LASTER, Vice Chancellor.
The plaintiffs sought a preliminary injunction against the acquisition of Compellent Technologies, Inc. ("Compellent" or the "Company") by Dell Inc. The parties settled after significant discovery but before merits briefing or a hearing. The settlement consideration consisted of modifications to the deal protections in the merger agreement, including the rescission of a stockholder rights plan adopted in connection with the transaction, and six supplemental disclosures. The plaintiffs applied for a fee of $6 million. The defendants argued for not more than $1.25 million. I approved the settlement but reserved decision on the fee.
This opinion addresses the fee application. It does not consider how the challenged defensive measures might have fared under enhanced scrutiny had the injunction application gone forward. Nor does it say anything about what might have transpired had the litigation entered a post-closing phase. The settlement mooted those issues, the parties did not argue them, and I have not considered them.
Determining an appropriate fee award requires an evaluation of the benefits conferred by the settlement. Regardless of whether or not the defensive measures might have constituted a breach of fiduciary duty (a question I have not reached), the settlement shifted the agreement's protective array from the aggressive end of the spectrum towards the middle. The value of that benefit must be assessed as of the time settlement was reached by the two groups of fiduciaries who negotiated its terms: the attorneys who acted as fiduciaries for the class, and the Compellent directors who were sued for allegedly breaching their duties. Delaware law does not judge fiduciary decisions by hindsight or evaluate the merits of the decisions by what later transpired.
Deal protections provide a degree of transaction certainty for merging parties by setting up impediments to the making and accepting of a topping bid. Relaxing deal protections facilitates a topping bid. Here, the settlement resulted in the rescission of a rights plan (a rare result in the annals of Delaware corporate litigation) and a series of material changes to the suite of defensive measures. The principal benefit conferred by the settlement was therefore to increase the likelihood of a topping bid.
To estimate the value of the resulting benefit, I rely primarily on four studies that measure market-wide rates of topping bid activity and the incremental value generated by multiple bidders. In candor, the reported results seem high. I nevertheless have used the studies because they were submitted by the defendants and because they were more conservative and comprehensive than the figures advocated by the plaintiffs. They should not be construed as establishing definitive pricing guidance. I also evaluated the benefits conferred by the supplemental disclosures. In total, I award $2.4 million.
The facts are drawn from the record presented in connection with the parties' joint application for settlement approval and the plaintiffs' contested fee application. The record includes the public filings issued in connection with the merger, the operative agreements, and various documents produced and six depositions of fact witnesses taken during the injunction phase of the case. The parties engaged experts for the fee dispute, and the record contains their reports and deposition transcripts.
Before its acquisition by Dell, Compellent was a publicly traded Delaware corporation headquartered in Minnesota. The Company developed, marketed, and serviced enterprise-class network storage solutions. According to Compellent, its technology enabled business customers to "significantly lower storage and infrastructure capital expenditures, reduce the skill level and number of personnel required to manage information and enable continuous data availability and storage virtualization." Compellent Annual Report on Form 10-K at 1 (Mar. 5, 2010).
Beginning in the second half of the first decade of the current millennium, corporate technology heavyweights competed to dominate the increasingly important cloud computing sector. Part of their strategy involved acquiring smaller data storage companies. In the years before 2010, major players like Dell, EMC, IBM, and Hewlett-Packard each made at least one acquisition in the data storage space, with Dell buying EqualLogic, IBM purchasing XIV, HP picking up LeftHand Networks, and EMC acquiring Avamar and Data Domain. See Transmittal Affidavit of Sean M. Brennecke, Ex. 2 at CML_00014768 (Morgan Stanley/Blackstone presentation to the Board identifying these acquisitions as comparable precedents for Dell-Compellent).
In 2010, at least three large companies—Dell, HP, and IBM—were looking for additional data storage targets. In August 2010, Dell announced that it would purchase 3PAR for $18 per share. The Dell-3PAR merger agreement favored Dell with a termination fee equal to approximately 4.2% of the transaction's equity value and the right to match any competing offer. Notwithstanding those protections, HP topped the Dell-3PAR agreement by proposing to acquire 3PAR for $24 per share. HP made its public overbid despite having dropped out of 3PAR's non-public, pre-announcement process. A three-week contest ensued, with HP ultimately prevailing at $33 per share. During the same period, IBM acquired Netezza.
After Dell lost out on 3PAR, speculation abounded that Dell would approach Compellent. Dell did, and the Compellent board of directors (the "Board") authorized preliminary discussions. According to the defendants, "Compellent viewed Dell as the most likely acquirer for a variety of reasons, including a similar work culture, complementary products, and what Compellent believed to be synergistic interests." Compellent Answering Br. at 7.
Dell representatives visited Compellent on September 7 and 17, 2010. On September 23, Dell presented Compellent with a non-binding indication of interest in a transaction at $23-25 per share conditioned on thirty days of exclusivity. The next day, the Board retained Morgan Stanley & Co. Inc. and Blackstone Advisory Partners L.P. as its financial advisors.
At the Board's request, Dell extended the expiration date for its indication of interest from September 26 to September 28. During this time, the Board and its financial advisors evaluated potential transaction partners. Because of Compellent's size, profitability, and valuation, the Board concluded that financial sponsors were unlikely to have interest in Compellent. The directors decided to approach three potential strategic partners: IBM, Oracle, and Microsoft. None expressed interest at that time. The Board elected not to reach out to EMC, HP, or Cisco, which were identified by Morgan Stanley and Blackstone as potential acquirers that were active in the space.
Dell's initial indication of interest expired on September 28, 2010. Three days later, Morgan Stanley and Blackstone presented the Board with their preliminary financial analyses of Dell's proposal and Compellent's alternatives, including Compellent's value as a stand-alone company. After evaluating Compellent's prospects, the Board decided to make a counter-proposal to Dell.
On October 7, 2010, Philip E. Soran, Compellent's Chairman and CEO, proposed that Dell agree to acquire Compellent for (i) $35 per share with thirty days of exclusivity or (ii) $32 per share without any period of exclusivity. Dell told Compellent that because of differing price expectations, Dell was no longer interested. From October 9 to October 20, 2010, there were no further discussions between the parties.
On October 21, 2010, a Blackstone representative spoke with Dell's Vice President for Corporate Development and raised the possibility of further discussions. Shortly afterwards, Dell told Compellent that it was pursuing other data storage alternatives and would not be interested in a transaction in Compellent's price range, but might be interested at a lower price. The Board decided to resume discussions.
