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In re Tangoe, Inc. Stockholders Litigation

Court of Chancery of Delaware

November 20, 2018


          Date Submitted: August 27, 2018

          Kurt M. Heyman, Esquire and Melissa N. Donimirski, Esquire of Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware; Jason M. Leviton, Esquire and Joel A. Fleming, Esquire of Block & Leviton LLP, Boston, Massachusetts; and Jeremy S. Friedman, Esquire, Spencer Oster, Esquire and David F.E. Tejtel, Esquire of Friedman Oster & Tejtel PLLC, New York, New York, Attorneys for Plaintiff.

          Catherine G. Dearlove, Esquire and Sarah A. Galetta, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and William H. Paine, Esquire, Timothy J. Perla, Esquire, Peter A. Spaeth, Esquire and Alexander C. Boudreau, Esquire of Wilmer Cutler Pickering Hale and Dorr LLP, Boston, Massachusetts, Attorneys for Defendants.


          SLIGHTS, Vice Chancellor

         There is no basis in our law to deny corporate fiduciaries the protection of the business judgment rule simply because they make risky decisions when the company is navigating stormy waters. Indeed, the evaluation and management of acute risk is "a core function of the exercise of business judgment."[1] But, when navigating a company through the storm, as always, fiduciaries must act first and foremost in the interests of the stockholders.

         The storm analogy is apt in this case. The lead Plaintiff, a former stockholder of Tangoe, Inc. ("Tangoe" or the "Company"), alleges that former members of Tangoe's Board of Directors (the "Board") breached their fiduciary duties to Tangoe stockholders by steering the Company into an ill-advised take-private acquisition by TAMS Inc., Asentinel, LLC and Marlin Equity Partners (collectively, "Marlin").[2]According to Plaintiff, the members of Tangoe's Board (the "Director Defendants") recommended the transaction to stockholders in the midst of a storm conjured by the Board's false filings with the Securities and Exchange Commission ("SEC"), a failed effort to restate the Company's financials and correct the false filings, the subsequent delisting of the Company's stock by the NASDAQ exchange, the near deregistration of the stock by the SEC due to the Board's ongoing failure to file the restatement, rumblings of a proxy contest that threatened the Director Defendants' Board seats and, finally, the enticement of significant equity awards to the Director Defendants that would be triggered only by a change of control. Rather than navigate through or around the storm, according to Plaintiffs, the Director Defendants sailed Tangoe directly "into an iceberg and then faithlessly commandeered the lifeboats, leaving stockholders to drown."[3]

         The storm clouds began to gather in March 2016, when Tangoe announced that the SEC had detected false statements in its publically filed financial statements and that the Company would have to restate its financials for 2013, 2014 and the first three quarters of 2015 (the "Restatement"). The announcement prompted a 10% drop in Tangoe's stock price. Soon after, as the stock price continued to decline, Marlin, a global private equity firm, filed a Schedule 13D disclosing that it beneficially owned 7.6% of Tangoe's common stock. Within months, Marlin increased its stake to 10.4%. This move, according to Plaintiffs, sent a clear signal to the Director Defendants-a proxy contest was coming.

         As rumblings of a proxy fight grew more pronounced, the Company struggled to complete the Restatement. The delay, in turn, prompted NASDAQ to delist the Company's stock and the SEC to threaten deregistration. As the prospect of a successful Restatement began to fade, the Director Defendants confronted the reality that they would reap nothing from the Company's existing equity incentive plan because SEC rules barred the Company from making equity awards while the Restatement was pending. In the midst of this intensifying storm, the Board pivoted from completing the Restatement to selling the Company. At the same time, the Board created a new incentive plan for its members that would be triggered only upon a change of control.

