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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE TRADOS INCORPORATED : Consolidated SHAREHOLDER LITIGATION : C. A. No. 1512-VCL
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Chancery Courtroom No. 12C New Castle County Courthous e 500 North King Street Wilmington, Delaware Wednesday, August 22, 2012 10:02 a.m.
- - - BEFORE: HON. J. TRAVIS LASTER, Vice Chancellor. - - -
ORAL ARGUMENT ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT and RULINGS OF THE COURT
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APPEARANCES:
DAVID A. JENKINS, ESQ.ROBERT K. BESTE, III, ESQ.Smith, Katzenstein & Jenkins LLP for Plaintiff Marc Th. Christen
RAYMOND J. DiCAMILLO, ESQ.Richards, Layton & Finger, P.A. -and-DAVID J. BERGER, ESQ.
of the California Bar Wilson Sonsini Goodrich & Rosati, P.C. for Defendants David Scanlan, Lisa Stone,
Sameer Gandhi, Joseph Prang, Joseph Campbell , Jochen Hummel, Klaus-Dieter Laidig, and
Trados Incorporated
- - - --------------------------------------------------- ---
CHANCERY COURT REPORTERS New Castle County Courthouse
500 North King Street - Suite 11400 Wilmington, Delaware 19801
(302) 255-0524
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CHANCERY COURT REPORTERS
THE COURT: Welcome, everyone.
Mr. DiCamillo, good morning.
MR. DiCAMILLO: Good morning, Your
Honor. I 'd l ike to take a minute to make a few
introductions on my side. I know Your Honor knows
Mr. Berger.
THE COURT: I don't know if anybody
needs to be introduced in this group.
Good to see you, Mr. Berger.
MR. DiCAMILLO: I think you do need an
introduction.
MR. BERGER: Good morning.
MR. DiCAMILLO: I do want to introduce
you to the gentleman seated behind Mr. Berger and
myself. This is Joe Campbell, who is one of the
defendants in the action and former CEO of Trados.
THE COURT: Mr. Campbell, welcome.
Good to see you.
MR. DiCAMILLO: And with the Court's
permission, Mr. Berger wil l be presenting the argum ent
on behalf of defendants this morning.
THE COURT: That's f ine.
MR. BERGER: Good morning, Your Honor.
Thank you for hearing me. I know Your Honor's view s
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on summary judgment, and I 'm well aware of intrudin g
upon Your Honor's t ime on this motion.
I do think my argument's very short
and simple, Your Honor. There's one issue for this
Court to decide. Paragraph 4 of plaintiff's compla int
says, and I quote, "... the Director Defendants
approved the Merger at the behest of certain holder s
of preferred stock who wanted to exit the investmen t
that he had made in the Company. Four of the
Director[s] ... were affil iated with these preferre d
stockholders and served as their designated appoint ees
to the Company's board."
And then it goes on, "The remaining
director simply acquiesced to the wishes of the oth er
defendants, who dominated the Company's board, with out
any regard to his duties to the common stockholders ."
That's the allegation from the
complaint fi led in December of 2008. We're now fou r
years from that t ime, Your Honor. It got plaintiff
past the motion to dismiss; but since that t ime
hundreds of thousands of documents have been produc ed,
dozens of depositions have occurred, including
multiple depositions of several of the defendants; and
it 's now time for plaintiff to come forward with
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record evidence to support this allegation. And I
would submit to Your Honor that he has none.
Under the Court's decision, former
Chancellor Chandler's decision in Orman v Cullman, it
makes clear that summary judgment is the appropriat e
time to reconsider whether plaintiff has satisfied the
duty -- his burden to overcome the presumptions of the
business judgment rule. This is also clear from
then-Chancellor Strine's decision in Live
Entertainment where then-Chancellor Strine --
then-Vice Chancellor Strine made it clear that "...
colorful rhetoric is no substitute for record evide nce
of bad faith or disloyalty."
Because Trados' charter had an
exculpatory provision pursuant to 8 Delaware Code
Section 102(b)(7), defendants are entitled to summa ry
judgment on plaintiff's duty of care claims. And
plaintiff has to come forward with specific evidenc e
to show that defendants acted with bad faith or
disloyalty.
In addition, where there's a sale to a
third party -- and that's what we have here --
plaintiff can only meet his burden to overcome the
business judgment rule by showing record evidence t hat
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the directors had, quote, "... a substantial
self-interest suggesting disloyalty, such as eviden ce
of entrenchment motives, vote sell ing, or fraud ... ";
and plaintiffs must also show that the materially
self-interested directors constituted either a
majority of the board or dominated and controlled t he
board as a whole. Again, that's from Goodwin versu s
Live Entertainment, 1999 Westlaw 64265 at *26.
That's the appropriate standard for
summary judgment here, and it 's confirmed again in
Vice Chancellor Parsons' recent opinion in Zimmerma n.
Now, I know the Court's very familiar
with the factual argument -- with the factual recor d
in this case, and I 'm not going to burden the Court
with a lot of those facts. I think there's just a few
points I want to make clear here.
First, none of the venture capital
f irms are named as defendants. There's no claim of
aiding and abetting liabil i ty here. There's obviou sly
none named as having primary l iabili ty, nor is ther e
any claim that these firms acted improperly, owed a ny
duty to the class, or breached any supposed duty to
the class.
Significantly, there is no claim that
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the venture capital firms ever sought to improperly
influence any of the director defendants. And ther e
is certainly no evidence that the venture capital
f irms ever threatened any of the director defendant s,
said that the director defendants would be penalize d,
lose their jobs, lose their positions, or otherwise
suffer any consequences if they did not sell Trados .
There is just no evidence of this in the record.
Indeed, there's not even any
allegation of this in the complaint; but, again, fo r
our purposes here, we need record evidence to show
this. And there is none.
Instead, plaintiff 's core allegation
is that each of the venture capital f irms
independently decided to exit their investment in
Trados. For example, at paragraph 30 of the
complaint, he alleges that by June 2003, Sequoia ha d
made a decision to exit its investment in Trados. At
paragraph 35 of the complaint, plaintiff alleges th at
by early to mid-2004 Wachovia had determined to exi t
its investment in Trados. And in paragraph 36, he
alleges, on information and belief, that by mid-200 4
HgCapital had decided to exit its investment as soo n
as possible.
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But there's no allegation that these
firms were on both sides of any transaction -- and
this is not a case involving a controlling sharehol der
-- nor is there an allegation that these venture
capital f irms were all acting in a coordinated
fashion. This makes it different from the situatio n
in Zimmerman, where there were allegations and actu al
record evidence, that the venture capital f irms wer e
acting in a coordinated fashion.
Here, plaintiff 's claim is that
somehow these firms came to an epiphany independent ly
between 2003 and 2004 that they should sell their
stock in Trados. But, again, what's missing is rec ord
evidence to support that. Indeed, Your Honor can g o
through the -- about 150 exhibits that my friend fr om
the other side put in in opposition to our motion.
There is not a single page from any of the document s
that he received from any of the venture capital f i rms
that shows that any of these firms were interested in
sell ing their stock in Trados. What's striking is
that although discovery occurred against all of tho se
firms, nothing, nothing in this record supports the
venture capital f irms were interested in sell ing th eir
stock in Trados.
