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In re Saba Software, Inc. Stockholder Litigation

Court of Chancery of Delaware

March 31, 2017

IN RE SABA SOFTWARE, INC. STOCKHOLDER LITIGATION

          Submitted: February 17, 2017

          Peter B. Andrews, Esquire and Craig J. Springer, Esquire of Andrews & Springer LLC, Wilmington, Delaware; Seth D. Rigrodsky, Esquire, Brian D. Long, Esquire, Gina M. Serra, Esquire, and Jeremy J. Riley, Esquire of Rigrodsky & Long, P.A., Wilmington, Delaware; and Brian J. Robbins, Esquire, Stephen J. Oddo, Esquire, and Nichole T. Browning, Esquire of Robbins Arroyo LLP, San Diego, California, Attorneys for Plaintiffs.

          Gregory V. Varallo, Esquire, Robert Burns, Esquire, and Sarah A. Galetta, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware; Erik J. Olson, Esquire of Morrison & Foerster, LLP, Palo Alto, California; and Robert W. May, Esquire of Morrison & Foerster LLP, San Francisco, California, Attorneys for Defendants Shawn Farshchi, William V. Russell, Dow R. Wilson, William M. Klein, William N. MacGowan, Michael Fawkes, and Nora Denzel.

          Brian C. Ralston, Esquire, Jordan A. Braunsberg, Esquire, and Christopher G. Browne, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware; Alan S. Goudiss, Esquire of Shearman & Sterling LLP, New York, New York; Alethea Sargent, Esquire and Tiana Peterson, Esquire of Shearman & Sterling LLP, San Francisco, California, Attorneys for Defendants Vector Capital Management, L.P., Vector Talent II LLC, and Vector Talent Merger Sub, Inc.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor

         This action arises out of the acquisition of Saba Software, Inc. ("Saba" or "the Company") by entities affiliated with Vector Capital Management, L.P. in an all-cash merger in which stockholders received $9 per share for their Saba stock (the "Merger"). The Plaintiff's Second Amended Verified Class Action Complaint (the "Complaint"), and its description of the unfortunate series of events leading up to the Merger, calls out to Samuel Barber's Adagio for Strings to set the mood for the final scene. According to the Securities and Exchange Commission ("SEC"), Saba, through two of its former executives, engaged in a fraudulent scheme from 2008 through 2012 to overstate its pre-tax earnings by $70 million. Thereafter, Saba repeatedly promised regulators, its stockholders and the market that it would get its financial house in order. Each promise included assurances to stockholders that Saba would restate its financial statements by a certain date. And each time Saba inexplicably failed to deliver the restatement by the promised deadline. When it failed to meet a deadline for filing its restatement set by the SEC, the SEC revoked the registration of Saba's common stock. Not surprisingly, the stock price suffered. In the midst of this chaos, the Company announced that "it was exploring strategic alternatives, including a sale of the Company."

         When Saba's board of directors ultimately sought stockholder approval of the Merger, after a months-long sales process, the choice presented to stockholders was either to accept the $9 per share Merger consideration, well below its average trading price over the past two years, or continue to hold their now-deregistered, illiquid stock. Not surprisingly, the majority of Saba's stockholders voted to approve the Merger.

         Plaintiff, a former Saba stockholder, brings two claims: Count I alleges breach of fiduciary duty against the members of Saba's Board of Directors (the "Board") and Count II alleges aiding and abetting breach of fiduciary duty against the Vector-affiliated defendants. In this opinion, I conclude the Board may not invoke the business judgment rule under the so-called Corwin doctrine because the Complaint pleads facts that allow a reasonable inference that the stockholder vote approving the transaction was neither fully informed nor uncoerced. I also conclude that Plaintiff has pled a non-exculpated claim of bad faith and breach of the duty of loyalty by stating facts that support pleadings-stage inferences that the Board knowingly failed to disclose material information to stockholders and was motivated to approve the Merger so that its members could cash-in on equity options and restricted stock units that would otherwise have been illiquid as a consequence of the deregistration of the Company's stock. Plaintiff has failed, however, to state a claim for aiding and abetting breach of fiduciary duty against the Vector defendants because he has failed to allege sufficient facts to support a reasonable inference that Vector knowingly participated in the breach of fiduciary duty.

          I. BACKGROUND

         In considering this motion to dismiss, I have drawn the facts from the well-pled allegations of the Complaint, documents incorporated into the Complaint by reference, and judicially noticeable facts.[1] As I must at this stage, I have accepted all well-pled facts in the Complaint as true.[2]

         A. The Parties and Relevant Non-Parties

         Plaintiff, Gary Poltash, was a stockholder of Saba at all relevant times who beneficially owned over 80, 000 shares of Saba stock prior to the Merger. He was appointed lead plaintiff in this consolidated class action on or about April 8, 2015.

         Defendants, Nora Denzel, Shawn Farshchi, Michael Fawkes, William M. Klein, William N. MacGowan, William V. Russell and Dow R. Wilson (the "Individual Defendants") all served on the Board during the timeframes that give rise to Plaintiff's breach of fiduciary duty claims. Farshchi also served as Saba's President and CEO, beginning in August 2013, after previously serving as Saba's Interim CEO from March 2013 to August 2013 and Executive Vice President and Chief Operating Officer from June 2011 to August 2013. Fawkes was the Chairman of the Board's Corporate Governance and Nominating Committee and a member of the Strategic Committee. Klein also served on the Board's Strategic Committee and the Ad Hoc Transaction Committee (the "Ad Hoc Committee"). MacGowan served as Chairman of the Board's Compensation Committee. Russell was the non-executive Chairman of the Board, beginning in March 2013, and served on the Ad Hoc and Strategic Committees. Wilson was a member of the Ad Hoc Committee.

