In re PLX Tech. Stockholders Litig. - 2018 Del. Ch. LEXIS 336 (Ch. Oct. 16, 2018)

Rule:

When the enhanced scrutiny standard applies, the defendant fiduciaries bear the burden of proving that they acted reasonably to seek the transaction offering the best value reasonably available to the stockholders. When a plaintiff sues a third party for aiding and abetting a breach of fiduciary duty, the plaintiffs bear the burden of proving that the directors' conduct fell outside the range of reasonableness. Determining whether directors acted reasonably requires that the court consider both (i) the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (ii) the directors' action in light of the circumstances then existing. Through this examination, the court seeks to assure itself that the board acted reasonably, in the sense of taking a logical and reasoned approach for the purpose of advancing a proper objective, and to thereby smoke out mere pretextual justifications for improperly motivated decisions. 

Facts:

In January 2013, defendant Potomac Capital Partners II, L.P. ("Potomac") launched an activist campaign to pressure PLX Technology Inc. ("PLX" or the "Company") into a sale. Eric Singer, Potomac's co-managing member, led the activist campaign. Singer's investment thesis was simple. PLX had agreed to sell itself to Integrated Device Technology, Inc. ("IDT"), but PLX and IDT terminated their deal in December 2012 after the Federal Trade Commission challenged it on antitrust grounds. During the go-shop period, another bidder had expressed interest in buying PLX. After the IDT deal failed, PLX's stock plummeted. Singer bought shares at depressed prices, believing that Potomac could achieve short-term profits if PLX was sold to the other bidder. A senior executive from Avago Technologies Wireless (U.S.A.) Manufacturing Inc. ("Avago") contacted Deutsche Bank Securities Inc., who was serving as PLX's financial advisor. Conveniently, Deutsche Bank was also advising Avago on its acquisition of LSI Corporation, one of PLX's competitors. Avago had been the other bidder who had approached PLX during the go-shop period for the IDT deal. Subsequently, in February 2013, Avago had proposed to acquire PLX for $6.00 per share. The Board had rejected Avago's offer, telling Avago that the price needed to "start with a 7." The Avago executive told Deutsche Bank that he "saw the PLX BoD transition" but that because of the LSI acquisition, Avago would be in the "penalty box" until that deal closed. He said that once the LSI transaction was complete, Avago would be "open for business on all topics," including an acquisition of PLX, which he described as a "$300M deal." With 45.9 million shares outstanding, this figure equated to $6.53 per share. Deutsche Bank shared the information with Singer. Deutsche Bank and Singer did not share the information with PLX's management team or with the other members of the Board. As a result of the tip from Avago, Singer and Deutsche Bank knew when Avago was likely to bid (after the LSI acquisition closed) and how much Avago wanted to pay ($300 million). In May 2014, Avago closed the LSI transaction and approached PLX, just as it said it would. The same senior executive from Avago asked to meet personally with Singer. The two discussed the pricing for a sale of PLX. The next day, Avago proposed to acquire PLX for $6.25 per share. Nine days later, PLX had agreed in principle to a deal at $6.50 per share—just what Avago said it wanted to pay when it approached Deutsche Bank in December 2013. On June 23, 2014, Avago and PLX formally announced their transaction, which was structured as a medium-form merger under Section 251(h) of the Delaware General Corporation Law (the "Merger"). In the recommendation statement that the Board sent to stockholders, the Board did not disclose Avago's December 2013 contact with Deutsche Bank and claimed that the June 2014 Projections had been prepared in the ordinary course of business. On August 12, the Merger closed. Each publicly held share of PLX common stock was converted into the right to receive $6.50 in cash. The plaintiffs sued the directors, contending that they breached their fiduciary duties when approving the Merger. They also argued that the directors breached their duty of disclosure when recommending the Merger to stockholders. The plaintiffs sued Potomac, Deutsche Bank, and Avago for aiding and abetting the directors' breaches of duty.

Issue:

Did the directors breach their fiduciary duties when approving the Merger and their duty of disclosure when recommending the Merger to stockholders?

Answer:

Yes

Conclusion:

The court held that because describing projections in misleading ways and failing to disclose other information material to a decision to tender into a medium-form merger under Del. Code Ann. tit. 8, § 251(h) breached the directors' duty of disclosure, the enhanced scrutiny standard of review, instead of the business judgment rule, applied to a claim against an investment fund for aiding and abetting breaches of fiduciary duty. A director who was an agent and co-managing member of the fund had a conflict of interest in seeking a quick sale, withheld material information, influenced the other directors to favor a sale, and breached the duty of loyalty. The director's knowledge and actions could be attributed to the fund. The court found that damages were not proven because a discounted cash flow analysis did not establish that the fair value exceeded the merger price, which likely included synergies.