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This is important, because as
plaintiff does not even allege that the venture
capital f irms did not act improperly, if he cannot
show that the venture capital f irms sought to exit
their investments in Trados or that the directors
somehow believed or felt pressured to exit their -- to
exit the venture capital f irms' investment in Trado s,
then plaintiff's entire theory about why the direct or
defendants decided to sell Trados goes up in smoke.
In other words, plaintiff 's notion
that the director defendants breached their duty of
loyalty by acting at the behest of the venture capi tal
f irms in deciding to sell Trados is invalid if you
cannot show with record evidence that the venture
capital f irms were interested in sell ing Trados. A nd
there is nothing in the record to support that.
Indeed, the record evidence -- it 's not only that h e
can't have evidence to support that, the record
evidence is to the contrary.
So both sides, plaintiff and us, put
in some evidence about some of the regular reports
that the individual directors were submitting to th e
various venture capital firms. And throughout thes e
reports -- and there's a few of them in the record --
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each of them suggests that the venture -- that the
director defendants were saying "This is an investm ent
that we can continue for awhile or we can try and s ell
the company." And that's from -- Ms. Stone include s
that in her reports to HgCapital. Even Mr. Gandhi
suggests that in his reports to Sequoia Capital, bo th
in 2003 and 2004. And those are -- that's in our
evidence at Exhibit 61, as well as Ms. Stone's repo rts
at Exhibit 116 of plaintiff 's exhibits.
Finally, I would just urge Your Honor
to, again, note that even plaintiff concedes that n one
of these venture capital f irms had any need for
l iquidity. So what are we left with? Why did the
venture capital f irms -- what is the evidence to
support the notion that the venture capital f irms
wanted to exit Trados? There is none. And that --
that goes to the heart, the core of plaintiff 's cla im.
Now, even if plaintiff could show that
the venture capital firms wanted to sell Trados, th e
legal issue for this motion is whether plaintiff ha s
come forward with any evidence to show that a major ity
of the board had a substantial self-interest, as th at
term is defined by Delaware law. That's the legal
question I intend to address today. And, again, th e
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record on this issue is clear. Plaintiff has no su ch
evidence. I 'm not going to bore the Court with the
definition of "substantial self-interest" under
Delaware law. This Court knows that legal test far
better than I ever could.
Obviously given the provision of the
exculpation clause in Trados' charter, you must loo k
at each director on an individual basis. And that' s
Cede II. For our purposes today, the parties are i n
agreement, I think, that with respect to four of th e
seven directors are what we're looking at. For the
purposes of this motion only, we're going to conced e
that Messrs. Campbell, Hummel, and Prang are not
disinterested, although I would note that all three
were incentivized to achieve the highest value for
Trados' common stockholders in any sale, a fact
plaintiff does not dispute.
Now, I also believe plaintiff does not
dispute that Mr. Laidig is independent. He says th at
Mr. Laidig didn't perform his duty properly; but,
again, as Trados has a charter provision under
102(b)(7), he's got to go far beyond that to state a
claim that Mr. Laidig somehow breached his duty. A nd
I don't think he's even come close to doing it or e ven
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tried.
Thus, this motion really comes down to
the issue of whether Messrs. Scanlan, Ms. Stone, an d
Mr. Gandhi were independent. That's what the issue is
here.
And the legal test is whether they
were self-interested because they were elected to t he
board by three different venture capital investors who
had different classes of preferred stock. And what
plaintiff is trying to do here -- and I suggest it ' s
unprecedented under Delaware law -- is to create a
bright-l ine rule stating that the board was interes ted
because they had affil iations with venture capital
investors. Delaware law has always prided itself o n
its contextual nature of its law, that Delaware avo ids
bright-l ine tests that plaintiff is trying to creat e
here, whether in the context of break-up fees, the
proper way to sell a company, or any of the other
major crit ical corporate law issues that come befor e
this Court every day. Delaware looks at these issu es
in the contextual nature of the context and not by
creating bright-l ine rule.
Yet plaintiff offers no other reason
for the alleged interest of these directors other t han
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they were employees of the venture capital f irms wh ich
held the preferred stock. He does not offer any
evidence that these three directors had any prior o r
subsequent contact with SDL. And he could not make
such a claim. He does not offer any evidence that any
of the three directors benefited directly as a resu lt
of the sale to -- Trados' sale to SDL. And, again, he
could not put forward any such evidence.
To the contrary. After all of the
discovery in this case, plaintiff purports to rely
simply on the law-of-the-case doctrine from former
Chancellor Chandler's opinion in the motion to dism iss
rather than come forward with any new facts obtaine d
in discovery. That's outstanding, given that, agai n,
hundreds of thousands of documents have been produc ed
since the time of that motion to dismiss opinion wa s
written; dozens of depositions have been taken sinc e
the time of that motion to dismiss was written.
And it 's particularly striking, given
that we challenged plaintiff in our opening brief t o
come forward with any evidence to support his core
allegation at paragraph 4 that I read at the openin g
of this argument. And he has none.
Now, again, to the -- the applicable
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test for determining when a director is
self-interested was set forth by Vice -- then-Vice
Chancellor Strine in Live Entertainment. He descri bed
it as follows: "To the extent a plaintiff sharehol der
... challenge[s] the independence of directors base d
solely upon their election by and relationship to a
controll ing stockholder" -- and, again, we don't ha ve
a controll ing stockholder here -- "... he has an
obligation to produce record evidence demonstrating
that the controll ing stockholder's commercial
interests were of such a substantial nature as to
possibly compromise its natural desire to obtain th e
best price for its shares." None of that exists he re.
The Vice Chancellor further noted, as
it 's well-known under Delaware law, that showing th at
the directors were current employees of the current
shareholder is not enough. Plaintiffs must also sh ow
that the directors are "... beholden to the
controll ing shareholder because of personal or othe r
relationships)." That is at *28, and it 's also in
Vice Chancellor Parsons', again, recent decision in
Zimmerman.
So let's go through the three
directors very quickly, and then I 'l l finish up, Yo ur
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Honor.
First, Mr. Scanlan. The key facts
about Mr. Scanlan and his relationship with Wachovi a
are undisputed. Most importantly, for this motion,
Mr. Scanlan had already announced his intention to
leave Wachovia as well as the Trados board to start
his own firm in April of 2005 and only agreed to st ay
on the board through the end of 2005 as a result of
personal requests from Mr. Campbell. The document in
which this is made clear is at Exhibit 148 to
plaintiff 's brief, as well as in Mr. Scanlan's
deposition, which is Exhibit 72 to Mr. DiCamillo's
affidavit. And the fact that Mr. Scanlan started h is
own firm, Silverhawk Capital Partners, in 2005 is a
matter of public record and not in dispute.
Given that Mr. Scanlan had told
Wachovia that he was planning to leave Wachovia and
Trados in 2005, plaintiff needs to come forward wit h
specific evidentiary record evidence to suggest why
Mr. Scanlan was supposedly beholden to Wachovia, gi ven
that he had no financial interest in Wachovia's
investment in Trados and was planning on leaving bo th
Wachovia and Trados by the middle of 2005.
