In re TIBCO Software Inc. Stockholders Litigation ( 2015 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE TIBCO SOFTWARE INC. CONSOLIDATED
STOCKHOLDERS LITIGATION C.A. No. 10319-CB
MEMORANDUM OPINION
Date Submitted: July 23, 2015
Date Decided: October 20, 2015
Stuart M. Grant and Cynthia A. Calder of GRANT & EISENHOFER, P.A., Wilmington,
Delaware; Mark Lebovitch, David Wales, Edward G. Timlin and John Vielandi of
BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York;
Francis Bottini, Jr. of BOTTINI & BOTTINI INC., La Jolla, California; Juan E.
Monteverde and James Wilson, Jr. of FARUQI & FARUQI LLP, New York, New York;
Counsel for Lead Plaintiff.
Tamika Montgomery-Reeves and Bradley D. Sorrels of WILSON SONSINI
GOODRICH & ROSATI, PC, Wilmington, Delaware; Steven M. Schatz, David J. Berger
and Katherine L. Henderson of WILSON SONSINI GOODRICH & ROSATI, PC, Palo
Alto, California; Counsel for Defendants TIBCO Software Inc., Vivek Ranadivé, Nanci
Caldwell, Eric Dunn, Manuel A. Fernandez, Phillip Fernandez, Peter Job, David J. West
and Philip Wood.
Gregory P. Williams, Anne C. Foster and J. Scott Pritchard of RICHARDS, LAYTON &
FINGER, P.A., Wilmington, Delaware; Yosef J. Riemer, P.C., Matthew Solum, David S.
Flugman and Shireen A. Barday of KIRKLAND & ELLIS LLP, New York, New York;
Counsel for Defendants Balboa Intermediate Holdings, Balboa Merger Sub, Inc., and
Vista Equity Partners V, L.P.
Kevin G. Abrams, J. Peter Shindel, Jr. and Matthew L. Miller of ABRAMS & BAYLISS
LLP, Wilmington, Delaware; Paul Vizcarrondo, Jr., Carrie M. Reilly, Steven Winter and
Luke M. Appling of WACHTELL, LIPTON, ROSEN & KATZ, New York, New York;
Counsel for Defendant Goldman, Sachs & Co.
BOUCHARD, C.
This decision is round two of an action in which a stockholder of TIBCO Software
Inc. challenges the per-share consideration that a private equity fund (“Vista”) agreed to
pay to acquire TIBCO in a merger that closed on December 5, 2014. The merger
agreement provided for stockholders to receive $24 per share. Based on the number of
fully diluted shares of TIBCO outstanding, which was accurately reflected in the merger
agreement, a $24 per share price implied an aggregate equity value for the transaction of
approximately $4.144 billion.
Plaintiff does not challenge the sale process that led to a $24 per share merger
price, which plaintiff acknowledges was a “good outcome” and which over 96% of
TIBCO’s stockholders voted to accept. The rub here is that Vista and TIBCO both
operated under a mistaken belief that the aggregate equity value implied by the
transaction was approximately $4.244 billion—approximately $100 million or $0.57 per
share more than what was reflected in the merger agreement. This mistaken belief arose
from a capitalization spreadsheet for TIBCO that double-counted certain shares. That
spreadsheet was used by Vista during the bidding process and by TIBCO’s financial
advisor, Goldman, Sachs & Co., in its fairness analysis.
The share count error was discovered after the parties had signed the merger
agreement on September 27, 2014. Over two weeks later, on October 16, 2014, TIBCO
filed its preliminary proxy statement for the merger disclosing the share count error,
which prompted plaintiff to file this action and seek to enjoin the merger. In its
preliminary injunction motion, plaintiff pressed claims for reformation of the merger
agreement and breach of fiduciary duty concerning the alleged failure of the TIBCO
board to take any action after the share count error was discovered to obtain the
additional $100 million in equity value it thought the transaction was supposed to yield.
On November 25, 2014, I issued an opinion denying plaintiff’s motion for a
preliminary injunction (the “PI Opinion”). Regarding the reformation claim, I explained
that plaintiff had demonstrated a reasonable probability of success of proving by clear
and convincing evidence that Vista and TIBCO both operated under a mistaken
assumption that the implied equity value of the merger was $4.244 billion. I further
concluded, however, that plaintiff had failed to demonstrate a reasonable probability of
proving by clear and convincing evidence—as required under Delaware law to reform a
contract—that Vista and TIBCO had specifically agreed before signing the merger
agreement that the merger would be consummated at an aggregate equity value of $4.244
billion. The record instead demonstrated that what Vista offered and what TIBCO
accepted when they negotiated the final terms of the merger agreement had been
expressed in terms of dollars per share (i.e., $24 per share) and not in terms of an
aggregate equity value.
I did not reach the merits of the fiduciary duty claim in the PI Opinion because
plaintiff had failed to demonstrate the existence of irreparable harm due to the availability
of a damages remedy, and because the balance of the equities clearly weighed in favor of
permitting TIBCO’s stockholders to decide whether or not to approve the merger and
accept $24 per share for their stock of TIBCO, which they have now done.
After the merger closed, plaintiff, with the benefit of having taken some discovery,
amended his complaint. The amended complaint asserts claims for reformation, breach
2
of fiduciary duty, aiding and abetting (against Goldman), professional malpractice
(against Goldman), and unjust enrichment (against Vista and Goldman). Defendants
moved to dismiss the amended complaint in its entirety for failure to state a claim for
relief. For the reasons explained below, I conclude that all of the claims, except the claim
for aiding and abetting claim against Goldman, fail to state a claim for relief.
The reformation claim is legally deficient for the same reason plaintiff came up
short at the preliminary injunction phase of this case. Specifically, plaintiff has failed to
allege facts demonstrating the existence of an antecedent agreement between Vista and
TIBCO inconsistent with the price term of the merger agreement. Thus, although I am
sympathetic to plaintiff’s desire to recover the additional $100 million that Vista
apparently was willing and intended to pay to acquire the equity of TIBCO, his claim for
reformation simply does not pass muster under the strict requirements of Delaware law
for modifying the unambiguous terms of a contract.
As to the fiduciary duty claim, I conclude that the complaint states at most a claim
for a breach of the duty of care by TIBCO’s directors for their alleged failure to
adequately inform themselves in the wake of the discovery of the share count error about
certain basic matters one rationally would expect a board to explore to properly assess its
options. But because the directors are exculpated for breaches of the duty of care, the
fiduciary duty claim will be dismissed. That claim, however, forms the predicate for an
aiding and abetting claim that has been sufficiently pled against Goldman. In particular,
the amended complaint alleges facts from which it is reasonably conceivable that
Goldman knowingly participated in a breach of the TIBCO board’s duty of care by
3
creating an informational vacuum when it failed to apprise the board of a critical piece of
information: that, during the crucial period in October 2014 when the board was
considering options concerning the share count error, Vista admitted to Goldman that it
had, in fact, relied on the erroneous share count in making its $24 per share offer.
