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In re Xura, Inc. Stockholder Litigation

Court of Chancery of Delaware

July 12, 2019

Re: In re Xura, Inc. Stockholder Litigation

          Date Submitted: May 28, 2019

          A. Thompson Bayliss, Esquire, Abrams & Bayliss LLP.

          John L. Reed, Esquire, DLA Piper LLP (US).

          Robert S. Saunders, Esquire, Skadden, Arps, Slate, Meagher & Flom LLP One Rodney Square.

          Marcus E. Montejo, Esquire, Prickett, Jones & Elliott, P.A.

          Rudolf Koch, Esquire, Richards, Layton & Finger, P.A.

         Dear Counsel:

         As you know, this case arises from the merger of Xura, Inc. and an affiliate of Siris Capital Group, LLC (the "Merger"). The Merger has prompted certain Xura stockholders to seek statutory appraisal of their Xura stock in this Court. One of those stockholders, Obsidian Management LLC, filed a separate complaint in this Court (the "Obsidian Complaint") in which it raised breach of fiduciary duty claims related to the Merger against Xura's CEO, Philippe Tartavull, and aiding and abetting breach of fiduciary duty claims against Siris, Frank Baker, a Siris Managing Partner, and Michael Hulslander, also a principal of Siris (collectively the "Siris Defendants"). On December 10, 2018, the Court granted the Siris Defendants' motion to dismiss Obsidian's aiding and abetting claims but denied the motion to dismiss brought by Tartavull (the "Obsidian Opinion").[1] The facts relating to the Merger and Obsidian's claims against those involved in consummating the transaction are spelled out in detail in the Obsidian Opinion.

         Ten days after the Court issued the Obsidian Opinion, another appraisal petitioner, Istvan Szoke, filed a complaint in this Court (the "Szoke Complaint") that is nearly identical to the Obsidian Complaint raising the same claims against the same defendants named by Obsidian, including the Siris Defendants. Unlike Obsidian, however, Szoke purports to bring his claims on behalf of a class of Xura stockholders. In doing so, he acknowledges that he read the Obsidian Opinion, took note of the pleading deficiencies identified by the Court with respect to the aiding and abetting claim and then attempted to cure those deficiencies with additional pled facts in his complaint.

         The Siris Defendants are not pleased. They believed they had achieved a dismissal with prejudice and yet they now face another round of litigation relating to the same Merger-related conduct at issue in the Obsidian Opinion. They have moved to dismiss. Not surprisingly, their lead-off argument is that Szoke's aiding and abetting claim is barred by res judicata. In this regard, they point out that Szoke and Obsidian's principal are close friends and both Szoke and Obsidian have joined together with a select few other Xura stockholders to seek appraisal. Szoke and Obsidian are represented by the same counsel and there appears to have been some degree of coordination between the litigants. According to the Siris Defendants, these connections justify a finding that Szoke is bound by the Court's disposition of the claims against the Siris Defendants in the Obsidian Opinion. Alternatively, the Siris Defendants urge the Court to adhere to stare decisis by finding that all of the claims and issues raised by Szoke have been decided in the Obsidian Opinion.

         It is tempting to take on the Siris Defendants' res judicata argument. The filing of the Szoke Complaint on the heels of the Court's dismissal of Obsidian's aiding and abetting claim raises legitimate concerns that may justify claim preclusion. But I need not go there for the simple reason that I am satisfied Szoke, like Obsidian, has failed to state a viable aiding and abetting claim against the Siris Defendants.[2] For that reason, the Siris Defendants' motion to dismiss must be granted.[3]

         Szoke's complaint presents the same theories of aiding and abetting that were advanced in Obsidian's complaint. Specifically, Szoke alleges the Siris Defendants aided and abetted Tartavull (and perhaps other Xura fiduciaries) (collectively, the "Xura Fiduciaries") in breaching their fiduciary duties because Siris consummated the Merger after: (i) knowing that Tartuvall had steered Xura into an underpriced transaction with Xura, (ii) knowing that Xura stockholders were "dissatisfied with Tartavull and that his hold on his CEO role was slipping," and then "knowingly exploit[ing]" this conflict by "deliberately induc[ing] Tartavull to believe that he would be CEO of the Company after the Merger," (iii) knowing that Francisco Partners had approached Xura about a transaction and was diverted by the Xura Fiduciaries to join Siris on the buy-side of the Merger, and (iv) facilitating the Xura Fiduciaries' allegedly inadequate public disclosures to Xura stockholders about the Merger.[4] As noted, I determined in the Obsidian Opinion that the plaintiff there had not well-pled facts that would support any of these aiding and abetting theories.