         Defendant, Vector Capital Management, L.P., a Delaware limited partnership, is a private equity firm that manages over $2 billion in equity capital and focuses on value-oriented investments in technology companies. Prior to the Merger, Vector Capital Management, L.P. was one of Saba's lenders. Defendant, Vector Talent II LLC, is a Delaware limited liability company and affiliate of Vector Capital Management, L.P. Defendant, Vector Talent Merger Sub, Inc., a Delaware corporation, is wholly-owned by Vector Talent II LLC and an affiliate of Vector Capital Management, L.P. (collectively, with Vector Capital Management, L.P. and Vector Talent II LLC, "Vector" or the "Vector Defendants"). The Merger caused Saba to merge with Vector Talent Merger Sub, Inc. with Saba surviving as a wholly-owned subsidiary of Vector Talent II LLC.

         Prior to the Merger, non-party Saba Software, Inc. was a Delaware corporation with its principal executive offices in Redwood City, California. Saba provided "cloud-based human resources solutions, such as products and services for employee training, performance evaluations, employee planning, collaboration tools, succession planning and recruiting."[3] Saba's stock traded on the NASDAQ exchange until it was delisted on June 17, 2013. Thereafter, it was traded over-the-counter ("OTC") until it was deregistered by the SEC on February 19, 2015.

         B. The Financial Fraud and Failed Attempts to Restate Financials

         As alleged in an SEC complaint filed against Saba and two of its former executives in September 2014, Saba's Indian subsidiary engaged in millions of dollars of financial fraud beginning in 2008 and ending in the second half of 2012. The fraud caused Saba to overstate its pretax earnings by $70 million from 2007 to 2011. After the fraud was uncovered, Saba continually assured its stockholders, regulators and the market that it would complete a restatement of its financial statements by dates certain. In each instance, without explanation, the Company would fail to file the restatements as promised. On April 9, 2013, NASDAQ suspended trading of Saba's shares due to Saba's ongoing failure to restate its financials. NASDAQ eventually delisted Saba on June 17, 2013. Saba's common stock then began to trade OTC.

         Saba announced that it had reached a settlement with the SEC regarding its financial fraud on September 24, 2014. The settlement provided that Saba would pay a $1.75 million civil penalty and "cease and desist from committing or causing future violations of [] the securities laws."[4] The settlement also required Saba to complete a restatement of its financials and file its Comprehensive Annual Report by February 15, 2015 (collectively, the "Restatement"). If Saba failed to complete the Restatement, the settlement provided that the SEC would deregister Saba's common stock pursuant to the Securities Exchange Act of 1934 § 12(j). When Saba announced the settlement, its then-CFO Mark Robinson stated: "We continue to anticipate filing the restatement in the fourth quarter of this calendar year [2014]."[5]

         A few days after the announcement of the SEC settlement, Saba's stock was trading at $14.08 per share. In the wake of the settlement, an analyst at B. Riley & Co. reported: "We continue to believe an acquisition of the company, which we acknowledge could garner a healthy premium to our price target of [$14], is the likely endgame. Even so, such a scenario is unlikely to transpire before Saba regains compliance with the SEC and puts its longstanding accounting restatement in the rearview mirror."[6] Unfortunately, true to past form, on December 15, 2014, Saba announced that it would not complete the Restatement by the February 15, 2015 deadline and thereby ensured that the SEC would deregister Saba's stock in February 2015. This, in turn, would render the stock untradeable and essentially illiquid.

         C. Saba Pursues Strategic Alternatives Including a Sale

         At the same time Saba delivered the news that it would fail to comply with the SEC's Restatement deadline, it also announced that it was "evaluating strategic alternatives, including a sale of the Company" and that it was engaging in "preliminary discussions with potential acquirers."[7] By the end of that day, Saba's stock price fell from $13.49 to $8.75 per share. Even so, on December 16, 2014, analysts at Craig-Hallum Capital Group LLC set a price target for Saba stock at $17 per share and gave it a "Buy" rating.

         Saba had been open to exploring strategic alternatives, including a possible sale, since at least February 2011, and had retained Morgan Stanley to facilitate that process. Morgan Stanley's retention agreement was purely contingent; it provided that Morgan Stanley would be compensated $1, 000, 000 if Saba signed a merger agreement and 1.5% of the transaction price if a transaction was completed. Otherwise, there would be no compensation.

         The Strategic Committee of the Board, comprised of Russell, Klein and Fawkes, was created in August 2013 to "evaluate strategic alternatives and [] conduct negotiations with potential investors or acquirers."[8] From January to November 2014, Saba engaged in discussions with twelve parties regarding a possible sale, including private equity firms and other technology companies, but no deal came to fruition.

