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In Re Saba Software, Inc. Stockholder Litigation considered whether a stockholder vote satisfied the Corwin test for a full informed, uncoerced vote to determine if the shift to the business judgement rule was warranted.  The Delaware Court of Chancery determined it did not.

The opening paragraphs of the opinion sets forth the relevant facts:

“The Plaintiff’s Second Amended Verified Class Action Complaint (the “Complaint”), and its description of the unfortunate series of events leading up to the Merger, calls out to Samuel Barber’s Adagio for Strings to set the mood for the final scene. According to the Securities and Exchange Commission (“SEC”), Saba, through two of its former executives, engaged in a fraudulent scheme from 2008 through 2012 to overstate its pre-tax earnings by $70 million. Thereafter, Saba repeatedly promised regulators, its stockholders and the market that it would get its financial house in order. Each promise included assurances to stockholders that Saba would restate its financial statements by a certain date. And each time Saba inexplicably failed to deliver the restatement by the promised deadline. When it failed to meet a deadline for filing its restatement set by the SEC, the SEC revoked the registration of Saba’s common stock. Not surprisingly, the stock price suffered. In the midst of this chaos, the Company announced that “it was exploring strategic alternatives, including a sale of the Company.”

When Saba’s board of directors ultimately sought stockholder approval of the Merger, after a months-long sales process, the choice presented to stockholders was either to accept the $9 per share Merger consideration, well below its average trading price over the past two years, or continue to hold their now-deregistered, illiquid stock. Not surprisingly, the majority of Saba’s stockholders voted to approve the Merger.”

While the Court dispensed with many allegations that disclosures were insufficient, the Court found that adequate disclosures were not made regarding the ability of the Company to ever complete the restatement. According to the Court, the Plaintiff earned a pleading-stage inference that the stockholders would need all material information regarding the likelihood that the Company could ever complete the restatement in order meaningfully to assess the credibility of the management projections. The Company had repeatedly failed to meet deadlines to restate its financials. The management projections assumed the Company would complete the restatement at some point in the future. Without the means to test that assumption by drilling down on the circumstances surrounding the Company’s past and latest failure to deliver its restated financials, stockholders had no basis to conclude whether or not the projections made sense.

Additionally, according to the Court, in order to cast a fully informed vote, a reasonable stockholder would have needed to understand what alternatives to the merger existed. Plaintiff alleged that the investment banker advised a board committee that the purchaser’s proposal was a “discount to current market prices” of Saba stock and, importantly, that a transaction with purchaser “would ‘eliminate further upside for investors from standalone value creation.’” The investment banker cautioned that further pursuit of the proposed transaction “could trigger ‘[l]ikely shareholder litigation … due to price below market.’”   The Court said it is reasonably conceivable that Plaintiff will be able to demonstrate a substantial likelihood that a reasonable Saba stockholder would have found this information to be important when deciding how to vote on the merger.

The Court also considered whether the stockholder vote was coerced. Delaware courts will find wrongful coercion where stockholders are induced to vote “in favor of the proposed transaction for some reason other than the economic merits of that transaction.”  The Court said in voting on the merger, Saba stockholders were given a choice between keeping their recently-deregistered, illiquid stock or accepting the merger price of $9 per share, consideration that was depressed by the Company’s nearly contemporaneous failure once again to complete the restatement of its financials.  Examining the facts, the Court pointed out the forced timing of the merger and the proxy’s failure to disclose why the restatement had not been completed and what financing alternatives might be available to Saba if it remained a standalone company left the Saba stockholders staring into a black box as they attempted to ascertain Saba’s future prospects as a standalone company. This left them with no practical alternative but to vote in favor of the Merger.

Since Corwin did not apply, the Court found that the merger is subject to enhanced scrutiny and that the individual defendants bear the initial burden of demonstrating that they were fully informed and acted reasonably in the sales process to secure the best available price.

As the decision was based on a motion to dismiss, the Court assumes the well-pleaded facts in the complaint are true. Ultimately the litigation could come out differently.