’ claims, in large part, were “not sufficiently specific to rise to the level of colorable claims.” For example, the plaintiffs alleged that one of Ness’s directors was conflicted, but did not dispute that the Board formed a Special Committee and excluded the conflicted director from the sale process. The plaintiffs also alleged that the deal protection provisions in the agreement were “onerous and preclusive,” but provided “no explanation as to how these relatively mundane deal protections would prevent a serious bidder from making a superior offer.” As a result, the plaintiffs’ allegations did not sufficiently color the claim that either the price or process of the Proposed Transaction was unfair to Ness’s stockholders.
The Vice Chancellor held that the only aspect of the complaint that “possibly stated a colorable claim” was the allegation that alleged conflicts of interest on the part of the financial advisors had not been sufficiently disclosed. Although the Preliminary Proxy disclosed that Jeffries and BoA had a pre-existing relationship with CVCI and its affiliates, it did not indicate how much business they did, or might expect to do in the future. If either financial advisor did a material amount of business with CVCI, then the plaintiffs would have a colorable claim. Therefore, Vice Chancellor Noble granted the plaintiffs’ motion to engage in expedited discovery to “answer the narrow question of whether [the] Special Committee’s or the Board’s financial advisor’s past, present, or expected future dealings with CVCI or its affiliates created a conflict of interest for one or both of the financial advisors.” The Vice Chancellor denied the motion to expedite in all other respects.