IN RE CYAN, INC. STOCKHOLDERS LITIGATION
Submitted: February 7, 2017
Michael Van Gorder, FARUQI & FARUQI, LLP, Wilmington,
Delaware; Seth D. Rigrodsky, Brian D. Long, Gina M. Serra,
and Jeremy J. Riley, RIGRODSKY & LONG, P.A., Wilmington,
Delaware; Shane T. Rowley, LEVI & KORSINSKY LLP Attorneys
Bradley D. Sorrels, Ian R. Liston, Andrew D. Berni, and
Jessica A. Montellese, WILSON SONSINI GOODRICH & ROSATI,
PC, Wilmington, Delaware; Boris Feldman and Ignacio E.
Salceda, WILSON SONSINI GOODRICH & ROSATI, PC, Palo Alto,
California, Attorneys for Defendants Mark A. Floyd, Michael
L. Hatfield, Promod Haque, Paul A. Ferris, Michael J.
Boustridge, Niel Ransom, and Robert E. Switz.
action arises out of the merger of Cyan, Inc. and Ciena
Corporation that closed in August 2015. In exchange for their
Cyan shares, the former stockholders of Cyan received shares
of Ciena common stock and cash that accounted for 89% and
11%, respectively, of an estimated $335 million in merger
identified a host of alleged disclosure deficiencies in
Cyan's proxy statement, but they elected not to seek
injunctive relief to cure any of them before the
stockholders' meeting, and the transaction closed after
receiving the approval of 98% of the shares that voted.
Almost one year later, plaintiffs filed their current
complaint, advancing two claims.
asserts that the members of Cyan's board breached their
fiduciary duties in approving the merger, primarily on the
theory that the directors were motivated out of self-interest
to bolster their indemnification rights in the face of a
pending securities litigation to partner Cyan with a company
with "deeper pockets." Count II seeks equitable
relief in the form of quasi-appraisal. Defendants moved to
dismiss both claims for failure to state a claim for relief.
For the reasons explained below, I conclude that both claims
are without merit and the Complaint must be dismissed.
fails to state a claim for relief for two independent
reasons. First, because the merger consideration primarily
consisted of stock in a publicly traded company, the
board's approval of the transaction is presumptively
governed by the business judgment rule and plaintiffs have
failed to plead sufficient facts to support a reasonable
inference that a majority of Cyan's board was interested
in the transaction or acted in bad faith so as to sustain a
non-exculpated claim for breach of fiduciary duty. Second, a
majority of disinterested stockholders of Cyan approved the
merger in a fully informed, uncoerced vote.
of Count II logically follows from the dismissal of Count I.
As this Court has previously held, quasi-appraisal is simply
a form of remedy, typically sought to address disclosure
deficiencies that are the product of a fiduciary breach.
Because plaintiffs have failed to identify any material
misrepresentation or omission in Cyan's proxy statement,
or to allege any other viable claim for a fiduciary breach,
there is no basis to impose a quasi-appraisal remedy in this
noted otherwise, the facts recited in this opinion come from
the allegations of the Verified Third Amended Class Action
Complaint (the "Complaint") and documents
incorporated therein. Any additional facts are either
undisputed or subject to judicial notice.
The Parties and Relevant Non-Parties
an agreement and plan of merger dated May 3, 2015 (the
"Merger Agreement"), Ciena acquired all of the
outstanding shares of Cyan in a merger transaction with an
enterprise value of approximately $335 million, net of
estimated cash (the "Merger"). Plaintiffs are
individuals who allege they were stockholders of Cyan at all
the Merger, Cyan was a Delaware corporation with its
principal executive offices in California. Cyan provided
various carrier-grade networking solutions in North America,
Asia, and Europe. Its common stock was traded on the New York
Stock Exchange under the symbol "CYNI."
is a Delaware corporation focused on providing communications
networking solutions. Ciena's common stock trades on the
New York Stock Exchange under the symbol "CIEN."
were the seven members of Cyan's board of directors who
approved the Merger. Two of them were members of management;
the other five were outside directors.