         1. The Threat of Deregistration Fuels the Sales Process

         By November 2014, Saba knew that it would not complete the Restatement in time to avoid deregistration. During a Board meeting on November 12, the Board and Saba management "discussed the difficulties that the [Company] was having in regaining compliance with the SEC requirements to restate financial statements and the risks presented to the Corporation as a result of those challenges."[9] On November 17, 2014, private equity firm Thoma Bravo, LLC, which had been engaged in negotiations with Farshchi about a possible acquisition of Saba since May 2014, submitted an oral indication of interest to acquire Saba at $11 per share.

         On November 19, 2014, the Board met with representatives from Morgan Stanley and Morrison & Foerster LLP, Saba's legal counsel, to discuss the Restatement and possible strategic alternatives. Morgan Stanley told the Board that it had approached eleven potential buyers, six had signed non-disclosure agreements, four had met with management but only Thoma Bravo had actually submitted any indication of interest. Morgan Stanley also told the Board that many parties had submitted feedback regarding their "concerns about the impact of the restatement and SEC regulations on consummating a timely transaction, " and explained that these concerns were discouraging many potential buyers from submitting a bid.[10]

         At the conclusion of the November 19 meeting, the Board formed the Ad Hoc Committee, with Russell, Klein and Wilson as members, to explore strategic alternatives, "provide additional oversight regarding the process of evaluating strategic alternatives" [11] and "ensur[e] that [the Company] ran a robust process."[12]While the Ad Hoc Committee was supposed to direct the sales process, it allowed Farshchi as CEO to communicate directly with interested parties, even on the subject of "his future employment and compensation" with potential acquirors.[13]

         The Ad Hoc Committee was advised during its meeting on December 3, 2014, that the Restatement was unlikely to be completed in the first quarter of 2015. The consequences of the failure to complete the Restatement on time were well known to all concerned. At this meeting, Morgan Stanley indicated that, at the Board's direction, Saba was "progressing toward a [] mid-December transaction signing with Thoma Bravo, "[14] even though the deal likely would come in below the current OTC market price and eliminate the possibility of upside that stockholders might achieve if Saba remained a standalone company. Morgan Stanley also advised the Ad Hoc Committee that by signing a deal before the deregistration date, Saba "would be able to consummate a transaction . . . [that] it may not normally be able to accomplish if it was still under the purview of the SEC."[15]

         In early December, private equity firm Golden Gate Capital submitted its expression of interest in acquiring Saba at a price of $11-$12 per share. When the Board met again with representatives from Morgan Stanley and Morrison & Foerster on December 10, 2014, however, Morgan Stanley advised that Thoma Bravo was the only party interested in acquiring Saba and that the consideration it would offer would be below $9 per share. This drop in price was attributed, at least in part, to Saba's inability to complete the Restatement and concerns about the SEC's reaction to an acquisition. According to Morgan Stanley, no other parties were interested as they would not be able to complete due diligence in the short time that remained before deregistration. Morgan Stanley also told the Board that all price feedback it had received was below the current market price. Finally, Morgan Stanley informed the Board that Vector would be interested in engaging in a go-shop if the Thoma Bravo final offer came in at less than $15 per share.

         After the announcement on December 15, 2014 that Saba would be unable to complete the Restatement by the SEC's deadline, the Board directed Morgan Stanley to contact additional parties who may be interested in acquiring Saba.[16] On December 17, 2014, the Ad Hoc Committee was informed that one of Saba's current stockholders had indicated that it might be willing to provide additional funding to the Company on a standalone basis. The Ad Hoc Committee was also told that a group of Saba stockholders had expressed an interest in acquiring the Company at a price above $8-$9 per share, the latest range indicated by Thoma Bravo. There is no indication, however, that the Ad Hoc Committee followed up on either of these overtures. In total, Morgan Stanley contacted twenty-six parties by the end of December 2014, but no indications of interest remained extant by year-end other than Thoma Bravo's proposal at $8-$9 per share.

         2. Vector Enters the Fray

         Vector surfaced on January 15, 2015, with a written indication of interest to acquire Saba at $9 per share. As if on que, Saba then received written indications of interest from Golden Gate Capital, Sumeru Equity Partners L.P. and Silver Lake Partners working together and Thoma Bravo, as well as verbal indications of interest from H.I.G. Capital and Symphony Capital between January 15 and 16, ranging from $5.25-$9 per share.

         Vector had a prior relationship with Saba as one of its lenders dating back to 2013. Most recently, Vector had provided Saba $15 million in debt financing on September 23, 2014, in addition to the $30 million of debt previously outstanding. In 2013, Vector engaged in due diligence of Saba in relation to a possible further debt financing transaction and therefore had access to Saba's recent and detailed financial information through that process. Morgan Stanley also had a prior relationship with Vector, having previously provided financing services to a Vector affiliate for which it had received fees. Additionally, it was disclosed to the Board that representatives of Morgan Stanley who were working with Saba on its sales process "may have committed and may commit in the future to invest in private equity funds managed by [Vector]."[17]

         On January 20, 2015, Saba issued a press release announcing its intention to enter into a definitive acquisition agreement prior to the February 15, 2015 Restatement deadline if the Board determined that pursuing a sale was in the best interests of the Company. Outside counsel provided drafts of a merger agreement to Vector's counsel on January 22, 2015. On January 23, 2015, however, Morgan Stanley informed the Board that more potential bidders had just signed nondisclosure agreements and that it was receiving interest from additional parties.

