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In re TIBCO Software Inc. S’holders Litig., C.A. No. 10319-CB (Del Ch. Nov. 25, 2014) (C. Bouchard)

November 25, 2014

In this memorandum opinion, the Court of Chancery declined to enjoin Vista Equity Partners V, L.P.’s acquisition of TIBCO Software Inc., finding that, although the record showed that, based on an inaccurate share count of TIBCO stock, both Vista and TIBCO thought that the merger would be consummated at an aggregate equity value of $4.244 billion rather than $4.144 billion, the plaintiff did not demonstrate a reasonable probability of success on his claim for reformation of the merger agreement.  Specifically, the Court held that the plaintiff stockholder failed to show by clear and convincing evidence that the parties specifically agreed that the transaction would be consummated at an overall amount rather than a price per share.  The Court also declined to enter a preliminary injunction based on plaintiff’s breach of fiduciary duty claims against the TIBCO board of directors (the “Board”) relating to the Board’s actions after it learned that the proposed merger would not yield the expected equity value, finding that plaintiff failed to establish that irreparable harm would result absent a preliminary injunction because the harm alleged was easily quantifiable.

After several months of negotiations and preliminary bids, on September 26, 2014, Vista submitted a final offer to acquire all of TIBCO’s common stock for $24 per share.  In arriving at this offer, Vista relied on a spreadsheet (the “Cap Table”) provided by TIBCO’s financial advisor, Goldman Sachs & Co., that overstated the number of outstanding shares of TIBCO’s common stock.  Based on the inaccurate share count in the Cap Table, Vista anticipated that its offer for $24 per share represented an implied aggregate equity value of $4.224 billion.  On September 27, 2014, the TIPCO Board unanimously approved the merger with Vista, relying in part on Goldman’s presentation on the fairness of Vista’s offer, which in turn relied on the incorrect share count in the Cap Table and assumed a total implied equity value of $4.224 billion. 

The same day, TIBCO and Vista executed a merger agreement (the “Merger Agreement”), which provided that each share of TIBCO common stock would be “automatically converted into the right to receive cash in an amount to $24.00, without interest.”  The Merger Agreement did not list a total purchase price or an implied equity value for the transaction but did include a capitalization representation (the “Cap Rep”) that accurately provided the number of outstanding common shares of TIBCO common stock.  The Merger Agreement provided a termination right for Vista in the event that the Cap Rep was inaccurate at closing to the extent that Vista would be required to pay more than $10 million above the product of $24 multiplied by the number of fully diluted shares reflected in the Cap Rep.  The Merger Agreement also provided for a termination fee of $116.7 million, or 2.75% of the assumed $4.244 billion equity value.  On September 29, 2014, TIBCO issued a press release announcing the merger. 

On October 5, 2014, upon reviewing a draft proxy statement, a Goldman employee identified for the first time the error in the Cap Table, and Goldman and TIBCO recognized that correcting the share count in the Cap Table reduced the total implied equity consideration of the proposed merger by about $100 million from $4.244 billion to $4.144 billion.  The Board thereafter met with Goldman to discuss the implications of the error.  Goldman explained how the error in the Cap Table impacted its initial fairness opinion, and confirmed that Goldman did not change its opinion that the $24 per share offered in the merger was fair to TIBCO’s stockholders, even at the lower total equity consideration of $4.144 billion.  Without discussing with Goldman whether Vista had relied on the incorrect information in the Cap Table in calculating its final offer, the Board concluded that Goldman’s revised analysis did not alter the Board’s recommendation that stockholders approve the merger.  On October 15, 2014, Vista informed Goldman that it had in fact relied on the incorrect share count in the Cap Table in calculating its final offer.  Goldman, however, never communicated this fact to the Board.  On October 16, 2014, TIBCO filed its preliminary proxy statement, disclosing the error in the Cap Table as well as the revised, accurate total equity consideration represented by the merger.

