Delaware Chancery Court Declines To Dismiss Fiduciary Duty Claims In Shareholder-Approved Merger, Finding That Shareholders Alleged Sufficient Facts To Negate Application Of Corwin
On March 31, 2017, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery declined to dismiss a shareholder claim for breach of fiduciary duty against the board of directors (the “Board”) of Saba Software, Inc. (“Saba”) in connection with Saba’s shareholder-approved all-cash merger with affiliates of private equity group Vector Capital Management, L.P. (“Vector”). In re Saba Software, Inc. Stockholder Litigation, C.A. No. 10697-VCS (Del. Ch. Mar. 31, 2017). The Court held that plaintiff’s allegations, if taken as true, “allow a reasonable inference that the stockholder vote approving the transaction was neither fully informed nor uncoerced.” Therefore, notwithstanding the stockholder approval, the Court declined to apply the business judgment rule (as would ordinarily apply under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015)) and declined to dismiss the claims against the Board. The Court did dismiss the aiding and abetting claims against Vector, finding that plaintiffs failed to allege that Vector knowingly participated in the Board’s alleged breach.
Saba’s stock was delisted after revelation of a long-running financial fraud by a subsidiary, which allegedly caused Saba to overstate its earnings by $70 million from 2007 to 2011. Saba settled a resulting SEC enforcement action by paying a fine and committing to restate its financials by February 2015. On December 15, 2014, Saba announced it would miss the February deadline and was pursuing a sale. The Board ultimately entered into a sale agreement with Vector for $9 per share, well below Saba’s average share price over the preceding year and even slightly below its closing share price on the date of agreement. The Saba directors received new equity awards (replacing previously received awards that lapsed due to Saba’s financial difficulties) that could be cashed out at closing. Due to Saba’s failure to comply with its agreement with the SEC, its stock was deregistered on February 19, 2015. Saba stockholders approved the Vector transaction in March 2015.
Plaintiff thereafter sued the Board for alleged breaches of their fiduciary duty in connection with the sale, as well as Vector for aiding and abetting. The Board moved to dismiss, invoking Corwin, but the Court concluded that plaintiff adequately alleged that Saba did not adequately disclose information about its repeated failures to restate its financials, which left stockholders unable “to evaluate the choice they were being asked to make—accept merger consideration that reflected the depressed value” caused by regulatory scrutiny “or stay the course in hopes that the Company might return to the good graces of the SEC.” The Court also credited plaintiff’s allegation that the stockholders were “situationally” coerced to approve the transaction because the Board left them with a “Hobson’s choice” between a rushed sale to Vector at a below-market price or complete loss of their investment following deregistration. Finally, the Court found the complaint adequately alleged that the directors acted in bad faith and breached the duty of loyalty against the Board, noting that the allegations were sufficient to plead that the Board failed to discharge their Revlon duties by accepting a sale price that undervalued Saba but allowed the directors themselves to profit from the new equity awards.