Chen v. Howard-Anderson
2014 Del. Ch. LEXIS 50
| Del. Ch. | 2014Background
- Occam Networks (public company) negotiated a merger with Calix (announced Sept. 2010; closed Feb. 2011) where Occam shareholders received cash plus Calix stock; plaintiffs sued claiming breaches of fiduciary duty (sale process and proxy disclosure defects).
- Occam’s board included two venture-capital-affiliated directors (Krausz/USVP and Abbott/Norwest) holding ~25% combined; CEO Howard‑Anderson and CFO Seeley were centrally involved in the sale process.
- Management prepared multiple internal revenue projections (April, June, August 2010) that included 2012 forecasts; Jefferies and Morgan Stanley performed fairness work but the Proxy Statement said management provided forecasts only for 2010–2011.
- Key contested process events: (1) extensive informal early contact with Calix (Krausz/Russo); (2) a 24‑hour ultimatum to Adtran to bid; (3) a 24‑hour “market check” conducted over the July 4th weekend; and (4) the Board’s repeated grant/extension of exclusivity to Calix without re‑shopping despite improving results (e.g., TDS opportunity).
- Plaintiffs claim directors favored Calix and omitted/materially misstated projections and facts in the Proxy Statement; defendants moved for summary judgment and some directors invoked a charter exculpatory clause (8 Del. C. §102(b)(7)).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Sale‑process breach (enhanced scrutiny applies) | Board tilted process to favor Calix (24‑hour ultimatum; inadequate market check; favored bidder contacts) and thus acted unreasonably | Board acted reasonably, pursued alternatives, and did not ‘utterly fail’ to attempt to obtain best value | Enhanced scrutiny governs; record permits inference some decisions fell outside range of reasonableness, but no sufficient evidence of improper motive for outside directors; summary judgment for six outside directors on sale‑process claims (exculpated) |
| Exculpation under §102(b)(7) for directors | Exculpation should not shield directors because conduct may reflect loyalty/good‑faith breaches | Exculpation bars monetary recovery for duty‑of‑care violations; defendants claim any shortcomings are care failures only | For outside directors (Krausz, Abbott, Pardun, Moyer, Bylin, Strom) alleged defects plausibly were care breaches only; §102(b)(7) bars money damages; for interested director (Howard‑Anderson) and officers (Seeley) exculpation inapplicable |
| Proxy disclosures (projections and background) | Proxy omitted/materially misstated: (i) existence/reliability of 2012 projections, (ii) character of management’s 2011 projections, (iii) Jefferies’ statement that no forecasts beyond 2011 were provided, and (iv) a slanted sale history (Calix/Adtran/market check) | Disclosures were accurate or immaterial because 2012 forecasts were speculative/unreliable and not used in the fairness analysis | Summary judgment denied — factual disputes exist about reliability, what management/board knew, and whether omissions/characterizations were materially misleading; disclosure claims survive to trial |
| Remedy/standing of Occam as defendant | Plaintiffs named Occam too | N/A | Occam as entity is not a proper defendant for fiduciary‑duty claims; judgment in favor of Occam |
Key Cases Cited
- Revlon, Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (Del. 1986) (establishes enhanced scrutiny in sale‑of‑control context; focus on obtaining best value reasonably available)
- Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985) (intermediate review to address situational conflicts and board motivation concerns)
- Lyondell Chem. Co. v. Ryan, 970 A.2d 235 (Del. 2009) (Delaware Supreme Court clarified limits of ‘known‑duty/conscious‑disregard’ theory and discussed ‘utterly failed to attempt’ scope)
- In re Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006) (articulates bad‑faith categories and when intentional dereliction of duty is non‑exculpable)
- Malone v. Brincat, 722 A.2d 5 (Del. 1998) (directors must disclose fully and fairly all material information under board’s control)
- Paramount Communications, Inc. v. QVC Network Inc., 637 A.2d 34 (Del. 1994) (discusses reasonableness metric under enhanced scrutiny and review of decisionmaking process)