Opinion
No. C 00-1528 CW
July 8, 2002
ORDER GRANTING MOTION FOR SUMMARY JUDGMENT; DENYING PLAINTIFFS' MOTION FOR CLASS CERTIFICATION
Plaintiffs Edward Harris (Harris), George Garcia (Garcia), and Peter DeMao (DeMao) bring this putative class action against Defendants Intel Corporation (Intel), its wholly owned subsidiary, CWC Acquisition Corporation (CWC), CWC president Susan A. Miller, and Intel vice president and general counsel F. Thomas Dunlop, Jr. Plaintiffs seek damages for an alleged violation of § 14(d)(7) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78n(d)(7) and Rule 14d-l0 of the Securities and Exchange Commission (SEC), 17 C.F.R. § 240.14d-10.
Defendants move for summary judgment or, in the alternative, partial summary judgment, pursuant to Rule 56 of the Federal Rules of Civil Procedure. Plaintiffs oppose the motion. The matter was heard on April 26, 2002. For the reasons set forth below, the Defendants' motion for summary judgment is granted (Docket #58). Plaintiffs move for an order, pursuant to Rule 23 of the Federal Rules of Civil Procedure, certifying a plaintiff class consisting of all persons and entities who were common shareholders of DSP Communications, Inc. (DSP) who tendered their DSP shares at $36 per share to Intel and CWC pursuant to a tender offer. Plaintiffs also move to appoint Harris, Garcia, and DeMao as the representatives of the class. The Court denies as moot Plaintiffs' motion for class certification (Docket #50)
BACKGROUND
This action arises out of a tender offer by Intel and CWC to purchase for $36 per share the outstanding common stock of DSP, a developer and supplier of form-fit reference designs, chip sets, and software for mobile phones. The tender offer was the first step in a two-step Agreement and Plan of Merger (Merger Agreement) executed by Intel, CWC, and DSP and publicly announced on October 14, 1999.
On October 20, 1999, Intel, CWC, and DSP filed with the SEC a Schedule 14D-1 Tender Offer Statement and a Schedule 14D-9 Initial Solicitation Statement pursuant to the Exchange Act. By November 17, 1999, the date the tender offer expired, a majority of the outstanding shares of DSP had been tendered. On November 19, 1999, the parties completed the second step of the Merger Agreement — a statutory merger of CWC with and into DSP — by which DSP became a wholly-owned subsidiary of Intel.
The dispute in this case concerns payments to DSP senior executives David Gilo, David Aber, and Stephen P. Pezzola, hereinafter referred to collectively as the executives. Gilo was the Chairman of the Board of Directors, Chief Executive Officer, and President of DSP. Aber was the Senior Vice President and Chief Financial Officer of DSP. Pezzola was the general counsel and Secretary of DSP.
The payments to Gilo had three components. First, Gilo executed a letter agreement with Intel, dated October 13, 1999, amending his employment agreement to provide that after the completion of the tender offer, Gilo would remain an employee of DSP until March 31, 2000, at which time he would receive a severance payment of $525,000 upon his voluntary termination. Second, Gilo signed a two-year Non-Compete Agreement, commencing on October 13, 1999, for which he received $5 million plus an amount known as a "gross up" to cover any tax burden under § 4999 of the Internal Revenue Code after the completion of the tender offer. Third, the DSP board of directors on October 13, 1999 approved a $5 million bonus to Gilo to be paid on January 3, 2000. The same day, October 13, 1999, Gilo tendered his 2,733, 104 DSP shares at $36 per share pursuant to the tender offer.
The payments to Aber and Pezzola were similar. Aber and Intel executed an agreement amending Aber's employment agreement so that he would remain a DSP employee until March 31, 2000, at which time he would receive $40,000 plus a "gross up" upon his voluntary termination. Aber also received a bonus from the DSP board of directors of $2.5 million to be paid on January 3, 2000. Pezzola's agreement provided for a $50,000 severance payment upon his voluntary termination on March 31, 2000. Pezzola also received a $2.5 million bonus from the DSP board of directors to be paid on January 3, 2000.