Plaintiff’s professional malpractice claim against Goldman, which is asserted
under California common law, fails to state a claim based on my review of precedents
suggesting that California law would not allow investors to sue a financial advisor they
are not in privity with for negligence to recover purely economic losses. Finally, the
unjust enrichment claims are dismissed because the subject matter concerning each of
those claims is governed by a comprehensive contract.
I. BACKGROUND 1
A. The Parties
Defendant TIBCO Software Inc. (“TIBCO” or the “Company”), a Delaware
corporation based in Palo Alto, California, is in the enterprise software industry. TIBCO
1
Unless otherwise noted, the facts recited in this opinion are based on the allegations in
the Verified Second Amended Class Action Complaint (“Complaint”), documents
integral to or incorporated in it, or facts of which the Court may take judicial notice. The
Complaint was filed on March 3, 2015, and incorporates much of the factual record that
had been developed during expedited discovery in connection with plaintiff’s motion for
a preliminary injunction that was heard in November 2014. Thus, the factual background
recited below largely tracks the factual recitation in the PI Opinion.
In the PI Opinion, I referred to the additional per share amount attributable to the share
count error as being $0.58 per share. In this opinion, I use the figure $0.57 per share as
referenced in the amended pleading. See Compl. ¶¶ 2, 153.
4
is named as a defendant solely as a necessary party for the claim to reform the Agreement
and Plan of Merger dated as of September 27, 2014 (the “Merger Agreement”).
Defendants Vivek Ranadivé, Nanci Caldwell, Eric C.W. Dunn, Manuel A.
Fernandez, Philip M. Fernandez, Peter J. Job, David J. West, and Philip K. Wood were
the eight members of the TIBCO board of directors (the “Board”) during the events in
question. Each was a director from at least June 2014 until the merger (hereafter, the
“Merger”) closed, with three directors having joined the Board in 2014. Ranadivé was
the Chairman of the Board and the Company’s Chief Executive Officer from the
Company’s founding in 1997 through the closing of the Merger. The individual director
defendants are referred to collectively as the “Director Defendants.”
Defendant Vista Equity Partners V, L.P. (“Vista V”) is a fund affiliated with
private equity firm Vista Equity Partners. It formed two entities to acquire TIBCO: (i)
defendant Balboa Intermediate Holdings, LLC, a Delaware limited liability (“Balboa”);
and (ii) its merger subsidiary, defendant Balboa Merger Sub, Inc., a Delaware corporation
(“Merger Sub”). For simplicity, I refer to these three defendants collectively as “Vista.”
Defendant Goldman, Sachs & Co. (“Goldman”) is an investment bank. It had
been TIBCO’s financial advisor before the Board initiated the sale process. In September
2014, a special committee formed to manage the sale process hired Goldman to act as its
financial advisor. For its advisory services and its fairness opinion in connection with the
Merger, Goldman received $47.4 million from TIBCO.
Plaintiff Paul Hudelson was a TIBCO stockholder at all relevant times. He brings
this lawsuit individually and on behalf of a class of all TIBCO stockholders, excluding
5
defendants and their affiliates, during the period from September 26, 2014 through the
closing of the Merger on December 5, 2014.
B. TIBCO Decides to Explore a Sale Transaction
During the first half of 2014, several private equity firms contacted Ranadivé, then
TIBCO’s Chairman and CEO, to express interest in possible transactions, including a
potential acquisition of the entire Company. The Board did not immediately pursue these
inquiries.
On June 3, 2014, TIBCO pre-announced its financial results for the second quarter
of 2014, which were lower than Wall Street’s estimates. On June 6, 2014, the Board held
a special meeting to discuss the Company’s financial outlook and a potential sale of the
Company. Representatives of Goldman attended the meeting and gave a presentation on
TIBCO’s general market position and strategic alternatives.
On July, 11, 2014, the Board called a second special meeting after receiving
additional market analysis from Goldman. At the July 11 meeting, the Board instructed
Goldman to engage in a comprehensive review of the strategic alternatives available to
the Company. On July 29, 2014, at a third special meeting, the Board formally decided
to explore a possible sale of the entire Company. The Board decided to reach out to the
financial sponsors that had expressed interest earlier in 2014 in acquiring the entire
Company.
C. The Board Forms a Special Committee to Manage the Sales Process
On August 16, 2014, the Board held a fourth special meeting, attended by
representatives of Goldman. The Board determined to engage in further review of the
6
strategic alternatives available to the Company and to form a special committee for that
review comprised of defendants Caldwell, Dunn, and West (the “Special Committee”).
The Special Committee was authorized to engage advisors and charged with reviewing
all strategic alternatives available to TIBCO and making a recommendation to the Board
regarding a course of action. On August 18, 2014, the Special Committee held its first
meeting, during which it directed Goldman to contact a list of potential acquirers limited
to those who would potentially buy the entire Company.
While Goldman had been analyzing possible strategic alternatives for TIBCO
from at least June 2014 and negotiating with potential acquirers starting in August 2014,
the relationship was not formalized until September 1, 2014, when Goldman signed an
engagement letter (the “Engagement Letter”). The Engagement Letter entitled Goldman
to a $500,000 retainer, which would be the only compensation Goldman would receive if
no transaction occurred, and to a transaction fee of 1% of the “aggregate consideration”
paid for the Company’s equity securities, assuming a transaction was done at $24.50 per
share or less. Under this arrangement, almost 99% of Goldman’s final transaction fee of
$47.4 million became contingent on closing a transaction.
D. Goldman Provides Information about TIBCO’s Capital Structure to
the Two Highest Bidders
On September 3, 2014, the Company issued a press release announcing the
formation of the Special Committee to review the strategic and financial alternatives
available to TIBCO. Goldman assumed responsibility for negotiations with potential
acquirers, and for managing TIBCO’s electronic data room of due diligence materials and
7
responding to the bidders’ diligence-related questions. Throughout late August and
September, Goldman discussed an acquisition of the Company with twenty-four potential
acquirers. Two serious bidders eventually emerged: Vista and Sponsor B. They were
the only bidders to receive access to the data room.
