On October 16, 2018, Vice Chancellor J. Travis Laster of the Delaware Courtroom of Chancery issued a post-trial opinion in In re PLX Know-how Inc. Stockholder Litigation, a dispute arising from the August 2014 merger between PLX Know-how (“PLX” or the “Company”) and Avago Wi-fi (U.S.A.) Manufacturing Inc. (“Avago”), now generally known as Broadcom Inc. The Courtroom held that PLX’s administrators had breached their fiduciary and disclosure duties in reference to the merger, and that Potomac Capital Companions II, L.P. (“Potomac”), an activist hedge fund that pushed for the sale of PLX to Avago, had knowingly participated in that breach. The Courtroom based mostly its conclusions primarily upon the conduct of the PLX administrators, Potomac and its principal, Eric Singer, throughout each Potomac’s proxy contest and Singer’s subsequent tenure on the PLX Board because the chair of the particular committee overseeing the gross sales course of. Critically, the Courtroom reasoned that Singer, whose conduct was imputed to stockholder Potomac, was a twin fiduciary to PLX’s stockholders and Potomac’s buyers, and, as such, had incurable conflicts of curiosity arising from Potomac’s place that the one viable plan of action for the Firm was a short-term sale.
This determination is critical as a result of the Courtroom made a theme of director susceptibility or acquiescence to what it termed “activist pressure” the idea for its conclusions that fiduciary and disclosure duties had been breached. Additional, the choice seems to be the primary event that a Delaware courtroom has decided that a battle of curiosity attendant to a breach of fiduciary obligation could possibly be current based mostly solely on the Courtroom’s notion that a shareholder director had a brief time period funding outlook absent any further elements, similar to additional or undisclosed compensation or different improper advantages.
The Failed IDT Transaction
The related occasions started seven years in the past, when PLX first started merger discussions with Built-in System Know-how, Inc. (“IDT”). In April 2012, PLX and IDT signed a merger settlement with a worth of $7.00 per share. PLX’s monetary advisor, Deutsche Financial institution, then solicited aggressive bids. That course of resulted in just one proposal, from Avago: an all-cash deal for $5.75 per share. The PLX Board declined to pursue Avago’s supply, and disclosed the competing proposal to shareholders. PLX and IDT ultimately deserted the transaction after the Federal Commerce Fee moved to dam the merger on antitrust grounds.
Potomac Acquires a Giant Stake in PLX
PLX’s inventory worth plummeted after the merger with IDT failed, which attracted the eye of Potomac. After constructing and disclosing its place in PLX, Potomac’s publicly-stated funding thesis for the Firm, as persistently set forth in a letter-writing marketing campaign to the PLX Board and shareholders, was that the Firm ought to be bought promptly, and that its almost definitely purchaser can be the unnamed competing bidder who emerged through the IDT gross sales course of (i.e., Avago). Singer additionally personally relayed his place to PLX’s CEO and different executives by way of voicemail, e-mail, phone calls, and additional correspondence. In response, PLX’s administrators and executives said that they not believed a sale was in the most effective pursuits of the Firm.
Potomac Launches a Profitable Proxy Contest
and Singer Shepherds PLX’s Sale to Avago
In November 2013, Potomac filed a definitive proxy assertion that sought to switch three of the eight PLX administrators with Singer and two unbiased candidates. As soon as once more, Potomac disclosed its view that PLX was ripe for a sale, and it urged the opposite PLX shareholders to help its candidates on that foundation. Institutional Shareholder Providers (“ISS”) endorsed Potomac’s slate, and PLX’s stockholders subsequently authorised Potomac’s nominees, who joined the PLX Board on December 18, 2013.
The subsequent day, an Avago government contacted Deutsche Financial institution relating to Potomac’s presence on the PLX Board. On the time, Deutsche Financial institution was appearing as a monetary advisor to each Avago and PLX. The Avago government informed Deutsche Financial institution that Avago was in a quiet interval in reference to a separate transaction, however would have an interest in buying PLX for about $300 million. Deutsche Financial institution relayed these factors to Singer later that very same day, however Singer didn’t share this info with the opposite PLX administrators.
Singer subsequently was named by the PLX Board as chair of the particular committee overseeing the gross sales course of. After the conclusion of the quiet interval, Avago and PLX started negotiations in Might 2014, and introduced the Avago-PLX transaction in June 2014. No competing bidder emerged and, after a vote of the stockholders and the Board, the merger closed on August 12, 2014.
After the announcement of the Avago-PLX merger, plaintiff stockholders alleged the PLX administrators had breached their fiduciary duties by approving the merger and breached their disclosure duties in recommending the stockholders approve the merger. Plaintiffs additionally asserted claims towards Avago, Potomac, and Deutsche Financial institution, which finally served as PLX’s monetary advisor for the sale, for aiding and abetting the administrators’ breaches of fiduciary obligation. The Courtroom subsequently granted motions to dismiss submitted by Avago and two administrators. After the shut of discovery, all remaining defendants besides Potomac reached settlements with plaintiffs. The Courtroom then denied Potomac’s movement for abstract judgment and the events proceeded to trial.