LEGAL STANDARD
Summary judgment is properly granted when no genuine and disputed issues of material fact remain, and when, viewing the evidence most favorably to the non-moving party, the movant is clearly entitled to prevail as a matter of law. Fed.R.Civ.P. 56; Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986); Eisenberg v. Ins. Co. of N. Am., 815 F.2d 1285, 1288-89 (9th Cir. 1987)
The moving party bears the burden of showing that there is no material factual dispute. Therefore, the Court must regard as true the opposing party's evidence, if supported by affidavits or other evidentiary material. Celotex, 477 U.S. at 324; Eisenberg, 815 F.2d at 1289. The Court must draw all reasonable inferences in favor of the party against whom summary judgment is sought. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Intel Corp. v. Hartford Accident Indem. Co., 952 F.2d 1551, 1558 (9th Cir. 1991)
Material facts which would preclude entry of summary judgment are those which, under applicable substantive law, may affect the outcome of the case. The substantive law will identify which facts are material. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)
Where the moving party does not bear the burden of proof on an issue at trial, the moving party may discharge its burden of showing that no genuine issue of material fact remains by demonstrating that "there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325. The moving party is not required to produce evidence showing the absence of a material fact on such issues, nor must the moving party support its motion with evidence negating the non-moving party's claim. Id. see also Lujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 885 (1990); Bhan v. NME Hosps., Inc., 929 F.2d 1404, 1409 (9th Cir. 1991), cert. denied, 502 U.S. 994 (1991). If the moving party shows an absence of evidence to support the non-moving party's case, the burden then shifts to the opposing party to produce "specific evidence, through affidavits or admissible discovery material, to show that the dispute exists." Bhan, 929 F.2d at 1409. A complete failure of proof concerning an essential element of the non-moving party's case necessarily renders all other facts immaterial. Celotex, 477 U.S. at 323.
DISCUSSION
The issue in this case is whether the payments received by Gilo, Aber, and Pezzola violated what is known as the "all holders, best price rule" embodied in § 14(d)(7) of the Exchange Act and SEC Rule 14d-10, promulgated pursuant to § 14(d)(7). The "all holders, best price rule" requires a tender of feror to pay all tendering shareholders an equal amount for tendered shares. Therefore, the severance payments, bonuses, and Gilo's $5 million Non-Compete Agreement would violate SEC Rule 14d-10 if they were an inducement from the acquiring company to the executives to tender their shares during the tender offer.
Section 14(d)(7) of the 1968 Williams Act Amendments to the Exchange Act provides:
Where any person varies the terms of a tender offer . . . before the expiration thereof by increasing the consideration offered to holders of such securities, such person shall pay the increased consideration to each security holder whose securities are taken up and paid for pursuant to the tender offer. whether or not such securities have been taken up by such person before the variation of the tender offer[.]15 U.S.C. § 78n(d)(7)
SEC Rule 14d-10 provides in relevant part:
(a) No bidder shall make a tender offer unless:
(1) The tender offer is open to all security holders of the class of securities subject to the tender offer; and
(2) The consideration paid to any security holder pursuant to the tender offer is the highest consideration paid to any other security holder during such tender offer.
(c) Paragraph (a)(2) of this section shall not prohibit the offer of more than one type of consideration in a tender offer, provided, that:
(1) Security holders are afforded equal right to elect among each of the types of consideration offered; and
(2) The highest consideration of each type paid to any security holder is paid to any other security holder receiving that type of consideration.
17 C.F.R. § 240.14d-10.
Defendants contend that these payments were not additional consideration for the executives' shares of DSP, but were compensation paid to the executives independently and without regard to whether the executives tendered their shares to Intel at the tender offer price of $36 per share.
A. Rule 14d-10
1. Epstein v. MCA
In Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir. 1997), reversed on other grounds sub nom., Matsushita Electric Industrial Co. v. Epstein, 516 U.S. 367 (1996), the Ninth Circuit examined the application of SEC Rule 14d-10 in circumstances similar to those in this case. Both Epstein and the case at bar came before the court on defendants' motions for summary judgment. In both cases, the defendants argued that the timing of and motivation behind the insider payments immunized them from the application of Rule 14d-10
Epstein involved a suit over payments given to two executives of MCA, Inc., which was acquired by the defendant Matsushita Electrical Co. Ltd. Matsushita made a tender offer at $71 per share for all outstanding common stock of MCA, but structured different deals for two MCA executives, Lew Wasserman and Sydney Sheinberg.
Rather than tender his shares to Matsushita as part of the tender offer, Wasserman agreed with Matsushita that his MCA shares would be exchanged for preferred stock in a Matsushita subsidiary, contingent on a successful tender offer. Id. at 653. Moments after Matsushita and Wasserman signed this agreement, MCA and Matsushita announced the tender offer. Four weeks later — and an hour and twenty minutes after the tender offer was successfully completed — Matsushita exchanged Wasserman's shares for stock in the Matsushita subsidiary. Id.
The agreement with Wasserman clearly entailed payment beyond the tender offer price for Wasserman's shares. Matsushita argued that Wasserman's deal fell outside the Rule's ambit, however, because it closed one hour after the tender offer period expired. Id. at 654. The Ninth Circuit rejected Matsushita's "timing argument," holding that such a rule,
if adopted, would drain Rule 14d-10 of all its force. Under Matsushita's reading, even the most blatantly discriminatory tender offer — in which large shareholders were paid twice as much as small shareholders — would fall outside Rule 14d-10's prohibition so long as the bidder waited a few seconds after it accepted all of the tendered shares before paying the favored shareholders. Rule 14d-10's equality requirements . . . cannot be so easily circumvented. Id. at 655.
