BOUCHARD, C.
This 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 consideration.
Plaintiffs 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.
Count I 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.
Count I 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.
Dismissal 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 case.
Unless 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.
Under 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 relevant times.
Before 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."
Ciena 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."
Defendants 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.
Defendant 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 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 holdings.
Defendant 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.
Defendants 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 Committee.
On 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.
On or 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.
On May 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.
In 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.
On 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.
Under 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.
In 2014 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.
By 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.
On 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.
During 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.
During 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,
On 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.
On 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 US 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.
On 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.
On 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 diligence process.
On 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."
On 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.
On May 3, 2015, Houlihan Lokey rendered a fairness opinion concerning the Merger. The board unanimously approved the Merger the same day.
On May 4, 2015, Ciena issued a press release announcing the Merger, which stated in relevant part that:
Beginning 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.
On June 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").
In 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.
On July 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.
Plaintiffs' 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.
On July 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,"
On July 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."
The standards governing a motion to dismiss for failure to state a claim for relief are well settled:
Although the standard is a minimal one, the Court "will not credit conclusory allegations or draw unreasonable inferences in favor of the Plaintiffs."
For the 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.
I also 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.
Under 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
Cyan's certificate of incorporation contained an exculpatory provision permitted under 8 Del. C. § 102(b)(7).
Well-pleaded 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,"
After 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 bad faith.
Plaintiffs identified in their brief three sources of conflicts that allegedly rendered members of Cyan's board interested in the Merger. I address each in turn.
First, plaintiffs allege that all of Cyan's directors were "conflicted because they were motivated to secure a buyer with deep pockets to ensure they would be indemnified from the high litigation exposure associated with the Cyan Securities Litigation due to the Company's uncertain cash position."
There is a significant and indisputable flaw in this theory. Plaintiffs overlook the fact that not all stockholders of Cyan at the time of the Merger could be members of the class certified in the Securities Litigation, which concerns disclosures Cyan made in connection with its initial public offering.
Putting aside that securities litigation rarely leads to a 100% recovery, when the maximum exposure from the Securities Litigation is put in proper perspective, it is not reasonably conceivable in my view from the facts alleged in the Complaint that the directors of Cyan had a disabling conflict of interest when they approved the Merger based on their alleged desire to "ensure there would be sufficient cash so they will continue to be indemnified."
Second, plaintiffs allege that Haque and Ferris, as affiliates of Cyan's two largest stockholders (Norwest and Azure), had interests "not aligned with other Cyan stockholders because their holdings are so sizable that the Transaction is their only opportunity to cash out without the scrutiny of the public markets."
Plaintiffs do not allege that Norwest or Azure received different consideration for their shares than other stockholders of Cyan, nor do they allege that Norwest or Azure had any "immediate need for liquidity" that amounted to "a crisis" or "fire sale." Therefore, consistent with Synthes, plaintiffs' bare allegation that Norwest and Azure wanted to "cash out without the scrutiny of the public markets" is insufficient to support a reasonable inference that Haque or Ferris faced a disabling conflict of interest in approving the Merger.
Third, plaintiffs allege that Floyd, Hatfield, and Haque were "motivated to ensure a transaction occurred so they could either receive the make-whole payment from the convertible notes in connection with a fundamental change or in the alternative, keep the convertible notes outstanding, but tied to a much more financially secure company."
Plaintiffs' contention that the desire to obtain the make-whole payment created a material conflict of interest is open to serious question given that each of these individuals held (or indirectly benefitted from) a significant amount of Cyan stock and thus were motivated to maximize the exchange ratio in Cyan's favor. Specifically, the Complaint alleges that Floyd, Hatfield, and Norwest held, respectively, 0.83%, 4.76%, and 22.71% of Cyan's outstanding shares.
Plaintiffs' sole allegation of bad faith is based on defendants' refusal to supplement the Proxy after receiving a July 20, 2015 letter from plaintiffs' counsel asking them to do so shortly before the stockholder meeting to consider the Merger was held on July 31.
Even if reasonable minds could differ over the merits of plaintiffs' disclosure allegations, furthermore, the Complaint contains no non-conclusory allegation that could support a reasonable inference that the Cyan board members demonstrated "a conscious disregard for [their] duties,"
For the reasons explained above, plaintiffs have failed to state a non-exculpated breach of fiduciary duty claim against defendants. Count I thus must be dismissed.
As a second and independent ground for dismissal of Count I, defendants seek to invoke the cleansing effect flowing from a fully informed, uncoerced stockholder vote under Corwin and its progeny.
In Corwin, the Delaware 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."
Here, plaintiffs do not allege that the stockholder vote on the Merger was coerced or that the Merger failed to receive the approval of a disinterested majority of stockholders. The Corwin doctrine thus applies if the stockholder vote approving the Merger was fully informed.
"[D]irectors of Delaware corporations are under a fiduciary duty to disclose fully and fairly all material information within the board's control when it seeks shareholder action."
"The application of [the materiality] standard does not require a blow-by-blow description of events leading up to the proposed transaction. That is, the directors are `not required to disclose all available information,' but only that information necessary to make the disclosure of their recommendation materially accurate and complete."
Although the Complaint lists something in the neighborhood of twenty disclosure deficiencies, all but one of which plaintiffs had identified before the Merger,
Plaintiffs allege that the Proxy is "materially misleading as to the Board's acknowledgement of Jefferies' conflict of interest in giving advice on a strategic transaction."
