HERBERT CHEN and DEREK SHEELER, individually and on behalf of all others similarly situated, Plaintiffs,
ROBERT HOWARD-ANDERSON, STEVEN KRAUSZ, ROBERT ABBOTT, ROBERT BYLIN, THOMAS PARDUN, BRIAN STROM, ALBERT MOYER, JEANNE SEELEY, and OCCAM NETWORKS, INC., Defendants
Submitted January 10, 2014.
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This opinion is subject to revision or withdrawal till it released for publication in the permanent law reports. This disposition will appear in a reporter table.
Robert J. Katzenstein, David A. Jenkins, Michele C. Gott, SMITH, KATZENSTEIN & JENKINS LLP, Wilmington, Delaware; Eduard Korsinsky, Michael H. Rosner, LEVI & KORSINSKY, LLP, New York, New York, Attorneys for Plaintiffs.
Peter J. Walsh, Jr., Matthew D. Stachel, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Jerome F. Birn, Jr., Ignacio E. Salceda, Gregory L. Watts, WILSON SONSINI GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants.
LASTER, Vice Chancellor.
In September 2010, Occam Networks, Inc. (" Occam" or the " Company" ) announced an agreement and plan of merger with Calix, Inc. (the " Merger Agreement" ). The Merger Agreement called for Calix to acquire Occam through a merger in which each share of Occam common stock would be converted into the right to receive 0.2925 shares of Calix common stock and $3.83 in cash (the " Merger" ). The Merger closed in February 2011. The plaintiffs contend that the defendants breached their fiduciary duties by (i) making decisions during Occam's sale process that fell outside the range of reasonableness and (ii) issuing a proxy statement for Occam's stockholder vote on the Merger (the " Proxy Statement" ) that contained materially misleading disclosures and material omissions.
After discovery, the defendants moved for summary judgment. The defendants ask the court to rule as a matter of law that they did not breach their fiduciary duties. Alternatively, the defendants who were Occam directors contend that the evidence at most could support a breach of the duty of care, for which a provision in Occam's certificate of incorporation exculpates them from liability (the " Exculpatory Provision" ).
As to the sale process claims, the director defendants' motion for summary judgment is granted. When the evidence is analyzed for purposes of Rule 56, with enhanced scrutiny as the standard of review, the record supports an inference that certain decisions fell outside the range of reasonableness. Nevertheless, the plaintiffs failed to develop sufficient evidence to support an inference that the directors acted with an improper motive. The Exculpatory Provision therefore insulates the director defendants from liability. The remaining defendants were officers who cannot invoke the Exculpatory Provision.
As to the disclosure claims, the motion for summary judgment is denied. When the evidence is analyzed for purposes of Rule 56, the record supports an inference that the Proxy Statement contained materially misleading disclosures and material omissions. The director defendants again invoke the Exculpatory Provision, but the record supports an inference that the defendants knew about the disclosure problems before approving the Proxy Statement. In addition, the defendants engaged in questionable conduct during discovery sufficient to support an inference that they sought to conceal evidence about potential disclosure issues until after the Merger closed. At this stage of the case, the defendants' conduct reinforces the inference of scienter. Summary judgment on the disclosure claims is therefore denied. A trial is both necessary and desirable to inquire into and develop the facts more thoroughly before seeking to apply the law.
I. FACTUAL BACKGROUND
The record for the defendants' summary judgment motion fills many binders, and the parties have submitted what are effectively post-trial briefs replete with extensive evidentiary citations. Each side weaves a tale out of the evidence and draws its own inferences from the documents and testimony. On a motion for summary judgment, the court cannot weigh the evidence, decide among competing inferences, or make factual findings. For purposes of this decision, Rule 56 requires that the evidence be construed in favor of the non-movant plaintiffs. What follows is therefore predominately the plaintiffs' side of the story.
Before the Merger, Occam was a publicly traded Delaware corporation based in Santa Barbara, California. Its stock traded on NASDAQ under the symbol OCNW. Occam developed, marketed, and supported products for the broadband access market.