There are other undisputed facts that
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further demonstrate that Mr. Scanlan was not behold en
to Wachovia with respect to Wachovia's investment i n
Trados. For example, it is undisputed that
Mr. Scanlan had no direct or indirect investment in
Trados, that his compensation was not based in any way
on the performance of Trados; and the decision by
Trados to accept or reject the SDL merger had no
impact on Mr. Scanlan's position at Wachovia.
It is also undisputed that in all of
the discovery in this case, plaintiff cannot point to
a single document or piece of testimony showing tha t
Wachovia ever pressured Mr. Scanlan to try and sell
Trados or that Wachovia, which invested in Trados i n
2000 and 2001, was ever interested in a, quote, "ea rly
exit in Trados," despite the allegation made at
paragraph 35 of the complaint.
Thus, plaintiff has come forward with
nothing, nothing to support his allegation that
Mr. Scanlan was beholden to Wachovia other than the
fact that Mr. Scanlan was working at Wachovia at th e
time the decision to sell Trados was made. And eve n
that claim is dubious, given that Mr. Scanlan had
already announced his intention to leave Wachovia a nd
was just staying on the board of Wachovia at the
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request of Mr. Campbell. That's the first director .
The second director, Mr. Gandhi -- or
third, if you count Mr. Laidig. Third is Mr. Gandh i.
Mr. Gandhi has also left Sequoia since this occurre d
and the venture firm he was with at the time of the
merger. He's now with Accel.
THE COURT: When did he leave?
MR. BERGER: He left later, after this
occurred. He left in the last couple of years.
THE COURT: A long time after the SDL
deal or shortly after?
MR. BERGER: Several years after.
Now, once again, plaintiff has no
evidence that Mr. Gandhi was ever pressured or coer ced
in any way, shape, or form by Sequoia to vote in fa vor
of this transaction. Indeed, what is perhaps most
striking about plaintiff 's brief and the evidence h e
submits with it is the complete and utter lack of
evidence concerning his allegation that Mr. Gandhi was
interested in the Trados transaction.
To the contrary. As shown in our
brief and as made clear in Mr. Gandhi's testimony,
what plaintiff does admit is that by 2003, Mr. Gand hi,
too, was thinking of leaving the Trados board and t hat
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there was no evidence of any harm, injury, or coerc ion
from Sequoia as a result of this consideration.
THE COURT: He's the one who seems
most focused -- you know, I 'm -- I 'm with you in te rms
of your categorization. He's the one, though, that
seems most focused on the idea that this company is
going downhil l, "We really don't have any shot at
upside. Let's get back as much of our capital for
Sequoia as we can." I mean, that's at least one
plausible reading of the reports that he is sending
back to Sequoia. Would you agree with that?
MR. BERGER: All with -- except with
respect to the last sentence Your Honor said. And I
want to point out something on that. As late as th e
fall of 2004 and first part of 2005, Mr. Gandhi is
getting e-mail messages -- and it 's in the record - -
from the banker for SDL saying "SDL is interested" --
this is after Mr. Campbell joins the company -- say ing
"SDL is interested in, you know, purchasing or
acquiring Trados." One would think that if Mr. Gan dhi
was really interested in pushing a sale fast, he wo uld
have taken some action with that. Instead, what he
does -- and the record is clear and undisputed on
this -- is he passes those e-mail messages on to bo th
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Mr. Campbell and to the banker for Trados and says,
"You guys handle this. I'm not involved in it."
THE COURT: Yeah. I mean, there
seemed to be a l itt le bit of a sense, though, that he
had basically washed his hands of it, "Look, this
company is done. I 'm done. I got bigger fish to f ry.
If I can get a l i tt le bit of my capital back, I 'm
happy because I 've got more important things to do
than mess around with a dead company," at least --
again, I 'm not saying that's the only way to read
them, but it seemed like that's one way.
MR. BERGER: What's important about
that -- and I think that's -- one could read it tha t
way. What's important about that is Mr. Gandhi is
making his decision as a director of Trados. There 's
no evidence in the record, notwithstanding the fact
that Mr. Gandhi was deposed twice -- and subpoenas
were issued to Sequoia to also produce documents --
that Sequoia ever said to Mr. Gandhi, "You have to
sell this company. You have to get your money out
fast. You have to get off this board. You have to do
anything."
There's evidence that Mr. Gandhi said,
as Your Honor notes, you know, "This company's not
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worth a lot. I 'm not going to go to board meetings
directly unless they're in California. Otherwise I ' l l
attend by phone." Mr. Gandhi explains at length in
his deposition why he thought Trados was not likely to
ever obtain more than $60 mill ion and he thought th is
was a great offer. But that's Mr. Gandhi's decisio n
as a director.
THE COURT: Yeah. That's -- you know,
that's where, again, for -- for summary judgment, I
have diff iculty because part of what I think we wor ry
about is that when people have an interest or
affi l iation, even a loyalty duty to someone who has an
interest, that that colors how they see things.
And so, you know, part of what may
have been on Mr. Gandhi's mind was the idea that he
did have this l iquidation preference and he was goi ng
to get money back in a transaction. A common holde r
isn't in that position. A common holder really onl y
has the option value of betting on, you know, Campb ell
continuing to improve and show revenue -- greater
revenues and profits.
MR. BERGER: Your Honor, that is
precisely why plaintiff was able to defeat the moti on
to dismiss in this case.
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THE COURT: Uh-huh.
MR. BERGER: We're now at summary
judgment. What the summary judgment cases make
clear -- and this is Vice -- now-Chancellor Strine in
Live Entertainment and the others -- is that it 's n ot
appropriate to say "Well, because this may happen, he
may have had this view" or, you know, give plaintif f
those types of inferences. He's got to come forwar d
with some record evidence that, in fact, Mr. Gandhi
had those types of interests involved.
What, in fact, we've got is Mr. Gandhi
making clear that he did not profit at all on the s ale
of Trados. And that's clear in the record. And,
again, there's -- there's -- Mr. Gandhi made nothin g
from this sale personally. And there's no evidence
that Sequoia -- and this is really critical. There 's
no evidence that Sequoia was tell ing Mr. Gandhi, "S ell
this company."
THE COURT: And -- I mean, you'd
expect that if there was going to be -- that to be the
case -- I guess sometimes people are lax and put it in
an e-mail; but, you know, one would think that that
would have been a telephone call or a -- you know, a
VC partners meeting, sitting around the table.
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So, I mean, I guess where -- because
of the procedural posture -- l ike, if this was a
situation where Sequoia, l ike in TKT, it only helpe d
common and the claim at the pleading stage was thes e
guys are fatigued, they want out, then there had be en
no evidence developed to support that and so you ha d a
deal where there was no differential treatment and you
were at this point just resting on the bare claim t hat
"Oh, Sequoia must have wanted out," I 'd agree with
you.
Where I become concerned is the fact
that Sequoia did have the right to differential
treatment. And so what -- what I keep coming back to
is why isn't it enough for summary judgment purpose s
to point to differential treatment at the preferred
stockholder level in terms of the preference, plus the
employment relationship? And then instead of, you
know, you and me having the discussion, Mr. Gandhi can
sit there, and I ' l l evaluate him. And I ' l l come aw ay
with that, and I ' l l think either okay, Mr. Gandhi
actually made a good faith business decision that t his
thing wasn't worth a lot. Or I 'l l come away with t he
inference that -- or the finding that, you know, th is
guy washed his hands and gave up on the company.