On October 27, 2010, Compellent proposed that Dell acquire Compellent for $28 per share. Dell responded on November 2 with a written, non-binding indication of interest at $26 per share conditioned on thirty days of exclusivity. With its recent 3PAR experience in mind, Dell focused on avoiding any topping bids and achieving certainty of closure. Dell therefore proposed a two-step tender offer that would enable the transaction to close faster than a one-step merger. Dell also identified a range of deal protections that would be "key conditions" for proceeding, including (i) a strict no-shop provision; (ii) a termination fee equal to 4.75% of equity value; (ii) the right to be notified of any competing offers with an unlimited five-day match right; (iii) a requirement that Compellent adopt a stockholder rights plan with a carve out for Dell's tender offer, and (iv) support agreements from senior management, board members, and their affiliates, who collectively held approximately 29% of Compellent's outstanding shares. Dell wanted the significant stockholders to commit to tender into (or vote in favor of) Dell's transaction and to refuse to tender into (and vote against) any competing transaction, regardless of whether the Board changed its recommendation on Dell's transaction or the merger agreement otherwise terminated. Dell also wanted the stockholders to agree to pay to Dell all of the upside that they would receive from any topping bid.
This was an aggressive opener. To use just one data point for comparison, the Mergers and Acquisitions Committee of the American Bar Association has prepared a model merger agreement for the acquisition of a public company. See ABA Mergers & Acqs. Comm., Model Merger Agreement for the Acquisition of a Public Company (2011) [hereinafter Model Agreement]. The Model Agreement "represents a hypothetical strategic buyer's first draft" that would be delivered by the buyer "to commence the negotiations." Id. at xi. In other words, it is a buyer-friendly agreement with "terms generally slanted to buyer favorable positions." Id. at xii. Dell asked for much more than the Model Agreement contemplates as the pro-acquirer first draft.
The Board rejected Dell's $26 price as inadequate. On November 10, 2010, Dell offered $27 per share but insisted on the other terms of its offer. On November 15, Compellent countered at $27.50 per share. The Board conceded on the rights plan but proposed a 3.5% termination fee, a three day match right for new offers with a two day match right for amendments, and support agreements that would expire on the termination of the merger agreement and which omitted the upside protection.
After much negotiation, the parties reached an impasse over the support agreements and upside protection. On November 24, 2010, Dell proposed an acquisition at $27.50 per share structured as a single-step merger. Dell lowered its termination fee demand to 4% and reduced its match right demand to four days for initial offers and three days for amendments. Dell also dropped its request for the upside protection in the support agreements, but insisted that the agreements survive for nine-months after the merger agreement terminated. Based on this proposal, the parties entered into an exclusivity agreement on the evening of November 24.
While Dell conducted due diligence and the parties negotiated a definitive agreement, Compellent's stock price rose. In early December, Compellent's shares traded over $33, significantly above the $27.50 price. Market watchers cited Compellent's decision not to attend an analyst conference hosted by Barclay's Capital.
Dell expressed concern to Compellent about the run-up. Dell also worried that analysts would question Dell representatives about a Compellent deal at the Barclay's conference. Dell asked Compellent to issue a press release announcing their discussions, adding that Dell would issue the press release itself if Compellent did not agree to a joint release. On December 9, Dell and Compellent announced that they had entered into an exclusivity agreement and were discussing a transaction at $27.50 per share. This figure was 18% less than Compellent's closing price of $33.65 per share on December 8. Compellent's stock price promptly declined, closing at $29.04 on December 9 and at $28.71 on December 10.
Between December 9 and December 12, Dell and Compellent continued to negotiate the merger agreement. On Friday, December 10, Compellent's stock again closed above the deal price. On Saturday, December 11, with the parties nearing execution, Blackstone asked Dell whether it would increase its price. On Sunday, December 12, without any increase in hand, the Board approved the merger agreement. Dell then informed Blackstone that it would increase its price to $27.75 per share. The parties executed the merger agreement that evening and announced the transaction on Monday, December 13. Compellent's stock price closed that day at $27.98.
The merger agreement as executed on December 12, 2010 (the "Original Merger Agreement" or "OMA") contemplated a reverse triangular merger between Compellent and a Dell acquisition subsidiary. The transaction valued Compellent's equity at approximately $960 million. The deal price of $27.75 per share represented a discount of 17.5% to Compellent's closing price of $33.65 on December 8, the day before the parties jointly announced the exclusivity agreement. It represented a discount of 3.3% to Compellent's closing price of $28.71 on December 10, the business day before the Original Merger Agreement was announced. It represented a premium of 134% to Compellent's closing price of $11.86 on August 13, the last business day before Dell announced its proposed acquisition of 3PAR.
Consistent with Dell's demands for deal protection in its indication of interest, the Original Merger Agreement contained an aggressive combination of defensive measures. M&A practitioners have developed a taxonomy of familiar provisions that frequently appear in merger agreements, such as no-shop clauses, information rights, matching rights, and termination fees. Embracing these generic terms, the defendants have listed the types of provisions found in the Original Merger Agreement and labeled them "customary." Compellent Answering Br. at 24. But to identify defensive measures by type without referring to their details ignores the spectrum of forms in which deal protections can appear. Taking an obvious example, to say that a merger agreement contains a termination fee is an unhelpful banality. Anyone evaluating the transaction would want to know the size of the fee in absolute terms and as a percentage of equity value and enterprise value, the events that could trigger the fee, the amount of expense reimbursement, whether there was a stock option lock-up and its terms, and any other deal-specific attributes. It is equally critical to understand the terms and operation of a no-shop clause, information rights, and matching rights.
In this case, the Original Merger Agreement combined aggressive variants of each familiar provision with additional pro-buyer twists. Because the value of the settlement turns on changes to these provisions, I will review them in some detail, reiterating that my task is not to rule on their validity or speculate on whether their adoption might have constituted a breach of duty. The discussion centers on the provisions targeted by the plaintiffs; any failure to mention other provisions should not be taken as a silent blessing.
Section 4.3 of the Original Merger Agreement provided broadly that Compellent could not solicit, provide information to, or engage in discussions with any potential bidder other than Dell. As is customary, the provision then created an exception by identifying circumstances under which Compellent could respond to a competing bidder. In the buyer-friendly Original Merger Agreement, the prohibition was expansive and unqualified, while the exception was cabined and constrained.