On August 30, 2014, Vista submitted a non-binding indication of interest for “an
all-cash transaction at $23.00 to $25.00 per share of common stock and common stock
equivalents.” 2 Vista’s initial proposal included an express assumption about the
approximate number of shares of outstanding common stock and stock-based awards to
be acquired.
In late August, Vista and Sponsor B sought diligence information regarding
TIBCO’s share count. TIBCO and Goldman prepared a spreadsheet showing the number
of fully diluted shares that would need to be acquired in a merger as of August 15, 2014
(the “First Cap Table”). The First Cap Table did not list the number of fully diluted
shares—it was up to the bidders to compute that number. 3 Instead, the First Cap Table
listed (i) the total number of shares of common stock outstanding and (ii) line items
2
Compl. ¶ 41.
3
As noted in the PI Opinion, it appears that a fully diluted share count was not provided
because that number is partly a function of the per-share consideration. That is, as the
per-share offer price increases, the amount of proceeds to be received by the holders of
in-the-money options also increases and, thus, the number of share equivalents necessary
to cover the in-the-money value of the options increases as well. For this reason, when
Goldman provided the First Cap Table (and the subsequent versions described later), it
also provided data on the exercise prices of the outstanding options and stock-based
awards. I use “fully diluted shares” to refer to the sum of the share equivalent of the
outstanding options and other stock-based awards at the offered consideration (based on
the weighted average exercise price) plus the outstanding shares of common stock.
8
detailing options and various categories of stock-based equity awards outstanding, which
were totaled together separately from the common stock outstanding. One of these line
items stated that there were approximately 4.3 million unvested restricted shares
outstanding.
It could not be determined from the face of the First Cap Table (or from
subsequent versions created by Goldman and the Company) that those 4.3 million
unvested restricted shares also were included in the outstanding common stock total.
Thus, these restricted shares were being double-counted—once as unvested restricted
shares and again as outstanding common shares. This double-counting of unvested
restricted shares is at the heart of TIBCO’s and Vista’s misunderstandings about the total
purchase price of the Merger.
According to plaintiff, the cap tables provided to Vista led it to believe that in
assessing its bid and articulating it on a per-share basis, it had to divide the total purchase
price it was willing and able to pay by a greater number of shares outstanding than in fact
existed. The cap tables told Vista, in essence, that it had to spread the per-share merger
consideration to over four million shares that did not exist. 4
In mid-September 2014, Vista and Sponsor B requested updated share count
information from Goldman. TIBCO and Goldman prepared an updated spreadsheet
reflecting the Company’s share count as of September 19, 2014 (the “Second Cap
Table”). The Second Cap Table contained the same share count error as the First Cap
4
Compl. ¶ 44.
9
Table: the unvested restricted shares (now approximately 4.2 million shares) were listed
as a component of the outstanding stock-based equity awards, and were included in the
outstanding common stock total, without any notation of this double-counting. Goldman
sent the Second Cap Table to the bidders on September 21, 2014.
On September 23, 2014, Sponsor B submitted a proposal to acquire TIBCO for
$21 per share. On September 24, 2014, Vista submitted a bid to acquire TIBCO for $23
per share. On September 25, 2014, Sponsor B raised its proposal to $22.50 per share. On
September 25, 2014, after Sponsor B raised its proposal, Goldman asked the bidders to
submit final proposals by early afternoon on September 26, 2014.
During the morning of September 26, 2014, the Board and Special Committee
held a joint meeting attended by Goldman representatives and TIBCO management. At
this meeting, Goldman reviewed Vista’s $23 per share and Sponsor B’s $22.50 per share
proposals. The Board told Goldman to maximize the consideration offered by the
competing bidders, and discussed the financial model and forecasts that Goldman would
use in preparing a fairness opinion.
E. Vista Calculates its Maximum Bid
The Complaint explains that a private equity firm like Vista typically looks for a
per-investment target internal rate of return (“IRR”) somewhat higher than its target IRR
for its overall fund. Target IRR can be expressed in terms of a targeted return on a cash-
on-cash basis, or a “hurdle rate,” or can be expressed as an expectation that an acquired
asset can be sold for X times the purchase price within Y years. To evaluate whether it
can expect to achieve a minimum hurdle rate, a private equity firm will look at the
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target’s projections and potential exit value at the end of the investment period. Running
the projections and exit value through the private equity firm’s financial model will
determine how much it believes the target is worth. The private equity firm will then
assess its ability to finance the acquisition and the expected cost of doing so. Based on
these calculations, the firm determines the maximum aggregate investment it can make in
the target company and still have a reasonable expectation of achieving its targeted return
(i.e., meeting its hurdle rate), nets out any costs or debt assumption obligations, then
divides the aggregate equity value by the number of shares and share equivalents
outstanding to determine the maximum per-share price it can offer. In short, as plaintiff
explains, the total enterprise and equity valuation necessarily comes first, and the per-
share price is calculated thereafter. 5
During the morning of September 26, 2014, an internal committee of Vista that
was responsible for approving acquisition bids (the “Vista Committee”) met to discuss
the maximum bid Vista could make using the methodology described above. 6 At the
conclusion of the meeting, the Vista Committee approved a proposal to acquire TIBCO
for up to the maximum aggregate value that would allow Vista to achieve its hurdle rate.
That amount was $4.237 billion of equity value, which represented a $4.305 billion
enterprise value. Based on the share count information Vista had received to date, the
$4.237 billion in equity value translated into a maximum price of $24.25 per share.
5
Id. ¶¶ 47-49, 51, 55-56.
6
Id. ¶¶ 61-62.
11
F. The Discovery of the LTIP Share Count Error and the Final Bids
On September 26, after the Vista Committee meeting but before Vista had
submitted a higher bid, TIBCO discovered an error in the share count information in the
Second Cap Table, but not the share count error at the heart of this case. Specifically, the
Second Cap Table omitted approximately 3.7 million shares in the Company’s Long
Term Incentive Plan (the “LTIP”), and thus understated the common stock outstanding
by approximately 3.7 million shares. To correct the LTIP share count error, TIBCO and
Goldman revised the Second Cap Table to reflect the Company’s share count as of
September 25, 2014 (the “Final Cap Table”). The Final Cap Table properly identified the
approximately 3.7 million LTIP shares as a separate line item within the outstanding
stock-based awards category, but it still failed to note that the unvested restricted shares
(which now totaled 4,147,144 shares) that were listed as a separate line item in that same
category also were included in the total common stock outstanding. Thus, the error
concerning unvested restricted shares remained unrectified.