Mark A. Floyd was Cyan's Chief Executive Officer and
Chairman of the Board, and served on Cyan's three-member
Strategic/Finance Committee.Defendant Michael L. Hatfield, a
co-founder of Cyan, served as Cyan's President.
Promod Haque was an outside director of Cyan. He also was the
senior managing partner and co-CEO of Norwest Venture
Partners ("Norwest"), which held 22.71% of
Cyan's outstanding shares and was Cyan's largest
stockholder as of the date of the Merger Agreement. Haque had
voting control and dispositive power over Norwest's
Paul A. Ferris was an outside director of Cyan and served on
Cyan's Strategic/Finance Committee. He also was the
general partner and managing member of Azure Capital Partners
("Azure"). Azure was Cyan's second largest
stockholder, holding 12.4% of the company's outstanding
shares when the Merger closed. Ferris had voting and
dispositive power over the shares Azure held.
Michael J. Boustridge, Niel Ransom, and Robert E. Switz were
the remaining members of the Cyan board. Each was an outside
director. Switz served on Cyan's Strategic/Finance
The Securities Litigation in California
April 1, 2014, two pension funds filed a securities class
action in California state court asserting violations of the
Securities Act of 1933 in connection with Cyan's initial
public offering in May 2013 (the "Securities
Litigation"). The defendants in the Securities
Litigation include Cyan, the seven members of its board of
directors who are defendants in this action, Jefferies LLC,
and several other firms that served as underwriters for the
IPO: Goldman, Sachs & Co., J.P. Morgan Securities LLC,
and Pacific Crest Securities LLC.
about May 18, 2015, a class was certified in the Securities
Litigation consisting of "[a]ll persons who purchased or
otherwise acquired Cyan common stock from May 9, 2013 to
November 4, 2013, except for purchases or acquisitions of
non-registered shares in a private transaction, " and
excluding certain affiliates of the defendants in the
Securities Litigation and any person who validly requests
exclusion from the class. The action remains pending as of the
date of this opinion. Cyan is obligated to indemnify
Jefferies and the Cyan directors for damages that could
result from the Securities Litigation.
Cyan Issues Convertible Debt
22, 2014, during a meeting of Cyan's board of directors,
management informed the board that Cyan only had sufficient
cash to survive through the second quarter of 2015.
Preliminary discussions with several potential lenders
indicated that Cyan might only be able to secure modestly
more debt than what was available at the time under its
existing credit facility.
early June 2014, Floyd (Cyan's CEO) held discussions with
representatives of Jefferies concerning opportunities for
Cyan to raise additional capital. On July 2 and again on July
23, representatives from Morgan Stanley & Co. LLC
expressed the view that it would be difficult for Cyan to
raise additional capital absent one or more key business
developments, such as a major customer win.
August 6, 2014, after having discussions with Morgan Stanley
and Jefferies, the Cyan board determined that Cyan could
raise additional capital through a convertible debt offering
(the "Convertible Debt Offering"). By December 4,
2014, however, the board had not been able to secure
sufficient commitments from unaffiliated investors to satisfy
certain minimum investment conditions for the proposed
Convertible Debt Offering. As a result, the two management
directors on Cyan's board (Hatfield and Floyd), an
investment firm controlled by one of its outside directors
(Norwest), and Jefferies agreed to invest in the offering in
the following amounts: $4 million, $2 million, $11 million,
and approximately $5 million, respectively. The Convertible
Debt Offering ultimately raised $50 million.
the indenture governing the convertible notes, if the notes
are converted in connection with a merger, the converting
note holder would receive the same consideration that a
holder of the number of shares of Cyan common stock into
which such notes were convertible immediately before the
merger would have been entitled to receive in the merger,
subject to the acquirer's right to elect to pay cash in
lieu of issuing shares. The indenture also contained a
"make-whole" provision under which, for a certain
period of time, the note holders could require a purchaser to
repurchase their convertible notes at 100% of the principal
amount plus accrued and unpaid interest if a
"Fundamental Change" occurs.