Assuming arguendo that the Proxy inaccurately characterized the board's assessment as of its January 27, 2015 meeting concerning the nature of Jefferies' interest in the Merger due to its convertible note holdings,
As the above quotation demonstrates, the Proxy disclosed in detail Jefferies' holding of the convertible notes, the implied value of the notes upon consummation of the Merger, the fact that Jefferies was indemnified by Cyan in the Securities Litigation, and the Strategic/Finance Committee's decision to hire an additional financial advisor for a second fairness opinion after it had become apparent that the proposed transaction had been structured to result in a "Fundamental Change" thereby triggering the make-whole payment. Under these circumstances, it is not reasonably conceivable in my view that the word choice of "could" versus "would," and the comment of Cyan's General Counsel that described substantially similar information already disclosed elsewhere in the Proxy, would significantly alter the total mix of information made available to Cyan's stockholders.
Plaintiffs next argue that the Proxy failed to disclose the importance of revenues from Cyan's largest customer, Windstream, to the management projections contained in the Proxy. According to plaintiffs, "the Proxy and Amended S-4 fail to disclose the fact that the recent Windstream order substantially affected the Company's future performance and that the loss of that income would have a significant negative impact on Cyan."
Under the section entitled "Cyan Management Projections," the Proxy disclosed the following:
Three paragraphs later, the Proxy further stated:
The "Risk Factors" sections of Cyan's Form 10-K for the 2014 fiscal year and Form 10-Q for the first quarter of 2015 contain substantially identical disclosures concerning Cyan's dependence on Windstream.
As plaintiffs acknowledge, this Court at times has considered materials explicitly incorporated into a proxy statement to be part of the total mix of information available to stockholders.
The last of plaintiffs' "three strongest disclosure claims" challenges the omission from the Proxy of a "Selected Software & Network Management Precedent Transactions" analysis that appeared in the appendix of a powerpoint presentation Jefferies provided to the board on May 3, 2015.
"[A] complaint may, despite allegations to the contrary, be dismissed where the unambiguous language of documents upon which the claims are based contradict the complaint's allegations. Likewise, a claim may be dismissed if allegations in the complaint or in the exhibits incorporated into the complaint effectively negate the claim as a matter of law."
As mentioned above, the "Selected Software & Network Management Precedent Transactions" that is the subject of plaintiffs' disclosure challenge appeared in the appendix of Jefferies' powerpoint presentation.
By contrast, the "Selected Network Communications Precedent Transactions" analysis that Jefferies performed for Cyan as a whole appeared in the body of its powerpoint presentation—not in the appendix.
Our case law only requires disclosure of a fair summary of a financial advisor's work. The Proxy fully and accurately disclosed the precedent transactions analysis Jefferies performed to value Cyan as a whole. The failure to disclose a supplemental analysis that concerned a small fraction (5%) of the company's estimated revenues and that the financial advisor ostensibly did not rely on in rendering its fairness opinion is not material in my view. Therefore, plaintiffs fail to state a disclosure claim concerning Jefferies' precedent transactions analysis.
For the foregoing reasons, none of plaintiffs' "three strongest" disclosure claims is viable. Having reviewed the rest of plaintiffs' disclosure claims, most of which are of the "tell me more" variety and all of which are concededly weaker than the three discussed above, I conclude that each of them also falls short of identifying a material misrepresentation or omission and that the stockholder vote approving the Merger was fully informed. Accordingly, and because plaintiffs do not assert that the Cyan board's decision to approve the Merger amounted to waste, Count I of the Complaint must be dismissed for failure to state a claim for relief under Corwin and its progeny.
Count II of the Complaint, which is styled as a "Claim for Equitable Relief," seeks the "remedy of quasi-appraisal" based on the disclosure allegations in the Complaint.
In In re Orchard Enterprises, Inc. Stockholder Litigation, the Court explained based on a thorough analysis of Delaware law that "quasi-appraisal" is simply a form of remedy:
The Court further explained that "[o]ne cause of action where the Delaware Supreme Court and the Court of Chancery consistently have held that quasi-appraisal damages are available is when a fiduciary breaches its duty of disclosure in connection with a transaction that requires a stockholder vote."
As a threshold matter, because I have concluded that plaintiffs' disclosure allegations are without merit, plaintiffs' request for the remedy of quasi-appraisal based on those allegations must be dismissed as well. In addition, Count II must be dismissed because the cause of action underlying the remedy sought is an alleged breach of fiduciary duty and, as discussed above, plaintiffs have failed to plead a non-exculpated claim for breach of fiduciary duty.
In an effort to circumvent the effect of the exculpatory provision in Cyan's certificate of incorporation, plaintiffs argue that their "equitable claim is for frustration of the statutory right of appraisal, not breach of fiduciary duty."
Plaintiffs' argument runs counter to the well-reasoned conclusion in Orchard, quoted above, that "quasi-appraisal" is simply a form of remedy. Indeed, plaintiffs fail to identify a single case in Delaware that recognizes a cause of action for "frustration of the statutory right of appraisal" under similar circumstances.
As importantly, the allegations underlying Count II demonstrate, despite plaintiffs' protestations to the contrary, that the claim actually is predicated on the theory that the defendants breached a fiduciary duty of disclosure. For example, plaintiffs allege that:
When the cause of action supporting plaintiffs' request for a quasi-appraisal remedy is for breach of a fiduciary duty, plaintiffs cannot circumvent the protection afforded in Cyan's certificate of incorporation through artful pleading.
For the foregoing reasons, defendants' motion to dismiss the Complaint with prejudice is GRANTED.