Rather than the bright-line rule advocated by Matsushita, the Epstein court articulated a functional test that, in determining whether additional consideration is proscribed by SEC Rule 14d-10, focuses on whether "the . . . transaction was an integral part of [the] tender offer." Id. at 656. SEC Rule 14d-10 is not violated when "all material terms of the transaction stand independent of the tender offer." Id. However, because Wasserman's deal was predicated both on the tender offer's terms and its eventual success, the court found a violation and granted partial summary judgment to the plaintiffs on this issue. Id.
MCA structured a different deal for Sheinberg. Unlike Wasserman, Sheinberg tendered his MCA shares at the tender offer price, but MCA agreed to pay him an additional $21 million in cash if the tender offer succeeded. Id. at 657. The plaintiffs contended that the $21 million payment was a "covert premium . designed to induce Sheinberg to tender his shares." Id. Matsushita countered that the payment was in exchange for 1,000,000 stock options that the MCA board had given to Sheinberg at an exercise price of fifty dollars. The $21 million, in other words, was the difference between the exercise price and the tender offer price. In addition, Matsushita claimed that the payment was in exchange for Sheinberg's agreement to amend his employment contract. Id. at 657-58.
In support of its explanation of the Sheinberg transaction, Matsushita introduced evidence that the grant of stock options had been approved by MCA's Stock Awards Plan Committee prior to the tender offer, and that MCA, rather than Matsushita, paid Sheinberg. Id. at 658. The plaintiffs, in opposition to summary judgment, same forward with circumstantial evidence "disput[ing] the purpose of the Sheinberg payment." Id. at 657.
The plaintiffs' evidence challenged the authenticity of the grant of stock options by noting, first, "the absence of any evidence even suggesting that Sheinberg might be in line for an award of stock options before . . . the eve of the tender offer." Id. In addition, the plaintiffs pointed out that the stock option award "was entirely conditional on the success of the tender offer," and, therefore, could be construed as an inducement to secure Sheinberg's participation. Id. Lastly, the plaintiffs noted Matsushita's internally inconsistent explanations for the $21 million payment. "If Matsushita is correct that Sheinberg owned . . . options for 1,000,000 shares of MCA stock . . . it is unclear why Matsushita would claim that the Sheinberg payment was also made in consideration of an agreement to amend his employment contract." Id.
The Ninth Circuit held that the "central issue regarding the legality of the Sheinberg payment . . . is whether it constitutes incentive compensation that MCA wanted to give Sheinberg independently of the Matsushita deal, or a premium that Matsushita wanted to give Sheinberg as an inducement to support the tender offer and tender his own shares." Id. at 659. Because "[a] trier of fact could decide, on the evidence cited by plaintiffs, not to credit Matsushita's explanation for the Sheinberg payment," the court found that a disputed issue of material fact existed and refused to grant summary judgment to Matsushita. Id. at 658.
2. Validity of Epstein
Defendants question Epstein's precedential value due to its convoluted procedural history, and urge the Court to adopt the contrary holding and rationale of Lerro v. Quaker Oats Co., 84 F.3d 239 (7th Cir. 1996). The question of Epstein's continuing validity was raised in Defendants' earlier motion to dismiss. At that time, the Court considered the issue and, in its February 2, 2001 order denying Defendants' Motion, stated, "The Court cannot agree with Defendants' argument to disregard Epstein." That holding is the "law of the case" and the Court will not reconsider it here. See Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 815-16 (1988)
In Lerro, the Seventh Circuit held that payments made prior to announcing the tender offer do not violate the "all holders, best price" rule as a matter of law.
In addition, the portions of Epstein relevant to the dispute
now before the Court have never been disavowed or overruled. The Supreme Court overruled Epstein without addressing the meaning of the statute and regulations at issue here. On remand from the Supreme Court, the Ninth Circuit first reversed then, on rehearing, affirmed the district court's award of summary judgment to the defendants. See Epstein v. MCA, Inc., 126 F.3d 1235 (9th Cir. 1997) (Epstein II), withdrawn by Epstein v. MCA, Inc., 179 F.3d 641 (9th Cir. 1999) (Epstein III)
Defendants argue that by affirming the district court's summary judgment order, the court necessarily vacated its previous order. However, the Ninth Circuit specifically withdrew Epstein II, but said nothing about the original Epstein decision. Because the portion of Epstein at issue here has not been overruled, withdrawn, or vacated, it remains binding precedent in this Court. See Levine v. Heffernan, 864 F.2d 457, 461 (7th Cir. 1988) ("Lower courts, however, out of respect for the great doctrine of stare decisis, are ordinarily reluctant to conclude that a higher court precedent has been overruled by implication.")