Section 4.3(a) of the Original Merger Agreement established the general prohibition on Compellent interacting with actual or potential bidders. It stated:
OMA § 4.3(a) (the "No-Shop Clause") (formatting added).
Several buyer-friendly features jump out. First, subsection 4.3(a) imposed strict contractual liability on Compellent for any breach, direct or indirect, including by any representative, without limitation as to scope or qualification as to knowledge. See Model Agreement at 153. More balanced versions limit the universe of covered persons, include a knowledge qualifier (e.g. "knowingly solicit"), require that the target "not authorize or permit" covered persons to engage in prohibited activities, or call for the target to "use its best efforts and act in good faith to cause" covered persons not to engage in prohibited activities. See, e.g., Lou R. Kling & Eileen T. Nugent, 2 Negotiated Acquisitions of Companies, Subsidiaries and Divisions § 13.05[1] at 13-28-29 (2001). In addition, the restrictions found in subsection (i) extended not only to Acquisition Proposals (defined broadly to include any transaction involving 15% of Compellent's stock or assets), but also to Acquisition Inquiries, defined as any "inquiry, indication of interest or request for non-public information (other than an inquiry, indication of interest or request for non-public information made or submitted by Parent or any of its Subsidiaries) that could reasonably be expected to lead to an Acquisition Proposal." See Model Agreement at 152. Target-friendly variants apply more narrowly, for example by setting a higher percentage threshold or by limiting coverage to actual offers or proposals.
Section 4.3(b) of the Original Merger Agreement then carved out the exception to the general prohibition imposed in Section 4.3(a). In its entirety, Section 4.3(b) stated:
OMA § 4.3(b) (the "Superior Offer Out") (formatting added).
The Superior Offer Out had several buyer-friendly aspects. First, subsection (i) required strict compliance with Sections 4.2 and 5.3 without any qualifiers based on materiality, intent, or a relationship between the breach and the party making the offer. See Model Agreement at 159. A more balanced provision would include these types of qualifiers, most notably by requiring some connection between the breach of the no-solicitation requirement and the Superior Offer. Second, subsection (iii) framed the necessary determination by the Board as whether the failure to take action "would constitute a breach . . . of its fiduciary obligations." Examples of more flexible formulations include whether the failure to act "could constitute a breach," "would be reasonably likely to constitute a breach" or "would be inconsistent with the fiduciary duties of the Company's board of directors." See Model Agreement at 160-61. Third, even if Compellent complied with all other requirements, subsection (iv) required two days advance notification to Dell before Compellent could enter into discussions, and subsection (v) required 24-hours advance notice to Dell of all information provided to the second bidder. The Superior Offer Out literally required the Board to knowingly breach its fiduciary duties, albeit for a limited period of time, by first requiring the Board to determine that failing to act constituted a breach of its fiduciary obligations and then forbidding the Board to act until subsequent contractual conditions were met. This last problem could have been avoided by using a pure Superior Offer clause, rather than a hybrid with a Superior Offer trigger and a fiduciary duty determination. See John F. Johnston, A Rubeophobic Delaware Counsel Marks Up Fiduciary-Out Forms: Part II, 14 Insights: The Corp. & Sec. L. Advisor, No. 2, 16, 18-19 (Feb. 2000) [hereinafter Rubeophobe Part II].
Under Section 4.3(b)(iv), Compellent could not provide any information unless a potential bidder agreed to a 275 day standstill without any exceptions, sunsets, or fall-away provisions. Section 4.3(e) then imposed contractual limitations on Compellent's ability to waive any standstill. Section 4.3(e) provided:
OMA § 4.3(e) (formatting added). As with the Superior Offer Out, the Board's ability to waive a standstill was conditioned on strict contractual compliance with the No Shop Clause, without any qualifiers based on materiality, intent, or a relationship between the breach and Superior Offer. Once again, the Board had to determine that failing to act "would constitute a breach . . . of its fiduciary obligations," rather than a more flexible standard. And again, even if the Board determined that not acting constituted a breach of fiduciary duty, the Board could not act for at least four business days.
If the Board satisfied the Superior Offer Out, then Section 4.3(c) granted Dell expansive information rights that required Compellent to keep Dell updated in real time on all discussions with competing bidders. Section 4.3(c) provided:
OMA § 4.3(c) (the "Information Rights") (formatting added). Drawing an analogy to Texas Hold `Em, the plaintiffs observe that this provision enabled Dell to see every card dealt to every other player.
As authorized by Section 146 of the General Corporation Law, Section 5.2(e) of the Original Merger Agreement required Compellent to submit the transaction for approval at a special meeting of Compellent's stockholders, regardless of whether the Board maintained its recommendation in favor of the transaction. Dell obtained support agreements from holders of 27% of Compellent's outstanding shares.
A force-the-vote provision elevates the importance of a board's ability to change its recommendation. See John F. Johnston, Recent Amendments to the Merger Sections of the DGCL Will Eliminate Some—But Not All—Fiduciary Out Negotiation and Drafting Issues, 1 Mergers & Acqs. L. Rep. (BNA) No. 20, 777, 781-82 (July 20, 1998). "The carve-out from the target board's obligation to recommend the agreement to the target's stockholders raises issues that are fundamentally different from those raised by the no-shop and termination carve-outs because it implicates the duties of the target directors to communicate truthfully with its stockholders." Rubeophobe Part II at 19; see also Steven M. Haas, Limiting Change of Merger Recommendations to "Intervening Events," 13 No. 8 M&A Law. 15 (Sept. 2009); R. Franklin Balotti & A. Gilchrist Sparks, III, Deal-Protection Measures and the Merger Recommendation, 94 Nw. U. L. Rev. 467 (2002); John F. Johnston, A Rubeophobic Delaware Counsel Marks Up Fiduciary-Out Forms: Part I, 13 Insights: The Corp. & Sec. L. Advisor, No. 10 (Nov. 1999).
Consistent with the Original Merger Agreement's pro-acquirer stance, Section 5.2 cabined the Board's ability to change its recommendation. So extensive and complex were the contractual hurdles that they merit quotation in full:
OMA § 5.2 (the "Recommendation Provision") (emphasis and formatting added).
