Chancery Court OKs Different Treatment for Bidders in M&A Deal

Corproate By: Mark Tarallo 

On November 25, 2014, the Delaware Chancery Court granted summary judgment in favor of the defendants in the matter of In re Novell, Inc., Shareholder Litigation.  In Novell, the plaintiffs brought suit against the defendants, all directors of Novell, Inc. (“Novell”), alleging bad faith on the part of the directors in connection with the sale of Novell to Attachmate Corporation (“Attachmate”).  In particular, the plaintiffs claimed that the directors had acted in bad faith by treating certain bidders for Novell differently for reasons that were not in the best interests of the Novell shareholders.

The plaintiffs took the position that the actions of the directors towards Symphony Technology Group (“Symphony”) constituted bad faith.  The complaint alleged, among other things, that the directors of Novell did not timely notify Symphony of the intent to sell the company, did not provide Symphony with an NDA until long after other bidders had been provided with a draft, and did not timely respond to due diligence requests from Symphony, hampering Symphony’s ability to raise its bid.

The Court considered which standard of review should be applied; the business judgment rule, the enhanced scrutiny standard, or entire fairness standard.  The Court determined that because two of the directors were interested in the transaction, the business judgment rule was not applicable, and further, because the other seven directors were independent, the entire fairness standard was not appropriate. Accordingly, the Court applied the enhanced scrutiny standard.

The Court noted that “[u]nder enhanced scrutiny, defendants bear the initial burden of showing that their decision-making process and actions were reasonable” and that “favoring a bidder is not unreasonable per se,” but that any favoritism must be justified solely by serving the purpose of maximizing the sale price to shareholders. The Court found that while some of the facts of the case were troubling, the plaintiffs could not show any evidence that the conduct of the directors was motivated by any improper purpose.  The Court ruled that because the defendants could show at least a reasonable basis that their actions were intended to maximize the return to shareholders (even though they did not treat all bidders the same), summary judgment in the defendants’ favor should be granted.

 The full text of the decision is here.

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