Immediately after discovering the LTIP share count error, Goldman informed the
bidders, and the submission of final bids was suspended until revised share count data
could be circulated. Later in the afternoon on September 26, Goldman sent Vista
summary share count data, which corrected the LTIP share count error, but which still
double-counted the unvested restricted shares. Vista responded that it wanted a full,
updated capitalization table “in the exact format” used for the prior cap tables. Goldman
then sent the Final Cap Table to the bidders.
12
After receiving the Final Cap Table, Vista reran its internal leveraged buyout
financial model and prepared an updated investment committee memorandum reflecting
the new share count. Because correction of the LTIP share count error informed the
bidders that there were more shares than previously understood, the total aggregate equity
value that would allow Vista to meet its hurdle rate translated to a lower price per share.
After correcting for the LTIP share count error, the maximum Vista could bid decreased
from $24.25 per share to $23.97 per share. On the basis of its revised analysis, Vista
submitted a proposed final bid of $23.85 per share, which implied an aggregate equity
value of $4.217 billion and an enterprise value of $4.284 billion—each about $21 million
lower than the maximum aggregate value that the Vista Committee had authorized earlier
in the day.
In the same timeframe, Sponsor B submitted its final proposal of $23.75 per share.
Goldman told Vista and Sponsor B that their bids “were not materially differentiated.”
After further negotiations, Goldman asked both Vista and Sponsor B to submit revised
“best and final” offers that evening. Vista raised its bid from $23.85 to $24 per share
(Vista’s “Final Bid”). Based on the then-current share data, Vista’s Final Bid of $24 per
share implied an aggregate equity value of $4.244 billion and an aggregate enterprise
value of $4.311 billion.
Late in the evening on October 26, 2014, Goldman told Vista that it had won the
auction with its Final Bid. Goldman also told Vista that TIBCO’s counsel would be in
touch with Vista’s counsel to finalize a merger agreement, which counsel for Vista and
13
TIBCO had been negotiating during the bidding process. The goal was to sign a merger
agreement, if approved by the Board, the next morning.
A few minutes after midnight on September 27, 2014, Vista’s counsel emailed
Vista’s equity commitment letter to TIBCO’s counsel (the “Equity Commitment Letter”),
which contemplated financing the Merger from Vista’s cash on hand. Specifically, in the
Equity Commitment Letter, Vista V “commit[ed], conditioned upon (i) satisfaction, or
waiver . . . of all conditions precedent . . . and (ii) the contemporaneous consummation of
the Merger, to contribute . . . an aggregate amount up to $4,859,000,000 . . . in cash in
immediately available funds” to Balboa, the Vista entity formed to make the acquisition. 7
A “spreadsheet showing the calculations used to arrive at the amount of the
commitment” was attached to the email forwarding the Equity Commitment Letter. That
spreadsheet shows that the largest component of the $4,859,000,000 commitment amount
was the equity value payable to stockholders of $4.244 billion. This amount was
calculated by multiplying $24 per share by approximately 176.8 million fully diluted
shares outstanding, which number of shares had been derived from the Final Cap Table.
G. TIBCO Accepts Vista’s Offer
On September 27, 2014, the Special Committee and Board held concurrent
telephonic meetings to review Vista’s Final Bid of $24 per share and Sponsor B’s final
proposal of $23.75 per share. Representatives of Goldman were in attendance. Goldman
presented its opinion on the fairness of Vista’s Final Bid to the Board, which was based
7
Id. ¶ 83.
14
on the inaccurate share count data from the Final Cap Table. In its “Summary of Key
Economic Terms,” Goldman advised the Board and the Special Committee that (i) the
implied enterprise value of the proposed Merger was $4.311 billion, (ii) the implied
equity value to stockholders was $4.244 billion, (iii) Vista would acquire approximately
176.8 million shares, and (iv) the multiple of enterprise value for the latest twelve
months’ EBITDA was 18 times. Thus, Goldman’s presentation utilized an erroneous
share count derived from the Final Cap Table (the same 176.8 million fully diluted share
figure Vista had used in making its Final Bid) when opining that $24 per share was fair.
After its presentation, Goldman delivered its written opinion that Vista’s Final Bid
was fair from a financial point of view (the “Fairness Opinion”). After Goldman’s
presentation, the Special Committee unanimously recommended that the Board approve
the Merger. The Board then unanimously approved the Merger, adopted and approved
the Merger Agreement, and recommended that TIBCO’s stockholders vote in favor of
adoption of the Merger Agreement.
H. Key Terms of the Merger Agreement
Later in the morning of September 27, 2014, TIBCO and Vista signed the Merger
Agreement, which is governed by Delaware law. The Merger Agreement did not state an
aggregate purchase price or an implied equity value. Instead, the Merger Agreement
specifically provided that, at the effective time of the Merger, each share of TIBCO
15
common stock would be “automatically converted into the right to receive cash in an
amount equal to $24.00, without interest.” 8
The Merger Agreement included a representation from TIBCO entitled “Company
Capitalization” (the “Cap Rep”). The Cap Rep stated that there were 163,851,917
outstanding common shares of TIBCO common stock, a figure that expressly included
the 4,147,144 unvested restricted shares. 9 The Merger Agreement also accurately listed
the other outstanding options and stock-based awards. The Merger Agreement thus
accurately provided the share count data needed for Vista to calculate that, based on the
$24 per-share price, it would need to acquire 172,670,009 fully diluted shares in the
Merger—not the 176,817,153 fully diluted shares it assumed it would need to acquire, as
reflected in the spreadsheet attached to the Equity Commitment Letter. 10
8
Sorrels Aff. Ex. A (Merger Agreement) § 2.7(a)(ii) (Apr. 2, 2015). I take judicial notice
of the contents of the Merger Agreement, which is a defined term in the Complaint and
referenced throughout the Complaint. See, e.g., Gerber v. EPE Holdings, LLC, 2013 WL
209658, at *1 n.12 (Del. Ch. Jan. 18, 2013) (considering limited partnership agreement
integral to the complaint when it was “given a defined term and referred to explicitly and
implicitly throughout the Complaint.”).
9
Merger Agreement § 3.7(a)-(b).
10
As explained in the PI Opinion, there were 4,641,716 outstanding options at a weighted
average exercise price of $13.41. At an offer price of $24 per share, the share equivalent
of these options is 2,282,165 shares. There were also 2,934,638 shares in other unvested
stock-based awards and 3,601,289 LTIP shares (after subtracting shares withheld for tax
purposes). Thus, the total number of fully diluted options and awards at an offer price of
$24 equated to 8,818,092 (2,282,165 + 2,934,638 + 3,601,289 = 8,818,092). When
added to the total number of outstanding common shares, this yields a fully diluted
number of shares of 172,670,009 (163,851,917 + 8,818,092 = 172,670,009).