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I mean, isn't that something I have to
decide at trial rather than now?
MR. BERGER: So Your Honor raises
right where I started off. And I 'm glad -- I
shouldn't say to the Court I'm glad you asked that
question, but I am glad you asked that question, Yo ur
Honor.
THE COURT: I ' l l take any compliment I
can get.
MR. BERGER: So will I.
But, Your Honor, that is the
bright-l ine test that I think Delaware abhors. Wha t
you're saying basically, if that's the test that's
adopted, is that any time there is differential
treatment and an employment relationship, it 's
impossible to get summary judgment.
THE COURT: For a majority of the
board, yeah. I mean, again, l ike -- l ike, let's sa y
that if -- because Gandhi is really the swing. I
mean, if -- they really haven't -- I mean, Scanlan and
Stone, you're right. You could make the same
argument. But if you imagine a firm that had three
VCs in the type of -- VC reps in the type situation
we're talking about and four people of the type of
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Klaus-Dieter Laidig, then you wouldn't be in that
problem. But if you have -- if you don't have a bo ard
majority, shouldn't you -- why shouldn't you have t o
come and actually tell your story and be evaluated as
opposed to a getting-out-free trial?
MR. BERGER: I 'm not sure why
Ms. Stone -- and maybe I'm undercutting my own case --
is that much different from Mr. Gandhi here because
Ms. Stone also worked at HgCapital. She had no
personal investment in -- in the Trados investment,
nor did Mr. Gandhi.
THE COURT: You're absolutely right.
I mean --
MR. BERGER: So --
THE COURT: -- to the extent it rests
on if VC plus employment, then triable issues of fa ct,
she's similarly situated. I don't -- I don't think --
I mean, it 's part of the factual inference problem
that I have -- that I have at this stage.
You know, reading her stuff, I don't
have the same sense from the paper record of "I wan t
out" that I do with Gandhi. And that's why I 've be en
focusing more on Gandhi.
MR. BERGER: What's striking -- what's
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so particularly striking about Mr. Gandhi is he say s
back in 2003 that he thinks that this is a company
that's not going to succeed in the long term and
should be sold; but you don't see him pushing for a
sale in 2003, nor do you see him pushing for a sale in
2004.
And so where I -- I guess where I part
company with Your Honor is, to me, plaintiff has th e
burden at this stage. In order to overcome the
business judgment rule, the presumption of the
business ... he has to come forward with something
that says he's breached his duty of loyalty in doin g
it. And just the mere fact of employment relations hip
plus -- again, the differential treatment is not of
Mr. Gandhi personally.
THE COURT: Sure. I get that.
MR. BERGER: That is not -- if
Mr. Gandhi held those shares, I would agree with Yo ur
Honor. But here, what he's got to come forward wit h
is differential treatment and -- of the individual.
And there's no claim -- again, this is where I star ted
off. There's no claim that Sequoia was pressuring
Mr. Gandhi to do anything. Now, Your Honor could s ay
"Well, gee, maybe they were doing it in internal
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meetings and it wouldn't" -- "you wouldn't expect i t
to come up in e-mail." That's what gets you past t he
motion to dismiss. It 's not enough to get you past
summary judgment. Summary judgment in this Court,
record evidence.
THE COURT: I mean, it could also --
again, I don't want to suggest anything conspirator ial
or nefarious with Sequoia. I mean, it could also j ust
be that that's the culture, l ike, "That's what we d o.
When we see a deal, when we see a company that ain' t
going to make it, we get our money out and we move on"
so that, you know, nobody at Sequoia had to tell th em
that because that's what you do. You cut your loss es
and you get your capital back and you reinvest it i n
one that -- that might be a good -- you know, bette r
performer.
But, really, it does seem to turn on
is it sufficient at the summary judgment stage to h ave
differential interests plus employment. We'l l see
what Mr. Jenkins has to say. But, really, that's w hat
they've got. And they've got that at least with
Gandhi, with some additional documentary evidence i n
his reports saying things l ike "We're not going to get
our money back except in a sale," et cetera.
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MR. BERGER: Now, what he's also
saying -- again, he says it in his reports and he s ays
in his deposition -- he explains why the -- why Tra dos
wasn't going to succeed. But that's right, Your
Honor. I mean, that's -- it 's -- essentially the k ey
point here is whether or not that's enough to get o ver
the hurdle at summary judgment.
THE COURT: Why didn't they take the
value of the common to zero for purposes of the opt ion
pool?
MR. BERGER: So the -- the decision
was made at the -- again, this is made in 2004 befo re
Mr. Campbell joined the company. And this is -- yo u
know, you can't take the option -- you can't take t he
common to zero for an option pool for accounting
reasons. You could have taken it to a bank. They cut
it from a quarter to a dime. That's a pretty
significant cut. You know, there -- there was --
there's always -- when you're trying to value the
private stock for an option issue, there's always a
question there. They didn't have any professional do
it. They just did it, sort of sitting around the
table and having the CFO run some numbers. They
weren't sure; but, you know, they -- it 's always a
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question as to what the actual worth of the private
stock is when you're valuing it for option pools.
THE COURT: I hear you. I
understand.
MR. BERGER: The -- what surprised
me -- just to go back to Mr. Gandhi for a second, a nd
then I 'l l leave him for Ms. Stone.
What plaintiff relies upon for
Mr. Gandhi is the law of the case. I was actually
really surprised to see that in plaintiff 's brief
after all the discovery. You know, he deposed
Mr. Gandhi twice. He got documents from Sequoia. Not
a one in any of these things.
So there's the Sequoia -- the reports
that Mr. Gandhi wrote, but there's nothing from
Sequoia and there's no e-mails from Mr. Gandhi sayi ng
-- you know, at worst, at most, what plaintiff can
show is that Mr. Gandhi was interested in getting o ff
the board. That is not, I would submit to this Cou rt,
a basis to say that he was interested in the
transaction. There's no evidence that he was going to
be penalized for getting off the board or that Sequ oia
was going to take any action against him for gettin g
off the board.
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THE COURT: Should -- should I draw
any inference or be concerned at all about the
testimony to the effect that the notion of a
distinction between the common and the preferred ne ver
came up unti l l i t igation, nobody ever really talked
about the common in the boardroom?
MR. BERGER: Your Honor, the -- the
only testimony -- the only submission on that is
Mr. Laidig's -- and I think it 's a misquote or it's
taken out of context, the submission by
plaintiff about Mr. Laidig. And, in fact, however, if
you look at the other deposition transcripts, it 's
clear that they're talking about all of the
stakeholders of the company.
The issue for this company when you're
looking for a sale, you have to consider all the
stakeholders, because while it 's not on the verge o f
bankruptcy -- and, again, Your Honor doesn't need t o
discuss at this point what the future of the compan y
was going to look l ike -- there was a concern among
all of the directors about the employees, the
customers, about the technology, about all of those
things. I think the evidence is that they did look at
the common, but I don't think for the purposes of o ur
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motion today you need to take that into account. I
think for purposes of our motion today what you nee d
to think about and resolve is whether plaintiff has
met his burden to show that the directors breached
their duty of loyalty. This is not a due care case .