         On February 2, 2015, Vector again submitted an indication of interest to acquire Saba at $9 per share. The OTC closing price for Saba's common stock on that day was $9.45 per share. Vector indicated that it would be able to execute the transaction agreements by February 6, 2015, and that it had completed its due diligence except for some confirmatory accounting and legal diligence. The proposal also indicated Vectors' intent to retain CEO Farshchi and Williams, who was Saba's Executive Vice President, General Counsel and Corporate Development officer, after the acquisition. The Ad Hoc Committee met with Morgan Stanley and Saba management on February 3, 2015 to discuss Vector's offer.

         Beginning in October 2014, as part of the process of exploring strategic alternatives, Saba management created four sets of projections incorporating various assumptions about whether and when Saba would complete the Restatement and whether its stock would be deregistered. At its February 3, 2015 meeting, the Ad Hoc Committee ultimately adopted scenarios reflecting the negative impact of deregistration on Saba stock and assumed that the Company would complete the Restatement in either August 2015 or December 2015. The Board then instructed Morgan Stanley to rely on this negative scenario for purposes of its fairness analysis. This, of course, resulted in the lowest valuation of Saba as among all of the scenarios created.

         3. The Board Accepts Vector's Proposal

         At the conclusion of the February 3 meeting, the Ad Hoc Committee decided to respond to Vector that day and ask for $9.25 per share. Vector responded that it would not pay more than $9 per share given the pending deregistration of Saba's shares. On February 4, 2015, the Ad Hoc Committee agreed to an exclusivity agreement with Vector at $9 per share, set to expire February 10, 2015. The Ad Hoc Committee also discussed Vector's desire to enter into new employment contracts with Farshchi and Williams as a condition of the Merger. During a February 6, 2015 meeting of the Board with representatives from Morgan Stanley and Morrison & Foerster, after determining that due diligence on the deal was "essentially complete, [the Board] authorized Farshchi and Williams to negotiate with Vector with regards to their post-merger employment."[18] Ultimately, the post-Merger company employed Farshchi and Williams on an at-will basis with a guarantee that their base salaries would not be reduced. They also retained "'the cash incentive compensation target amount opportunit[ies]'" and employee benefits "no less favorable" than those they had received from Saba prior to the Merger.[19]

         The Board received Morgan Stanley's fairness opinion at a Board meeting on February 9, 2015. At this meeting, the Board also granted themselves equity awards that would be cashed-out upon consummation of the merger in place of "unvested, suspended, lapsed and/or cancelled equity awards, " including those suspended, lapsed and/or canceled due to the Company's failure to complete the Restatement.[20]Having just approved cash consideration for their otherwise illiquid equity awards, the full Board then approved the Merger at $9.00 per share. That day, Saba stock closed at $8.94 per share.

         On February 10, 2015, only five days before the Restatement deadline, Saba and Vector executed the Merger agreement at $9 per share and Saba issued a press release announcing the Merger. The Merger consideration constituted a 2% discount to the average stock price for the week prior to the announcement. On February 19, 2015, the SEC issued an order to deregister Saba stock under the Securities Exchange Act of 1934 § 12(g), meaning that the stock was ineligible for trading using means of interstate commerce and, therefore, essentially illiquid.

         Because the stockholder vote was to take place after Saba's stock was deregistered, Saba was not required to submit its Proxy or GAAP financials for SEC review and was able, therefore, to accelerate the time from signing, to mailing of the Proxy, to stockholder vote. Saba mailed the Proxy to its stockholders on or about March 6, 2015, only twenty-four days after announcing the Merger. Twenty days later, on March 26, 2015, the Saba stockholders voted to approve the Merger. When asked to vote on the Merger, in the wake of deregistration, Saba stockholders were left with a choice either to accept the $9 per share offered through the Merger or hold onto their illiquid stock with no real sense of when or if that circumstance might change. While projections in the Proxy indicated that Saba would complete the Restatement in August of 2015, the stockholders also knew that Saba had failed to complete restatements of its financials on several occasions in the past despite assurances that various filing deadlines would be met. The Merger closed on March 30, 2015.

         D. The Equity Awards are Converted to Cash

         The ongoing failure to restate its financials left Saba unable to award equity compensation to Board members, executives and employees. As noted, that changed on February 9, 2015, the day before the Company executed the Merger Agreement, when the Board approved changes to the compensation plan that allowed executives and Board members to receive cash payments in the form of synthetic options and synthetic Restricted Stock Units ("RSUs"), equal to the amount of their suspended equity awards. These cash payments were "contingent on the consummation of the [Merger] and certain other conditions."[21] In addition to the cash payments in lieu of suspended equity awards, the Saba Board also approved cash payments to executives whose equity awards were canceled or lapsed during the restatement process.