Furthermore, the Court finds Epstein's analysis more persuasive than that articulated by the Seventh Circuit in Lerro. Where Epstein and Lerro differ is in their interpretation of the congressional purpose behind the "all holders, best price" rule. According to Lerro, Rule 14d-10 is not intended to prohibit price discrimination among security holders. The Seventh Circuit noted that such activity could be economically beneficial. 84 F.3d at 243. Rather, the Lerro court held that "the point of Rules 10b-13, 14d-10, and their cousins is to demark clearly the periods during which the special Williams Act rules apply." 84 F.3d at 243. In other words, the rule at issue here is a rule of administrative convenience, not substantive fairness.
In Epstein, on the other hand, the court noted, "The administrative history of Rule 14d-10 . . . suggests anything but the notion that the SEC intended the Rule to be a mechanical provision concerned . . . with timing of payments to favored shareholders." Epstein, 50 F.3d at 654. Citing the administrative and legislative record, the Ninth Circuit explained that the rule "emphasize[s] the need for equality of treatment among all shareholders who tender their shares." Id. (citing S. Rep. No. 550, 90th Cong., 1st Sess. 10 (1967)). The Epstein court recognized that adopting the defendant's approach (the approach subsequently adopted by the Seventh Circuit) would drain the rule of this substantive purpose. Id. ("even the most blatantly discriminatory tender offer" would be acceptable "so long as the bidder waited a few seconds after it accepted all of the tendered shares before paying the favored shareholders")
The Court finds the Epstein approach to be more consistent with the language and the legislative and administrative history of the "all holders, best price" rule and adopts the "integral part of the tender offer" test articulated there. See also Katt v. Titan Acquisitions, Ltd., 133 F. Supp.2d 632, 644 (M.D. Tenn. 2000) (rejecting Lerro and adopting holding of Epstein in denying defendant's motion to dismiss)
B. The Payments
Defendants contend that the payments to Gilo, Aber, and Pezzola were solely "executive compensation" outside the ambit of SEC Rule 14d-10 Epstein makes clear, however, that the purpose of the payments, not the label placed on them, determines whether they violate the Rule. 50 F.3d at 656 ("Whether an acquisition of shares in a corporation is part of the tender offer for purposes of the Act cannot be determined by rubber-stamping the label used by the acquirer.") (quoting Field v. Trump, 850 F.2d 938, 944 (2d Cir. 1988)). To prevail on this motion for summary judgment, then, Defendants must demonstrate that there are no genuine issues of material fact from which a jury could conclude that the payments to the executives were an "integral part of" the tender offer or "an inducement to support the tender offer and tender [their] own shares." Id. at 655, 659.
1. The Bonuses and Non-Compete Agreement.
Defendants argue that the $10 million in bonuses paid to Gilo, Aber, and Pezzola was part of a preexisting plan to keep senior DSP management in place through the merger, and that DSP was obliged to pay the bonuses independently of the Intel transaction. Defendants cite McMichael v. United States Filter Corp., 2001 WL 418981 at *4 (C.D. Cal. 2001), for the proposition that "golden parachute" payments premised on a preexisting duty of the target company to pay its executives are not payments for stock in a tender offer and, therefore, are not regulated by SEC Rule 14d-10
The plaintiffs in McMichael alleged that certain executives of the defendant received additional consideration for their U.S. Filter shares in a tender offer and merger with Eau Acquisition Corporation. Id. at *1. The court held, however, that the undisputed evidence showed that U.S. Filter made the challenged payments pursuant to employment contracts that predated the tender offer. Id. at *5 Therefore, the payments were not dependent on the tender offer, but merely recognized U.S. Filter's "preexisting duty to pay its executives." Id. at *6.
Defendants here contend that the bonuses to Gilo, Aber, and Pezzola, like the payments in McMichael, were premised on a preexisting obligation of the target company. According to Lewis Broad, a member of DSP's Board of Directors and of its Compensation Committee, that Committee adopted the bonus plan on August 30, 1999. Declaration of Lewis Broad (Broad Dec.), ¶¶ 4, 6, Ex. D. At the time the bonus plan was adopted by the Compensation Committee, DSP was negotiating a potential business combination agreement with several different prospective partners. Id. ¶ 4. Pezzola testified that it was the possibility of an acquisition by another company with whom DSP had been negotiating, and not the Intel transaction, that first prompted him to suggest to Gilo that the Board adopt a management retention plan. Declaration of Martin C. Washton (Washton Dec.), Ex. K (Pezzola Dep.), at 56:15-57:12.