16
The Merger Agreement also provided a termination right to Vista in the event that
the Cap Rep was inaccurate at closing and that any inaccuracies, individually or in the
aggregate, would require Vista to pay more than $10 million above the product of $24 per
share multiplied by the number of fully diluted shares derived from the Cap Rep. 11 This
$10 million “cap ceiling” reflects the reality that, for a public company, the share count
may change between signing and closing. For example, during this period, options or
other stock-based compensation may be granted to newly hired employees or forfeited by
terminated employees.
Two provisions of the Merger Agreement were negotiated by TIBCO and Vista as
a percentage of an assumed equity value of $4.244 billion: the termination fee in Section
8.3(b)(i) and a liability cap in Section 8.3(f). 12 Section 8.3(b)(i) of the Merger
Agreement provides that TIBCO must pay a fee to Vista under certain circumstances
where the Merger Agreement is terminated and TIBCO enters into a different transaction
within one year (the “Termination Fee”). Vista initially requested a Termination Fee
equal to 3.25% of the equity value of the Merger, but TIBCO negotiated the fee down to
2.75% of the equity value of the Merger. Section 8.3(b)(i) of the Merger Agreement thus
provides for a Termination Fee of $116,700,000, which, while not expressed as such in
the Merger Agreement, is equal to 2.75% of an assumed equity value of $4.244 billion
(rounded to the nearest $10,000).
11
Merger Agreement §§ 7.2(a)(iii), 8.1(e).
12
Compl. ¶¶ 95-98.
17
Section 8.3(f) of the Merger Agreement defines Vista’s maximum liability for any
breaches of the Merger Agreement or ancillary agreements (the “Liability Cap”).
According to plaintiff, merger agreements often cap acquirer liability at twice the
termination fee. 13 Under Section 8.3(f), the Liability Cap is $275,800,000, which (while
again not expressed in percentage terms or by reference to any aggregate value in the
Merger Agreement) is exactly 6.5% of $4.244 billion, or twice the originally proposed
termination fee of 3.25%. Although TIBCO negotiated the Termination Fee down from
3.25% to 2.75%, Vista did not require an equivalent reduction in the Liability Cap.
I. TIBCO, Vista, and Goldman Make Statements that the Merger Implies
a $4.3 Billion Enterprise Value
On September 29, 2014, Vista and TIBCO announced the Merger in a joint press
release. TIBCO, Vista, and Goldman each participated in drafting the joint press release,
and had the opportunity to review and sign off on the final version. The joint press
release stated that:
[U]nder the terms of the agreement, TIBCO stockholders will receive
$24.00 per share in cash, or a total of approximately $4.3 billion, including
the assumption of net debt . . . . The total enterprise value for the
transaction represents more than 18 times TIBCO’s earnings before
interest, depreciation and amortization (EBITDA) for the 12 months ending
August 31, 2014. 14
Although the Equity Commitment Letter provided that Vista would fund the
Merger in cash, Vista had intended to obtain debt financing for a portion of the
commitment amount. After the announcement of the Merger, Vista prepared
13
Id. ¶ 97.
14
Id. ¶ 100.
18
presentations for potential lenders and rating agencies regarding the contemplated debt
financing. Vista’s draft presentations, up to and after the discovery of the share count
error on October 5, 2014, based Vista’s commitment amount on the implied enterprise
value (approximately $4.3 billion) that had been derived from the erroneous share count.
For example, a draft rating agency presentation dated October 14, 2014, stated that “[o]n
September 29, 2014, Vista entered a definitive agreement to acquire TIBCO for $4.3 bn
in an all-cash transaction inclusive of a refinance of TIBCO’s existing $605mm of
debt.” 15 It was not until October 17, 2014 that Vista’s presentation was modified to
reflect the enterprise and equity values implied by the correct share count in the Cap Rep.
Up to and after the announcement of the transaction, Goldman similarly expressed
its belief that the implied enterprise value of the Merger was $4.311 billion. For
example, Goldman’s September 29, 2014 “case study”—a marketing document the
Goldman deal team prepared to tout the firm’s services to current and prospective
clients—highlighted that the Merger had an equity value of $4.244 billion, an enterprise
value of $4.311 billion, and a multiple of enterprise value to latest twelve months’
EBITDA of 18 times.
J. The Error in the Final Cap Table is Discovered
On Sunday, October 5, 2014, TIBCO’s counsel circulated a draft of the proxy
statement for the special meeting of the TIBCO stockholders to consider the Merger (the
“Preliminary Proxy”), which included enterprise and equity values for the transaction
15
Id. ¶ 103.
19
based on the share count numbers set forth in the Merger Agreement. A Goldman
employee reviewed the draft, and commented in an email that “[t]he aggregate value
calculation doesn’t look right” compared to the number that had been used in Goldman’s
analysis. An hour later, Goldman emailed TIBCO’s counsel to discuss whether, in light
of the data in the Final Cap Table, the reduced “equity value and aggregate value [in the
Preliminary Proxy] should come out to a different number.” 16
After a series of conversations between TIBCO and Goldman, it was discovered
that the capitalization data that was provided to Vista (and Sponsor B) in the Final Cap
Table (and its earlier versions) had double-counted 4,147,144 unvested restricted shares.
Decreasing the number of the fully diluted shares (at the $24 per share offer) to account
for this discrepancy had the effect of reducing the total implied equity value of the
transaction by about $100 million, from approximately $4.244 billion to approximately
$4.144 billion. Goldman and TIBCO allegedly did not make an immediate inquiry to
determine whether Vista or Sponsor B had relied on the incorrect data. 17
K. The Board Meets After the Share Count Error is Discovered
On October 11, 2014, after the Board was informed of the share count error, it
convened a special meeting to consider the situation. TIBCO management and
representatives of Goldman attended the meeting, at which Goldman presented a revised
analysis of the Merger with revised capitalization numbers that eliminated the double-
16
Id. ¶ 105.
17
Id. ¶ 107.
20
counting in the Final Cap Table. In its analysis Goldman assumed that the per-share
price would remain constant and reduced (i) the enterprise value from $4.311 billion to
$4.212 billion; (ii) the equity value from $4.244 billion to $4.144 billion; (iii) and the
EBITDA multiple for the Merger from 18 to 17.6 times EBITDA.
After discussions with the Board, Goldman stated that there was no change to its
previous Fairness Opinion. Following Goldman’s presentation, the Board concluded that
the revised analysis Goldman had provided did not impact its recommendation in favor of
the Merger. The Preliminary Proxy was revised to include a disclosure addressing the
share count error.