The Courtroom discovered that the PLX administrators had breached their fiduciary duties by, in essence, being “susceptible to activist pressure.” The Courtroom particularly contrasted the administrators’ defensive representations through the proxy contest with their post-contest settlement to a sale and a gross sales course of carried out by Singer. The Courtroom additionally negatively cited the PLX administrators’ incapability to place forth a reputable rationalization for a collection of changes to the projections PLX used to justify the deal worth, and their selection to make use of an funding advisor with a “longstanding and thick” relationship to Avago, the customer. Particularly, the Courtroom criticized Singer for concealing from the opposite administrators materials details about the gross sales course of that he discovered by way of the funding advisor. The Courtroom deemed PLX’s disclosures insufficient on primarily the identical grounds, citing Singer’s concealment from the stockholders of the early communication of fabric info and the deceptive disclosures relating to the projection changes.
The Courtroom then thought-about whether or not a stockholder might be held chargeable for the actions of its agent on a board of administrators, and concluded that Singer’s relationship with Potomac and “his role in directing and implementing Potomac’s strategy” permitted the attribution of his information and actions to Potomac. Delaware regulation presumes that buyers act in their very own self-interest, and sometimes, an investor’s management of a giant block of shares is presumed to mitigate divergent curiosity considerations. Right here, nevertheless, the Courtroom reached the other conclusion,]9and reasoned that Singer, as a twin fiduciary to each PLX’s stockholders and Potomac’s buyers, had incurable conflicts of curiosity, arising solely from Potomac’s place that the one viable plan of action for the Firm was a short-term sale.
After figuring out legal responsibility, the Courtroom thought-about damages, and concluded that plaintiffs have been unable to show that the sale worth was insufficient or that the worth of PLX as a standalone firm was higher than the deal worth.
Evaluation and Key Takeaways
Each activists meaning to advocate for the sale of a goal and boards dealing with or defending an activist marketing campaign ought to pay attention to the result of this case, in which the Courtroom explicitly concluded that fiduciary and disclosure duties had been breached because of administrators making use of or succumbing to what the Courtroom deemed “activist pressure.”
As a basic matter, Delaware regulation doesn’t require incumbent administrators to rigidly adhere to their defensive positions after a proxy contest ends. Such a requirement would impermissibly hamper a director in finishing up her fiduciary duties, by stopping her from contemplating new recommendation or info. On this case, the Courtroom made the distinction between the pre- and post- proxy contest conduct of Potomac and the PLX administrators the crux of its legal responsibility determinations. Particularly, the Courtroom scrutinized the general public statements and positions of Potomac and the PLX Board through the proxy contest, notably Potomac’s give attention to the sale of the Firm and repeated threats to sue the administrators who questioned its plans, and the PLX administrators’ responsive illustration that it was not the fitting time to promote. The Courtroom then in contrast these stances with the post-contest conduct of the PLX Board, now together with Potomac’s designees, which promptly put in Singer because the chair of the particular committee and executed Potomac’s funding thesis—a sale of Avago—as shortly as attainable after the expiration of Avago’s quiet interval. The Courtroom additionally was extraordinarily important of Singer’s failure to reveal Avago’s indication of continued curiosity that he discovered via its monetary advisor, and cited the presence of inconsistent projections, poor and submit hoc report protecting, and the engagement of a monetary advisor with a longstanding relationship with the customer as additional elements in its conclusion that fiduciary and disclosure duties had been breached because of “activist pressure.”
The choice is also notable as a result of it seems to characterize the primary time that a Delaware courtroom has discovered a prevailing battle of curiosity solely on the Courtroom’s notion that a hedge fund investor held a short-term funding thesis. That is an uncommon outcome as a result of no further or aggravating elements have been current, corresponding to an additional or gratuitous compensation sought by or given to Potomac, and Potomac acquired the identical worth per share as each different PLX stockholder because of the merger. Furthermore, Potomac’s funding thesis—a fast sale to offer income to PLX’s stockholders, together with Potomac—was brazenly disclosed as the only plank of the platform on which Potomac carried out its proxy contest, which in flip was endorsed by ISS and supported by a majority of PLX stockholder votes.
Importantly, the Courtroom made clear that it was not saying a totally new commonplace governing the attribution of the actions of a stockholder director-designee to the stockholder itself, and that the preponderance of the proof commonplace was nonetheless firmly in place. The Courtroom’s willpower that Singer was not a reputable witness at trial, notably with respect to his declare that he thought-about the pursuit of worth enhancement choices aside from a sale of PLX and his denials of contentious interactions with different administrators, in addition to the indicia of a poorly managed gross sales course of, additionally may go to restrict the impression of this determination to the details of the case. Nonetheless, the choice has the potential to open the door to a brand new wave of shareholder litigation following gross sales or change of management transactions initiated by activist buyers who acquire board illustration, alleging that “activist pressure,” evidenced by a robust funding thesis in favor of a sale, overcame fiduciary and disclosure duties and contaminated the gross sales course of.
