In re Saba Software, Inc. Stockholder Litigation
CA 10697-VCS
| Del. Ch. | Mar 31, 2017Background
- Saba Software engaged in a multi-year accounting fraud at a subsidiary that overstated pretax earnings and triggered repeated failures to restate its financials; NASDAQ delisted Saba and the SEC threatened deregistration unless a restatement was filed by Feb 15, 2015.
- After repeatedly missing restatement deadlines, Saba announced it could not meet the SEC deadline (Dec 15, 2014), pursued strategic alternatives, and ran an accelerated sale process while deregistration loomed.
- Vector (a prior Saba lender) submitted a $9/share acquisition proposal in mid-February 2015; Saba’s board accepted, approved conversion of suspended/expired equity awards into cash payable on closing, and executed the merger agreement Feb 10, 2015.
- The SEC deregistered Saba stock Feb 19, 2015; Saba mailed a proxy on or about Mar 6, 2015 and stockholders approved the merger Mar 26, 2015; the deal closed Mar 30, 2015.
- Plaintiff (former stockholder) sued derivatively/directly for breach of fiduciary duty (Count I) against the board and for aiding-and-abetting (Count II) against Vector, alleging inadequate disclosures, a coercive/tainted vote, director self-interest (cash-out of equity), and a rushed/ conflicted sales process.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the stockholder vote “cleanses” fiduciary claims under Corwin (i.e., vote was fully informed and uncoerced) | Vote was not fully informed (material omissions about reasons restatement failed, sales process alternatives, and certain disclosures) and was coercive because deregistration forced a Hobson’s choice | Vote was fully informed and neutral; proxy disclosures were sufficient and no wrongful coercion occurred | Corwin does not apply: plaintiff plausibly alleged material omissions and situational coercion; enhanced (Revlon) scrutiny applies |
| Whether claims are derivative (extinguished by merger) or direct | Claims challenge fairness of the merger itself (flawed sales process, conflicted approvals, insufficient disclosures) and thus are direct | Core allegations are corporate mismanagement (derivative) and lost by merger | Claims were pled as direct merger-related claims and survive post-closing |
| Whether Saba’s Section 102(b)(7) exculpatory charter bars claims (duty of care) and whether plaintiff pled non‑exculpated claims (bad faith / disloyalty) | 102(b)(7) does not bar loyalty/bad‑faith claims; plaintiff pleads facts allowing inference directors acted in bad faith and were interested (cash conversion of otherwise‑illiquid awards) | Charter exculpates directors for care claims; asserted conduct does not rise to non‑exculpated bad faith or loyalty breach; Morgan Stanley conflicts and process flaws are at most care failures | 102(b)(7) bars duty‑of‑care claims but complaint adequately pleads non‑exculpated duty‑of‑loyalty / bad‑faith allegations (board interest in merger via merger‑related cash awards and rushed process) — Count I survives |
| Whether Vector can be liable for aiding and abetting the board’s alleged breach | Vector knowingly participated in the breach by exploiting lender access/confidential info and securing a rushed deal at an unfair price | Vector negotiated at arm’s length; plaintiff fails to plead Vector acted with knowledge that it was causing a fiduciary breach | Aiding and abetting claim against Vector fails: plaintiff did not plead sufficient facts that Vector knowingly participated in a fiduciary breach — Count II dismissed |
Key Cases Cited
- Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015) (vote-by-disinterested-stockholders that is fully informed and uncoerced invokes business judgment rule)
- Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) (when sale/change of control is inevitable, board must seek to maximize sale price; enhanced scrutiny)
- Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004) (test for whether claim is derivative or direct)
- Malpiede v. Townson, 780 A.2d 1075 (Del. 2001) (standard for third‑party knowing participation and limits on aiding and abetting)
- Williams v. Geier, 671 A.2d 1368 (Del. 1996) (framework for inequitable coercion of shareholder votes)