On October 14, 2014, after the Board had reaffirmed its approval of the Merger,
Vista was informed about the share count error when TIBCO’s counsel told Vista’s
counsel that the equity value in the Preliminary Proxy should be reduced by $100 million.
Vista was confused, as it believed that it had agreed to pay $4.311 billion, replying that it
“cannot reconcile this.” 18 The next morning, on October 15, 2014, Vista forwarded to
Goldman “the email that [Vista] used for the calculation of equity value” in connection
with its Final Bid: a September 26, 2014 email from Goldman to Vista attaching the
Final Cap Table, which included the erroneous share count. 19 Goldman allegedly never
told the Board that Vista had admitted relying on the inaccurate capitalization data when
18
Id. ¶ 113.
19
Id.
21
preparing its Final Bid. 20 James Ford, COO of Vista, testified in connection with the
motion for a preliminary injunction that once he realized the windfall Vista was about to
get as a result of the change in share count—which made the deal cheaper and put Vista’s
expected returns above its hurdle rate—he felt “pleasure.” 21
L. The Share Count Error Becomes Public
On October 16, 2014, TIBCO filed the Preliminary Proxy, which disclosed
information about the share count error in the “Background of the Merger” section. It
also disclosed that, based on the accurate share count, the $24 per share consideration
implied an enterprise value of approximately $4.2 billion, or approximately $100 million
less than the $4.3 billion that the Company had initially announced. 22 The financial press
quickly picked up on this issue and remarked on the magnitude of the reduction in equity
value arising from the share count error, the minimal disclosure in the Preliminary Proxy
regarding the circumstances surrounding the error, and the absence of any indication that
TIBCO intended to pursue remedies to recover the lost $100 million for stockholders.
20
Id. ¶¶ 114, 119.
21
Id. ¶ 122.
22
See TIBCO Software Inc., Preliminary Proxy Statement (Schedule 14/A), at 37-38
(Oct. 16, 2014). I take judicial notice of the contents of the Preliminary Proxy, which are
not subject to reasonable dispute. See, e.g., In Re Santa Fe Pac. Corp. S’holder Litig.,
669 A.2d 59, 70 n.9 (Del. 1995) (“Despite the fact that a SEC filing may constitute
hearsay with respect to the truth of the matters asserted therein, courts may consult these
documents to ascertain facts appropriate for judicial notice under D.R.E. 201.”).
22
M. The Board Further Considers the Share Count Error
On October 23, 2014, the Board met telephonically to further discuss the share
count error. Special Committee member West stated that, at the time of the October 23
meeting, “[t]here wasn’t certainty about how the error had occurred.” 23 According to the
Complaint, no member of the Board ever asked Goldman (i) how the share count error
was made; (ii) whether it was Goldman’s fault or not; (iii) whether Goldman had
discussed with Vista the overstated share count, or its implication for the Merger’s terms;
or (iv) whether Vista should or would pay the full $4.244 billion that the Board had
thought it had secured for stockholders. 24
Plaintiff alleges that Goldman never informed the Board that, over a week earlier
on October 15, 2014, Vista had acknowledged that the inaccurate share count data was
built into its Final Bid, and that the absence of this information is confirmed by the
minutes of the October 23 Board meeting, which state that “it was still unknown if either
Vista or Sponsor B used an incorrect share count in arriving at their per share bids.” 25
Special Committee member West testified that the lack of this information was a
motivating factor for deciding not to challenge Vista on the aggregate purchase price,
saying: “One of [the options] was to go back to Vista . . . with [the] context [of] not
really knowing what Vista and/or [Sponsor B] may or may not have done in terms of
23
Compl. ¶ 117
24
Id. ¶ 118
25
Id. ¶ 119.
23
negotiation and not knowing what Goldman Sachs said . . . . It was unclear to us who
used what data, and so at that point – that’s the starting point for us.” 26
The Board did not learn that Vista had relied on the erroneous share count, and
that Goldman knew that Vista had relied on the erroneous share count, until this litigation
was relatively advanced. Specifically, in its brief opposing plaintiff’s motion for a
preliminary injunction, the Board wrote that “Goldman apparently also discussed the
issue with Vista, which had apparently relied upon the” inaccurate share count. 27 At oral
argument on that motion, the Board’s counsel confirmed that the Board only learned the
truth about Vista’s admitted reliance during the litigation. 28
On October 29, 2014, TIBCO scheduled a December 3, 2014 special meeting for
stockholders to consider the Merger. The stockholders approved the Merger at that
meeting, and the Merger closed on December 5, 2014. 29
N. Goldman’s Transaction Fee
Goldman was paid a total of $47.4 million for its services to TIBCO, about 99% of
which ($46.9 million) was contingent on the closing of the Merger. Goldman’s fee was
1% of the “aggregate consideration” for any transaction where common stockholders
received up to $24.50 per share (with a higher-valued transaction resulting in a greater
percentage fee). “Aggregate consideration” was defined in Goldman’s Engagement
26
Id. ¶ 120.
27
Id. ¶ 121.
28
Tr. of Oral Arg. 76 (Nov 21, 2014).
29
Compl. ¶¶ 14, 123.
24
Letter as: “[i]n the case of the sale, exchange or purchase of the Company’s equity
securities, the total consideration paid for such securities (including amounts paid to
holders of options, warrants and convertible securities, net of the exercise price
thereof).” 30 Goldman’s $47.4 million dollar fee thus was calculated based on an
aggregate consideration of $4.74 billion dollars, which included the $600 million
principal amount of TIBCO 2.25% Convertible Senior Notes.
Plaintiff contends that Goldman should not have been entitled to any fee on the
amount of the convertible notes because (i) Vista did not agree to purchase the
convertible notes as part of the Merger, and thus no consideration was paid to the
convertible noteholders in the Merger, and (ii) in any event, Goldman was only entitled to
a fee on 1% of that amount “net of the exercise price thereof,” and no noteholder received
compensation exceeding the exercise price of the notes. 31 Plaintiff further contends that
Vista shared this understanding because, after obtaining the relevant language from the
Engagement Letter and updating its financial model to reflect the information from the
Engagement Letter, Vista accounted for no payment to Goldman related to the $600
million in convertible notes. 32 Vista did not challenge Goldman’s inclusion of the value
of the convertible notes, however, in its final calculation of its fee.
30
Id. ¶ 128.
31
Id. ¶¶ 130-131.
32
Id. ¶ 134.
