In Chen v. Howard-Anderson, a recent decision related to the acquisition of Occam Networks, Inc. by Calix, Inc. in 2011, the Delaware Court of Chancery granted one of the defendants’ summary judgment motions and provided guidance on the M&A transaction process. The plaintiffs alleged that the defendants breached their fiduciary duties in two ways: (i) during Occam’s sales process, the defendants made decisions “outside the range of reasonableness”; and (ii) the proxy statement delivered to Occam’s stockholders, which was reviewed and approved by the defendants, included materially misleading disclosures and material omissions.
This case serves as an important reminder that in contemplation of an M&A transaction, (i) director should conduct a reasonable process by providing potential bidders with reasonable time frames by which to respond; (ii) directors should carefully review the proxy statement to be delivered to the stockholders and the internal documentation relied upon to prepare the proxy statement; and (iii) officers of a company are not entitled to rely on exculpatory provisions with respect to breaches of the duty of care.
During Occam’s sales process, on June 23, 2010, Occam had received a revised offer from Calix, increasing its bid on Occam. Shortly thereafter, Occam received a competing bid from Adtran, Inc. which represented an approximate 11% premium over the revised offer from Calix. Over the following week, the Board met several times to discuss these offers, as well as other acquisition alternatives potentially available to the company. On June 30, 2010, the Board (i) instructed management and the investment banker to contact Adtran to request a final bid and give Adtran a 24-hour deadline to respond; and (ii) instructed the investment banker to perform a market check with other potential acquirers. On July 1, 2010 (the Thursday before the July 4th weekend), the investment banker distributed emails to seven additional potential acquirers, requiring a response within 24 hours. Of the seven potential acquirers, five indicated an interest, but all of them stated that they were unable to meet the 24-hour deadline. Adtran also declined to move forward within the required 24-hour window.
Applying the enhanced scrutiny standard of review, the Chancery Court determined that directors and officers of a company could be held personally liable for breaching their duty of loyalty if the court determines that the directors and officers behaved unreasonably during the sales process and were influenced by interests other than obtaining the best value reasonably available for stockholders of the company. However, even though the Chancery Court ruled that the facts suggested that the directors did indeed act unreasonably by favoring Calix as the potential acquirer over other bidders who may have been in a position to offer a higher value for the stockholders, the Court concluded that the directors had acted in good faith, that there was no evidence that the directors acted improperly, and therefore the directors were exonerated as a result of the exculpatory provisions set forth in the company’s certificate of incorporation. With respect to the sales process, the Chancery Court granted the summary judgment motion in favor of the disinterested directors. The Court simultaneously denied the summary judgment motion for the officers of the company who were not entitled to rely on the exculpatory provisions contained in the company’s certificate of incorporation.
In denying the summary judgment motion related to the disclosure in the proxy statement, the Chancery Court reviewed conflicting evidence related to the reliability of projections which had been provided in the proxy statement and determined that the evidence was inconclusive. Since evidence existed that could support the position of the plaintiffs, the Court declined to grant the defendants’ summary judgment motion. The Court also considered the exculpatory provisions contained in the company’s certificate of incorporation; however, the Court stated that it was unclear whether the proxy statement disclosure violations were a result of a breach of the directors’ duty of loyalty or the duty of care and therefore the defendant directors could not rely on the exculpatory provisions in seeking summary judgment.