This aggressive provision raises a host of questions. For example, if stockholders are entitled to a current, candid, and accurate board recommendation, can a merger agreement contractually prevent the board from updating its recommendation for "at least four business days" and potentially longer given procedural hurdles and a requirement that "any change in the form or amount of the consideration payable in connection with a Superior Offer, and any other material change to any of the terms of a Superior Offer, will be deemed to be a new Superior Offer (or other Acquisition Proposal), requiring a new Recommendation Change Notice and a new advance notice period"? See id. § 5.2(d). If a company's constitutive documents contemplate that directors take action by a majority of those present at a meeting where a quorum exists, can the board nevertheless agree contractually that "the Company Board Recommendation shall be deemed to have been modified by the board of directors of the Company in a manner adverse to Parent and Merger Sub if the Company Board Recommendation shall no longer be unanimous"? See id. § 5.2(c)(i). If the board determines that its fiduciary duties require the postponement or adjournment of the special meeting so that stockholders can receive and digest material information or a change in recommendation, can the company nevertheless be bound contractually not to "(without Parent's prior written consent) adjourn, postpone or cancel (or propose to adjourn, postpone or cancel) the Company Stockholders' Meeting, except to the extent required to obtain the Requisite Stockholder Approval"? I need not attempt to answer these or other questions that the Recommendation Provision raises. For now, it is sufficient to recognize that the provision added novel and decidedly acquirer-friendly features to what otherwise resembled a pro-buyer first draft to which a target corporation would have manifold and legitimate objections. See Model Agreement at 169-89.
Section 4.2(e) of the Original Merger Agreement required Compellent to adopt a stockholder rights plan with a 15% trigger (the "Rights Plan"). The provision stated:
OMA § 4.2(e) (the "Rights Plan Provision") (formatting added).
The Rights Plan Provision in itself was novel and bidder-friendly. Merger agreements have not traditionally required that a target board adopt a rights plan. This is not to say that the provision was improper. When a target corporation already has a rights plan in place, it is not uncommon for a merger agreement to include a covenant providing that the rights plan will remain in place except for any amendments required to facilitate the acquisition. See, e.g., In re Orchid Cellmark Inc. S'holder Litig., 2011 WL 1938253, at *7 (Del. Ch. May 12, 2011); Model Agreement at 205-06. In addition, there have been occasions when a target board could have used a rights plan to stop a creeping takeover and obtain greater value for stockholders. See, e.g., NACCO Indus. v. Applica, Inc., 997 A.2d 1, 31 (Del. Ch. 2009); La. Mun. Police Empls.' Ret. Sys. v. Fertita, 2009 WL 2263406, at *8 (Del. Ch. July 28, 2009). But regardless of the Rights Plan's potentially beneficial use, the Rights Plan Provision represented another pro-buyer innovation in the Original Merger Agreement.
The Original Merger Agreement gave Dell the right to terminate and require Compellent to pay a $37 million termination fee plus $960,000 in expense reimbursement under a variety of circumstances, most notably the occurrence of any "Triggering Event." See OMA §§ 8.1(e) & 8.3(d). A more apt label would have been "Hair-Trigger Event," because a "Triggering Event" was deemed to have occurred if
OMA Ex. A at A-A-7 (formatting added).
Under these definitions, if a competing acquisition proposal emerged, the Board responded to it or changed its recommendation, and Dell terminated, then Compellent would have to pay Dell the termination fee plus expenses. The $37 million termination fee plus $960,000 in expenses represented approximately 3.95% of Compellent's equity value at the deal price. By contrast, under Section 8.3(b), if a competing acquisition proposal emerged, the Board took no action in response, and Dell terminated, then Compellent only would owe Dell expense reimbursement, giving the Board a strong financial inducement not to respond to a bid or provide stockholders with an updated recommendation. If the Board exercised its right to change its recommendation due to a "Change in Circumstances," i.e. other than because of a topping bid, the termination fee increased to $47 million. Together with the expense reimbursement, the toll for the Board to exercise its fiduciary responsibilities when faced with a "Change in Circumstances" was approximately 5% of Compellent's equity value at the deal price. In addition, the $37 million fee plus expenses would be due if (i) Compellent's stockholders failed to approve the transaction or it failed to close by June 30, 2011, (ii) a competing acquisition proposal was made prior to termination, and (iii) Compellent was acquired or agreed to be acquired by another company within 275 days after the date of the termination—a nine month tail.
On December 13, 2010, Compellent and Dell issued a joint press release announcing the merger. Two days later, the first putative class action challenging the merger was filed in Minnesota state court, followed by a second on December 22. Between December 17 and December 29, six putative class action lawsuits were filed in this Court. The Delaware actions were consolidated and certified as a class action. The Minnesota plaintiffs responsibly agreed to intervene in this proceeding and work with the Delaware plaintiffs. In doing so, the plaintiffs' firms promoted the interests of the stockholder class by joining forces, avoiding unnecessarily duplicative and wasteful litigation in multiple forums, and moving forward in the jurisdiction whose law governed the dispute and where, if necessary, the parties could have obtained a prompt and definitive answer from the Delaware Supreme Court—the only decision-maker empowered under the United States Constitution to rule definitively on Delaware law.
On December 30, 2010, Compellent filed its preliminary proxy statement. On January 14, 2011, Compellent filed its definitive proxy statement. On January 17, the plaintiffs filed an amended complaint that fleshed out their breach of fiduciary duty claims in connection with the merger in greater detail and added disclosure claims.
During expedited discovery, the defendants and their advisors produced over 106,000 pages. Between January 13 and 29, 2011, the plaintiffs took six depositions: three Compellent directors, a representative from each of Compellent's financial advisors, and the lawyer who served as Dell's lead negotiator. As their expert on deal protections, the plaintiffs retained Professor Steven M. Davidoff from The Ohio State University Michael E. Moritz College of Law. Davidoff is more popularly known for his regular column on the DealBook website, where he writes as "The Deal Professor."
Settlement negotiations commenced in January 2011. Davidoff assisted in the negotiations and helped draft modifications to the Original Merger Agreement.
By agreement effective as of January 31, 2011, the plaintiffs settled the litigation in exchange for modifications to the deal protections and a half-dozen supplemental disclosures. Compellent and Dell executed an amended merger agreement (the "Amended Merger Agreement") to implement the changes.