Cyan's Financial Performance Improves
and the first quarter of 2015, Cyan reported continuous
revenue growth and improving liquidity. It reported revenues
of $19 million, $24.4 million, $26.6 million, and $30.5
million for the first, second, third, and fourth fiscal
quarters of 2014, respectively, and $36 million in revenue
for the first fiscal quarter of 2015. As of March 31, 2015,
Cyan had cash and cash equivalents on hand of $53.87 million.
February 10, 2015, Cyan had received a $28 million purchase
order from its largest customer, Windstream Corporation. The
Windstream order was expected to be filled across the first
three quarters of 2015, and management believed that there
could be a second round of orders from Windstream in the
following months. Management revised its internal revenue
outlook for 2015 to incorporate the Windstream order and its
outlook for 2016 and 2017 based on Windstream and other
generally positive momentum in the business. Due to these
developments, management prepared a 2015 momentum plan, which
increased the 2015 revenue projection above the level of the
previously approved operating plan.
April 6, 2015, Cyan's board noted the company's
increased dependence on Windstream. It also noted that United
States government stimulus spending was driving recent
business activity in part, and that it was uncertain whether
the increased level of Windstream business could be sustained
through all of 2015 and 2016.
Cyan Enters into a Merger Agreement with
the same period when Cyan was conducting the Convertible Debt
Offering and its operational results were improving, it also
explored potential strategic opportunities with other
companies. A sale process began around April 2014, when a
third party contacted Cyan's Chief Financial Officer to
express its interest in learning about Cyan's business.
On December 17, 2014, Cyan's board enlisted
Jefferies' assistance for the sale process.
a meeting on January 27, 2015, Cyan's management and the
Strategic/Finance Committee "discussed the fact that
Jefferies had purchased, and was still holding, $5.5 million
of the Company's 8% convertible notes and the related
warrants and, as such, would have an interest in the
outcome of a strategic transaction in addition [to] the fee
arrangement in the advisory engagement." The General
Counsel of Cyan "noted that the Committee and,
eventually the full Board, would want to consider these
factors in connection with evaluating the advice and, if
applicable, any fairness opinion by
Jefferies." The board also considered Jefferies'
potential conflict of interest because of its status as a
defendant in the Securities Litigation, but ultimately
decided to keep Jefferies involved in the sale process.
January 29, 2015, Hatfield learned that Ciena, which had been
engaged in discussions to acquire Cyan, would prefer him to
stay with the company following a transaction.
April 9, 2015, Cyan's General Counsel and representatives
of its outside counsel, Wilson Sonsini Goodrich & Rosati,
P.C., participated in a call with representatives of Ciena
and its outside counsel, Hogan Lovells U.S. LLP, to discuss
how Cyan's outstanding convertible notes and warrants
would be treated in a proposed strategic transaction.
Representatives of Hogan Lovells expressed Ciena's
concern that the note holders' security interests in
Cyan's assets and the negative covenants in the
convertible notes would continue to apply after the closing
based on the structure of the proposed transaction that was
under consideration. They also conveyed Ciena's
preference for the proposed transaction to be structured in a
way that would qualify as a "Fundamental Change, "
which would cause the security interests and the negative
operating covenants to terminate after the closing.
Representatives of Hogan Lovells then discussed that a
"Fundamental Change" could be triggered in a
transaction in which the consideration paid for Cyan common
stock was a mix of both cash and stock.
April 18, 2015, representatives of Hogan Lovells participated
in a call with representatives of Wilson Sonsini to discuss
Ciena's requirement that the form of merger consideration
be adjusted to consist of both cash and stock so as to
trigger a "Fundamental Change" under the indenture
for the convertible notes. On April 21, representatives of
Jefferies participated in a call with Ciena's financial
advisor, Morgan Stanley, during which representatives of
Morgan Stanley formally proposed that the form of merger
consideration Ciena was offering be changed from all stock to
a mix of 11% cash and 89% stock in order to trigger a
"Fundamental Change." The stock component of the
merger consideration would be measured by the value of
Ciena's common stock at closing.