I think that's what 102(b)(7) provides.
With respect to the final director,
Ms. Stone, again, it 's undisputed that Ms. Stone
received nothing from either Hg or Trados as a resu lt
of the SDL merger. In fact, plaintiff admits at pa ge
7 of his brief that Ms. Stone had no direct or
indirect investment in Trados. As a result, once
again, the sole basis for plaintiff's claim that
Ms. Stone was beholden to HgCapital is that she is an
employee of the firm.
Now, Your Honor, again, if you're
going -- if we're at the point of differential
treatment and employment relationship equals trial,
then we're there, and you know, there's nothing mor e
that I can offer on that.
I don't think that's where Delaware
law is. I don't think that's a bright-l ine test th at
we should establish here. And I think this is the
case where you should say that the plaintiff, as in
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Live Entertainment, needs to come forward with reco rd
evidence to show that there is a duty of loyalty
issue.
And, further, the difference, I guess,
Your Honor would point out between Ms. Stone and
Mr. Gandhi, although Mr. Gandhi has it as well and Mr.
-- is Ms. Stone, as late as February 2005, reports to
Hg that an option for Trados was to continue trying to
grow the business and sell the company in 18 months or
more.
Now, Mr. Gandhi says similar things,
that "We've hired a hard-nosed CEO who can look to
grow the business." And so -- and there's no evide nce
that Mr. Gandhi was pressuring Mr. Campbell to try and
sell the business. But, again, as late as 2005
Ms. Stone is tell ing her partners back in London th at
one of the options is to grow the business over the
next 18 months.
Given that we are at summary judgment
-- I think, again, plaintiff received documents fro m
Hg as well as Ms. Stone, obviously deposed Ms. Ston e.
What plaintiff needs here is evidence that he can r ely
upon as opposed to the motion to dismiss stage wher e
he was allowed all the inferences that then-Chancel lor
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Chandler gave him, and there is none.
THE COURT: If you have a choice
between zero -- and admittedly speculative -- but a t
least option value and you've got, you know, some
preliminary trend suggesting that the option value on
the common might be positive, why do you take zero?
MR. BERGER: So, in other words, why
did Mr. Laidig support this transaction.
THE COURT: Right, or why would -- why
would a director, viewing this from the perspective of
equity without a liquidation preference, support th is
transaction?
MR. BERGER: Again, it goes back to my
stakeholder argument, Your Honor. You know, there are
other alternatives for this business, including
that -- and this is what all of the directors
testif ied uniformly in their deposition. And there 's
no contrary evidence supplied. What could have
happened to this company is a year from the time it
was sold, it could be half its size and it could be
worth a lot less, with employees being laid off,
customers being dissatisfied.
Now, plaintiff has his theories about
why -- and he points to the record, you know, the
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budgets and things, you know, about why that -- the
company was going to have a great future. We can g o
back and forth on that. That is, frankly, not an
issue for this motion. I think that's the answer t o
your question. I think all of the directors felt, not
because they were going to get something back from
this transaction, that that's why they sold it; but
all of the directors believed that the alternative,
waiting for a year, would result in a greater harm to
the company, to its employees and other stakeholder s.
And they saw no path to success for the common
stockholders.
Again, remember, the directors are
also the largest common stockholders. So if this
common was going to succeed -- and, again, you don' t
need to reach this point for summary judgment. But if
this company was going to succeed so that the commo n
stockholders would get something, all of the
directors, particularly Mr. Campbell and Mr. Hummel ,
who was the founder, would make far more than what
plaintiff would make off of this case. All of them
had, you know, common stock as well as options that
would be worth a great deal.
So from the context of incentivizing
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the board to make sure that the common would get
something, this was a board that was very much alig ned
to make sure that the common stockholders got -- wo uld
get something if there was a deal there to be had.
But I ...
THE COURT: Yeah. I mean, I tend to
look at this, rightly or wrongly, as there being a --
an incentive to get the best price once you've
embarked on a sale decision and -- and incentive to
make a sale decision as opposed to managing for the
long term.
And I agree with you, that once you're
in the question of is this sale the best sale, then
the MIP, the fact that the preferred didn't get the ir
full l iquidation preference and could participate
afterwards; the fact that the three common folks,
common directors, also had options and shares, all
that gave everybody a reason to push for the best
possible deal. So it's hard for me to believe that
any money was left on the table in terms of how muc h
you could get if you sold at the time they sold. Y ou
know, it 's hard to believe that -- that there's any
reason why I would second-guess the abil ity of thes e
folks to negotiate hard with SDL or any reason to
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doubt that they got the best possible deal, because
once you're in the idea of "We're going to sell," I
totally agree. Everybody's got reasons to max out,
you know.
But that's why I keep coming back to
the stand-alone versus sale decision where, you kno w,
the MIP, it taints -- it doesn't taint. Taint is a
bad word. It skews the incentives of the people in
the boardroom who otherwise would have reason to pu sh
back hard against the preferred to manage the compa ny
long term.
MR. BERGER: So let me answer that in
a couple of ways, Your Honor. First, MIP was adopt ed
in mid-2004 shortly after -- this was proposed befo re
Mr. Campbell came to the table. It was adopted
shortly after Mr. Campbell joined the company.
There's no deadline on the MIP. All r ight? So
there's nothing that said "You have to do a sale by
the end of 2005 or 2006 so that if you don't, we're
going to reduce the payments."
So the MIP is in place, as is common
in a lot of change-of-control plans, for whenever a
sale has occurred. And if there was an abil ity to get
a higher price a year from now, the MIP creates a m uch
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greater incentive to get that higher price because, as
Your Honor properly noted, the percentage goes up a s
the price goes up. So there's no deadline on the M IP
time.
Second answer to that, Your Honor --
again, this is undisputed -- Trados' board, even
before Mr. Campbell was on the board, turned down a n
offer to sell the company in 2004 for $40 million.
Remember, SDL approached Trados to sell the company .
If the board was really determined to sell at any
price, they didn't need to bring on Mr. Campbell.
They didn't need to go through all this. If their
decision was "Let's just get back for the common" - -
"for the preferred what we can and let's just," you
know, to use your expression about Sequoia, "let's
just close down this thing and move on to our next
investment," they had that opportunity. They had t hat
opportunity of $40 mill ion before worrying about
trying to turn it around, before spending more time on
it. They could have done it in the spring of 2005.
They decided not to do that. Instead, they brought on
Mr. Campbell and continued to try and turn around t he
business.
There's no evidence, none -- again,
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we're at the point of summary judgment. A lot of
discovery. There's no evidence that said, you know ,
"We're going to have to sell this company in 2005 o r
else," you know, "we just" -- "we just want to be d one
with it."
And that's what's really missing.
What's missing from this case is some piece of pape r,
some documentary evidence, some testimonial evidenc e,
something from any of the venture firms or from any of
the directors that said "We had to sell this compan y
by 2005." There's just no impatience, and there's not
even a motive for impatience.
You know, in some of the cases that
have come before this Court, you've heard about how --
the desire to achieve l iquidity. That's now a very
popular motive by my friends on the plaintiffs' bar
and, Your Honor has seen a lot of that, I 'm sure.