25
O. Procedural History
On October 6, 2014, the first of seven putative class action lawsuits challenging
the Merger was filed in this Court. On November 5, 2014, plaintiff filed his initial
complaint seeking to enjoin the closing of the Merger until the Merger Agreement was
reformed to reflect an additional $100 million in consideration for the equity of TIBCO.
Plaintiff also asserted, among other claims, a breach of fiduciary duty claim against the
Board for failing to try to capture the $100 million for TIBCO’s stockholders, and aiding
and abetting claims against Vista and Goldman. On November 8, 2014, I granted
plaintiff’s motion for consolidation and appointment as lead counsel, and his motion for
expedited proceedings.
On November 16, 2014, plaintiff filed an amended complaint, which added
TIBCO as a defendant solely as a necessary party for the reformation claim, and added
unjust enrichment claims against Vista and Goldman. On November 21, 2014, I heard
the motion for a preliminary injunction, which was denied on November 25, 2014.
On March 10, 2015, plaintiff filed the Verified Second Amended Class Action
Complaint (as defined above, the “Complaint”). In April 2015, the defendants filed
motions to dismiss. On the day of argument, July 23, 2015, plaintiff voluntarily
dismissed his aiding and abetting claim against Vista (Count III).
II. LEGAL ANALYSIS
With the voluntary dismissal of Count III, six claims remain that are the subject of
defendants’ motions to dismiss: (1) reformation of the Merger Agreement (Count I); (2)
breach of fiduciary duty against the Director Defendants (Count II); (3) aiding and
26
abetting against Goldman (Count IV); (4) professional malpractice and professional
negligence against Goldman (Count V); (5) unjust enrichment against Vista (Count VI);
and (6) unjust enrichment against Goldman (Count VII).
A. Legal Standard
Under Court of Chancery Rule 12(b)(6), a motion to dismiss for failure to state a
claim must be denied “unless the plaintiff would not be entitled to recover under any
reasonably conceivable set of circumstances.” 33 “In determining whether a pleading
meets this minimal standard, this Court draws all reasonable inferences in the plaintiff’s
favor, accepts all well-pleaded factual allegations as true, and even accepts ‘vague
allegations in the Complaint as ‘well pleaded’ if they provide the defendant notice of the
claim.’” 34
For Count I, which alleges the existence of a mutual mistake as the basis for
reformation of the Merger Agreement, Court of Chancery Rule 9(b) is implicated. It
requires that “the circumstances constituting . . . mistake shall be stated with
particularity.” In the context of a reformation claim, Rule 9(b) requires that “the facts
upon which a plaintiff relies in pleading reformation must be set forth with at least some
particularity in order to put the defendant on notice of what is charged against him, but
33
Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535
(Del. 2011); see also Winshall v. Viacom Int’l., Inc., 76 A.3d 808, 813 n.12 (Del. 2013).
34
Seinfeld v. Slager, 2012 WL 2501105, at *2 (Del. Ch. June 29, 2012) (quoting Cent.
Mortg. Co., 27 A.3d at 536).
27
does not go so far as to require a textbook pleading or the use of specific words or
phrases.” 35
B. Count I: Reformation Due to Mutual Mistake
Count I of the Complaint seeks reformation of the Merger Agreement due to an
alleged mutual mistake. As executed, the Merger Agreement expressly required Vista to
pay $24 per share to acquire the common stock of TIBCO. 36 Based on the share count in
the Cap Rep, which was accurate, this implied an enterprise value for TIBCO of
approximately $4.211 billion and an equity value of approximately $4.144 billion.
According to plaintiff, the Merger Agreement should be reformed “to reflect [an implied
enterprise value] of $4.311 billion and [an implied equity value] of $4.244 billion to
stockholders, which on a per-share basis equals approximately $24.57.” 37
1. The Legal Standard Governing the Reformation Claim
Reformation “is an equitable remedy which emanates from the maxim that equity
treats that as done which ought to have been done.” 38 The Court of Chancery has
35
Duff v. Innovative Discovery LLC, 2012 WL 6096586, at *10 (Del. Ch. Dec. 7, 2012)
(internal citations and quotation marks omitted).
36
Merger Agreement § 2.7(a)(ii) (each TIBCO share will be “automatically converted
into the right to receive cash in an amount equal to $24.00, without interest.”).
37
Compl. ¶ 153. At times, when asserting that Vista intended to pay $4.244 billion for
the equity of TIBCO, plaintiff also asserts that Vista intended to pay an enterprise value
of $4.311 billion. Because one figure mathematically goes hand in hand with the other, I
analyze plaintiff’s contentions by referring only to the equity value for simplicity.
38
Interim Healthcare, Inc. v. Sherion Corp., 2003 WL 22902879, at *6 (Del. Ch. Nov.
19, 2003, revised Dec. 1, 2003) (quoting 27 Williston on Contracts § 70:19 (4th ed.
2003)).
28
equitable jurisdiction to reform the terms of a written contract “in order to express the
‘real agreement’ of the parties involved.” 39 Reformation is not an equitable license for
the Court to write a new contract at the invitation of a party who is unsatisfied with his or
her side of the bargain; rather, it permits the Court to reform a written contract that was
intended to memorialize, but fails to comport with, the parties’ prior agreement. 40 As
Professor Williston explains:
It is not enough that the parties would have come to a certain agreement
had they been aware of the actual facts.
Reformation requires an antecedent agreement, which the written
instrument attempts to express. However, any mistake must have been in
the drafting of the instrument, not in the making of the contract. An
instrument will not be reformed due to a mere misunderstanding of the
facts, or a mistake as to an extrinsic fact which, if known, would probably
have induced the making of a different contract or no contract at all. If
there has been any misunderstanding between the parties, or a
misapprehension by one or both, so that there is no mutuality of assent,
then the parties have not made a contract, and neither will the court do so
for them. 41
39
Cerberus Int’l, Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1151 (Del. 2002) (quoting
Colvocoresses v. W.S. Wasserman Co., 28 A.2d 588, 589 (Del. Ch. 1942)).
40
See Collins v. Burke, 418 A.2d 999, 1002-03 (Del. 1980) (“Reformation is not a
mandate to produce a reasonable result . . . . Rather, it is based on intention.”); see also
In re Estate of Justison, 2005 WL 217035, at *10 (Del. Ch. Jan. 21, 2005) (“The purpose
of reformation is to make an erroneous instrument express correctly the intent of, or the
real agreement between, the parties.”).
41
27 Williston on Contracts § 70:19, quoted in Interim Healthcare, 2003 WL 22902879,
at *7; see also Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990) (quoting 3
Pomeroy’s Equity Jurisprudence, § 870 (5th ed.)) (“Reformation is appropriate, when an
agreement has been made . . . as intended by all the parties interested, but in reducing
such agreement or transaction to writing, . . . through the mistake common to both
parties, . . . the written instrument fails to express the real agreement or transaction.”).