         The sales process unfolded as Tangoe's regulatory woes persisted. Marlin emerged as the most likely buyer. Its initial expression of interest was at $9 per share. By the time Tangoe's stock was delisted from NASDAQ, Marlin's offer had dropped to $6.50 per share (a 28% negative premium). Tangoe and Marlin announced the transaction-a tender offer at $6.50 per share followed by a second-step merger pursuant to 8 Del. C. § 251(h) ("the Transaction")-on April 28, 2017. Faced with the "Hobson's choice" of holding potentially illiquid stock or accepting an all-cash transaction, a majority of the Company's shareholders tendered at the recommended price of $6.50 per share.[4] The consideration represented a negative premium against every conceivable benchmark prior to Tangoe's delisting.

         The Complaint pleads a single count against the Director Defendants for breaching their fiduciary duties by: (1) "agreeing to sell Tangoe to Marlin for an inadequate price, pursuant to an unreasonable process, while they were inadequately informed, ultimately failing to maximize stockholder value"; and (2) failing to "disclose to Plaintiff and the Class all information material to Tangoe stockholders' decision on whether to tender their shares and agree to the sale of the Company."[5]

         The Director Defendants have moved to dismiss the Complaint. Their showcase argument is that they are entitled to business judgment rule deference under Corwin v. KKR Fin. Hldgs. LLC because a majority of disinterested, fully informed and uncoerced stockholders approved the Transaction.[6] Alternatively, they maintain that because Tangoe's certificate of incorporation contained a Section 102(b)(7) exculpatory provision, Plaintiff was obliged, but failed, to plead a non-exculpated claim for breach of the duty of loyalty.[7]

         Plaintiff, not surprisingly, sees his Complaint in a different light. He argues that he has pled facts from which it may reasonably be inferred that stockholders were either coerced to tender or did so without the benefit of material information. Moreover, he maintains that he has pled facts to support a reasonably conceivable breach of the duty of loyalty claim that is not, as a matter of law, subject to Section 102(b)(7) exculpation.[8]

         For reasons explained below, I conclude that Corwin "cleansing" is not available at the pleading stage because it is reasonably conceivable that the stockholders' approval of the transaction was uninformed. I also conclude that Plaintiff has adequately pled a non-exculpated claim for breach of the duty of loyalty against the Director Defendants because it is reasonably conceivable they approved the Transaction and recommended it to stockholders for self-interested reasons.

         I. BACKGROUND

         I draw the facts from the allegations in the Complaint, documents incorporated by reference or integral to that pleading and judicially noticeable facts.[9] As I must, I have accepted as true the Complaint's well-pled factual allegations and have drawn all reasonable inferences from those allegations in Plaintiff's favor.[10]

         A. The Parties and Relevant Non-Parties

         Lead Plaintiff, Matthew Sciabacucchi, owned Tangoe common stock at all times relevant to the Complaint. He seeks to prosecute this action on behalf of himself and a class of all other similarly situated Tangoe stockholders.

         Defendant, James Foy, joined the Board in March 2014 and was named Tango's "Acting CEO" on June 6, 2016. Defendant, Gerald Kokos, joined the Board in September 2002 and became its Executive Chairman on May 2, 2016. Both Foy and Kokos served on the Board through the consummation of the Transaction.

         Plaintiff refers to the following Director Defendants as "Outside Directors, "[11]each of whom served on the Board until the consummation of the Transaction: Ronald Kaiser (who began serving on the Board in January 2009); Noah Walley (who began serving on the Board in July 2008); Jackie Kimzey (who began serving on the Board in March 2008); Richard Pontin (who began serving on the Board in March 2007); David Coit (who began serving on the Board in August 2006); and Gary Golding (who began serving on the Board in September 2002).