No motive to achieve l iquidity.
Plaintiff admits liquidity wasn't even necessary he re.
Why would the venture capital f irms take a quick ex it
if they thought this company could be worth more a
year from now? At this stage there needs to be
evidence they needed to do that, they wanted to do
that, or why they would make that decision.
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And, again, Ms. Stone goes through it
in her deposition at length. We've quoted it in ou r
brief. But she talks about the risk/reward issue t hat
she's thinking about for the company as a whole. A nd
then she talks about it in terms of a common
stockholder, because HgCapital held a lot of common
shares, far more common shares than any of the
plaintiffs. And she says, you know, "We go through
that every day." And here, the decision was made j ust
on a risk/reward basis. And she's the one who said ,
you know, "We could continue running this for anoth er
18 months," as late as February 2005.
And so what plaintiff needs to do in
order to prevail in this case, in order to defeat t his
motion is come forward with some record evidence th at
shows why the -- he doesn't -- on behalf of the
venture firms, why these directors wanted to sell a t
this particular t ime other than they thought it was
the best bid for the company.
THE COURT: Great. Thank you. Why
don't I hear from Mr. Jenkins.
MR. BERGER: Two minutes on the -- on
appraisal, or you don't want to hear that at all?
THE COURT: I got to be honest, I
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wasn't too inspired by the appraisal issue. I thin k
to the extent -- I mean, really, to me, it -- it be gs
the question of this whole implicit minority discou nt
issue. I mean, the -- the premium has several
components. The premium is -- a control premium ha s
part synergy value. It has part value of different ial
management, differential strategy, just the idea th at
we can make these assets better if we manage them o n a
stand-alone basis. It has, you know, some potentia l
idea of unpursued opportunities. And what you real ly
don't have here because of the concentrated VC
ownership, but in the case of a public company, you
have the -- the reduced agency costs from concentra ted
ownership.
If -- and I know there's a Delaware
Supreme Court case on it, there's about four or fiv e
Chancery Court cases on it that say minority stock,
trades in a minority position; therefore, implicit
minority get discount, got to true it up.
Larry Hamermesh and Mike Wachter have
written three articles explaining that that idea ha s
no support in f inance theory. It sort of slipped i nto
Delaware law in a case that Larry actually l i tigate d
and didn't oppose it because the other side made th e
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argument it was favorable to him. And then it's
gotten picked up and has a mind of its own.
If I 'm bound to apply implicit
minority discount, as one could very well believe
based on the Supreme Court case, at a minimum, then it
seems to me that I can't do summary judgment at thi s
stage because of the multiple valuation metrics and
the fact that at least some -- I mean, I could sit
here at trial and have to decide okay, how much of the
premium was X, how much of the premium was Y, and
where is the valuation going to float as a result o f
that?
If you cut out the implicit minority
discount and that's right, I don't see where there' s
any damages here because it 's only correcting for t he
-- the implicit minority discount gets these guys u p
above the premium.
You haven't had a chance to argue,
Mr. Jenkins hasn't had a chance to think about, nob ody
has had a chance to address whether I have to follo w
this implicit minority discount thing. So I 'm not
about to do that at this stage of the case. But I
do -- I am convinced, Mr. Berger, that if that is
right, then there are sufficient credibil ity and
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weighing issues about how to treat the premium and how
to correct for that discount, that I can't just giv e
you summary judgment on it.
So I think in the interests of t ime, I
would like to -- to hear --
MR. BERGER: Okay.
THE COURT: -- from Mr. Jenkins on
that.
MR. BERGER: Thank you, Your Honor.
MR. JENKINS: Good morning, Your
Honor. May it please the Court. David Jenkins for
Marc Christen and the class. Your Honor knows
Mr. Beste.
THE COURT: I do. Good to see you,
Mr. Beste.
MR. BESTE: Good afternoon, Your
Honor. Good morning. Sorry.
THE COURT: Sti ll morning.
MR. JENKINS: I had to look to make
sure.
THE COURT: And that's no comment on
Mr. Berger's argument. I don't want anybody thinki ng
that that was a dig at him for saying he was
long-winded or something. It 's absolutely not.
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MR. JENKINS: No, it wasn't, nor on my
part. Very straightforward.
MR. BERGER: I know what to expect
when I come to this Court, Your Honor.
(Laughter)
MR. JENKINS: I agree with Mr. Berger
on a couple of points. Summary judgment we have to
rely on evidence, documents, deposition transcripts ;
and we get inferences. I think he indicated that w e
only get inferences at the motion to dismiss stage.
No. We get reasonable inferences at the summary
judgment stage as well. And we have to show -- and we
believe we have -- that a majority of the board was --
had their abili ty to analyze this transaction
independently wiped out for one of three reasons.
That is, we can show that they were acting in bad
faith. We can show that they lacked independence. We
can show that they had a self-interest in the
transaction.
Defendants have conceded that Joseph
Campbell, Jochen Hummel, and Joseph Prang had a
self-interest for purposes of this motion only. We
move on. I'm going to cover the three of them,
however, in the sum of my further arguments. Let m e
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go to the three bases. And I ' l l do bad faith,
independence, and interest in that order.
It 's -- we argued in our answering
brief -- and, you know, bluntly, defendants really did
not come to grips with it -- that there was -- ther e's
a bad faith component here. It applies to all the
directors. And the directors have to show that the y
acted faithfully to all the stockholders, not just the
preferred stockholders but also the common
stockholders.
The evidence is overwhelming that the
board of directors paid no real interest to the com mon
stockholders when they were deciding to do a deal
here. We know from Delaware law that there's a num ber
of things they could have done. They don't have to do
anything in particular. We know that there is a
broad -- they have a broad number of choices, but
they've got to do something to show that they
understood that they represented the common
stockholders as well as the preferred stockholders and
that they looked at the common stockholders' intere sts
in this transaction.
We rely on Chancellor Chandler's
motion to dismiss argument -- I mean -- excuse me - -
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opinion for a number of points, one of which is how
can you do worse than zero? I 'm a common stockhold er.
I get zero in this deal. Why not go forward? Yes,
the defendants point out -- Lisa Stone is actually the
best of this -- there's risk going forward. Of cou rse
there is, but there's also reward for the common
stockholders. I ' l l get to this later. I get it th at
the preferred stockholders as stockholders can say
"I'm not wil l ing to take the further risk. Let's t ake
what we can now and move on." They have the absolu te
right to say that. But the directors, whether the
appointees of the preferred stockholders or otherwi se,
do not. They have to consider, based on equity-lin ked
investors and the Chancellor's decision in Trados i n
this case, we say they have to consider the common
stockholders first.
But I don't think the Court --
THE COURT: I -- I would define it as
you have to consider the equity as an undifferentia ted
slug without preferential rights, because once you
folks start thinking about preference rights, you
think about contract rights. So it's just not the
common. I mean, you could imagine there being
multiple classes of stock, but you have to think of it
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as an undifferentiated block of equity and maximize
the value of that undifferentiated block rather tha n
looking to protect someone's contractual preference ,
which only gets contract protection, not fiduciary
protection.
