Document: In re Novell, Inc. Shareholders Litig., C.A. No. 6032-VCN (Del. Ch. Jan. 3, 2013)
The Delaware Court of Chancery held that plaintiffs had stated a claim that the members of the board of directors of Novell, Inc. (“Novell”) acted in bad faith by preferring one bidder to another in connection with the sale of Novell to Attachmate Corporation (“Attachmate”) in a transaction worth approximately $2.2 billion.
In March 2010, the Novell board initiated an eight-month, exploratory sales process following receipt of an offer from a minority stockholder, Elliott Associates, LP (“Elliott”), to acquire the company at a price which the Novell board deemed inadequate. J. P. Morgan, Novell’s financial advisor, contacted over fifty potential buyers, and more than thirty of the contacted parties entered into a non-disclosure agreement with Novell, including Attachmate. In August 2010, the Novell board requested that Attachmate and a private equity firm (“Party C”) submit their best and final offer, and Novell subsequently granted Attachmate exclusivity despite having received a higher offer from Party C. However, the period of exclusivity ran out without Novell and Attachmate agreeing to a deal. In October 2010, Novell received a revised offer from Attachmate on the same day as it received an unsolicited, revised offer from Party C, which proposal was again higher than the offer submitted by Attachmate. Shortly thereafter, Microsoft Corporation submitted an offer to acquire certain of Novell’s patents for $450 million, and Novell approached Attachmate, but not Party C, about acquiring the company exclusive of the patents. Attachmate raised its bid conditioned on the consummation of the patent sale, and Novell and Attachmate entered into a merger agreement on November 21, 2010.
In this action, plaintiffs alleged, inter alia, that the Novell board breached its fiduciary duties by preferring Attachmate to Party C in the sales process. Specifically, plaintiffs alleged that the Novell board breached its fiduciary duties by failing to (1) follow-up with Party C about either of its competing bids, and (2) approach Party C about a bid for the sale of the company exclusive of the patents following Microsoft’s $450 million cash bid for the patents. Because a majority of the members of the Novell board were disinterested and independent and Novell’s certificate of incorporation contained an exculpatory provision authorized by Section 102(b)(7) of the General Corporation Law of the State of Delaware, plaintiffs’ fiduciary claims could only survive a motion to dismiss if they supported an inference of bad faith conduct by the Novell board. On the record before it, the Court found inexplicable on any grounds other than bad faith, the board’s failure to pursue Party C’s offers. The Court acknowledged that there might be plausible and justifiable reasons for Novell treating Attachmate differently than other bidders, but it could not make that judgment at this stage in the proceedings. Thus, the Court denied defendants’ motion to dismiss the claim.