         Non-party, Marlin Equity Partners, is a global private equity firm with over $6.7 billion of capital under management.[12] Non-party, Asentinel, LLC ("Asentinel"), is a limited liability company organized under the laws of the State of Delaware, with its principal executive offices located in Memphis, Tennessee.[13]Asentinel is a portfolio company of Marlin Equity Partners and a provider of telecom expense management ("TEM") software and services.[14] Following the Transaction, Marlin Equity Partners intended to combine Tangoe and Asentinel under the Tangoe brand, "creating a market leader managing more than $38 billion of [information technology] and telecom on behalf of over 1, 300 customers worldwide."[15]

         Prior to the Transaction, Tangoe was a Delaware corporation that provided information technology ("IT"), telecom expense management ("TEM") software and related services. The Company's stock traded on the NASDAQ exchange until it was delisted on March 14, 2017. Thereafter, the stock traded over-the-counter until the Transaction closed.

         B. Tangoe Before the Restatement

         Tangoe was incorporated in 2000. It quickly emerged as a leading global provider of connection lifestyle management software and services to a wide range of blue chip global and non-global enterprises. The core of its business was its Matrix Solution Suite, "an on-demand suite of software designed to manage and optimize the complex processes and expenses associated with the complete lifestyle of an enterprise's connection assets and services."[16] "Between 2010 and 2014, the Company's year-over-year total revenue growth tripled from $68.5 million to $212.5 million."[17]

         In late 2015, a number of Vector Capital IV, L.P. affiliates (collectively, "Vector") and Clearlake Capital Partners IV GP, L.P. affiliates (collectively, "Clearlake") made announcements that they had taken significant positions in Tangoe.[18] Their stated goal was to encourage the Board to consider strategic alternatives for Tangoe. When Vector approached the Board about a possible strategic transaction, the Board responded that it was not interested and would, instead, continue to pursue the Company's standalone plan.

         C. The Restatement

         On March 7, 2016, Tangoe announced that it had erroneously recognized $17.1 million of non-recurring revenue and, consequently, would need to restate its financial results for 2013, 2014 and the first three quarters of 2015. The Company reported that it did not expect to file its Form 10-K Annual Report on time but "would diligently pursue completion of the restatement as soon as reasonably practicable."[19]

         Just one day after Tangoe announced the need for the Restatement, on March 8, 2016, Marlin acquired 3, 001, 426 shares of Tangoe common stock. About a week later, Marlin filed a Schedule 13D disclosing that its beneficial ownership position was approximately 7.6%. It also disclosed its interest in "potential business combinations and strategic alternatives" involving Tangoe.[20] On March 21, 2016, the Company announced it had received a NASDAQ notification letter in which Tangoe was admonished for failing to file its annual Form 10-K for the fiscal year ending December 31, 2015. Under the NASDAQ listing rules, Tangoe was required to submit a plan of compliance by May 20, 2016 or risk delisting.

         In April 2016, the Board engaged StoneTurn Group, LLP, a forensic accounting firm, to assist the Board and Tangoe's independent accounting firm, BDO USA, LLP ("BDO"), in the efforts to complete the Restatement. That same month the Board announced it had accepted the resignation of the Company's CFO and had appointed Jay Zager interim-CFO. Tangoe's co-founder, President, CEO and Chairman of the Board tendered his resignation soon after. To fill the void, the Board appointed Foy as interim-CEO and Kokos as Executive Chairman of the Board. According to Board presentation materials, on May 11, 2016, the Board verbally committed to "provide 'cash value' in [a change in control] scenario" to Foy and Kokos as compensation for their new roles.[21]

         On May 16, 2016, four days before the NASDAQ plan of compliance was due, and with knowledge that Marlin intended either to "seek to cause [Tangoe] to implement various plans or proposals intended to enhance stockholder value" or to "engage in discussions" with Tangoe's Board about "potential business combinations and strategic alternatives, "[22] the Board formally retained Stifel, Nicolaus & Company, Inc. ("Stifel") to serve as Tangoe's financial advisor. The engagement contemplated that Stifel would conduct a strategic review process and then pursue a sale of the Company. Indeed, under the terms of its engagement, Stifel's compensation was almost entirely contingent on a sale of Tangoe.[23]