         Through this process, Denzel, Fawkes, Klein, MacGowan, Russell and Wilson each were granted 10, 000 RSUs and Williams was granted 63, 000 RSUs. Further, the expiration of 15, 000 stock options held by Wilson and 50, 000 stock options held by Williams was rescinded, thereby allowing them to receive cash compensation in lieu of these awards upon consummation of the Merger. In addition to the grant of new options, all Saba options and RSUs that were vested and outstanding prior to the Merger (including those vested through acceleration or otherwise due to the Merger) would be canceled and converted to cash payments upon completion of the Merger. Based on these revisions to the compensation plan, the following payments were due to Board members and Saba executives as a result of the Merger:

Name

Total Merger-Related Compensation

Shawn Farshchi

$2, 828, 050

Peter Williams

$908, 194

William Russell

$270, 000

William Klein

$270, 000

William MacGowan

$270, 000

Nora Denzel

$270, 000

Michael Fawkes

$270, 000

Dow Wilson

$270, 000

         II. PROCEDURAL STANDARD

         When considering a motion to dismiss:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and (iv) dismissal is inappropriate unless the 'plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof.'[22]

         III. ANALYSIS

         As noted, the Complaint is comprised of two counts: Count I alleges breach of fiduciary duty against the Individual Defendants and Count II alleges aiding and abetting that breach of fiduciary duty against the Vector Defendants. The Individual Defendants have moved to dismiss on three grounds. First, they contend that the Merger has been "cleansed" by a fully informed, uncoerced stockholder vote and therefore is subject to the business judgment rule. If the Court agrees, then the Merger would be assailable only for waste, which Plaintiff has not pled here. Second, they argue that Plaintiff's allegations regarding the failure to complete the Restatement state derivative claims that were extinguished in the Merger. Third, they maintain that any direct claims that might remain are exculpated by the Section 102(b)(7) provision in Saba's certificate of incorporation. Vector joins the Individual Defendants in these arguments, and asserts (correctly) that if there is no underlying breach, then Vector cannot be liable for aiding and abetting. Further, Vector argues that the aiding and abetting claim must be dismissed in any event because Plaintiff has not adequately pled a necessary element of the claim-- knowing participation in the underlying breach of fiduciary duty.

         I begin my analysis with the Individual Defendants' argument that a fully informed, uncoerced stockholder vote has cleansed any claim for breach of fiduciary duty stated in the Complaint. Because I have concluded that a cleansing vote did not occur here, I next take up the argument that Plaintiff's claims are derivative and therefore he lost standing to assert them after the Merger. Because I have concluded that Plaintiff has asserted direct, not derivative, claims that survive the Merger, I turn next to the Individual Defendant's argument that Plaintiff has failed to plead non-exculpated claims against the Individual Defendants. Here again, I disagree and therefore deny the Individual Defendants' motion to dismiss. Finally, I address the aiding and abetting claim and conclude that Plaintiff has failed to state that claim as a matter of law.

         A. The Corwin Analysis

         In Corwin v. KKR Financial Holdings LLC, [23] our Supreme Court held that when a "transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies."[24] This reasoning flows from Delaware's "long-standing policy . . . to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves."[25] The so-called Corwin doctrine, however, only applies "to fully informed, uncoerced stockholder votes, and if troubling facts regarding director behavior were not disclosed that would have been material to a voting stockholder, then the business judgment rule is not invoked."[26]

         Here, Plaintiff does not dispute that the majority of Saba's disinterested stockholders approved the Merger.[27] The inquiry, then, turns to whether the Plaintiff has pled facts from which one might reasonably conceive that the vote was not fully informed or was coerced.[28] If yes, then Corwin will not apply, the business judgment rule will not be available to the Individual Defendants at the pleadings stage and enhanced scrutiny will be the standard of review; if no, then the motion to dismiss must be granted because Plaintiffs have not alleged waste.[29]

         1. Plaintiff has Adequately Pled that the Stockholder Vote was not Fully Informed

         As noted, to overcome a Corwin defense, the "plaintiff challenging the decision to approve a transaction must first identify a deficiency in the operative disclosure document, at which point the burden would fall to defendants to establish that the alleged deficiency fails as a matter of law in order to secure the cleansing effect of that vote."[30] Delaware law requires directors to "disclose fully and fairly all material information within the board's control" when soliciting stockholder action.[31] This obligation of disclosure extends only to information that is material, [32]and information is material when "there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote."[33] Stated differently, a disclosure is material only if it "significantly alter[s] the 'total mix' of information made available" to the stockholders.[34]

         Plaintiff has alleged four areas where the Proxy omitted material facts: "(i) the reasons why Saba was unable to complete the restatement; (ii) Saba management's financial projections; (iii) Morgan Stanley's financial analyses supporting its fairness opinion and potential conflicts of interest; and (iv) the process leading up to the execution of the Merger Agreement."[35] Two of the four categories of disclosure deficiencies identified by the Plaintiff, relating to the management projections and the work of Morgan Stanley, recast disclosure allegations that this court repeatedly has rejected under similar circumstances. I address these first. I then address Plaintiff's allegations in support of the other two material omissions identified in the Complaint relating to the failure to explain the circumstances surrounding the Company's failure to complete the Restatement and the events leading up to the Merger. For reasons explained below, applying a reasonably conceivable standard to these allegations, I conclude that Plaintiff has identified material omissions from the Proxy that undermined the stockholder approval of the Merger.[36]

         (a) The Omitted Management Projections

         Plaintiff has alleged a litany of alleged omissions regarding the financial projections prepared by Saba's management which Morgan Stanley relied upon for its fairness opinion. Specifically, Plaintiff finds fault with the Proxy's failure to disclose management's financial projections for "(i) revenue; (ii) EBITDA (2020- 2024); (iii) EBIT (or depreciation and amortization); (iv) restatement expenses (2020-2024); (v) taxes (2020-2024); (vi) capital expenditures (2020-2024); (vii) changes in net working capital (2020-2024); (viii) stock-based compensation expense (2020-2024); and (ix) unlevered free cash flow (2020-2024)."[37]