The purported purpose of the bonus plan was to keep senior DSP management in place in the event of a change in control. This, in turn, would facilitate the sale of the company as a going concern, thereby maximizing its value. Broad Dec. ¶¶ 4, 6. The bonus plan provided for an aggregate bonus pool of $15 million for senior management. Under the Plan, bonuses would be awarded upon consummation of a change-in-control transaction, if such a transaction was approved by the DSP Board at a premium above the "all-time high price" of DSP stock. To receive the bonus, the specified senior managers had to stay with the company through such a change in control Id Ex. D. The bonus plan adopted by the Compensation Committee does not mention Intel, and purports to take effect upon consummation of any change in control of DSP. Id.
On October 3, 1999, approximately one month after the bonus plan was adopted by the Compensation Committee, Intel and DSP agreed in principle on an all cash tender offer of $36 per share. Declaration of Davidi Gilo (Gilo Dec.) ¶ 17; Declaration of Guy Anthony (Anthony Dec.) ¶ 4; Declaration of Stephen Pezzola (Pezzola Dec.) ¶ 4. This purchase price was contingent on approval by the DSP board, and subsequent negotiation of the definitive form of merger agreement. Anthony Dec. ¶ 4. This price was never revised and Intel subsequently made a tender offer at $36 per share.
Intel first became aware that the bonus plan existed on October 9, 1999, when Intel discovered the plan during routine due dingence. Washton Dec., Ex. F (Williams Dep.), at 44:9-20; Ex. A (Anthony Dep.), at 80:24-83:13. Intel's Assistant Treasurer for Mergers and Acquisitions, Guy Anthony, testified that Intel considered the bonus plan adopted by the Compensation Committee on August 30 to be a contractual commitment that Intel was obliged to honor. Washton Dec., Ex A (Anthony Dep.) at 97:5-97:7. Intel's Treasurer, Arvind Sodhani, further testified that he believed the bonus plan to be "a board resolution [that] was preexisting and final" at the time Intel discovered it through its due diligence. Washton Dec., Ex. B (Sodhani Dep.), 32:24-33:3. According to Defendants, upon learning of the bonus plan, Intel had no choice but to pay the amounts previously determined or, if it found the bonuses objectionable, it would have to decide "whether the bonus amounts in relation to the purchase price were such that [it] would not move forward with the deal." Id. 29:2-5.
On October 13, 1999, after the DSP Board approved the merger with Intel, the Board "ratified and approved the terms of the bonus plan" with two modifications. Specifically, the Board modified the plan "to clarify that the bonus will be paid on March 31, 2000 in the event the tender offer contemplated in the proposed transaction had closed." Id. Ex. F. In addition, because Gilo had agreed to accept $5 million of the authorized bonus in the form of consideration for agreeing to an expanded covenant not to compete, the Board approved for him a $5 million rather than a $10 million bonus. Id. ¶ 9.
Defendants contend that this evidence demonstrates that DSP undertook the obligation to pay the bonuses prior to and separate from Intel's tender offer. Defendants argue that the undisputed evidence shows that 1) Intel and DSP had agreed on a purchase price of $36 a share on October 3, 1999; 2) Intel had no knowledge of the bonuses until October 9, 1999; 3) upon learning of the bonuses, it had no control over whether or not to pay the bonuses; and 4) the payment of the bonuses was not motivated by a desire to induce the executives to tender their shares. According to Defendants, Intel could not have violated SEC Rule 14d-10 because it, like the defendant in McMichael, merely acknowledged DSP's preexisting obligation to pay its executives. See McMichael, 2001 WL 418981 at *6.
In fact, Defendants argue that DSP and not Intel authorized, ratified and paid the bonuses.
a) Pre-existing Obligation
Plaintiffs do not present any evidence that Intel knew of the bonus plan before October 9, 1999, or that Intel played any role in designing the plan that was adopted by the Compensation Committee on August 30, 1999. Plaintiffs contend, however, that following discovery of the bonus plan on October 9, Intel did more than merely recognize a preexisting obligation to pay the executives.
First, Plaintiffs maintain that DSP was not, in fact, obliged to the bonuses until DSP's Board of Directors ratified the bonus plan, which it did not do until October 13, 1999, hours before the tender offer was announced. Plaintiffs base this contention on the minutes of the meeting of the Compensation Committee at which the Committee adopted the bonus plan. Those minutes state, "This special management bonus plan shall be subject to subsequent ratification of the Board of Directors." Broad Dec. Ex. D at 2. Minutes from the October 10, 1999 meeting of the DSP Board of Directors indicate that the adoption of the bonus plan by the Compensation Committee did not constitute a binding commitment of the company to pay the bonuses. Id. Ex. E at 29 (board members "discussed the proposed bonus plan that had been approved by the Compensation Committee at a special meeting held on August 30, 1999 subject to discussion and confirmation by the Board"). At its October 13, 1999 meeting, the DSP board ratified the bonus plan with some modifications from the resolution originally adopted by the Compensation Committee. Id. Ex. F at 11-12.