Defendants Robert Howard-Anderson, Steven Krausz, Robert Abbott, Robert Bylin, Thomas Pardun, Brian Strom, and Albert Moyer constituted Occam's board of directors (the " Board" ). Howard-Anderson also served as Occam's President and CEO. The other six directors were facially independent and disinterested outsiders. Two directors--Krausz and Abbott--were affiliated with investment funds that together held approximately 25% of Occam's common stock. Krausz, who had served as an Occam director since 1997 and as Chairman of the Board since 2002, was a general partner at U.S. Venture Partners (" USVP" ). Together with its affiliates, USVP beneficially owned 15% of Occam's common stock. Abbott, who had served as an Occam director since 2002, was a general partner at Norwest Venture Partners (" Norwest" ). Together with its affiliates, Norwest beneficially owned nearly 10% of Occam's common stock.
Another key player at Occam was defendant Jeanne Seeley, who had served as Occam's CFO since May 2008. Seeley was intimately involved in the process leading to the Merger. She was the person " running the deal" for Occam. Seeley Tr. at 181.
B. The Broadband Access Equipment Market
Analysts in the early 21st century divided the North American market for broadband access equipment into three tiers based on the size of the telecom companies who were the target customers. Occam primarily sold equipment to the Tier 3 segment, where the customers consisted of small rural service providers, many of whom relied on government subsidies. Occam had approximately 20-30% of the Tier 3 market at the time of the Merger. Occam had barely penetrated the Tier 2 segment, which consisted of larger service providers, and had no presence in the Tier 1 segment, which consisted of the largest service providers.
Calix is a Delaware corporation based in Petaluma, California. Calix did not go public until March 2010, after which its stock traded on the New York Stock Exchange under the symbol CALX. Like Occam, Calix manufactured broadband access equipment. Calix had approximately 30-40% of the Tier 3 segment. Unlike Occam, Calix had a significant presence in the Tier 2 segment.
Adtran, Inc. is a Delaware corporation based in Huntsville, Alabama. Like Occam and Calix, Adtran manufactured broadband access equipment. Adtran primarily operated in the Tier 1 and Tier 2 segments.
C. Occam Expands Into The Tier 2 Segment.
In January 2008, Occam won its first Tier 2 customer, FairPoint Communications, Inc. Occam took the business from Adtran, FairPoint's incumbent supplier. The win demonstrated Occam's ability to successfully compete against larger access equipment suppliers, like Calix and Adtran.
Occam also was circling TDS Telecom (" TDS" ), another important Tier 2 customer. TDS historically used Calix as its exclusive supplier, but TDS had become dissatisfied with Calix and decided to become a two-supplier company. Going forward,
TDS would split its purchases between Calix and a second vendor. Occam had a good shot at becoming the second vendor.
D. Krausz Explores A Potential Transaction With Calix.
In early 2009, Krausz had several calls with Carl Russo, Calix's CEO, about a potential transaction between Occam and Calix. On March 13, Krausz reported to the Board on his activities. According to the minutes,
Mr. Krausz led a discussion concerning his recent meeting with [Calix] relating to a potential strategic transaction. A discussion ensued concerning the potential opportunities such a transaction would present to the Company and its stockholders as well as a discussion of potential risks and challenges. Following further discussion, the Board requested that Mr. Howard-Anderson and Ms. Seeley evaluate the operational and financial opportunities presented by the potential transaction and that they make an assessment of any related operational, financial and legal challenges. The board agreed to reconvene telephonically the following week.
Defs.' Mot. Ex. 27. At a follow-up meeting on March 20, " the Board determined that formal discussions with [Calix] were not appropriate at this time but encouraged management to continue an informal dialogue to the extent possible." Defs.' Mot. Ex. 28. After the Board meeting, Krausz contacted Russo and explained Occam's position.