On October 23, 2014, the Board met again to consider what, if anything, it should do in light of the Cap Table error.  At that time, the Board still did not know how the error occurred or whether Vista had relied upon the incorrect share count in arriving at its final offer.  Concluding that the Merger Agreement did not provide a basis for TIBCO to force Vista to increase its per share merger price or otherwise change the terms of their agreement, the Board decided not to attempt to renegotiate and, rather, to proceed with the merger on the terms set forth in the Merger Agreement.  The Board also concluded that the $24 per share offer appeared to be the highest price achievable at the time of negotiation. 

Plaintiff moved to enjoin the stockholder vote on the Merger Agreement until an expedited trial could be held on his suit to reform the per-share consideration in the Merger Agreement from $24.00 to $24.58, which would result in a transaction with a total equity consideration of $4.244 billion.  At oral argument, plaintiff also argued that the stockholder vote should be enjoined because the Board breached its fiduciary duties in relation to how it reacted to the news of the Cap Table error. 

With respect to plaintiff’s reformation claim, the Court explained that, to succeed on that claim, plaintiff would be required to establish at trial, by clear and convincing evidence, three distinct facts: (i) that Vista thought the merger would be consummated at an aggregate equity value of $4.244 billion; (ii) that TIBCO also thought the merger would be consummated at an aggregate equity value of $4.244 billion; and (ii) that Vista and TIBCO had specifically agreed that the merger would be consummated at an aggregate equity value of $4.244 billion.  The Court found that plaintiff had a reasonable probability of establishing by clear and convincing evidence that the first two elements were satisfied but had failed to demonstrate a reasonable probability of succeeding on the third element—showing by clear and convincing evidence that Vista and TIBCO had specifically agreed that the merger would be at an aggregate equity value of $4.244 billion.  In reaching this conclusion, the Court focused on Vista’s final offer letter, the minutes reflecting the Board’s acceptance of Vista’s final offer, and the Merger Agreement, which each reflected an agreement to a transaction based on a per-share figure, and not based on an aggregate equity value.  The Court also noted that the Merger Agreement (through the Cap Rep), recognized that the number of TIBCO’s fully diluted shares might change between signing and closing, which reflected the parties’ understanding that the transaction’s aggregate equity value was not fixed.  The Court found that the fact that the parties negotiated the termination fee and the limited guaranty in the Merger Agreement as a percentage of the assumed $4.244 billion equity value did not outweigh the strong evidence showing that the $24 per share figure in the Merger Agreement accurately reflected the parties’ agreement.  Accordingly, the Court declined to enter a preliminary injunction based on the reformation claim.

The Court also rejected plaintiff’s argument that the stockholder vote should be enjoined because of the Board’s alleged breach of fiduciary duty.  Plaintiff contended that the Board breached its duty of care by failing to adequately inform itself about the nature and circumstances surrounding the error in the Cap Table, and breached its fiduciary duties under Revlon by failing to request that Vista amend the Merger Agreement to reflect a transaction with an aggregate equity value of $4.244 billion.  Because plaintiff’s fiduciary duty claims concerned a definable sum of money – $100 million – the Court held that plaintiff had failed to establish the existence of irreparable harm should the stockholder vote on the merger proceed.  Significantly, the Court noted that the presence of a Section 102(b)(7) provision in TIBCO’s charter did not change the Court’s conclusion, explaining that the Board’s potential immunity from any monetary liability for the alleged breaches did not change the fact that the damages alleged by plaintiff were quantifiable.  As such, the Court declined to enjoin the stockholder vote based on plaintiff’s breach of fiduciary duty claims.  While declining to engage in any assessment of the merits of plaintiff’s fiduciary duty and aiding and abetting claims, the Court noted that there were “troubling aspects of the record” regarding the basic competence with which the mechanics of the bid process were handled and the quality of the information provided to the Board once the error in the Cap Table was discovered. 

The full opinion is available here