April 26, 2015, Ciena provided a draft employment term sheet
to Hatfield. He then participated in a call with
representatives of Ciena to review and discuss the employment
terms, as well as the terms of similar term sheets for eight
other Cyan employees that Ciena had identified during the due
April 28, 2015, the Strategic/Finance Committee decided that
it would be advisable to contact Houlihan Lokey Capital, Inc.
for a second fairness opinion. On April 30, during a board
meeting, an attorney from Wilson Sonsini "made note of
the fact that certain members of the Board, and Jefferies,
held convertible notes and related warrants of the Company,
the ownership of which could be interpreted as creating a
possible conflict of interest."
April 29, and continuing through until a final term sheet was
signed on May 3, 2015, Hatfield, with the assistance of
independent counsel, negotiated the terms of his employment
with representatives of Ciena.
3, 2015, Houlihan Lokey rendered a fairness opinion
concerning the Merger. The board unanimously approved the
Merger the same day.
4, 2015, Ciena issued a press release announcing the Merger,
which stated in relevant part that:
HANOVER, Md. - May 4, 2015 - Ciena® Corporation (NYSE:
CIEN), the network specialist, has entered into a definitive
agreement to acquire Cyan Inc. (NYSE: CYNI), a leading
provider of next-generation software and platforms to enable
open, agile and scalable software-defined networks. Under the
terms of the agreement, Ciena will acquire all of the
outstanding shares of Cyan in a cash and stock transaction
currently valued at approximately $400 million (or $335
million, net of estimated cash acquired) and inclusive of
Cyan's outstanding convertible notes on an as-converted
. . .
Transaction Terms and Timing
Upon the closing of the transaction, Cyan shareholders will
receive consideration equal to the value 0.224 shares of
Ciena common stock (89% of which will be delivered in Ciena
common stock and 11% will be delivered in cash based on the
value of Ciena common stock at closing). This exchange ratio
represents $4.75 per share of Cyan common stock, based on
Ciena's 20-day volume weighted average price as of May 1,
2015. Based on the structure of the transaction, Cyan's
outstanding warrants will be deemed to have been
automatically exercised upon closing. In addition, Ciena will
also assume Cyan's outstanding equity awards.
In connection with the acquisition, Ciena will assume
Cyan's $50 million in outstanding principal amount of
8.0% Convertible Senior Secured Notes due 2019. Under the
terms of the indenture, for a period following closing, the
note holders may elect to convert such notes at an increased
conversion rate, or alternatively require that all or a
portion of their notes be purchased for cash at a purchase
price equal to the principal plus accrued interest. In the
event that any note holders do not make either such election,
such notes will become obligations of Ciena.
Litigation Ensues and the Transaction Closes
on May 15, 2015, five purported class actions were filed in
this Court challenging the proposed transaction. On June 23,
2015, these five actions were consolidated and co-lead
counsel was appointed.
26, Ciena filed an amendment to its Form S-4 Registration
Statement with the Securities and Exchange Commission,
attaching Cyan's preliminary proxy statement (the
"Proxy"). On June 30, Cyan filed a definitive proxy
statement recommending that Cyan's stockholders vote in
favor of the Merger.
mid-July 2015, defendants made a voluntary production of
documents to plaintiffs' counsel. On July 20, 2015, after
reviewing the documents that were produced to them,
plaintiffs sent a letter to Cyan's counsel demanding that
Cyan supplement its disclosures in the Proxy. Cyan declined
to do so.
31, 2015, stockholders of Cyan holding approximately 71% of
Cyan's outstanding common stock voted to approve the
Merger, with approximately 98% of those voting expressing
their approval. The Merger closed on August 3, 2015.
initial complaint sought to enjoin the Merger. As noted
above, plaintiffs also demanded that Cyan supplement its
Proxy before the stockholders' meeting scheduled to
consider the proposed merger, which request Cyan rebuffed.
Plaintiffs nevertheless did not file a motion for expedition
or preliminary injunctive relief.
15, 2016, almost one year after the Merger closed, plaintiffs
filed the Verified Third Amended Class Action Complaint,
asserting two claims. Count I asserts that the seven members
of Cyan's board breached their fiduciary duties in
connection with their approval of the Merger. Count II
asserts that defendants withheld material information that
prevented Cyan's stockholders from determining
"whether to pursue their statutory appraisal rights,
" and asks the Court to award the remedy
19, 2016, defendants filed a motion to dismiss the Complaint
under Court of Chancery Rule 12(b)(6) for failure to state a
claim for relief. On February 6, 2017, after observing that
plaintiffs had asserted a lengthy list of alleged disclosure
deficiencies in their opposition brief, the Court asked
plaintiffs to file a letter before the hearing on the motion
to dismiss "identifying what plaintiffs believe are
their three strongest disclosure claims."
