In re Compellent Technologies, Inc. S'holder Litig., Consol. C.A. No. 6084-VCL (Del. Ch. Dec. 9, 2011) (V.C. Laster)
In In re Compellent Technologies, Inc. S'holder Litig., the Court of Chancery awarded $2.4 million in attorneys’ fees to shareholder plaintiffs following settlement of their suit to enjoin the acquisition of Compellent Technologies, Inc. (“Compellent”) by Dell Inc. (“Dell”). Pursuant to the settlement, defendants loosened the deal protections in the merger agreement and issued six supplemental disclosures. Plaintiffs’ counsel sought fees and expenses of $6 million.
In late December 2010, Dell initially expressed an interest in acquiring Compellent at a price of $23 to $25 per share. Compellent’s board promptly engaged financial advisors to canvass the market but they did not receive any other indications of interest. The board negotiated with Dell to increase its offer price to $27.75 and announced a proposed acquisition on December 13, 2010. Dell, having recently lost a bidding war for another company in the same industry, had negotiated aggressive variants of the customary defensive measures. The Court noted specifically the expansive and unqualified no-shop clause that imposed strict liability for its breach, the superior offer exception which required strict compliance with the no-shop provision absent a board determination that failure to take action would constitute a breach of fiduciary duty, Dell’s expansive information rights and ability to force a shareholder vote, and the board’s inability to change its recommendation unless several conditions were met. Further, the Court noted that the merger agreement required Compellent to adopt a stockholder rights plan with a 15% trigger and provided for a termination fee that represented about 3.95% of the equity value of the deal and had a “hairpin“ trigger that induced the board not to respond to superior offers.
Shareholders sued to enjoin the transaction and conducted expedited discovery, which included over 106,000 pages of documents and six depositions. Before merits briefing or a hearing, the parties negotiated a settlement that required modification of the merger agreement and six supplemental disclosures. In the revised merger agreement, defendants (i) eliminated a provision that precluded competing bidders from accessing non-public information for 275 days, (ii) limited liability for breach of the no-shop provision and expanded the superior offer exception, (iii) limited Dell’s information rights, (iv) limited triggering events for the termination fee, (v) reduced the termination fee to 3.23%, and (vi) rescinded the rights plan. The supplemental disclosures related to the events leading up to the merger agreement (which the Court found to be “interesting” but not material) and the financial advisors’ relationships with Compellent and Dell.
No competing bidder emerged and Compellent’s shareholders approved the merger, which closed on February 22, 2011.
Plaintiffs applied for an award of $6 million in fees in connection with the benefits they claimed to have achieved for Compellent shareholders. The Court considered the seven factors set forth by the Delaware Supreme Court in Sugarland and awarded $2.4 million in attorneys’ fees to plaintiffs. The Court focused primarily on the two most important Sugarland factors: the benefit conferred on the plaintiff class, which in this case was primarily the loosening of aggressive deal protections, and whether the plaintiff should be credited with achieving the benefit. Because parties frequently agree upon attorneys’ fee awards and because the Court has wide discretion in approving those fees, the Court noted that there is no framework to quantify the value of revised deal protections.
The Court imposed a framework that applied an estimated probability that a topping bid would emerge to an estimated increase in transaction value arising from subsequent bidding. The estimated probability that a topping bid would emerge under the revised “suite of deal protections” was approximately 8%. The Court’s calculation was informed by plaintiff’s expert’s report, which compared the revised suite to the suites in 62 comparable transactions and concluded there was a 9.38% chance under the revised terms that a topping bid would emerge. In addition, the Court considered data from four empirical studies but found their estimated incidence of topping bids across the market, (ranging from 12.75% to 42.78 %), to be high. Ultimately, the Court accepted plaintiff’s 9.38% probability estimate but adjusted it downward for three reasons. First, the Court reduced the probability to account for the slight chance of a topping bid under the original merger agreement. Second, the Court reduced the probability of a topping bid because the revised merger agreement remained restrictive and buyer-friendly. It still contained a force the vote provision, a lockup of 27% of the outstanding shares, information rights that entitled Dell to real-time information about any competing bid and advance notice of any information conveyed to a second bidder, unlimited matching rights with a right of first refusal, and a healthy termination fee equal to 3.23% of equity value. Finally, the Court reduced the probability estimate to account for Compellent’s market canvass.
The Court next estimated that the emergence of a topping bid would increase the transaction value by 11.37%. This calculation was informed by data from three published studies that reported that the emergence of competing bidders on average increased transaction value by 11.37%, 15%, and 18.2%. The Court selected the lowest of these figures because of its earlier finding that even the revised terms likely would have had a dampening effect on price competition. Finally, the Court held that plaintiffs’ counsel was entitled to 25% of the benefit achieved because, although the case settled at a relatively early stage, plaintiffs’ counsel engaged in a substantial effort on an abbreviated time frame, reviewing over 100,000 pages of documents and taking six depositions in less than three weeks.
Applying each of the above inputs, the Court calculated a fee award of $120,000 for the adjusted termination fee (25% of the benefit, estimated as 8% of the $6,000,000 decrease in the termination fee). Next, the Court calculated a fee award of $2,183,040 for the loosening of the other defensive measures (25% of the benefit, estimated as 8% of the estimated 11.37% increase in the value of the $960 million transaction). Finally, the Court added $100,000 for the minimal value of the two supplemental disclosures that related to the financial advisors’ relationships with Compellent and Dell.