At a minimal, activist buyers who succeed in electing designees ought to be cautioned that Courts favor to see boards perform collegially and professionally, and can take a dim view of incidents of threats or incivility each earlier than and after designees be a part of the board.  Moreover, ought to a board decide that a sale of the corporate is in one of the best pursuits of the shareholders, administrators should acknowledge and articulate, early and sometimes, that their fiduciary obligation is to all shareholders, and the activist designee shouldn’t be permitted to dominate both the consideration of the difficulty by the board or, as soon as the choice to promote is made, the method itself. Lastly, the sale of an organization is a singular course of that requires administrators to evolve their conduct to excessive requirements of conduct. It was clear that the Courtroom regarded Singer’s failure to share info with the board as each a really critical mistake and a stain on his trustworthiness, which is the important high quality that a Delaware director should have.
1 PLX Schedule 14D-9, at 1 (June 1, 2012).
2 Submit-Trial Op. at 111.
three See id. at 110-115.
four See id. at 93-94.
5 See id. at 106.
6 See id. at 119.
7 See id. at 115-16.
eight Publish-Trial Op., at 103, 120, and 121.
9 Notably, the Courtroom already had signaled to defendants throughout early movement follow that, by concurrently holding a seat on the PLX Board and controlling PLX’s largest stockholder, it believed Singer probably confronted the twin fiduciary drawback recognized Weinberger v. UOP, Inc., 457 A.second 701 (Del. 1983) (holding no dilution of obligation of loyalty the place director holds a twin fiduciary obligation). See In re PLX Tech. Stockholders Litig., C.A. No. 9880-VCL, 2015 WL 13501398, at 7 (Del. Ch. Sept. three, 2015).
01 The Courtroom recognized a number of situations that, in its view, definitively indicated Singer’s, and transitively Potomac’s, divergent curiosity because of this singular focus: “Singer and Potomac argued vehemently that PLX should be sold quickly”; “Singer’s thesis for investing in PLX depended entirely on a short-term sale to [Avago]”; “[Singer] never prepared any valuation [of PLX]”; and “[Singer] lacked any idea for generating value [other than selling PLX].” Submit-Trial Op. at 103-104. The Courtroom additionally wrote that after Singer joined the PLX Board he “consistently acted with [the] intent [to sell PLX to Avago],” emphasizing that Singer stated the PLX Board was “crazy for turning down $6+ from avago few months ago.” Id. at 105. Lastly, the Courtroom concluded that Singer “only backed off when he learned that Avago could not re-engage for several months” and “got to a deal within days” when Avago re-engaged. Id.
11 See id. at 134-35.
12 See id. at 111.
13 Air Prods. & Chem., Inc. v. Airgas, Inc., 16 A.3d 48, 128 (Feb. 15, 2011) (discovering no breach the place unbiased slate of administrators “changed teams” to agree with incumbents after proxy contest).
14 See Publish-Trial Op. at 22-23 (Singer threatening to carry administrators personally liable). One director testified at his deposition that Singer “threatened lawsuits all the time . . . [t]hat was his mode of operation at that point.” Id. at 14, n. 60.
15 See id. at 23.
16 See id. at 114-15.
17 See id. at 47.
18 See id. at 106.
19 In prior Delaware instances, the Chancery Courtroom has discovered a divergent curiosity the place a celebration obtained some kind of aspect profit, not merely a return on an funding. For instance, in In Re Southern Peru Copper Company Shareholder By-product Litigation, the controlling stockholder each orchestrated a sale and efficiently pursued registration rights to induce the goal firm’s founding shareholder to comply with promote. See In re S. Peru Copper Corp. S’holder Deriv. Litig., 30 A.3d 60, 99 (Del. Ch. Oct. 14, 2011). Equally, in In re Rural Metro Company, Vice Chancellor Laster discovered that a director and Royal Financial institution of Canada (“RBC”) aided and abetted the administrators’ breach of fiduciary obligation in the course of facilitating a short-term sale by, amongst different issues, in search of to safe advisory charges for RBC and extra compensation for the customer, somewhat than the perfect deal for the goal. See In re Rural Metro Corp., 88 A.3d 54, 91, 95 (Del. Ch. Mar. 7, 2014).
20 See Submit-Trial Op. at 60, 70.
21 See id. at 29, 31, 35.
22 Submit-Trial Op. at 120-21.
23 For instance, the Courtroom of Chancery has discovered overbearing and objectionable conduct by a controlling shareholder to adequately allege an aiding and abetting declare for a breach of fiduciary. In In re INFOUSA Shareholders Litigation, the Courtroom discovered that the founding shareholder of the corporate, Vinod Gupta, breached his fiduciary obligation in a “series of related-party transactions and improper benefits allowed to flow to [Gupta] from a board that was dominated and controlled by him” in addition to threatening different administrators to vote for him in shut board elections. 953 A.second 963, 1002 (Del. Ch. Aug. 13, 2007).