First, the defendants modified the No-Shop Clause and Superior Offer Out. They removed the requirement that any competing bidder enter into a 275-day standstill agreement before receiving non-public information, and they loosened the language of the Superior Offer Out from a proposal that "constitutes or is reasonably likely to result in a Superior Offer" to a proposal that "constitutes, or could (after review by such Person of confidential information and after negotiations between such Person and the Company) reasonably be expected to lead to, a Superior Offer." The defendants also modified Compellent's previously unqualified contractual liability for breach by limiting exposure for any breach, regardless of materiality, to those committed by an officer, director or financial advisor. As to other representatives, Compellent only would be responsible for "action inconsistent in any material respect."
Second, the defendants moderated the Information Rights. Under the Original Merger Agreement, Compellent was required to provide Dell with (i) the identity of the potential competing bidder at least two business days before entering into discussions with the bidder and (ii) any non-public information at least twenty-four hours before providing it to a third-party bidder. The Amended Merger Agreement shortened both time periods to "prior to." For an initial Acquisition Proposal or Acquisition Inquiry, the Amended Merger Agreement added a materiality qualifier so that Dell enjoyed a right to receive "written summaries of all material oral communications." The Amended Merger Agreement eliminated Dell's on-going right to receive copies of subsequent written communications and summaries of oral communications, substituting only a general requirement that the Company "keep Parent reasonably informed."
Third, the defendants changed the "Triggering Events" to eliminate "(d)," the failure of the Board to "reaffirm, unanimously . . . and publicly, the Company Board Recommendation within five business days after Parent requests." The Amended Merger Agreement also modified "(f)" to add a materiality qualifier, such that a Triggering Event would occur only if the No-Shop Provision was breached "in any material respect."
Fourth, the defendants lowered the termination fee from $37 million to $31 million. The percentage of equity value fell from approximately 3.85% to 3.23%.
Fifth, the defendants rescinded the Rights Plan. This was exceptional relief. Since 1988, no Delaware court has forced a public company to redeem its rights plan or invalidated a public company's rights plan in its entirety.
Finally, the defendants issued supplemental disclosures on a Form 8-K (the "Disclosure Supplement") and delayed Compellent's meeting of stockholders for at least twenty-one days. The Disclosure Supplement elaborated on the events leading up to the Original Merger Agreement and the fees historically received by Morgan Stanley and Blackstone for providing services to Compellent and Dell.
Despite the reduced defensive measures and the additional twenty-one days, no competing bidder emerged. On February 22, 2011, Compellent's stockholders approved the Amended Merger Agreement with more than 83% of the issued and outstanding shares voting in favor. The transaction closed that day.
When a plaintiff pursues a cause of action relating to the internal affairs of a Delaware corporation and generates benefits for the corporation or its stockholders, Delaware law calls for an award of attorneys' fees and expenses based on the factors set forth in Sugarland Industries, Inc. v. Thomas, 420 A.2d 142 (Del. 1980). "[T]he amount of an attorneys' fee award is within the discretion of the court." In re Plains Res. Inc. S'holders Litig., 2005 WL 332811, at *3 (Del. Ch. Feb. 4, 2005). In determining an appropriate award, a court applying Delaware law should consider
Id. (citing Sugarland, 420 A.2d at 149). "The last two elements are often considered the most important." Id. In setting fee awards, the Court seeks to reward plaintiffs' counsel appropriately for bringing meritorious claims while avoiding socially unwholesome windfalls. See In re Cox Radio, Inc. S'holders Litig., 2010 WL 1806616, at *20 (Del. Ch. May 6, 2010), aff'd, 9 A.3d 475 (Del. 2010) (TABLE).
The plaintiffs achieved a significant benefit by loosening the aggressive deal protections in the Original Merger Agreement. To reiterate, it is not my task to determine whether the original deal protections, individually or collectively, would have passed muster under enhanced scrutiny. The parties settled, mooting that issue. The relevant question is rather the value of the changes to Compellent's stockholders.
This question deserves attention, because modifying deal protections has emerged as a handy and frequently employed method for settling merger litigation.
In re Revlon, Inc. S'holders Litig., 990 A.2d 940, 947 (Del. Ch. 2010).
Because parties to a settlement frequently negotiate an attorneys' fee award that the defendants will pay in conjunction with the settlement, this Court historically has not been required to develop a framework for evaluating the benefits from changes in deal protections. There is a "natural judicial tendency when reviewing an uncontested fee application that will be paid by the defendants (rather than as a deduction from a common fund otherwise distributable to the class) to defer if the amount falls within a plausible range." In re Sauer-Danfoss Inc. S'holders Litig., 2011 WL 2519210, at *18 (Del. Ch. Apr. 29, 2011); see Olson v. ev3, Inc., 2011 WL 704409, at *16 (Del. Ch. Feb. 21, 2011) (noting "a natural element of judicial deference to a negotiated fee that fell within (albeit at the upper end of) a range of comparable awards"). The broad discretion that this Court enjoys when awarding attorneys' fees under the tractable multi-factor Sugarland test further alleviates the impetus for inquiry.
The benefit generated from modifying deal protections is easy to conceive but difficult to quantify. The benefit is an increased opportunity for stockholders to receive greater value. To take a simple example, a settlement that reduces a termination fee by $10 million generates a benefit in that more of the consideration from a topping bidder will go to the stockholders rather than the original acquirer. A court can use the full amount of the reduction because a target board would breach its fiduciary duties by approving a termination fee so large as to preclude any topping bid. The original transaction parties therefore cannot reasonably dispute that a topping bidder should be willing to pay at least the value implied by the deal price plus the original termination fee. See In re Del Monte Foods Co. S'holders Litig., 2011 WL 2535256, at *15 (Del. Ch. June 27, 2011) ("the $120 million termination fee should serve as a lower bound for the incremental value of a topping bid").
But just as it is easy to see how the target stockholders could receive an additional $10 million in consideration, it is equally easy to see that the value of the modification does not equal the face amount of the reduction. The modification only pays off if there is a topping bid, giving the modification a contingent value at the time of the settlement equal to $10 million discounted by the likelihood that a topping bid will emerge. If the likelihood of a topping bid were approximately 7-10%, then the benefit measured at the time of settlement would not be $10 million, but $700,000 to $1 million. And this figure in turn would not represent the amount of the attorneys' fee award, but rather the benefit that could then be used under a percentage-of-the-benefit analysis. If a plaintiff's efforts warranted approximately 25% of the benefit, then the fee for the reduction would range from $175,000 to $250,000.