         D. The Board Makes Preparations for a Sale

         On May 19, 2016, Tangoe received a NASDAQ deficiency notice for failure to file its 1Q16 Form 10-Q. Approximately two weeks later, on June 6, 2016, the Board named Foy Acting CEO in exchange for a salary of $50, 000 per month, and $100, 000 in Restricted Stock Units ("RSUs") under Tangoe's 2011 Stock Incentive Plan. This marked a 20-fold increase in Foy's annual salary.[24]

         In a presentation delivered on June 15, 2016, Stifel advised the Board that Marlin had moved from simply "wanting a seat at the table" to an "intent to force a sale of Tangoe to itself."[25] In the same presentation materials, Stifel advised that Tangoe's recently resigned CEO, Subbloie, had engaged in sale discussions with Marlin. Stifel then questioned whether "a competitive process [could] be run given . . ." that a "former CEO with inside access [was] teaming with [Marlin]," creating a dynamic that was "wrought with disclosure issues and fair dealings."[26] Stifel closed its presentation by observing that "[e]ngaging in a sale of the company without projections or current financials increases barrier to entry."[27]

         "On June 23, 2016, after Marlin and Tangoe had already engaged in preliminary acquisition discussions, Marlin purchased an additional 1, 093, 173 shares of Tangoe common stock, increasing its ownership interest to 10.4%."[28]A month later, on July 25, 2016, Tangoe received a letter from Vector in which Vector expressed its interest in taking Tangoe private. On the following day, Clearlake delivered a letter in which it shared its frustration with the Board's lack of progress in exploring a sale of the Company and requested that Tangoe enter into a non-disclosure agreement with Clearlake so it could make a competitive acquisition offer.[29]

         As the sales overtures intensified, the Board turned its focus inwards. The Restatement had profoundly affected the Board's and management's compensation and incentives. Tangoe's 2011 Stock Incentive Plan provided substantial equity compensation for Tangoe officers and directors. Indeed, as depicted in the chart below, equity incentives comprised the bulk (approximately 75%) of the Individual Defendants' compensation for Board service:[30]

         (Image Omitted)

         Form S-8 barred the issuance of equity compensation under the 2011 Stock Incentive Plan while the Restatement was pending.[31] Accordingly, on July 28, 2016, the Board caused the Company to enter into Equity Award Replacement Compensation Agreements ("EARCAs"), dated June 8, 2016, with each of the Director Defendants. The EARCAs granted the Director Defendants Measurement Shares representing the number of Company RSUs, Company performance stock units or shares of restricted stock that would have been granted to each Board member if the Form S-8 awards had been available. Specifically, under the EARCAs, each Director Defendant received 15, 142 Measurement Shares, which would fully vest only upon a change in control.[32]

         During the same meeting where the Director Defendants secured their EARCAs, the Board directed Stifel to explore a potential sale of Tangoe with a select group of acquirers, including Marlin, Clearlake and Vector. It is alleged that the common thread running through each of these financial sponsors was their willingness to consider a transaction regardless of whether Tangoe completed its Restatement and remained listed.[33]

         On August 15, 2016, on the same day Tangoe entered into a confidentiality agreement with Marlin, the Board granted Foy and Zager an additional 400, 000 and 100, 000 Measurement Shares, respectively, with substantially similar terms as the previous EARCAs. These awards, however, conditioned 25% of the Measurement Shares on achieving an undisclosed deal price.[34]

         E. The Restatement Stalls as Sale Discussions Continue

         In response to Tangoe's failure to file its 2Q16 Form 10-Q Quarterly Report, NASDAQ wrote the Company to advise the Board that Tangoe stock would be delisted if the Company did not comply with the Listing Rules by September 12, 2016. On August 19, 2016, Tangoe announced that it would not meet the already-extended September 12, 2016 deadline and would seek another extension. This prompted another letter from NASDAQ, this time from the exchange's Staff of the Listing Qualifications Department. This letter advised Tangoe that due to its failure to file timely Quarterly and Annual Reports, the Exchange would delist the Company's stock on September 22, 2016, and would thereafter file a Form 25-NSE with the SEC if Tangoe did not appeal the delisting decision.[35] Without any explanation for the delay, Tangoe informed its stockholders that it intended to request an appeal hearing.