Although several representatives of Defendant Intel testified that the bonuses were a preexisting commitment established on August 30, 1999, DSP's corporate documents may be sufficient to raise a question of fact as to whether or not this understanding was correct.
Whether or not Defendants actually believed the bonuses to be preexisting obligations is also disputed. Defendant Intel's attorney, Marc Braner, testified that he concluded Intel was obliged to pay the bonuses based on the ratification of the minutes of the Compensation Committee by DSP's full board on October 13. Declaration of Laura M. Andracchio (Andracchio Dec.), Braner Dep. 68:7-15. This testimony is not entirely consistent with that of other Intel representatives who contend that upon discovery of the August 30, 1999 Compensation Committee minutes on October 9, 1999, they believed that DSP was obliged to pay the bonuses. Consequently, there may be a disputed question of material fact not only as to whether the bonus plan was, in fact, a preexisting obligation of DSP, but also as to whether Defendants believed it to be one.
Assuming a jury could conclude that, at the time Intel discovered the existence of the bonus plan, DSP was not obliged to pay those bonuses, Plaintiffs must also come forward with admissible evidence from which a jury could conclude that 1) Defendants ratified and adopted the bonuses and 2) Defendants' motivation for doing so was to induce the executives to tender their shares.
b) Intel's Role in Adopting the Bonus Plan
Defendants have proffered evidence that "the payments to DSP executives were paid by DSP, not Intel." Declaration of Daniel W. Mckenzie (Mckenzie Dec.), ¶ 9. However, in Epstein, the Ninth Circuit recognized that determining whether the acquired or acquiring company "cut Ethel check" for the purported bonus plan "may be a relevant fact, but it does not establish as a matter of law that the . . . payment did not violate Rule 14d-10" Epstein, 50 F.3d at 659. Plaintiffs note that, upon discovering the minutes from the August 30 Compensation Committee meeting, Intel considered withdrawing from the deal because there was a possibility that "the bonus amounts in relation to the purchase price were such that we would not move forward with the deal." Andracchio Dec., Sodhani Dep. at 29:2-5. This testimony could be construed to show that the costs of the bonus plan would be borne by Intel. See also Karlin v. Alcatel, 2001 WL 1301216 at *6 (C.D. Cal 2001) (fact that acquiring company recognized that payments to executives "would ultimately be a cost to [the acquiring company] and make the transaction more expensive" probative of underlying purpose of the payments).
In addition, it is undisputed that the $10 million bonus authorized for Gilo by the Compensation Committee was restructured at the behest of Intel before the bonus plan was adopted by DSP's board. Andracchio Dec., Gilo Dep. at 129:15-21; Anthony Dep. at 92:14-17. Defendants contend that the reason they negotiated to reduce the bonus payment was out of concern over tax liability on a $10 million bonus payment. Anthony Dep. at 91:3-22. Nevertheless, Intel's role in negotiating and allocating the distribution of the $10 million bonus may raise a material dispute of fact as to the level of control Defendants exerted over the ratification and payment of the bonuses.
Plaintiffs also assert that one of the preconditions of the proposed bonus plan — that the change in control transaction be approved at a premium above the "all-time high price" of DSP stock — had not been met when the DSP Board ratified the plan and allocated the bonuses. Plaintiffs claim that the all-time high price of DSP stock was $63.5 per share. Plaintiffs, however, rely on a Pricing History Report that shows a $63.5 price for DSP stock on September 27, 1996, unadjusted for stock splits. See Andracchio Dec. ¶ 2; Ex. A. DSP's stock split, two for one, on December 3, 1996. The proper comparison is between the $36 per share tender offer price, and the all-time high price of DSP stock, adjusted for stock splits, of $31.875 on June 4, 1999. See Supp. Broad Decl. ¶ 4; Ex. B.
