Miramar Firefighters Pension Fund v. AboveNet, Inc., C.A. No. 7376-VCN (Del. Ch. July 31, 2013) (Noble, V.C.)
July 31, 2013
In this decision, the Court of Chancery granted the defendants’ motion to dismiss a stockholder class action challenging the acquisition of AboveNet, Inc. (“AboveNet”) by an arm’s-length buyer following a lengthy public sale process and a 30-day go-shop period.
AboveNet was a Delaware corporation that provided high bandwidth connectivity solutions and IP services. In early 2011, AboveNet hired J.P. Morgan to identify potential acquirers and undertake a “price discovery process.” The AboveNet board ended the sale process in June 2011, but negotiations resumed in early 2012. As the board was negotiating a sale to a group of private equity buyers for $78 per share, Zayo Group, LLC (“Zayo”), a provider of high bandwidth infrastructure solutions, expressed interest in acquiring AboveNet for $80 per share. The private equity group refused to bid higher than $78.50 per share, and AboveNet signed a merger agreement with Zayo for $84 per share, which represented a 21% premium over AboveNet’s average closing stock price for the 60 days preceding announcement of the merger. AboveNet hired Moelis & Co. to seek higher offers during a 30-day go-shop period. The merger closed in June 2012, with J.P. Morgan and Moelis independently opining that the price was fair and holders of 99.7% of the shares voted and 82.5% of all outstanding shares voting in favor of the transaction.
The plaintiff’s theory was that Bill LaPerch, AboveNet’s chief executive officer and a member of its board of directors, purposefully excluded strategic buyers in favor of financial sponsors in an attempt to retain his role as CEO and roll over his equity into a private venture. Because AboveNet’s certificate of incorporation contained an exculpatory provision pursuant to 8 Del. C. § 102(b)(7), the Court focused on allegations that the board violated its duty of loyalty. The Court held that allegations that the directors other than LaPerch “acquiesced” to LaPerch’s desires were insufficient to raise a reasonable inference that those directors had a disabling interest or lacked independence with respect to the merger.
The Court next rejected each of the plaintiff’s three arguments that the board acted in bad faith in approving the Zayo merger. First, the Court held that the plaintiff had not adequately pled that the directors consciously disregarded their obligation to sell AboveNet at the best price reasonably attainable. Neither an analyst’s commentary that the merger price was inadequate nor a non-binding indication of interest for $85 per share raised a reasonable inference that the board consciously accepted an inadequate price. The Court likewise dismissed claims that J.P. Morgan manipulated AboveNet’s financial projections downward, first to make AboveNet a more affordable target for private equity buyers, and later to justify accepting an allegedly inadequate price from Zayo, a strategic buyer. Aside from the inconsistency of these allegations, the Court held that allegations that J.P. Morgan manipulated AboveNet’s revenue growth rate and financial projections were merely a “quibble” with J.P. Morgan’s financial analysis, and that the complaint did not allege facts to support an inference that the board knew of the alleged manipulation. Similarly, differing financial projections used by J.P. Morgan and Moelis did not support a reasonable inference that the directors manipulated the sale process, and allegations that Moelis had never before run a go-shop did not support a reasonable inference that the board consciously hired an incompetent advisor.
Second, as to the allegation that the board favored financial sponsors and permitted J.P. Morgan to offer staple financing to financial sponsors but not Zayo, the Court noted that the board ultimately approved a merger with Zayo, a strategic buyer, who was able to complete a deal at $4 per share above its initial bid without financing from J.P. Morgan. As to the allegation that the board terminated the sale process in June 2011 to exclude strategic buyers, the Court held that it was not reasonably conceivable from the pled facts that the independent board would abandon the sale process at the slightest expression of interest from a strategic buyer to secure the CEO’s future employment by orchestrating a deal with a financial buyer. The Court similarly concluded that the complaint did not support an inference that the independent board would conspire with its independent financial advisors to sell the company to a strategic buyer for an inadequate price.
Third, the Court held that the deal protection measures in the merger agreement, which included a termination fee equal to approximately 2% of the deal’s equity value and a no-solicitation restriction following the 30-day go-shop, were unremarkable and have repeatedly been held to be reasonable under similar circumstances. Finally, the Court dismissed the aiding and abetting claim against Zayo because the complaint did not state a claim against the directors for breach of the duty of loyalty or plead facts suggesting that Zayo knowingly participated in the alleged breaches.