In re Saba Software, Inc. Stockholder Litig., C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017) (Slights, V.C.)
In this pleadings-stage memorandum opinion, the Court of Chancery for the first time declined to apply the Corwin “cleansing” doctrine set forth by the Delaware Supreme Court in Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304 (Del. 2015), finding it was “reasonably conceivable,” from the plaintiff’s complaint, that a stockholder vote approving a merger was “neither fully informed nor uncoerced.” Additionally, the Court concluded that the plaintiff adequately pled a non-exculpated claim of bad faith and breach of the duty of loyalty, but failed to state a claim for aiding and abetting breach of fiduciary duty.
The action arose out of the acquisition of Saba Software, Inc. (“Saba”) by entities affiliated with private equity firm Vector Capital Management, L.P. (the “Vector Defendants”) in a $9 per share all-cash merger that closed in March 2015 (the “Merger”). The merger consideration represented a 2 percent discount to Saba’s then-trading average stock price. Prior to the Merger, the Securities and Exchange Commission (“SEC”) had determined that, between 2008 and 2012, Saba fraudulently overstated its pre-tax earnings. After Saba failed to meet a deadline set by the SEC to restate its financials (the “Restatement”), the SEC deregistered Saba’s common stock rendering the stock illiquid. Surrounded by these regulatory problems, Saba announced it was exploring alternative strategies, including a possible sale of the company, and following a months-long sale process, a majority of Saba’s stockholders approved the Merger.
The complaint alleges that the Saba Board of Directors (the “Individual Defendants” or the “Board”) breached their fiduciary duties (Count I) and that the Vector Defendants aided and abetted the Individual Defendants’ breach of fiduciary duties (Count II). The Individual Defendants moved to dismiss the complaint arguing that (i) the Merger was “cleansed” by a fully informed, uncoerced stockholder vote and thus was subject to the business judgment rule; (ii) the plaintiff’s claim regarding Saba’s failure to complete the Restatement was derivative and therefore was extinguished in the Merger; and (iii) Section 102(b)(7) of Saba’s certificate of incorporation exculpated any of the plaintiff’s remaining direct claims. Joining in the Individual Defendants’ arguments, the Vector Defendants contended they could not be liable for aiding and abetting absent an underlying breach of fiduciary duty, and further that the plaintiff failed to adequately plead that the Vector Defendants knowingly participated in the underlying breach—a necessary element of the aiding and abetting claim.
The Court began its analysis by addressing the Individual Defendant’s argument that the business judgment rule applied because the Merger was “cleansed’ under the Corwin doctrine. Given that a majority of Saba’s disinterested stockholders approved the Merger, the dispositive inquiry, as the Court put it, was whether it was reasonably conceivable, from the plaintiff’s allegations, that the Merger vote “was not fully informed or was coerced.”
The Court found that the plaintiff adequately pled two reasonably conceivable disclosure deficiencies in Saba’s Proxy supporting a conclusion that Saba’s stockholders’ were not fully informed. First, with respect to the plaintiff’s allegation that the Proxy failed to disclose the factual circumstances behind Saba’s failure to complete the Restatement, the Court found that without this information, Saba stockholders could not evaluate whether to accept the merger consideration at a depressed value or continue with Saba in hopes of reinstatement by the SEC. Second, regarding the plaintiff’s allegation that the Proxy omitted information regarding the sales process, the Court found that while most of the alleged omissions were immaterial, the allegation that the Proxy failed to disclose the post-deregistration alternatives available to Saba made “a compelling case for materiality” because a reasonable stockholder needed to understand what alternatives to the Merger existed.
The Court also found that the cleansing effect under Corwin was inapplicable because the plaintiff adequately pled that the stockholder vote was coerced. The Court concluded that by failing to disclose certain material information in the Proxy, including the circumstances that prevented Saba from completing the Restatement, the Board created a situation where the Saba stockholders were faced with a “Hobson’s choice”—keep their deregistered, illiquid stock or accept the no-premium merger consideration. This, according to the Court, was an “impermissibly coercive” situation that put Saba stockholders in a “black box” and “left them with no practical alternative but to vote in favor of the Merger.”
Because Corwin did not apply, the Court determined that the transaction should be reviewed under the Revlon enhanced scrutiny standard.
Next, the Court addressed the Individual Defendants’ arguments that (i) the plaintiff lacked standing because the Restatement claims were derivative, and (ii) Section 102(b)(7) of Saba’s certificate of incorporation exculpated the Board from any monetary liability. The Court found that the plaintiff stated direct claims because the plaintiff challenged the Board’s “selfish” conduct during the allegedly flawed sales process, and such allegations “constitute[d] a direct challenge to the fairness of the merger itself.” The Court also determined that the allegations regarding Saba’s failure to restate its financials and the failure to disclose the circumstances surrounding the reasons why it failed to complete the Restatement, as well as the rushed sales process and forced stockholder vote “justif[ied] a pleading-stage inference of bad faith.” Furthermore, the Court found that the plaintiff’s allegation that the Individual Defendants approved certain cash equity awards for themselves in the midst of the looming deregistration of Saba’s stock “support[ed] a reasonable inference that the Board approved the Merger in order to receive that compensation.” The Court therefore held that the Complaint adequately stated a non-exculpated claim for breach of the duty of loyalty.
Finally, the Court granted the Vector Defendants’ motion to dismiss the aiding and abetting claims, holding that the plaintiff failed to plead any facts supporting a reasonable inference that the Vector Defendants knowingly participated in the Board’s breach of fiduciary duty.