c) Intent
On the critical question of Defendants' motivation for the payments, however, Plaintiffs have not raised a disputed question of material fact. As noted above, in Epstein, the Ninth Circuit found a triable issue of fact as to whether or not a $21 million payment to a corporate insider was made as an inducement for that executive to "support the tender offer and tender his own shares." 50 F.3d at 659. The court based its holding on the following evidence proffered by the plaintiffs: 1) an absence of evidence that the $21 million payment to the executive had been contemplated before the tender offer; 2) the fact that the payment was conditioned on the success of the tender offer; and 3) the defendant's inconsistent explanations for the payment. As was the case in Epstein, there is no direct evidence that the disputed payments were made to induce the executives to tender their shares. Unlike Epstein, however, the circumstantial evidence here is not sufficient to undermine the documented rationale for the bonus plan.In Epstein, MCA's financial advisor testified that there had been no discussion of awarding Sheinberg stock options until the day before the tender offer was announced. Id. at 658. In this case, however, the undisputed evidence establishes that the bonus plan was conceived and proposed while DSP was negotiating with multiple potential acquirers and adopted by the Compensation Committee six weeks before the tender offer was announced. It is also undisputed that Intel and the executives, representing DSP, had agreed on a purchase price of $36 per share prior to Intel's discovery of the bonus plan. Washton Dec., Ex. K (Pezzola Dep.) at 116:16-117-21. This purchase price did not change after Intel discovered the bonus plan on October 9, 1999.
Moreover, in Epstein, the $21 million payment was explicitly conditioned on the success of Matsushita's tender offer. "If the tender offer did not succeed, it is undisputed that Sheinberg would not have received the $21 million. Matsushita points to no evidence in the record indicating that the grant of options to Sheinberg was anything more than hypothetical in the event that the tender offer did not succeed." 50 F.3d at 658. Here, however, the bonus plan is contingent on any change in control at DSP. Andracchio Dec., Ex. 40 at 11. The failure of Intel's tender offer would not have terminated the bonus plan. Rather, the bonus plan was not specific to any acquiring company and did not require that a tender offer be the means through which a change of control occurred.
As was the case in Epstein, the board authorized the bonuses and approved the tender offer at the same meeting. However, the terms of the executives' bonuses required that the two events occur almost simultaneously. The bonuses could not be paid unless the change of control transaction took place at a premium over the "all-time high price" for DSP shares. The board, therefore, could not approve the bonuses until it confirmed that this condition was met. Gilo Dec. ¶ 22. Consequently, it was necessary for the board to confirm that the tender offer satisfied the "all-time high price" condition, and approve the transaction, before it could authorize payment of the bonuses. Given this context, the temporal proximity of the two transactions is not sufficient to raise an inference that Defendants acted with an impermissible motive.
The Epstein court also relied on the defendants' inconsistent explanations for the payment at issue. Defendants here have likewise offered potentially inconsistent explanations for Gilo's bonus and non-compete agreement. Specifically, Defendants contend that they were obliged to pay Gilo $10 million because of the Compensation Committee's adoption of the bonus plan. They contend that $5 million of this payment was reallocated to avoid the tax consequences incident to paying a $10 million bonus. However, Defendants also contend that they paid Gilo $5 million because that was "the business value of Mr. Gilo not competing with Intel." Andracchio Dec., Anthony Dep. at 91:24-25. As in Epstein, it is not clear why Gilo would provide additional consideration in the form of a covenant not to compete if Intel was already obliged to pay him the full $10 million.
The Court concludes that this potential inconsistency in Defendants' explanation for the $10 million payment to Gilo is not sufficient to establish a dispute as to whether the payment was, in fact, an inducement to Gilo to support the tender offer and tender his shares. Whether the $5 million was in exchange for a stronger non-compete agreement or simply reallocated from the change in control bonus pool to avoid detrimental tax consequences, there is no evidence that it was an inducement to Gilo to tender his shares at the agreed upon price.
In any event, the potentially inconsistent explanations for the payments to Gilo has no relevance to the payments made to Aber and Pezzola. There is neither contrary evidence nor internal inconsistency with respect to Defendants' explanation of the purpose behind the payments to Aber and Pezzola.
Plaintiffs also contend that both the size of the bonuses, and the distribution of these bonuses to only three DSP executives call into question their purported purpose of retaining "key management personnel" for six weeks and rewarding them for their efforts. The bonuses Gilo, Aber, and Pezzola received under the bonus plan were larger than any they had previously received or would considerably have received under their preexisting employment contracts. See Andracchio Dec., Gilo Dep. 61:3-22; Exs. 15, 17, 18. Moreover, two important managers — Shumuel Arditi, DSP's Chief Operating Officer, and Arnon Kohavi, Director of Investor Relations and Mergers and Acquisitions — did not receive bonuses. Id., Ex. 25; Gilo Dep. 104:22-25.
However, the bonus plan as it was adopted by the DSP Compensation Committee on August 30, 1999 identifies the CEO, CFO, and Secretary as the intended recipients of $15 million in bonuses. Andracchio Dec., Ex. 6. Plaintiffs have adduced no evidence that Intel had anything to do with choosing either the recipients or the amounts of the bonuses. As noted above, the uncontroverted evidence shows that Intel did not even know the bonus plan existed until October 9, 1999. Thus, neither the size of the bonuses nor the intended recipients is relevant to Intel's intent. In addition, Plaintiffs have presented no evidence that the bonuses provided to the executives here were unusually generous when compared to analogous "change of control" provisions in other executive compensation packages.
