Disputed Merger Continues Down Litigation Path

2013_03_23__5015A class action lawsuit filed to claim damages due to an improper merger between Occam Networks, Inc., (a Delaware corporation based in Santa Barbara) and Calix, Inc. (also a Delaware corporation, based in Petaluma). This lawsuit filed on behalf of Occam shareholders, brings up many potential legal issues that can arise when two corporations merge.

The lawsuit (Chen v. Howard-Anderson) survived a motion to dismiss filed by the defendants, which attempted to end the case before it was put to a jury. Plaintiffs claim defendants, Occam directors and others,

  • Breached their fiduciary duties to stockholders by making decisions during the process that were beyond the range of reasonableness, and
  • By issuing a proxy statement for Occam’s stockholder vote containing materially misleading disclosures and material omissions.

The lawsuit was filed in Delaware’s Court of Chancery. Defendants had one victory but also a major defeat earlier this month.

  • The Vice Chancellor (or judge) Laster granted the defendants’ motion for summary judgment, holding that a provision in Occam’s certificate of incorporation prevented directors from facing personal liability, but only as it pertained to the listed defendants who are corporate directors.
  • However, the court denied summary judgment as to the disclosure claims because genuine issues of material fact existed (and need to be resolved by a jury) as to these claims.

The Vice Chancellor found the evidence supported an inference that the proxy statement contained materially misleading disclosures and material omissions. The court found:

  • When directors submit to the stockholders a transaction that requires stockholder approval, Delaware law requires the directors to disclose fully and fairly all material information within the board’s control.
  • A fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. A fact is material if there is a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ̳total mix of information made available.
  • Delaware law does not require disclosure of inherently unreliable or speculative information which would tend to confuse stockholders or inundate them with an overload of information. The plaintiffs’ evidence suggests that Occam’s revenue projections were carefully created and vetted by management, but were not included in the proxy information. The Vice Chancellor found that based on the evidence, they were not unreliable, and plaintiff’s claim that information should’ve been included may be valid.
  • In addition to the traditional duty to disclose all facts material to the transaction, directors are also under a fiduciary obligation to avoid misleading, partial disclosures. They have an obligation to provide the stockholders with an accurate, full, and fair characterization of the events leading up to a proposed merger.
  • A proxy statement need not disclose every detail about early discussions with potential acquirers. Where an arm‘s length negotiation results in an agreement which fully expresses the terms essential to an understanding by shareholders of the impact of the merger, it’s unnecessary to describe all the “bends and turns in the road” which led to that result. The Vice Chancellor found in this case early contacts with Calix may have been more than inconsequential “bends and turns” and couldn’t rule as a matter of law that this information was immaterial and need not have been included in the proxy statement.

Corporate directors’ actions will come under close scrutiny in a merger because they owe a fiduciary duty to shareholders. Their actions may survive scrutiny by a judge, or, in this case, may not. This ruling is just in a preliminary matter and if the case goes to a trial, a jury may find for the defendants. Often defendants faced with a ruling like this may be more amenable to a settlement than risk a trial whose jury may see things as this judge did.

Corporate mergers can be big or small, and if you have questions or concerns about a corporate merger involving your interests, contact my office for a free consultation.