         The following chart, borrowed from the Siris Defendants' Opening Brief, lays out the allegations borrowed from the Obsidian Complaint, highlights the new aiding and abetting allegations in the Szoke Complaint (as underlined), and then compares these allegations to the findings of inadequate pleading identified in the Obsidian Opinion:

Pleading Deficiency Identified in the Obsidian Plenary Complaint

Redline Excerpt Showing New Allegation in the Szoke Complaint

“Plaintiff conspicuously stops short of alleging any precedent facts, even on information and belief, from which a pleading stage adverse inference could be drawn that Tartavull told or otherwise indicated to Siris that he was in danger of losing his job if the Transaction fell through or that he was motivated to steer Xura into the Transaction for self-interested reasons.” (Mem. Op. at 40)

“On information and belief, Siris knew that major Xura stockholders had expressed displeasure with Tartavull's performance and that Tartavull's hold on his job was slipping.” (Szoke Compl. ¶ 83; Ex. 1, new ¶ 83)

“On information and belief, Siris deliberately induced Tartavull to believe that he would be CEO of the Company after the Merger and would receive lucrative employment benefits. By doing so, Siris knowingly exploited Tartavull's conflict to secure an ally on the inside and to obtain information from Tartavull that it could use against the Company and drive down the transaction price.” (Szoke Compl. ¶ 84; Ex. 1, new ¶ 84)

“On information and belief, Baker, Hulslander and Siris knew that Xura's stockholders and its board were dissatisfied with Tartavull and that hishold on his CEO role was slipping.” (Szoke Compl. ¶ 139; Ex. 1, new ¶ 139)

“Baker, Hulslander, and Siris each knowingly participated in Tartavull's breachbreaches of fiduciary dutiesduty by …, (ii) using Tartavull's gloomy employment prospects to Siris's advantage and to the detriment of Xura's stockholders by inducing Tartavull to believe that he would receive a lucrative employment package as the Company's CEO post-merger....” (Szoke Compl. ¶ 140; Ex. 1, new ¶ 140)

“Plaintiff has not alleged anything to support its conclusory allegation that ‘[t]he Siris Defendants knew that Francisco Partners had expressed interest and [were] diverted to the buyside of the transaction.'” (Mem. Op. at 43)

“But Francisco Partners did not bid. Instead, it somehow learned that Siris was Xura's counterparty. On information and belief, Tartavull told Franscico [sic] Partners that Siris was the Company's counterparty. Instead of submitting a competing proposal and bidding against a rival private equity firm, Francisco Partners reached out to Siris about a potential co-investment on the buy-side of the transaction. On information and belief, Siris signaled to Francisco Partners that it was open to buy-side participation to avoid a bidding war, but it told Francisco Partners that it would need to obtain approval from Xura before officially beginning discussions about a buy-side partnership.” (Szoke Compl. ¶ 90; Ex. 1, new ¶ 90)

“Plaintiff's allegations that Siris somehow aided and abetted in the Board's deficient disclosures also fall short. At the outset, I note that an aiding and abetting claim based on a third party's alleged failure somehow to prevent a board from providing misleading disclosures to stockholders rests on thin ice. Yet that is what Plaintiff alleges here. It has pled no facts to support an inference that Siris knowingly facilitated alleged disclosure deficiencies or otherwise ‘knowingly participated” in that aspect of the alleged breach of fiduciary. Instead, at best, Plaintiff alleges (albeit summarily) that Siris knew certain facts and knew that the Board was not disclosing those facts to stockholders.” (Mem. Op. At 42-43)

“I note Plaintiff alleges Siris Defendants aided and abetted the purported disclosure deficiencies for the first time in its Answering Brief. … The Complaint simply claims Siris Defendants aided and abetted a breach of fiduciary duty ‘by engaging in direct and improper communications with Tartavull throughout the negotiations that led to the Merger.' … This alone is enough to disregard the claim.” (Mem. Op. at 42 n.147 (citation omitted))

“In any event, with regard to the specific disclosure violations Siris allegedly aided and abetted Xura in committing, Plaintiff has not alleged anything to support its conclusory allegation that ‘[t]he Siris Defendants knew that Francisco Partners had expressed interest and [were] diverted to the buyside of the transaction.'” (Mem. Op. at 43 (alterations in original; citation omitted))

“Shortly after the execution of the Merger Agreement, Xura and Siris personnel began working on a draft of the Proxy. On information and belief, Xura and Siris exchanged multiple drafts of the Proxy, and advisers for both sides were intimately involved in the drafting process. On information and belief, Xura and Siris personnel carefully reviewed and approved each portion of the Proxy, including the “Background of the Merger” section of the document. On information and belief, both Baker and Huslander [sic] were given the opportunity to comment on the Proxy, and both approved it before it was issued.” (Szoke Compl. ¶ 101; Ex. 1, new ¶ 101)

“On July 12, 2016, Xura issued the Proxy. But the Proxy It did not give the stockholders all the information they needed to properly evaluate the Merger, and it misled them in key regards respects. The Proxy made no mention of Francisco Partners whatsoever - despite the fact that Tartavull had detailed his communications with Francisco Partners in comments on a draft of the Proxy. Instead, the Proxy trumpeted the fact that Xura contacted ‘26 prospective buyers' and that ‘[n]one of the parties contacted during the go-shop process... submitted an Acquisition Proposal to the Company.' On information and belief, Siris and Xura jointly determined that the Proxy should not include any reference to Francisco Partners.” (Szoke Compl. ¶ 102 (alteration in original); Ex. 1, new ¶ 102)

“The Proxy also failed to mention a number of meetings and direct communications between Tartavull and Siris, including the February 24, 2016 meeting at which they discussed price and other sensitive topics. As a result, the Proxy painted an inaccurate picture of the nature and frequency of communications between Tartavull and Siris. On information and belief, Siris personnel commented on the Proxy's portrayal of the negotiating process and were intimately involved in determining what should and should not be disclosed.” (Szoke Compl. ¶ 103; Ex. 1, new ¶ 103)

“The Proxy described the Strategic Committee as a committee the board created to ...


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