MR. JENKINS: And they did not do that
here -- and I think it 's undisputed -- we would be
arguing the same at trial. What could the director s
have done so that --
THE COURT: They could end up being
right. I mean, they could end up proving at trial
that this thing was worth zero.
MR. JENKINS: That is correct, Your
Honor. That is the risk we take at going to trial.
We understand that. Typically -- and as Mr. Berger
has conceded here -- valuation is not something tha t's
typically handled on summary judgment because you h ave
competing valuation theories. Neither of the exper ts
has testif ied. It's tough to do on summary judgmen t.
The directors did nothing to protect
the interests of the common stockholders. They cou ld
have set up a special committee. They had a direct or
who would fit in, Klaus-Dieter Laidig. They didn't
set one up. They didn't even -- apparently never
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thought to consider it. They could have had a
fairness opinion from an investment banker, fairnes s
to the common stockholders' point of view. I suspe ct
that would have been difficult to get, but they nev er
even tried. To go beyond that, they never even got a
valuation with respect to the merger.
They could have put -- made this deal
contingent on a majority of the common stock. A
majority of the common stock, indeed, a significant
majority was held by people unaffi liated with the
preferred stockholders. They could have done that.
If they had done that and succeeded, I don't think I
get by a motion to dismiss, let alone summary
judgment; but, again, they didn't do it and they ne ver
even considered it.
Nor did they do anything of the
following: We hear in some of the directors'
testimony -- and we heard in the brief -- about how
"Well, the directors considered the risk-reward rat io
of going forward and determined it 's better to sell
now." One would have thought that there would be
documents to support that. A risk/reward ratio goi ng
forward, you have to determine all r ight, what do w e
think the company can do? What sort of valuation c an
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be achieved in the future? What's the risk of
achieving that? That is normally done on pieces of
paper and not in your head. There are no such piec es
of paper; no such analysis was done. Nobody sat do wn
and said, "Hmm, we can sell for 60 million today. We
can sell for 70 mill ion next year" or "Could we sel l
for 70 mill ion next year" -- and let me stop there to
say the -- as of the merger date, the liquidation
preferences were approximately 58 mill ion. Then yo u
have the management incentive plan on top of that.
But shortly above 60 million, the common stockholde rs
start to share. So one would think that a director ,
thinking of the interests of the common stockholder s,
would be sitt ing down and saying, "I can't do this in
my head. I have to figure out what is the reasonab le
valuation going forward and is there any realistic
chance that the common stockholders will be able to
share in the value of the company?" No such analys is
was done. As I said, that has to be done on paper.
No such piece of paper was ever produced in this
action.
Some of the directors have testified
that essentially they thought about it in their min ds.
That's tough to do. I don't know how you do
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valuations in your mind. So there was nothing done to
protect the common stockholders.
We've cited a couple of instances in
the -- in the -- in our brief where two of the
directors, Klaus-Dieter Laidig and, to a lesser
extent, Lisa Stone, both, sort of, admitted the
obvious. Nobody really focused on the common
stockholders.
Mr. Laidig -- and Mr. Berger said I
took this out of context, but I really did not.
Mr. Laidig testif ied that it was the best thing to do
to sell the company. This is me asking him a
question. He said, "It 's the best thing to do to s ell
the company."
I asked him: "Does that include the
common stockholders?" for obvious reasons.
He testified that the difference
between the common stockholders and preferred
stockholders only came up when this case was fi led.
And I happen to believe him. I think that is the
correct analysis. These -- whether they were --
whether the directors were influenced by the fact t hat
they were either put on the board by preferred
stockholders, whether they were influenced by the - -
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the management was influenced by the fact that this
deal put real money in their pocket right now, ther e
was no risk going forward, I don't know. I think b oth
of those are probably truth there.
THE COURT: But, I mean, I don't think
it 's uncommon, something that you see in cases, we see
and you see them in literature and just in discussi ons
generally, for people who hold a preference to beli eve
that when the value of the company is south of the
preference, that they own the company, quote unquot e,
because all the value supposedly belongs to them
because it doesn't achieve higher than the preferen ce.
So, you know, it wouldn't be surprising for people to
have been thinking in that mindset at the time and,
therefore, not to have thought about the common
because of the belief that the value of the company
couldn't get north of the l iquidation preference.
MR. JENKINS: Let me push back on
that, if I may, Your Honor. And that's where I go
into "and then they have to do some sort of analysi s
to do that." It 's just not the price today. It 's --
THE COURT: It 's so obvious it is, you
know. That's why, l ike, if this thing comes in and
it 's a real stinker, l ike, if you want to buy, you
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know, Laster Lawn Care Enterprises, you don't need to
do a valuation of that company.
(Laughter)
THE COURT: You know, it just depends
on how clear it is that the company is in extremis.
MR. JENKINS: But it isn't that clear
here. The company was doing better. It had proble ms
down through the middle of 2004. Mr. Campbell, to his
credit, came in and got things moving again. Reven ue
went way up at the end of 2004 and 2005. He -- we' ve
cited in our brief to his statements at the time,
"We're having record quarters in revenue. We're
having record profits." This is early 2005. They
took -- they borrowed a bunch of money 2004 and cou ld
take it in two tranches. They took the first. The y
didn't need to take the second. Their cash on-hand
was well above their optimistic forecasts. Things, at
least on the surface, were looking up.
And if you look at the documents at
the time, they are consistent with the fact of a
company that had reversed course under Mr. Campbell 's
leadership and was positioned for further growth.
I agree, at trial the Court, after
weighing all the evidence, may decide "The valuatio n
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really isn't there. There's no damages here." I
don't think that's going to happen, but there's a
theoretical possibil ity.
But what is -- what is in the record
shows Trados did not need to be sold. There is no
document, contemporaneous or otherwise, that says
Trados needed to be sold at the time.
Summing up here, given all of this --
we're going to argue the same at trial; but given a ll
this, I don't see how the board of directors could
legitimately say "We acted faithfully to the common
stockholders' interests." If they had done thoroug h
valuations and -- which they did not -- and showed
that "Look, this company was going downhill.
60 million is the most it would ever achieve on any
realistic basis," they would have something to argu e.
They did none of that.
Given the fact that they did
nothing -- and it 's their burden to do something.
They're the directors. They have to do something.
And given the fact that the company looks, to all
outward appearances, to be on an upward trajectory in
late 2004, early 2005, the directors did not do wha t
they should have done, which is consider the common
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stockholders' interests. That covers all seven of
them. That gets them right there. If the Court
agrees with me, we're done.
Let me move on to independence and
interest in this. Based on -- Mr. Berger has said
there's no reason why the common -- the preferred
stockholders wanted to exit. Sure, there's -- ther e's
reasons here. Mr. Gandhi hinted at some of them. He
said, "I 'm tired of this investment. I want to mov e
on." I think that's a fair inference from it. Tha t
could have applied to all the preferred stockholder s.
Ms. Stone said, "We took, you know, a risk/reward
ratio, and we decided this was the best we were goi ng
to get for our investment," except that she didn't do
what she should have done, which is actually do the
analysis.
They thought -- I suspect that if we
had them all under truth serum, several of them wou ld
say "I really thought that we got the best deal." But
what they didn't do was analyze specifically to say
what could be realistically achievable in the futur e.
