In re Novell, Inc. S’holder Litig., C.A. No. 6032 (Del. Ch. Nov. 25, 2014) (Noble, V.C.)
In this memorandum opinion, the Court of Chancery granted summary judgment in favor of defendants on claims alleging that directors acted in bad faith by favoring a bidder in a sale process for reasons other than the pursuit of the best interests of the corporation and its stockholders. In so holding, the Court explained that some “troubling” facts and an “imperfect” sale process were insufficient to support a bad faith claim against a board composed of a majority of independent directors whose actions were within the realm of reasonableness.
The bad faith claim, which was the only claim to survive a motion to dismiss granted by the Court in January 2013, centered on the purportedly favorable treatment by the Novell, Inc. board of directors (the “Board”) toward Novell’s acquirer, Attachmate Corporation (“Attachmate”), over another bidder, Symphony Technology Group (“Symphony”), in the company’s 2010 sale process. Plaintiffs, for example, complained about delayed or incomplete notification to Symphony of developments in the sale process, delays in providing Symphony with a draft nondisclosure agreement, restrictions placed on Symphony’s ability to partner with other potential bidders, and the Board’s granting and maintaining exclusivity with Attachmate. Plaintiffs also complained about disclosures made to Attachmate by one director with ties to certain Attachmate stockholders.
Applying enhanced scrutiny to the analysis of the bad faith claim (rather than the standards of review applicable under the business judgment rule or “entire fairness” review), the Court explained that plaintiffs must show not only that the defendant directors’ actions were unreasonable but also that the directors were motivated by an improper purpose that makes their conduct culpable.
Regarding reasonableness, the Court found evidence was unrebutted that favoring Attachmate—for instance, by granting it exclusivity and failing to engage with Symphony during periods of exclusivity with Attachmate—was reasonable in light of the Board’s view that a merger with Attachmate was more certain to close. The Board met no fewer than twenty-five times as part of the sale process and repeatedly sought and considered advice from legal and financial advisors whose competence was not questioned.
Regarding improper purpose, the Court noted that, while connections of one director to Attachmate were arguably a cause of concern, plaintiffs offered no facts to show that the interests of that one director overpowered the judgment of the seven other independent, disinterested directors. Plaintiffs did not present facts to question the motives of a majority of the Board. Even assuming that directors made mistakes in the sale process, such mistakes were, according to the Court, at most breaches of the duty of care, and Novell’s charter contained a provision under 8 Del. C. § 102(b)(7) eliminating monetary liability for directors for breaches of the fiduciary duty of care.