         Over the following week and a half, several suitors that had emerged in the sales process indicated their "concern with the lack of audited financial statements" and a "reluctance to pursue further discussions."[36] Marlin, however, was not deterred. On September 28, 2016, it communicated its interest in acquiring Tangoe at a price in the range of $8.25 to $8.50 per share. Tangoe's stock price closed at $8.17 that same day.

         The list of interested financial sponsors grew smaller through October 2016. Marlin, however, remained engaged and, on November 4, 2016, informed Tangoe that it was prepared to propose a transaction at $9.00 per share-a 9.3% premium to the current trading price. On November 9, 2016, NASDAQ granted one final extension for Tangoe to complete the Restatement and allowed that Tangoe's common stock would continue trading on the NASDAQ exchange through March 10, 2017.[37]

         On November 10, 2016, Tangoe filed a Form 12b-25 informing the SEC that it was unable timely to file its 3Q16 Form 10-Q.[38] This disclosure informed stockholders, however, that the Audit Committee had "substantially completed" its "internal investigation [and] internal review of the financial statements for the periods being restated."[39] Unbeknownst to stockholders, the investigation revealed that the Company actually recognized $30.5 million in revenue incorrectly and that the Company needed to make substantial adjustments to operating income.

         Stifel's engagement with six potential strategic buyers later that month yielded no interest. The feedback was consistent; there could be no meaningful engagement with the Company while the Restatement remained incomplete. The Board was not moved. It diverted focus and resources from the Restatement process and fixed its sights on Board compensation and a quick deal with any of the financial sponsors who were willing to look past the Restatement delays. On November 18, 2016, Director Defendants Coit, Pontin and Kaiser received additional EARCAs- 1, 225 Measurement Shares (valued at $20, 000) to each Coit and Pontin, and 12, 255 Measurement Shares (valued at $100, 000) to Kaiser. Also on November 18, 2016, the Board approved accelerated vesting upon a change in control for senior management with at least 9, 500 unvested RSUs, and extended the change in control deadlines to March 15, 2018 for both Foy's and Zager's EARCAs. As the Board was enhancing its compensation, Stifel was continuing its discussions with Marlin, Clearlake and Vector, the only potential acquirers that remained interested in Tangoe.[40]

         On December 16, 2016, the Board learned that StoneTurn provided BDO with the final piece of information BDO needed from StoneTurn to complete audit sampling for the Restatement. Yet, as reported in the minutes of the December 27, 2016 Audit Committee meeting, for reasons unclear, BDO never received the data it needed from the Company to complete the Restatement process. Instead, it appears that, by this point, the Board's focus was fixed on selling the Company.

         Shortly after the December 27, 2016 Board meeting, Marlin provided an indication of interest in acquiring Tangoe for $7.50 per share, conditioned upon, among other things, the receipt of a quality of earnings report. Unlike its approach to the Restatement, the Board was quick to respond to Marlin's requests. On December 28, 2016, the Board commissioned Alvarez & Marsal, LLC ("A&M") to prepare a quality of earnings report for Marlin. Despite the materiality of a quality of earnings report in Marlin's eyes, the Board elected never to disclose that report to, or summarize its findings for the benefit of, the other stockholders.