That was not done, and that absence of that, I thin k,
ends the motion right there.
In terms of independence, I agree with
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Your Honor. The best one we have is Mr. Gandhi. H e
has said several things from which this Court could
conclude, should you have to reach there, that he w as
focused on things other than the best interests of the
company. He was clearly the most aggressive in
wanting to get out. He made clear -- this is at
Exhibit 94 -- that Mr. Campbell 's mission was to
architect an M and A exit as soon as possible. Tha t's
one of his statements to Sequoia.
I should stop there. I don't think
it 's important for the purposes of this motion -- a nd
Mr. Berger said we had discovery from the -- from t he
preferred stockholders. That is technically true. We
got what, a couple dozen documents from Mentor
Capital, Mr. Prang -- that's really not relevant no w
-- a few more from Sequoia. We got a fair amount f rom
Ms. Stone's firm, Mercury Capital. We didn't get a
lot of documents. I 'm presuming they don't exist. I
don't think it's important right now; but I didn't
want to allow the Court to think yeah, we had a lot of
documents and there's nothing in there. We got a f ew
documents from several of the firms.
As long as I'm there, let me point out
one other thing. We did have a lot of discovery in
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this case, hundreds of thousands of documents and l ots
of depositions. Much of that was taken before the
motion to dismiss was decided. This was init ially an
appraisal action. It was not a breach of f iduciary
duty action. In the appraisal action, after much
problems, we eventually got a lot of discovery.
Mr. Berger's office did provide us with additional
discovery after the motion to dismiss was decided i n
this case. We had taken a number of depositions,
including Mr. Campbell 's deposition and Mr. Gandhi' s
deposition, prior to the motion to dismiss being
decided. We took others thereafter.
So I 'm not relying upon law of the
case here. We put it in because this is an unusual
situation. In our complaint --
THE COURT: Let me -- let me say why I
think you did it, and then you can tell me if i t 's
wrong.
MR. JENKINS: Okay.
THE COURT: It seemed to me your pitch
was "A motion to dismiss, usually just based on
allegations. Here we actually based it on evidence ."
MR. JENKINS: That's correct, Your
Honor.
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THE COURT: "We attached documents,
too. So if the former Chancellor has said that you
can draw an inference from those documents, that
inference which could be drawn at the complaint sta ge
is also drawable at the summary judgment stage."
MR. JENKINS: Your Honor has said it
more directly than I was going to. Thank you.
THE COURT: Well, you were going to
say it more eloquently.
MR. JENKINS: Eloquent --
THE COURT: I was more direct.
MR. JENKINS: You were more direct and
shorter, which is probably more to the point.
Also, going back to Mr. Gandhi, we
also have documents in which he said that, bluntly,
Sequoia does not own enough of the company to gener ate
a meaningful return. And we also have his admissio n
that he was spending too much time on Trados.
I don't think the Court has to get
there, but that's enough to show that Mr. Gandhi ha d
interests other than the best interests of the
stockholders when he was deciding the merits of thi s
merger.
With both Mr. Stone [sic] and Ms. --
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Mr. Scanlan, we have less in the record. The same
probably holds true with both of them. And, again,
I 've covered both of them with respect to the bad
faith. But both Ms. Stone and Mr. Scanlan did have
investments in their funds. Ms. Stone owned
10 percent of Mercury. She admitted she could be
removed from the firm by the vote of her partners.
And Mr. Scanlan also had -- excuse me. Mr. Scanlan
was a partner in Wachovia Capital Partners, and he
participated within their portfolio. So both
Ms. Stone and Mr. Scanlan had some investment inter est
in this -- in this matter. It isn't huge and I 'm n ot
resting heavily on it, but it does exist.
In terms of their independence,
Ms. Stone testif ied that she was a board designee o f
Mercury representing Mercury clients' interests. N ow,
maybe she just misspoke or maybe at trial she can
explain that "No; I was representing all the
stockholders' interests." But I think at this poin t
on summary judgment, we can use that to show no, sh e
wasn't interested in the common stockholders. She was
interested in her clients at Mercury.
And I understand that. You know, I
understand preferred -- directors appointed by
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preferred stockholders think that there's -- their
f irst allegiance is to the person who puts them on the
board. This is not the first t ime I've seen that.
But it 's just not right under Delaware law, and at
least for purposes of summary judgment, I think we
have enough here to question their independence.
Your Honor doesn't want to hear
anything on the appraisal. So unless Your Honor ha s
further questions, I -- that is my presentation.
THE COURT: What about Mr. Berger's
Live Entertainment point, that employment plus
differential treatment at the affi liate level shoul d
be enough, it should get you past a motion to dismi ss
but that's it?
MR. JENKINS: I 'm thinking, Your
Honor.
THE COURT: No; that's f ine. I mean,
it may just be you disagree with that legal point. I
don't know.
MR. JENKINS: I don't think I need to
disagree with that because the differential treatme nt
winds up in the bad faith, which I don't think Live
Entertainment spoke to at all. I mean, we have tha t
here, which they didn't -- which, you know, bluntly ,
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few other cases have.
Differential treatment alone plus
employment, it 's a matter of drawing inferences at
this level of summary judgment. And differential
treatment plus employment is a lot. We have certai nly
more with Gandhi. We have differential treatment p lus
employment plus statements that are just inconsiste nt
with his duties as a director.
With Ms. Stone and Mr. Scanlan we have
fewer of the statements. I agree with that.
Mr. Berger and I actually agree on one point. We h ave
fewer statements, but we stil l have a situation in
which both Ms. Stone and Mr. Scanlan could be remov ed
if they -- by, respectively, Mercury and Wachovia - -
if they did something their partners disagreed with .
I do not have a direct document from either Mercury or
Wachovia saying "Do this or you'l l be fired." Thos e
rarely happen.
THE COURT: You just wouldn't expect
to see that, and it 's not something that historical ly
we've required in the employment context. I mean,
again, you have a duty as an agent or as an employe e
to represent the person by whom you are employed. And
it 's that -- that's what, in the controller context --
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I know this isn't a controller case. I'm not using it
for the entire fairness idea. That's why the
employees of the controller on the subsidiary board
are viewed as confl icted, even if they don't get an y
personal benefit out of the deal, because they have a
duty that runs to the person on the other side of t he
transaction.
So I guess this is really musings for
Mr. Berger on reply. But I don't think you have to
tell a punishment story.
MR. JENKINS: I hope not, because at
least with -- well, with all three of them, we have
nothing direct, "Do this or else."
THE COURT: I actually don't think --
and this is -- this is another thing that maybe -- and
this is a question for you. Do you think it
necessarily means that Stone gets held l iable for
damages? I mean, don't I -- won't I have to --
doesn't her interest work for purposes of viewing t he
transaction as whether it's entirely fair or not? But
then in terms of assessing her liabil i ty for damage s,
don't I have to ask the question of whether there w as
conscious wrongdoing as opposed to, I mean, a lack of
appreciation for the importance of the common?
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MR. JENKINS: There's clearly --
THE COURT: One is going to get you
all the way.
MR. JENKINS: There is clearly a
distinction between an analysis of
interest/independence/bad faith at the summary