         Management projections are clearly material to stockholders when deciding whether to vote for a merger.[38] Plaintiff has focused his criticisms on management projections for years 2020-2024. The Proxy disclosed the management projections for 2015-2019.[39] The only indication that projections existed for 2020-2024 is in Morgan Stanley's description of its discounted cash flow analysis ("DCF"), where the Proxy states that Morgan Stanley developed the numbers for 2020-2024 used in its DCF "by an extrapolation of the 2019 estimates in the management projections based on 2019 growth and margin performance in the Management Case to reach a steady state margin and growth profiled by 2024."[40]

         "I reiterate this Court's consistent position that 'management cannot disclose projections that do not exist.'"[41] The Proxy's failure to disclose management projections for 2020-2024 cannot constitute a material omission because Plaintiff has failed to plead facts that would allow an inference that such projections even existed. And the omission from a proxy statement of projections prepared by a financial advisor for a sales process rarely will give rise to an actionable disclosure claim.[42]

         Turning next to Plaintiff's claim that the Proxy should have disclosed management projections for revenue and EBIT (or depreciation and amortization), I note that the Proxy clearly disclosed revenue for fiscal years ending May 31, 2016, 2017 and 2018.[43] To the extent Plaintiff quibbles with the omission of projections for later years, once again, Plaintiff has failed to allege that these projections exist. With regard to the omission EBIT-related data, the Proxy discloses adjusted EBITDA for 2015-2019, which is what Morgan Stanley relied upon when conducting its DCF.[44] Plaintiff fails to explain why the disclosure of EBIT (or depreciation and amortization, from which a stockholder presumably could calculate EBIT from the disclosed EBITDA), would be anything more than merely "helpful."[45]

         Plaintiff also contends that "even more importantly, the Proxy does not adequately disclose the justifications for the modifications to the Company's forecasts throughout the process and, in particular, following receipt of Vector's offer."[46] This court typically is not receptive to these kinds of "why" or "tell me more" disclosure claims that criticize the board for failing to explain its motives when making transaction-related decisions.[47] Yet this is precisely what the Plaintiff is seeking here: a further disclosure as to why management and the Board elected to make modifications to the Company's financial projections. The Proxy discloses the assumptions and data upon which management created the various scenarios that were set forth in the forecasts.[48] By comparing the changing assumptions that went into the various scenarios, a stockholder could readily track the changes and reasonably infer the rationale that went into the changes from one scenario to another. Plaintiff does not allege any facts or assumptions regarding the modifications that were omitted or misleading. He fails, therefore, to state a viable disclosure claim regarding the Saba management projections included in the Proxy.

         (b) The Omitted Information Regarding Morgan Stanley's Valuation Analysis and Conflicts

         Plaintiff identifies two categories of omissions in the Proxy in connection with Morgan Stanley's work: (1) omissions regarding Morgan Stanley's valuation of Saba and (2) omissions regarding Morgan Stanley's conflicts of interest arising from its prior relationship with Vector. Neither reflect material omissions.

         First, Plaintiff alleges that Morgan Stanley did not adequately disclose various facts, in four different categories, related to its valuation of Saba. For the first category-information pertaining to Morgan Stanley's Public Trading Comparables Analysis-Plaintiff alleges that the Proxy failed to disclose the "2014-2016 aggregate value/revenue and AV/EBITDA multiples for each of the selected public companies analyzed, " the revenue growth rates, gross margin and EBIT margin and "why Morgan Stanley relied on the multiples from the Enterprise Software peers instead of the Human Capital Management peers."[49] For Morgan Stanley's Precedent Transactions Analysis, Plaintiff claims that the Proxy failed to disclose the AV/last twelve months revenue, the AV/next twelve months revenue (and the one-day unaffected price premium multiples for each of the transactions analyzed) and "the specific subset of transactions that were analyzed with respect to the application of one-day unaffected premium paid analysis."[50] Plaintiff further alleges that the Proxy failed to disclose, with regard to Morgan Stanley's DCF analysis, "the implied terminal EBITDA multiple range and the implied terminal revenue multiple range, " various "individual inputs and assumptions utilized by Morgan Stanley to derive the discount range of 7.1%-8.1%, " "that Morgan Stanley incorporated Saba's net operating losses ('NOLs') in its analysis and assumed a present value of approximately $25 million, per management, from the total $274.1 million of NOLs available to the Company, " "the inputs and assumptions utilized by management to determine the $25 million present value of Saba's NOLs, " and "the specific arithmetic errors with respect to the treatment of certain stock based compensation and restatement expenses within Morgan Stanley's analysis."[51] Finally, Plaintiff alleges that the Proxy failed to disclose, with regard to Morgan Stanley's Discounted Equity Value Analysis, the "2018 estimated cash and estimated debt utilized by Morgan Stanley in its analysis" and "that Morgan Stanley utilized a revenue multiple range of 1.2x-2.4x as opposed to the range of 1.5x-2.5x referred to in the Proxy."[52]