Modifications to other types of defensive measures can be evaluated similarly. Loosening a no-shop clause, weakening information rights or matching rights, and ameliorating restrictions on a board changing its recommendation should, all else equal, increase the chance of a topping bid. The resulting benefits can be estimated as a function of the incremental amount that stockholders would receive if a higher bid emerged times the probability of the higher bid.
The incremental value that stockholders receive includes both the direct benefit from a reduction in the termination fee or other hard costs, as well the additional, more contingent and causally attenuated value from price increases generated by the topping bid and further bidding. The probability of receiving a higher bid must take into account that reducing the barriers makes a bid marginally more likely. The calculation consequently depends on the increased likelihood of a topping bid under the revised defensive measures. Because more extreme defensive measures should have a more powerful dampening effect, settlements that ameliorate stronger forms of deal protection should warrant larger fees.
Importantly, under this approach, the size of the benefit is not affected by whether or not a topping bid actually emerges. The revised deal protection provisions "provide[] the opportunity for a topping bid, and this benefit exist[s] whether or not a competing bidder materialized." Del Monte, 2011 WL 2535256, at *14.
Id. Modifications to deal protections operate similarly, but rather than protecting against the risk of loss, they create a greater opportunity for gain. "As with an insurance policy, that opportunity was conferred whether or not a bid actually emerged. As with the premium charged for an insurance policy, the value of the benefit does not depend on an actual topping bid." Id. Assessing the benefits of the settlement as of the time it was agreed to, rather than in light of after-the-fact events knowable only through hindsight, comports with how Delaware courts evaluate decisions made by fiduciaries.
In my view, estimating the benefit of reduced defensive measures in this fashion helps anchor this Court's discretionary fee determinations to something more objective than the boldness of the plaintiffs' ask and the vigor or passivity of the defendants' response. The calculation does not aspire to mathematical exactitude. To predict accurately how alternative takeover scenarios might play out is impossible. See Schwert, supra note 4, at 185-87 (explaining why market participants cannot accurately forecast takeover premiums).
Although the resulting calculation is admittedly rough, scientific precision is not required when awarding fees. This Court has substantial discretion in the methods it uses and the evidence it relies upon. See Tandycrafts, Inc. v. Initio P'rs, 562 A.2d 1162, 1166 (Del. 1989) (noting "the plenary power of the Court of Chancery over the allowance of [attorneys'] fees"). Delaware Supreme Court jurisprudence recognizes that this Court must make fee determinations on an incomplete record and without the benefit of a full trial.
The first input is the increased likelihood of a topping bid. To assist me in quantifying this variable, the plaintiffs provided an expert report from Professor Davidoff containing empirical evidence about other transactions. The defendants did not offer comparable expert testimony or argument, choosing to attack Davidoff's analysis. The defendants also argued that Davidoff's work lacks sufficient evidence of scientific reliability to be admitted under Delaware Rule of Evidence 702. Given the nature of the Court's role and the utility of Davidoff's data, I believe that this Court can consider Davidoff's report.
Davidoff estimated the increased likelihood of a topping bid by evaluating the strength of the suite of deal protections in both the Original Merger Agreement and the Amended Merger Agreement, then comparing them to suites found in comparable transactions. Davidoff used data from Factset MergerMetrics to identify signed deals in the Electronic Technology Sector with a transaction value over $100 million that were announced between January 1, 2008 and June 30, 2011. Eliminating still pending and duplicative transactions left a sample of sixty-two deals. Davidoff reviewed those transactions for the four most prominent deal protections found in the Original Merger Agreement and assigned to each transaction a number from zero to eight. He awarded two points for each of the following features: (i) a termination fee over 4%; (ii) strong information rights; (iii) a standstill requirement for competing bidders; and (iv) a poison pill at announcement. Davidoff defined strong information rights as those requiring all communications, written or oral, between the target and the competing bidder to be provided to the initial acquirer. Davidoff awarded one point for medium information rights, defined as requiring written terms and correspondence and material oral communications to be provided to the initial acquirer. He awarded zero points for weak information rights, defined as requiring only written terms and general status to be provided to the initial acquirer. Davidoff also awarded one point if a no-shop provision required a competing bidder to enter into a confidentiality agreement no less stringent than the initial acquirer's, because confidentiality agreements routinely contain standstills.
Of the sixty-one deals other than the Dell-Compellent transaction, 52.46% (32) received two points or less, 40.98% (25) received greater than two points to five points, and only 6.56% (4) received six points or more. Davidoff calculated an incidence of topping bids for each category. He found that 9.38% of the deals in the lowest category were topped, 8.00% in the intermediate category were topped, and none of the deals in the highest category were topped.
The Original Merger Agreement received the full eight points. The Amended Merger Agreement received one point. Based on his analysis, Davidoff concluded that the changes to the Amended Merger Agreement increased the likelihood of a topping bid by approximately 9.38%.
I do not regard the Davidoff analysis as a statistically valid study, nor do I accept it as a precise calculation of the increased likelihood of a topping bid. Yet despite its flaws, Davidoff's analysis provides relevant and probative evidence of the directional trend of the changes in the Amended Merger Agreement and the potential for topping bids in the Electronic Technology Sector.
For purposes of this decision, I find more persuasive the four empirical studies published in financial journals that the defendants submitted to attack Davidoff's work.
One study of 1,814 successful and unsuccessful takeovers of listed firms during 1975-91 found that multiple public bidders emerged in 20.5% of the cases. See Schwert, supra note 4, at 166. An earlier study of 669 successful takeovers of listed firms during 1975-91 found that multiple public bidders emerged in 24.1% of the cases. See Comment & Schwert, supra note 10, at 17-18. A study of 526 acquisition attempts between 1985 and 1998, which limited its sample to bids not solicited initially by the target firm, found that 42.78% of the attempts involved multiple public bidders. See Heron & Lie, supra note 10, at 1790-91. A study of 400 takeovers of major U.S. corporations announced over the 1989 to 1999 time period found that 12.75% (51/400) involved more than one public bidder. Boone & Mulherin, supra note 10, at 852.
In candor, the rates in these studies strike me intuitively as high. Previously, I have cited studies that suggest rates of topping bid activity.