In sum, it is not clear whether the bonuses approved by the Compensation Committee were pre-existing obligations prior to October 13, 1999 when they were approved by the Board. Intel's role in ratifying and paying the bonuses is similarly disputed. Nevertheless, summary judgment for Defendants is appropriate because Plaintiffs have not introduced sufficient evidence tending to show that either the bonuses or Gilo's $5 million non-compete agreement were intended as an inducement to the executives to support the tender offer and tender their shares.
Plaintiffs cite a number of cases in addition to Epstein in support of their position, but these cases all depend on their specific facts, and are distinguishable from the case at bar. For example, in Karlin v. Alcatel, No. SACV 00-214 DOC EE, 2001 WL 130126 (C.D. Cal. Aug. 13, 2001), the court denied the defendants' summary judgment motion because, among other things, the insider shareholders' additional compensation was conditioned on the success of the specific tender offer, the deal was made during the negotiation of the merger, and the acquiring company approved the payments. See id. at *6. As noted above, the facts here are different. In Katt v. Titan Acquisitions, Ltd., 133 F. Supp.2d 632 (M.D. Tenn. 2000), the court denied the defendants' motion to dismiss where the plaintiffs' complaint alleged that "golden parachute" and other payments to insiders of the target company were, in fact, intended to induce the insiders to support the tender offer. See id. at 635-37, 645. In the case at bar, however, the issue is not whether allegations of such payments are sufficient to state a claim for violation of Rule 14d-10, but rather whether Plaintiffs have adduced sufficient evidence to defeat Defendants' motion for summary judgment. As discussed above, Plaintiffs have not done so. The other cases cited by Plaintiffs are distinguishable on the same grounds. See Maxick v. Cadence Design Systems, Inc., No. C-00-658 PJH, 2000 WL 33174386 (N.D. Cal. Sept. 21, 2000); Perera v. Chiron Corp., No. C-95-20725 SW, 1996 WL 251936 (N.D. Cal. May 8, 1996).
2. The Severance Payments
Unlike the bonuses, there is no dispute that Intel, not DSP, negotiated and paid the severance payments to Gilo, Aber, and Pezzola. Thus, if these payments were actually additional consideration for the executives' DSP shares, rather than legitimate executive compensation, Intel violated SEC Rule 14d-10 The question, then, is whether an issue of material fact exists regarding the true purpose of these payments.Gilo, Aber, and Pezzola each had preexisting employment agreements with DSP that provided for severance pay in the event of termination without cause or a change in control. Broad Dec. ¶ 5, Exs. A, B, C. Defendants assert that Intel wanted DSP's senior management to stay with DSP for four months after the merger, to assist with the transition to new management. Braner Dec. ¶ 16. Accordingly, Intel negotiated with Gilo, Aber, and Pezzola amendments to their existing employment agreements, providing for service past the projected merger date of November, 1999, through March 31, 2000, with severance pay upon the executives' voluntary resignation. Anthony Dec. ¶ 8, Exs. E, F, G. The amended agreements reduced the amount of severance pay the executives would otherwise have received, and also reduced the hours they were to work from thirty to ten hours per week Id.
Plaintiffs object to and move to strike Anthony's declaration regarding Intel's negotiation of the amended employment agreements on the ground that Anthony testified that he did not personally negotiate the agreements. See Plaintiffs' Motion to Strike Evidence at 9:15-28; Anthony Dep. at 86:10-12. Anthony, however, was involved in drafting the employment agreements and attests that, as Intel's Assistant Treasurer for Mergers and Acquisitions and one of the lead negotiators in the DSP merger, he has personal knowledge of the facts in his declaration. Anthony Dep. at 86:13-88:5. Accordingly, Plaintiffs' motion to strike Anthony's declaration is denied.
Plaintiffs offer no evidence that these amendments to the employment agreements were anything other than legitimate arrangements to keep Gilo, Aber, and Pezzola at DSP during the transition to Intel's management of the company. The executives were entitled to receive severance pay regardless of the amendments, so Intel's negotiating for reduced severance payments cannot have violated SEC Rule 14d-10 The fact that the executives' hours of work were reduced is not sufficient evidence to allow a reasonable jury to decide that the amendments were, in fact, intended to induce the executives to support the tender offer.
CONCLUSION
For the foregoing reasons, Defendants' motion for summary judgment is granted (Docket #58). Plaintiffs have not raised a disputed question of material fact regarding the motivation for the executives' bonus payments, severance agreements or Gilo's covenant not to compete. Plaintiffs' motion for class certification is denied as moot (Docket #50).