When voting on a merger, "stockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender offer rely."[53]"A fair summary, however, is a summary."[54] The relevant disclosure document must disclose "the valuation methods used to arrive at that opinion as well as the key inputs and the range of ultimate values generated by those analyses."[55] "Whether a particular piece of an investment bank's analysis needs to be disclosed, however, depends on whether it is material, on the one hand, or immaterial minutia, on the other."[56] In this regard, the summary of the banker's work need only "be sufficient for the stockholders to usefully comprehend, not recreate, the analysis."[57]

         Here, the Proxy, over the course of nine single-spaced pages, described Morgan Stanley's analyses, including the methodology and projections used, the lists of comparable companies and transactions considered, and the valuation range resulting from these analyses.[58] Plaintiff has failed to well-plead any facts, or provide any explanation, as to why any of the minutia he says should have been in the Proxy would have significantly altered the "total mix" of information Saba shareholders received.[59] The Proxy provided Saba stockholders with a fair summary of the Morgan Stanley valuation analysis including its key inputs, and the "additional granularity" Plaintiff has pointed to would be nothing "more than helpful or cumulative to the information already disclosed."[60]

         In addition to these classic "tell me more" disclosure claims, Plaintiff alleges that the Proxy did not adequately disclose the "specific services Morgan Stanley provided to [Vector], and/or any of its affiliates in the past two years and the amount of compensation received for such services rendered."[61] That the Board was obliged to disclose "potential conflicts of interest of [its] financial advisors" so that "stockholders [could] decide for themselves what weight to place on a conflict faced by the financial advisor" has not been, and cannot be, disputed.[62] Whether the Proxy fulfilled this obligation, however, is very much contested. On this point, the Individual Defendants have the better of the argument. The Proxy disclosed that, in the two previous years, "Morgan Stanley or its affiliates have provided financing services to a Vector Capital affiliate and received customary fees of approximate[ly] $1 million in connection with those services."[63] This disclosure addresses precisely what Plaintiff claims is missing, except that it does not detail the specific services rendered. Here again, Plaintiff offers no explanation of how the specific services Morgan Stanley provided to Vector affiliates in the past would materially alter the total mix of information that Saba stockholders would find important when deciding how to vote. What was material, and disclosed, was the prior working relationship and the amount of fees.

         (c) The Omitted Information Regarding the Failure to Complete the Restatement

         Plaintiff points to the failure to describe the circumstances surrounding the Company's failure to complete the Restatement by the deadline set by the SEC as "the most glaring information missing from the Proxy."[64] According to the Plaintiff, this information is material because the deregistration clearly depressed the amount potential buyers were willing to pay for Saba and stockholders needed to understand whether the Company's state of deregistration was likely to continue or whether the Company had a legitimate prospect of completing the Restatement and regaining registered status with the SEC. Plaintiff also contends that the explanation of why the Company missed the SEC's deadline was material to stockholders as they assessed "the reliability of the financial projections relied on by Morgan Stanley in rendering its fairness opinion."[65]

         As already noted, this court repeatedly has held that "asking 'why' does not state a meritorious disclosure claim."[66] But in each of those cases, the "why" involved a decision made either by the board of directors, an officer or a company advisor. That is not what the Plaintiff alleges was omitted here. Rather, he alleges that the Board failed to disclose the factual circumstances regarding its failure, yet again, to complete the restatement of its financials. This was not a purposeful decision of the Board (at least it was not disclosed as such); it was a factual development that spurred the sales process and, if not likely correctible, would materially affect the standalone value of Saba going forward.

         To be sure, the Proxy was by no means silent with respect to the Restatement. It disclosed details regarding the events that led up to Saba's need to restate its financials, [67] explained the consequences of the deregistration-that Saba stock would no longer be freely tradeable, [68] provided the best estimate of Saba's management and Board of when the Restatement would be completed if Saba was not sold (August 2015), [69] and provided the projected value of Saba as a standalone company if the Restatement was completed in August 2015 or if it was not completed until December 2015.[70] Given its past history, however, unless the stockholders were armed with information that would allow them to assess the likelihood that Saba would ever complete a restatement of its financials, they would have no means to evaluate the choice they were being asked to make-accept merger consideration that reflected the depressed value caused by the Company's regulatory non-compliance or stay the course in hopes that the Company might return to the good graces of the SEC.[71]

         Plaintiff has also earned a pleading-stage inference that the stockholders would need all material information regarding the likelihood that the Company could ever complete the Restatement in order meaningfully to assess the credibility of the management projections. The Company had repeatedly failed to meet deadlines to restate its financials. The management projections assumed the Company would complete the Restatement at some point in the future. Without the means to test that assumption by drilling down on the circumstances surrounding the Company's past and latest failure to deliver its restated financials, stockholders had no basis to conclude whether or not the projections made sense.[72]