In April 2009, Occam retained Jefferies & Company, Inc. for advice on strategic alternatives. The Board believed that Occam needed to increase the scale of its business to compete. Options to increase scale included organic growth, acquisitions, or a combination with another company. On April 22, Jefferies gave the Board a presentation on market dynamics, the valuation environment, and potential alternatives.
E. Occam Evaluates A Range Of Strategic Alternatives.
During the summer of 2009, Occam continued working with Jefferies to evaluate a range of strategic alternatives. Krausz remained in contact with Russo and sought to keep Calix interested in a potential combination.
On July 31, 2009, Adtran's CFO called Howard-Anderson to discuss a potential combination and to invite Howard-Anderson to visit Adtran's corporate headquarters in Huntsville, Alabama. After the call, Adtran sent Occam a non-disclosure agreement. Occam never signed it, and Howard-Anderson did not take Adtran up on the invitation to visit Huntsville.
In August 2009, Jefferies reached out to Keymile International GmbH, a private European manufacturer of broadband access systems, to explore a potential acquisition. Later that month, on August 25, the Board met and discussed the Company's alternatives. On August 31, Krausz sent an email to the Board saying that he planned to call Russo as soon as Occam was able to settle a class action lawsuit stemming from an accounting restatement in 2007.
On September 1, 2009, Krausz told Howard-Anderson that he had spoken with the CEO of Zhone Technologies. Occam had identified Zhone as a potential transaction partner. Krausz reported that Zhone was " open to talking," and he suggested Howard-Anderson meet with Zhone. Defs.' Mot. Ex. 29. Zhone, however, wanted to be the acquirer. Occam saw this as a
" deal killer." Defs.' Mot. Ex. 23 at OCNX0001097.
On September 10, 2009, Occam issued a press release announcing that it had entered into a memorandum of understanding to settle the stockholder class action. Krausz promptly reached out to Russo by email, stating: " Give me a call when you have a chance. We have resolved the issues discussed before and [it's] probably time to talk if it is still of interest." Pls.' Opp'n Ex. 12. Russo apparently was still interested because, on September 21, Russo and Krausz spoke about a potential transaction.
On October 6, 2009, Howard-Anderson and Seeley met with the CFO of Keymile in Geneva, Switzerland. They scheduled a meeting for December 9 to further discuss a possible deal.
On October 15, 2009, Russo proposed to Krausz that Calix buy USVP's and Norwest's stakes in Occam. At the time, Calix was getting ready for its IPO, so Calix could not discuss a merger. But Calix was interested in a transaction with Occam, and Russo saw the purchase as " a leg up on acquiring Occam" after the IPO. Pls.' Opp'n Ex. 14. The purchase did not occur.
On November 13, 2009, Howard-Anderson asked Adtran whether it was still interested in pursuing an acquisition. Adtran again suggested an in-person meeting in Huntsville. This time Howard-Anderson agreed, and a meeting was scheduled for December.
F. The Board Authorizes Occam To Approach Potential Acquisition Targets.
On November 18, 2009, the Board met to evaluate Occam's alternatives. Jefferies reviewed six potential acquisition candidates, including Keymile, and the Board authorized management to make contact with them. Meanwhile, on November 21, Calix filed its preliminary registration statement for its IPO.
In early December, Howard-Anderson and other Occam representatives met in Europe with Keymile's management. In mid-December, Howard-Anderson met with Adtran representatives in Huntsville. During the visit, Adtran and Occam executed a non-disclosure agreement. James Matthews, Adtran's CFO, testified that Adtran " would have had a meeting earlier than [December] if Occam had . . . an earlier interest for lack of a better term." Matthews Tr. at 164.
In an email on January 3, 2010, Howard-Anderson followed up with Adtran to get their thoughts on next steps. Howard-Anderson told Adtran that there was a short " window of opportunity to pursue something together" and that as January progressed, Occam would pursue other strategic alternatives. Defs.' Mot. Ex. 31. Adtran's CFO responded that Adtran was " continuing to review the opportunity" and had " scheduled an internal meeting for early next week to contemplate further steps." Id.
