NeoMedia Technologies, Inc (NEOM)

[Personalizit]

Another opinion the the final judgement:
http://www.internationallawoffice.com/newsletters/Detail.aspx?g=8f7a405b-c45a-4a58-b60b-a3436e15a32c
January 15 2014

Facts
Decision
Comment



In In re Trados Incorporated Shareholder Litigation(1) Vice Chancellor Laster ruled that a $60 million deal to sell translation software firm Trados Inc to SDL PLC was fair to common shareholders which challenged the transaction, since their shares retained the same value of zero before and after the sale under the Delaware entire fairness test. The case is of particular interest to venture capital and other investors considering transactions involving distressed companies with preferred shares.

Facts

Prior to the transaction that eventually led to the shareholder suit, Trados obtained venture capital funding to support a growth strategy intended to lead to an initial public offering. The venture capital investors received preferred stock and placed representatives on the Trados board. In July 2005 Trados was acquired by SDL for $60 million in cash and stock. Under the terms of the merger, the preferred stockholders received $52.2 million of that amount to satisfy their liquidation preference and management received $7.8 million as part of an existing management incentive plan. The other common stockholders received no consideration in the merger. The plaintiff, a holder of common stock, sued Trados's directors for breach of fiduciary duties, alleging that the directors had structured the merger in a way that benefited the preferred shareholders at the expense of the common shareholders.

Decision

The Delaware Chancery Court reviewed the transaction under the entire fairness standard (rather than under the deferential business judgement rule), because the plaintiff proved that a majority of the board was either directly or indirectly interested in the merger. The court found that the board failed the 'fair process' prong of the entire fairness test because the directors did not evaluate the transaction from the perspective of the common shareholders, including failing to consider forming a special committee or obtaining a fairness opinion. Instead, the court concluded, the board was focused on finding exit opportunities for the venture capital investors.

Nevertheless, the directors were found not liable for breach of fiduciary duty, because although the process was not fair, the zero consideration was the economically fair price, making the merger fair in the court's estimation. Aided by experts, the defendants proved that the common stock "had no economic value before the [m]erger". As such, the transaction satisfied the fair price prong of the entire fairness test because the "common stockholders received in the [m]erger the substantial equivalent in value of what they had before".

Comment

The Trados opinion highlights a circumstance where an economically fair price can arise despite a questionable process. However, it also highlights the high litigation risk created by deals that can be construed as structured solely as 'venture capital exits'. In such circumstances a conflicted board dominated by preferred shareholders would still optimise its defence position by actively considering the interests of common shareholders and ways in which a robust process may mitigate the conflict, including considering a special committee process, hiring independent legal and financial advisers and obtaining fairness opinions as appropriate to the circumstances.

For further information on this topic please contact Marko S Zatylny at Ropes & Gray LLP's Boston office by telephone [phone]), fax [phone]) or email ([e-mail]). Alternatively, contact James C Davis at Ropes & Gray's Chicago office by telephone [phone]), fax [phone]) or email ([e-mail]). The Ropes & Gray website can be accessed at www.ropesgray.com.

Endnotes

Endnotes

(1) In re Trados Inc. S'Holder Litig, CA 1512-VCL (Del Ch Aug 16 2013).

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