Each of the defendants' studies supports an incidence of topping bid activity that is higher than the 9.38% rate that Davidoff estimated. I therefore start with Davidoff's lower figure as an estimate of the market rate, but I will not use the full 9.38%. Three additional considerations support lowering the rate somewhat.
First, for purposes of crafting an attorneys' fee award, I conclude comfortably that the realistic likelihood of a topping bid under the Original Merger Agreement, while not zero, was negligible. Dell sought to lock-up its deal with Compellent after its experience with 3PAR, the Original Merger Agreement contained aggressive forms of each type of individual defensive measure, and in combination the measures had a powerful antitakeover effect. Together with the Rights Plan, the provisions conveyed a clear message that any interloper would be resisted vigorously and should stay away. Only a uniquely determined and well-funded competitor who viewed Compellent as a critical asset would have been likely to challenge Dell. Some small reduction is warranted for this slight possibility.
Second, although I am equally comfortable concluding that the reduced battery of defensive measures left Compellent materially more open to a topping bid, the Amended Merger Agreement did not substitute an overly loose set of protections. For example, Compellent did not commence a go-shop, lower its termination fee to the 1%-2% range, offer expense reimbursement to a second bidder, or take similarly assertive actions to induce a topping bid. Largely because of the strength of the defenses in the Original Merger Agreement, the Amended Merger Agreement remained restrictive and buyer-friendly. Dell still could force a vote on the merger and veto any adjournment, postponement, or cancelation of the stockholder meeting "except to the extent required to obtain the Requisite Stockholder Approval," and Dell would go into any meeting with 27% of the outstanding shares committed under support agreements. Dell still enjoyed information rights that provided for real-time information about any competing bid and to advance notice of any information conveyed to a second bidder. Dell continued to have multi-day, unlimited matching rights that gave Dell a right of first refusal on Compellent. Dell still would receive a healthy termination fee equal to 3.23% of equity value if the deal terminated due to a topping bid. No changes were made to the procedural gauntlet that restricted the Board's ability to change its merger recommendation or the 5%-of-equity toll attached to a recommendation change due to a "Change in Circumstances." To my eye, the defensive suite in the Amended Merger Agreement took several steps towards a balanced, middle-of-the-road agreement, but remained squarely on the buyer's side of the street.
Third, record evidence weakly suggests a below-market likelihood of a competing bid for Compellent. Before entering into the Original Merger Agreement, Compellent did reach out quickly to three possible buyers in an abbreviated pre-agreement canvass. None were interested at that time. There also was a fleeting three-day period after Dell and Compellent announced their discussions on December 9 and before the execution of the Original Merger Agreement on December 12 during which a fast-reacting suitor might have approached. No one did.
Because the plaintiffs only can take credit for the increased likelihood of a topping bid, my estimate must incorporate these factors. On balance, and taking into account the higher indications for topping incidence suggested by the defendants' studies, I adopt a rate of 8%. Had Compellent engaged in a more extensive pre-agreement process, I would have reduced the rate further because of the additional evidence that a topping bid was unlikely to be forthcoming. If the Original Merger Agreement had contained less aggressive provisions, I similarly would have reduced because of a higher initial chance for a topping bid.
The second input for estimating the value of the changes in the Amended Merger Agreement is the expected value of the topping bid. The plaintiffs again provided helpful information in the form of Davidoff's report. The defendants did not provide any data, choosing only to attack Davidoff's analysis.
Davidoff calculated the expected value of a topping bid by focusing on the five transactions from his sixty-two deal sample where a second bidder emerged. In the five cases, the mean increase over the initial merger price was 39.56%. I accept and have considered his data, but I give it slight weight because of the small sample size and wide dispersion of price increases. For similar reasons, I give less weight to his analysis of four contested deals in the cloud computing sector.
As with the incidence of topping bids, I give primary weight to data from the published studies that the defendants submitted. One study examined 1,814 successful and unsuccessful takeovers of listed firms during 1975-91 to determine whether there was any correlation between the pre-bid run-up in the target corporation's stock price and the post-announcement markup, defined as "the increase in the stock price beginning the day the first bid is announced." Schwert, supra note 4, at 154; see id. at 156 (diagramming pre-bid run-up period and post-bid markup period). As the article explains,
Id. at 156. The study found that the average post-bid markup in the sample was 10.5%. The average markup for all successful takeovers in the sample was 15.8%. Successful takeovers involving only a single transaction partner had an average markup of 8.5%. Successful transactions in which a second bidder emerged had a higher mean markup of 18.2%. Schwert, supra note 4, at 164-65, 167.
An earlier study of 669 successful takeovers of listed firms during 1975-91 found that takeovers involving multiple public bidders generated mean stockholder returns that were 11.37% higher than single bidder takeovers. Comment & Schwert, supra note 10, at 31-32. A third study of 526 acquisitions attempts from 1985-98 where the initial bid was not solicited by the target firm found that multiple bidders were involved in 225 cases (43% of the contests). See Heron & Lie, supra note 10, at 1790-91. Overall, stockholders enjoyed mean cumulative returns that were 15% greater in multiple-bidder scenarios than in single-bidder scenarios. Id. at 1804-05. Although a fourth study of 400 takeovers from 1989-99 found no statistically significant difference in returns between single-bidder transactions and those involving multiple private or public bids, the authors did not provide data on transactions where multiple public bids were made after the initial public deal announcement. See Boone & Mulherin, supra note 10.
The defendants' three studies report mean increases in stockholder value from the involvement of competing public bidders of 18.2%, 11.37%, and 15%, respectively. As previously discussed, the terms of the Dell-Compellent deal remained on the restrictive side even after the settlement, and the information rights, matching rights, termination fee and other defensive measures likely would have had a dampening effect on any price competition. I therefore adopt the 11.37% figure.
A third fee award input is the percentage of benefit that counsel should receive. The stage at which litigation is settled factors into the determination.
In re Emerson Radio S'holder Deriv. Litig., 2011 WL 1135006, at *3 (Del. Ch. Mar. 28, 2011) (alteration in original; internal quotation marks omitted). The phase-based ranges do not establish bright-line breakpoints. They are rather indications for the Court to consider when crafting a discretionary award under Sugarland.
