After a series of successful applications of the Corwin doctrine in Delaware's Court of Chancery, a plaintiff has finally survived a motion to dismiss where Corwin was applied. In In re Saba Software Stockholder Litigation, the Court of Chancery held, for the first time, that a shareholder-approved all-cash merger did not satisfy Corwin. While limited by the unique facts at issue, the Saba decision provides useful guidance to practitioners as to the parameters of Corwin when analyzing the likelihood of success of challenges to third party mergers. The court's decision in denying a motion to dismiss in Saba, coupled with the court's decision dismissing a complaint under Corwin in In re Columbia Pipeline Group Stockholder Litigation, provide great insight into what constitutes material disclosures in the post-Corwin world.
In 2014, the SEC filed a complaint against Saba Software Inc., alleging that a Saba subsidiary engaged in millions of dollars of financial fraud between 2008 and 2012. Saba was accused of overstating its pretax earnings by $70 million. These accusations prompted Saba to make repeated promises to its stockholders that the company would restate its earnings, however, Saba never fulfilled those promises. Prior to the SEC complaint, in 2013, NASDAQ suspended trading of Saba stock due to Saba's failure to restate its financial earnings. NASDAQ ultimately delisted Saba in June 2013, leaving Saba's stock to trade OTC. In September 2014, Saba announced that it reached a settlement with the SEC which, in addition to paying a $1.75 million penalty, would require Saba to restate its financial earnings by Feb. 15, 2015. Failure to meet the Feb. 15, deadline would result in the SEC deregistering Saba's stock. Days following the announcement of the SEC settlement, Saba's stock was trading at $14.08 per share.
However, true to prior form, Saba's board determined that it would not meet the SEC's Feb. 15, 2015, deadline for restating Saba's earnings. On Dec. 15, 2014, Saba announced to its stockholders that it would not meet the SEC deadline, but added that the company was exploring its strategic alternatives. The market's reaction to this news was not positive. Saba's stock fell from $13.49 to $8.75 per share on the day of the announcement. Meanwhile, Saba explored the market for potential acquirers. Thoma Bravo made a proposal to acquire Saba at $8-$9 per share. Yet, in January 2015, Vector Capital Management L.P. arrived on the scene. Vector had provided Saba with $15 million in debt financing in 2014, and had a prior relationship with Saba's financial adviser, Morgan Stanley. Negotiations with Vector continued through the Feb. 15, 2015, SEC deadline, after which Saba's stock was deregistered. In early March 2015, Saba executed a merger agreement with Saba at $9 per share. Because of the deregistration of its stock, Saba was not required to submit its proxy to the SEC for review before sending to the company's stockholders in advance of the vote on the merger. Three weeks after receiving the proxy, Saba's stockholders approved the merger.
Following the closing of the merger with Vector, a former Saba stockholder filed a complaint asserting breach of fiduciary duty claims against the company's directors and an aiding and abetting claim against Vector and its affiliates. The defendants moved to dismiss the complaint, arguing that the Delaware Supreme Court's 2015 decision in Corwin v. KKR Financial Holdings, dictated that because the Vector merger was a third party transaction approved by Saba's stockholders the defendant-friendly business judgment rule should apply to the merger and the complaint should be dismissed. However, Vice Chancellor Joseph R. Slights III opined that the stockholder vote was not fully informed and was coerced, thus precluding the application of the business judgment rule. Rather, the court applied the more exacting Revlon standard of review to the transaction. In so ruling, the court focused on the proxy's omission of factual information surrounding Saba's failure to restate its financial earnings, which led to the disintegration of value of the company's stock. Absent that information, Saba's stockholders had no means of determining whether to accept the merger consideration or to continue to hold the company's deregistered stock. The court also held that the proxy's failure to disclose post-deregistration options was a material omission. While details concerning alternative courses of action do not ordinarily need to be disclosed, the impact of the deregistration "caused a fundamental change in the nature and the value of the stockholder's equity stake in Saba." Without knowing what alternative options were available, a reasonable stockholder would be unable to determine whether Saba was viable as a going concern without the proposed Vector merger.
The court also held that the stockholder vote was coerced insofar as the proxy gave Saba's stockholders a "Hobson's choice" of voting in favor of the merger or holding their stock in a deregistered company. The court opined that the stockholders did not have a free choice in deciding their fate as they lacked information regarding the circumstances surrounding Saba's failure to restate their financial earnings and information regarding alternative options available to the company post-deregistration. The court also ruled that the director defendants were not exculpated pursuant to the Section 102(b)(7) provision in Saba's charter, as the complaint adequately asserted claims of bad faith conduct. The court noted the plaintiff's allegations were sufficiently pled to suggest that Saba's board failed to discharge their duties under Revlon by rushing the sales process, refusing to consider alternatives to a sale, accepting an insufficient sale price and cashing in worthless equity awards prior to the merger. Finally, despite denying the motion to dismiss filed by the Saba defendants, the court did grant dismissal for Vector. The court held that the plaintiff failed to plead knowing participation in the predicate breach of fiduciary duty. In so ruling, the court stated that alleging that a third party received confidential information and "too good of a deal," without more, cannot sustain an aiding and abetting a breach of fiduciary duty claim.