         (d) The Omitted Information Regarding the Sales Process

         Finally, Plaintiff alleges that the Proxy omitted material information regarding the sales process. The Proxy, over the course of nine single-spaced pages, detailed the "Background of the Merger, " including the lengthy sales process and all contacts with parties that were potentially interested in acquiring Saba.[73] Nevertheless, Plaintiff alleges that the Proxy failed adequately to describe the events leading up to the Merger in several respects. While most of these criticisms fall well short of identifying material omissions or misstatements, Plaintiff has identified one omission within the Proxy's description of the events leading up to the Merger that a reasonable shareholder likely would have deemed important when deciding whether to approve the Merger.[74] Specifically, Plaintiff's allegations with respect to the omission of the post-deregistration options available to Saba, as discussed by the Ad Hoc Committee on December 3, 2014, make a compelling case for materiality. It is true, as the Individual Defendants trumpet, that Delaware law "does not require management 'to discuss the panoply of possible alternatives to the course of action it is proposing . . . .'"[75] As then-Chancellor Chandler explained, this settled guidance with respect to disclosure is justified because "stockholders have a veto power over fundamental corporate changes (such as a merger) but entrust management with evaluating the alternatives and deciding which fundamental changes to propose."[76] While this holds true in a typical case, this is hardly a typical case given the deregistration of Saba's shares by the SEC just prior to the time the stockholder vote on the Merger was to occur.[77] This caused a fundamental change to the nature and value of the stockholder's equity stake in Saba over which the stockholders had no control. The deregistration also dramatically affected the environment in which the Board conducted the sales process and in which stockholders were asked to exercise their franchise. The Board needed to take extra care to account for this dynamic in its disclosures to stockholders.

         In considering whether or not Saba was viable as a going-concern without the Merger, a reasonable stockholder would have needed to understand what alternatives to the Merger existed. Plaintiff alleges that Morgan Stanley advised the Ad Hoc Committee during its meeting on December 3, 2014, that the Thoma Bravo proposal was a "discount to current market prices" of Saba stock and, importantly, that a transaction with Thoma Bravo "would 'eliminate[] further upside for investors from standalone value creation.'"[78] Morgan Stanley cautioned that further pursuit of the Thoma Bravo deal "could trigger '[l]ikely shareholder litigation … due to price below market.'"[79] It is reasonably conceivable that Plaintiff will be able to demonstrate a substantial likelihood that a reasonable Saba stockholders would have found this information to be important when deciding how to vote on the Merger. The failure to disclose it in the Proxy undermines the cleansing effect of the stockholder vote under Corwin.

         2. Plaintiff Has Adequately Pled that the Stockholder Vote Was Coerced

         In addition to requiring a fully informed stockholder vote as a predicate to cleansing, Corwin also directs that the court consider whether the Complaint supports a reasonable inference that the stockholder vote was coerced.[80] It is settled in our law that a stockholder vote may be invalidated "by a showing that the structure or circumstances of the vote were impermissibly coercive."[81] The court will find wrongful coercion where stockholders are induced to vote "in favor of the proposed transaction for some reason other than the economic merits of that transaction."[82] It is not enough for an offer to be "economically 'too good to resist'" to constitute wrongful coercion.[83] Rather, in determining whether vel non stockholders were inequitably coerced, the court must be mindful that

for purposes of legal analysis, the term 'coercion' itself-covering a multitude of situations-is not very meaningful. For the word to have much meaning for purposes of legal analysis, it is necessary in each case that a normative judgment be attached to the concept ('inappropriately coercive' or 'wrongfully coercive', etc.). But, it is then readily seen that what is legally relevant is not the conclusory term 'coercion' itself but rather the norm that leads to the adverb modifying it.[84] Whether a particular vote was inequitably coerced and therefore "robbed of its effectiveness . . . depends on the facts of the case."[85]

         The determination of whether coercion was inequitable in a particular circumstance is a relationship-driven inquiry.[86] A corporation's directors are fiduciaries of their stockholders "whose interests they have a duty to safeguard."[87]Therefore, when addressing a potentially coercive interaction between a board of directors and the stockholders it serves, the relevant legal norms stem from the law of fiduciary duty. And, in this regard, whether the fiduciary's motives were benign or unfaithful when creating the circumstances that cause coercion is not dispositive of the determination of whether the coercion was inequitable.[88] The coercion inquiry, instead, focuses on whether the stockholders have been permitted to exercise their franchise free of undue external pressure created by the fiduciary that distracts them from the merits of the decision under consideration.[89] In the deal context, the vote must be structured in such a way that allows shareholders a "free choice between maintaining their current status [or] taking advantage of the new status offered by" the proposed deal.[90]

         Here, in voting on the Merger, Saba stockholders were given a choice between keeping their recently-deregistered, illiquid stock or accepting the Merger price of $9 per share, consideration that was depressed by the Company's nearly contemporaneous failure once again to complete the restatement of its financials.[91] This Hobson's choice was hoisted upon the stockholders because the Board was hell-bent on selling Saba in the midst of its regulatory chaos. Yet the Board elected to send stockholders a Proxy that said nothing about the circumstances that were preventing the Company from filing its restatements and therefore offered no basis for stockholders to assess whether the choice of rejecting the Merger and staying the course made any sense.[92] The forced timing of the Merger and the Proxy's failure to disclose why the Restatement had not been completed and what financing alternatives might be available to Saba if it remained a standalone company left the Saba stockholders staring into a black box as they attempted to ascertain Saba's future prospects as a standalone company. This left them with no practical alternative but to vote in favor of the Merger.

         The Individual Defendants argue that to find "actionable coercion" the court must identify "some affirmative action by the fiduciary in connection with the vote [] that reflect[s] some structural or other mechanism for or promise of retribution that would place the stockholders who reject the proposal in a worse position than they occupied before the vote."[93] While I disagree that the Complaint has failed to allege wrongful affirmative action by the Board, I also disagree that affirmative action is a predicate to wrongful coercion. Inequitable ...


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