On January 29, 2010, the Board met again. Howard-Anderson and Seeley reported on discussions with Keymile. Jefferies provided an updated analysis of a Keymile acquisition. The Board instructed management to continue discussions with potential transaction partners.
On February 17, 2010, Occam entered into a superseding non-disclosure agreement with Adtran. Two days later, senior executives of Adtran and Occam met in Denver, Colorado. Occam made a 68-page presentation about its products and finances. Adtran's executives told Occam that they would " internalize" the information and get back to Occam the following week. Defs.' Mot. Ex. 34 at OCNX0002344.
From Occam's standpoint, the meeting with Adtran was not encouraging. Howard-Anderson questioned Adtran's seriousness about making a bid, and he told the Board that he came away from the meeting " with more concern that they appear to [be] acting only opportunistically and may be taking advantage of fishing for free info on us." Id. at OCNX0002343. Adtran perceived Occam's negativity and questioned whether Occam was willing to sell. An internal Adtran presentation dated March 2, 2010, titled " [Occam] Review" drew the conclusion that Occam was " [n]ot pursuing for sale strategy" and was " [b]usy with buy side strategy; not focused on sell side." Pls.' Opp'n Ex. 21 at ADTRAN0002066.
In early March 2010, Adtran's CFO called Howard-Anderson to get further information for use in modeling Occam's revenue. Seeley had a call with the Adtran representatives, provided the requested information, and told the Adtran representatives that Occam was engaged in " ongoing, time sensitive, strategic plan efforts and that [Occam was] in a parallel process." Defs.' Mot. Ex. 35. Seeley then reported to the Board that " Adtran know[s] the next step is theirs and that it needs to be purposeful." Id. After that, Howard-Anderson received a voicemail from Adtran's CEO on March 16 saying that Adtran needed more time to finish " crunching their numbers." Defs.' Mot. Ex. 36. Howard-Anderson told the Board that Adtran's " [t]iming [was] starting to arouse [his] suspicions." Id. On March 24, Howard-Anderson and Adtran's CFO spoke again, but no offer was forthcoming.
On March 26, 2010, Howard-Anderson and Seeley had another call with Adtran's representatives. Adtran wanted even more information to help it model Occam's revenue. This time, Howard-Anderson and Seeley told Adtran to use publicly available projections. The Adtran representatives explained that because Adtran had little penetration in the Tier 3 segment, it needed information to understand the effect of a federal broadband stimulus program on Occam. The Occam representatives declined to provide anything beyond what was publicly available.
On April 21, 2010, Howard-Anderson followed up with Adtran. Adtran said it was " still actively interested in pursuing Occam" but cautioned that it was pursuing other alternatives. Defs.' Mot. Ex. 37. Adtran told Howard-Anderson that it had engaged a consultant, but that it had not hired an investment banker. Howard-Anderson told Adtran that Occam was " full-steam ahead on [its] strategic initiatives." Id. The next day, he reported to the Board on these discussions.
G. Occam Creates The April Projections.
In early April 2010, Seeley asked Russ Sharer, the Vice President of Marketing, to create a set of revenue projections for Occam for 2010, 2011, and 2012. Sharer was one of Occam's longest-tenured employees, and his responsibilities included " produc[ing] models regarding revenue, revenue assumptions, [and] the market." Seeley Tr. at 58. He " knew the market very well." Id. At the time, only two public analysts followed Occam: George Notter of Jefferies and Tim Petrycki of Jesup & Lamont, Inc. Neither analyst had published an estimate of Occam's 2012 revenue.
On April 30, 2010, Sharer sent Seeley a final version of his spreadsheet (the " April Projections" ). To develop the April Projections, Sharer used a top-down methodology, and he forecasted revenue of $115.6 million, $177.9 million, and $193.5 million for 2010, 2011, and ...