In this case, plaintiffs' counsel reviewed over 106,000 pages of documents produced by Compellent, Dell, and third parties and took six depositions in less than three weeks. Although the matter settled at a relatively early stage, plaintiffs' counsel engaged in substantial effort on an abbreviated timeframe. A fee award of 25% of the benefit is reasonable under the circumstances of this case.
The plaintiffs obtained a reduction in the termination fee from $37 million to $31 million. Using an increased likelihood of a topping bid of 8% and a 25% benefit allocation to counsel, the baseline fee award for this aspect of the settlement is $120,000. The plaintiffs created a more significant benefit in the form of an increased possibility for a topping bid with a transaction value north of $960 million. Using an increased likelihood of a topping bid of 8%, an average incremental value for a topping bid of 11.37%, and a 25% benefit allocation to counsel, the baseline fee award for this benefit is approximately $2,183,040. Together, the baseline fee award for these two elements of the settlement is approximately $2,303,040, which I round to $2.3 million.
"All supplemental disclosures are not equal. To quantify an appropriate fee award, this Court evaluates the qualitative importance of the disclosures obtained." Sauer-Danfoss, 2011 WL 2519210, at *17. "The court awards fees for supplemental disclosures by juxtaposing the case before it with cases in which attorneys have achieved approximately the same benefits." Plains Res., 2005 WL 332811, at *5 (internal quotation marks omitted). Recent contested fee awards for disclosure benefits reveal a range of discretionary awards with concentrations at certain levels.
Sauer-Danfoss, 2011 WL 2519210, at *18 (internal citations omitted). "For a disclosure claim to . . . provide a compensable benefit to stockholders, the supplemental disclosure that was sought and obtained must be material." Id. at *8. A disclosure is material if there is a substantial likelihood that it would be viewed by a reasonable investor as significantly altering the total mix of available information. See Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985).
The Disclosure Supplement contained six additional disclosures. The first provided additional detail about a meeting between Dell's lead negotiator and a Blackstone representative on October 21, 2010. The plaintiffs felt that the proxy statement painted the meeting as a chance encounter. The Disclosure Supplement made clear that Dell's lead negotiator and the Blackstone representative discussed beforehand that they should meet in connection with a scheduled corporate development dinner and that Compellent CEO Soran told the Blackstone representative to raise the topic of a strategic combination. These tangential tidbits did not alter the total mix of information.
The second supplemental disclosure provided additional detail about Compellent's efforts to seek out alternative bidders before granting exclusivity to Dell. The proxy statement already disclosed that after Dell's September 23 proposal, the Board told Blackstone and Morgan Stanley to reach out to the potential strategic partners that the Board felt would have the greatest interest in making a bid and that none of the parties expressed interest at that time. The Disclosure Supplement provided reasons why these parties did not have any interest, such as their internal development strategies, existing product offerings, and other potential strategic transactions. The marginal additional information provided by this disclosure was not material.
The third supplemental disclosure provided incremental information about the December 9 joint press release that announced the exclusivity agreement. The Disclosure Supplement added that Dell likely would have issued a press release alone if Compellent did not agree to a joint release and that Dell believed the increase in Compellent's stock price would work to the detriment of all parties, including Compellent's stockholders. This was interesting, but not material.
The fourth supplemental disclosure explained that Compellent cancelled its attendance at the Barclay's analyst conference because of pending discussions with Dell. The additional detail only confirmed what a reader would have assumed.
The final two supplemental disclosures addressed Morgan Stanley and Blackstone's potential conflicts of interest. The Disclosure Supplement noted that in the two years prior to the merger, neither Compellent nor Dell retained Blackstone for any services or paid any compensation to Blackstone, but that Blackstone representatives in the ordinary course of business met with Dell and Compellent to discuss market conditions, potential strategic transactions, and other matters relating to the companies' prospects. The Disclosure Supplement also informed stockholders that Morgan Stanley provided strategic advice to Dell on mergers and acquisitions, assisted Compellent with its initial public offering in 2007 and a secondary stock offering in 2009, and received approximately $2 million in fees from Compellent in the two years preceding the merger. The additional information about the financial advisors' relationships merits some compensation. An award of $100,000 is warranted for these disclosures.
"The time and effort expended by counsel serves [as] a cross-check on the reasonableness of a fee award." Sauer-Danfoss, 2011 WL 2519210, at *20. "This factor has two separate but related components: (i) time and (ii) effort." Id.
"The time (i.e., hours) that counsel claim to have worked is of secondary importance." Id. Plaintiffs' counsel submitted affidavits representing that they expended a total of approximately 2,416 hours litigating the case prior to settlement. There was undoubtedly some duplication of effort among the many plaintiffs' firms involved in the case. On balance, however, the plaintiffs' firms have not claimed an excessive number of hours in light of what they accomplished. "This is not a situation in which an enormous number of hours contrasts so markedly with minimal litigation activity as to suggest someone was padding the numbers." Del Monte, 2011 WL 2535256, at *12.
More important than hours is "effort, as in what plaintiffs' counsel actually did." Sauer-Danfoss, 2011 WL 2519210, at *20. In this case, the plaintiffs made a real effort. The case settled at a relatively early stage, but before settling plaintiffs' counsel reviewed a substantial document production, conducted six fact depositions, and retained and worked with an expert. On balance, the time and effort of plaintiffs' counsel supports the baseline fee award.
This was not cookie-cutter deal litigation in which plaintiffs' counsel advanced routine process and disclosure arguments, then accepted a standard package of board minutes and bankers' books before agreeing to a disclosure-only settlement. Although this case did not present complex issues relative to other transaction-related litigation, plaintiffs' counsel engaged in expedited discovery and negotiated for meaningful changes in the deal protections. The complexity of the case supports the baseline fee award.
Plaintiffs' counsel pursued this case on a contingent basis. They invested a significant number of hours and incurred expenses of $141,160.97, but they settled before briefing and a hearing. This factor does not merit an upward or downward adjustment.
The plaintiffs' lawyers are well-known practitioners who competently prosecuted the action. This factor does not merit an upward or downward adjustment.
Precedent fee awards for settlements in which the consideration consisted of revised deal protections and supplemental disclosures have ranged from mid-six-figures to $5.14 million.
The modifications to the deal protection provisions and the rescission of the Rights Plan were significant results. The supplemental disclosures were not. I award $2.3 million for the former and $100,000 for the latter, inclusive of expenses.
