In re Quest Software Inc. Shareholders Litigation
Submitted: August 6, 2013
The following represents my decision on the Plaintiffs' request for attorneys' fees under the corporate benefit doctrine. This case presents an unusual fact situation, in which suit was commenced to enjoin a merger during a go-shop period during which a superior deal emerged, mooting the initial claim. The question in such a case is whether the plaintiffs were premature intermeddlers whose presence was, if anything, an impediment to the board's ultimately- successful pursuit of its fiduciary duties; or a necessary goad without which the ultimate result would not have been reached. This case raises issues of the proper timing of litigation in the hyper-expedited world of merger litigation, with potential injunctive relief providing the best, and perhaps only, remedy. As with burglary, so with merger litigation; the greatest utility comes from the watchdog biting the burglar on the way in, not the way out. Because I find evidence that the Plaintiffs contributed to the result achieved here by the directors on behalf of the stockholders, I find a fee award appropriate.
This matter involves the merger of Quest Software, Inc. ("Quest") into Dell, Inc. ("Dell"), and the process leading up to this transaction. Before merging with Dell, the Quest Board entered into a merger agreement with Insight Holdings Group, LLC ("Insight"), an entity in which a Quest director, executive and substantial minority stockholder, Vincent Smith, had an interest. The Plaintiffs filed several actions, consolidated into this civil action, seeking to enjoin that transaction. The suits were filed during the pendency of a sixty-day go-shop period called for in the merger agreement between Quest and Insight (the "Insight Merger Agreement"). During this go-shop period, Dell emerged as a potential purchaser. The Board ultimately withdrew from the Insight Merger Agreement and entered into a merger agreement with Dell (the "Dell Merger Agreement"), providing a substantially better deal for Quest stockholders. The Plaintiffs argue that they caused this result, and accordingly seek fees and expenses of $2.8 million. The Quest Defendants vigorously oppose this fee request. For the reasons outlined below, I find that the Plaintiffs are entitled to a fee award of $1 million.
Defendant Quest is a global software company and Delaware corporation with over sixty offices in twenty-three countries; its headquarters are in Aliso Viejo, California. Quest is involved in "design[ing], develop[ing], market[ing], distribut[ing], and support[ing] enterprise systems management software products." Defendant Insight Holdings Group, LLC ("Insight"), a Delaware limited liability company, is the parent and administrator of several private equity and venture capital funds. Defendant Vincent Smith served as Quest's CEO, President and Board Chairman. Prior to the Dell merger, Smith was "the beneficial owner of approximately 34% of Quest's outstanding common stock, " as well as a "limited partner in various Insight funds and portfolio companies."Quest Directors H. John Dirks, Doug Garn, Kevin M. Klausmeyer, Augustine L. Nieto II, and Paul Sallaberry are also Defendants.
The facts in this matter are extensive; what follows is a summary of the merger process leading up to the fee application before me. In August 2011, representatives of Insight first met with Smith and other members of Quest's management to explore a possible acquisition of Quest. Following this display of interest and anticipating Smith's participation in the proposed buyout, the Quest Board, at its September 19 meeting, established a Special Committee comprised of Dirks, Klausmeyer and Nieto to oversee the process; Dirks served as Committee Chairman. In late September, the Special Committee retained Potter Anderson & Corroon LLP ("Potter Anderson") as outside legal counsel. The Special Committee selected Morgan Stanley & Co. LLC ("Morgan Stanley") as financial advisor.
I will omit the extensive history of the Special Committee's negotiation of a deal with Insight, which would have been relevant to the fiduciary duty action that was ultimately mooted. For purposes of this decision, it should suffice to say that the Special Committee undertook a lengthy negotiation with Smith and Insight.