Plaintiffs' counsel did so later that same day.
standards governing a motion to dismiss for failure to state
a claim for relief are well settled:
(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
the standard is a minimal one, the Court "will not
credit conclusory allegations or draw unreasonable inferences
in favor of the Plaintiffs." The Court also "is
not required to accept every strained interpretation of the
allegations proposed by the plaintiff."
reasons explained below, I conclude that Count I for breach
of fiduciary duty must be dismissed for two independent
reasons. First, plaintiffs have failed to plead sufficient
facts to support a reasonable inference that the directors of
Cyan breached their duty of loyalty or acted in bad faith in
connection with the Merger. Second, a majority of
disinterested stockholders of Cyan approved the Merger in a
fully informed, uncoerced vote. Thus, under Corwin v. KKR
Financial Holdings LLC and its progeny, the
transaction can only be attacked on the ground of waste,
which plaintiffs do not allege.
conclude that dismissal of Count II for quasi-appraisal
logically follows from the dismissal of Count I. As an
initial matter, plaintiffs' request for quasi-appraisal
is premised on disclosure deficiencies alleged in the
Complaint but, as discussed below, the former stockholders of
Cyan were not deprived of any material information in
deciding whether to seek appraisal. The cause of action
underlying the quasi-appraisal remedy that plaintiffs seek,
moreover, is in reality a claim for breach of the fiduciary
duty of disclosure. Because plaintiffs have failed to state a
non-exculpated claim for breach of fiduciary duty, they
cannot obtain quasi-appraisal as a remedy.
Plaintiffs Fail to Plead a Non-Exculpated Breach of
the Merger Agreement, the former stockholders of Cyan
received 89% of the merger consideration in the form of Ciena
common stock and the rest in cash. Because the merger
consideration primarily consisted of stock in a publicly
traded company, enhanced scrutiny under
Revlon does not apply, as plaintiffs sensibly
concede. Plaintiffs also do not allege that the
transaction triggers Unocal or should be subject to
the entire fairness review ab initio. Thus, the
business judgment rule presumptively applies to the
Court's review of the transaction, and the Court will not
second-guess a board's decision unless that decision
"cannot be attributed to any rational business
certificate of incorporation contained an exculpatory
provision permitted under 8 Del. C. §
102(b)(7). Accordingly, to survive the motion to
dismiss, plaintiffs must state a claim that a majority of
defendants acted in bad faith or otherwise breached their
duty of loyalty. As this Court stated in Orman
v. Cullman, where self-dealing is not involved,
one must allege facts from which it reasonably may be
inferred that a director's interest in a transaction is
material to that director in order to sustain a claim for
breach of the duty of loyalty:
in the absence of self-dealing, it is not enough to establish
the interest of a director by alleging that he received any
benefit not equally shared by the stockholders. Such benefit
must be alleged to be material to that director. Materiality
means that the alleged benefit was significant enough in the
context of the director's economic circumstances, as to
have made it improbable that the director could perform her
fiduciary duties to the . . . shareholders without being
influenced by her overriding personal interest.
allegations that the board did not act in good faith also
would state a claim for breach of the duty of loyalty
sufficient to survive a motion to dismiss. In general,
"bad faith will be found if a fiduciary intentionally
fails to act in the face of a known duty to act,
demonstrating a conscious disregard for his duties,
" or if "the decision under attack is
so far beyond the bounds of reasonable judgment that it seems
essentially inexplicable on any ground other than bad
carefully reviewing the allegations in the Complaint, I
conclude that plaintiffs have failed to plead sufficient
facts to support a reasonable inference that a majority of
Cyan's board were interested in the Merger or acted in
1.Plaintiffs Fail to Plead Sufficient Facts Supporting
a Reasonable Inference that a Majority of Cyan's Board