         During a telephone Board meeting on December 28, 2016, the Audit Committee reported that "progress on the Restatement was not sufficient for the Audit Committee to conclude with any degree of reliability that the Restatement would be completed" by NASDAQ's March 10 delisting deadline. Without explanation, on January 3, 2017, the Company notified NASDAQ of its anticipated non-compliance and then, that same day, advised stockholders that NASDAQ could "determine to suspend the Company's common stock from trading . . . at any time and to delist the Company's common stock . . . upon making the required filing with the SEC."[41]

         F. Delisting, Lower Forecasts and Marlin's Final Discounted Proposal

         At the same time it disclosed the likely delisting, Tangoe announced that Marlin proposed an acquisition of the Company for $7.50 per share, all cash-a 4.9% premium over Tangoe's then-prevailing unaffected trading price. The Company also publicly disclosed that Clearlake and Vector had proposed to acquire Tangoe for $7.00 per share (an 11% discount). In response to its request for additional diligence items, Director Defendants Foy, Kokos and Zager provided Marlin with updates on Tangoe's financial results for 2016 and lowered financial projections for 2017 in light of the 2016 results. Over the following weeks, additional financial sponsors approached the Company but declined to make a proposal after conducting due diligence.

         Early 2017 saw steady declines in Tangoe's stock price. Between January 3, 2017, when the Company publicly announced that it would not meet the March 10, 2017 delisting deadline, and February 24, 2017, the last trading day before formal acquisition proposals were due, Tangoe's stock price declined from a high of $8.32 per share to a closing price of $6.01 per share. Even as the stock price declined, the Board's focus was on Board and executive compensation. And so, on February 2, 2017, the Board approved amendments to Foy's and Zager's EARCAs, "lowering the minimum threshold" consideration necessary to trigger vesting.

         On February 27, 2017, Marlin submitted a revised and final proposal to acquire the Company at $6.50 per share cash. This offer marked more than a 13% decline from Marlin's initial proposal. The following week, on March 8, Stifel informed the Board that Vector and Clearlake would not make an acquisition proposal greater than $6.50 per share.[42] Notably, the minutes for the same Board meeting reveal that "management informed the Board that the Company's executive management team unanimously believe[d] the Company ha[d] reasonable prospects to continue operations on a standalone basis should the board decide that is the best course of action."[43]

         As predicted, on March 10, 2017, Tangoe announced that its stock had been delisted from the NASDAQ exchange. In the same announcement, the Company reported that it was continuing to work "diligently" toward completing the Restatement.[44]

         On March 14, 2017, Tangoe shares began trading over-the-counter. That same day, Marlin and Tangoe executed an exclusivity agreement. On March 23, 2017, ostensibly in response to the stock's recent delisting, the Board received a letter from certain stockholders representing approximately 4% of Tangoe's common stock, threatening that, absent a prompt transaction, they would seek to replace the Board with "new directors."[45] The letter also urged Tangoe to hold its first annual stockholders meeting in nearly two years and warned that activists were "more than willing to pursue any legal remedies necessary to force" Tangoe to do so.[46] The Board received similar correspondence from another group of stockholders representing over 3% of Tangoe's common stock on March 28 and 29, 2017.[47]

         G. The Board Recommendation and Stockholder Approval

         On April 27, 2017, the Board approved the Transaction at $6.50 per share. In doing so, the Board triggered the Director Defendants' right to receive collectively nearly $5 million in exchange for their Measurement Shares under the EARCAs. Marlin and Tangoe executed the Merger Agreement the following day and thereafter commenced a 30-day go-shop period pursuant to that Agreement. Despite Stifel actively shopping the Company to thirty-six parties during the go-shop, not a single serious overture or alternative acquisition proposal was submitted.

         Tangoe filed the 14D-9 and accompanying Form 8-K to stockholders recommending the Transaction on May 12, 2017.[48] By letter dated June 5, 2017, before the Tender Offer closed, the SEC advised Foy that it had "significant concerns as to whether investors have access to the financial information necessary to make a decision regarding the [Tender] Offer," particularly since Tangoe had not provided any audited financial statements. Undeterred, the Board pressed forward and the Transaction ...

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