On March 7 and 8, 2012, the Special Committee, Smith, Insight, and various advisors and lawyers negotiated a definitive merger agreement, as well as other agreements related to the transaction. Also, on March 8, the Special Committee met with its legal counsel and Morgan Stanley, at which time Potter Anderson reviewed the Special Committee's fiduciary duties in relation to the merger. In addition, Morgan Stanley provided a summary of its financial analyses and gave an oral fairness opinion, concluding that the transaction was fair to Quest stockholders. Following a discussion of the proposed transaction and related documents, the Special Committee unanimously adopted resolutions:
(i) declaring the Merger Agreement and the transactions contemplated thereby, including the Merger, to be fair to and in the best interests of the holders of Company common stock, other than the Rollover Investors, (ii) recommending the submission of the Merger Agreement to the Board, (iii) recommending that the Board approve and adopt the Merger Agreement and the Merger, and declare that the Merger Agreement, the Merger and the transactions contemplated thereby, are advisable, fair to and in the best interests of the holders of Company common stock, and (iv) recommending that the Board submit the Merger Agreement to the holders of Company common stock for adoption, and resolve to recommend that the holders of Company common stock adopt the Merger Agreement.
A Board meeting, with all directors present, followed the meeting of the Special Committee; Morgan Stanley and Potter Anderson, among others, also attended. Legal counsel reviewed the Board's fiduciary duties in relation to the merger, and Morgan Stanley noted that it had provided the Special Committee with its oral fairness opinion, and presented the Board with a summary of its financial analyses. After Smith excused himself from the meeting, the Board engaged in further discussion and, substantially relying on the Special Committee's recommendation, "approved and declared advisable the Merger Agreement, and resolved to recommend that the holders of [Quest] common stock adopt the Merger Agreement."
Later that day, after several months of negotiations and discussions, Quest and Insight entered into the Insight Merger Agreement, as well as related agreements, whereby Insight would buy out each outstanding share of Quest common stock for $23 in cash, excluding those shares owned by Smith. The Insight Merger Agreement included a sixty-day go-shop period that expired on May 7, 2012. Notably, as a result of the Insight Merger Agreement, "Smith would roll over his 34% equity stake in the company in exchange for an approximate 78.32% equity stake in the surviving entity and receive a $120 million loan from Insight to pay off indebtedness encumbering his Quest shares." On March 9, with the go-shop period now underway, Morgan Stanley began reaching out to potential acquirers.
Between March 9 and March 26, Morgan Stanley reached out to thirty-eight financial sponsors and seventeen strategic bidders, including Dell. By March 26, at least nineteen non-disclosure agreements had been circulated. Ultimately, of the twenty-three non-disclosure agreements circulated during the go-shop period, seventeen were executed. Potential suitors that had executed non-disclosure agreements were provided with management's projection and access to Quest's data room; nine of the proposed purchasers also met with Quest management.
However, Morgan Stanley noted that many of the potential purchasers were hesitant to bid because of Smith's ownership interest and interest in acquiring Quest. To appease this apprehension, the Special Committee discussed offering the "19.9% Option" to certain bidders. Under this mechanism, the company would issue "an option to acquire newly issued Quest shares constituting up to 19.9% of [Quest's] issued and outstanding shares of common stock . . . to an acquirer that made a superior proposal—if Mr. Smith declined to support that proposal." The Special Committee also discussed whether to allow parties to form partnership arrangements, ultimately deciding to consent to these arrangements. Financial Sponsor A and Dell entered into a non-exclusive partnering arrangement, as did Financial Sponsors D and E. Eventually, Financial Sponsor A removed itself from the bidding process.
Over the next few weeks, the Special Committee received and evaluated several written proposals. On May 6, Dell submitted a written proposal to acquire all outstanding stock of Quest for $25 per share in cash; at this time, Dell also submitted a proposed merger agreement. This agreement had no financing contingency; required Smith to enter into a voting agreement supporting the merger; included a sixteen-day exclusivity period; and provided for a termination fee of 2.5%. Further, the agreement provided that, if Smith refused to enter into a voting agreement with Quest, then the 19.9% Option ...