29
A claim for reformation must be proven by clear and convincing evidence. 42 As
the Delaware Supreme Court stated in Cerberus International, Ltd. v. Apollo
Management, L.P., the leading case on reformation under Delaware law, “the plaintiff
must show by clear and convincing evidence that the parties came to a specific prior
understanding that differed materially from the written agreement.” 43 The clear and
convincing evidence standard has been described as requiring “evidence which produces
in the mind of the trier of fact an abiding conviction that the truth of [the] factual
contentions are ‘highly probable.’” 44 This heightened requirement enables the Court to
compare the prior agreement and the executed contract in order to determine “exactly
what terms” need to be reformed. 45 It also “preserve[s] the integrity of written
agreements by making it difficult” to modify executed contracts. 46
The Supreme Court’s decision in Cerberus provides a three-part framework to
analyze a claim for reformation. In Cerberus, a financial sponsor (Apollo) acquired a
target company (MTI) under a merger agreement that set forth a formula reflecting the
42
Cerberus, 794 A.2d at 1152.
43
Id. at 1151-52.
44
Id. at 1151 (quoting In re Rowe, 566 A.2d 1001, 1003 (Del. Jud. 1989)).
45
See Collins, 418 A.2d at 1002 (emphasis added); see also Hob Tea Room v. Miller, 89
A.2d 851, 857 (1952) (“Unless there was a clear understanding with which the formal
contract conflicts, there is, of course, no comparative standard upon which to base a
reformation, and the contract as executed must stand.”).
46
See Joyce v. RCN Corp., 2003 WL 21517864, at *3 (Del. Ch. July 1, 2003); cf. ev3,
Inc. v. Lesh, 103 A.3d 179, 181 n.3 (Del. 2014) (“Delaware courts seek to ensure freedom
of contract and promote clarity in the law in order to facilitate commerce.”).
30
total consideration that MTI stockholders would receive: $65 million, less transaction
costs, and less proceeds from the sale of certain options and warrants. After the
transaction closed, the plaintiffs filed suit and alleged that the executed contract
contained a drafting error that warranted reformation because Apollo and MTI actually
had agreed to a different purchase price: $65 million, less transaction fees, plus the
proceeds from the sale of the options and warrants. According to the Supreme Court, the
plaintiffs would need to prove three facts (each by clear and convincing evidence) to
justify reformation of the purchase price under the doctrine of mutual mistake: “(i) MTI
thought that the merger agreement gave MTI’s stockholders the proceeds of the options
and warrants; (ii) . . . Apollo was also similarly mistaken . . .; and (iii) that MTI and
Apollo had specifically agreed that the proceeds of the options and warrants would go to
MTI’s stockholders.” 47
Applying this analytical framework, to prevail on Count I, plaintiff here must
demonstrate all three of the following facts: (i) that Vista thought that the Merger would
be consummated at an aggregate equity value of $4.244 billion; (ii) that TIBCO also
thought that the Merger would be consummated at an aggregate equity value of $4.244
billion; and (iii) that Vista and TIBCO had specifically agreed before signing the Merger
Agreement that the Merger would be consummated at an aggregate equity value of
$4.244 billion. Given that the current procedural posture is a motion to dismiss, which
implicates Court of Chancery Rules 9(b) and 12(b), plaintiff’s burden on this motion is to
47
Cerberus, 794 A.2d at 1152.
31
allege particularized facts concerning the circumstances of a mutual mistake from which
it is reasonably conceivable that plaintiff would be able to establish each of these
elements by clear and convincing evidence. 48
2. The Findings in the PI Opinion
In the PI Opinion, I found that plaintiff had demonstrated a reasonable probability
that he could successfully prove each the first two elements of the Cerberus test, but not
the third element. Specifically, as to the first two elements, I found that plaintiff had
shown both “a reasonable probability that he could prove, by clear and convincing
evidence, that Vista mistakenly believed it would pay $4.244 billion in total to acquire
the equity of TIBCO in the Merger” 49 and “a reasonable probability of success in
establishing, by clear and convincing evidence, that TIBCO mistakenly believed that
Vista would pay $4.244 billion in total to acquire the equity of TIBCO in the Merger.” 50
48
See, e.g., Pulieri v. Boardwalk Props., LLC, 2015 WL 691449, at *5 (Del. Ch. Feb. 18,
2015) (on motion to dismiss claim for specific performance, also subject to “clear and
convincing evidence” burden of proof, “[t]he legal standard . . . [is] whether it
is reasonably conceivable that Sunview could establish a right to specific performance
by clear and convincing evidence”); see also Pharmathene, Inc. v. Siga Techs., Inc., 2008
WL 151855, at *15 (“[I]t is reasonably conceivable that PharmAthene could show the
LATS contains all of the material and essential terms to be incorporated into the final
license agreement. For essentially the same reasons, I consider it conceivable that
PharmAthene also could establish that proposition by clear and convincing evidence [.]”).
49
In re TIBCO Software Inc. S’holders Litig., 2014 WL 6674444, at *17 (Del. Ch. Nov.
25, 2014).
50
Id.32
The third element is where plaintiff came up short at the preliminary injunction
phase of this case. Because this element remains the heart of the dispute on the present
motion, I set forth below the analysis in the PI Opinion on this element to frame the issue:
Despite the evidence reflecting that Vista and TIBCO both
mistakenly believed before signing the Merger Agreement that Vista would
pay $4.244 billion in total to acquire the equity of TIBCO, Plaintiff has not,
in my opinion, demonstrated a reasonable probability that he could prove
by clear and convincing evidence that Vista and TIBCO had specifically
agreed that the Merger would be at an aggregate equity value of $4.244
billion. In other words, Plaintiff has not shown a reasonable probability of
proving, by clear and convincing evidence, that the Merger Agreement does
not accurately reflect the parties’ meeting of the minds on the essential
economic term of the Merger: a deal at $24.00 per share.
To the contrary, key evidence from September 26 and 27 strongly
demonstrates that what Vista ultimately offered and what TIBCO
ultimately accepted was expressed in terms of dollars per share and not in
terms of an aggregate equity value. The three documents that evidence
their agreement to a transaction based on a per-share price are (1) Vista’s
September 26 bid letter conveying the $24.00 per share offer, (2) the
September 27 minutes reflecting the Board’s acceptance of the $24.00 per
share offer, and (3) the Merger Agreement Vista and TIBCO executed on
September 27, which sets forth the consideration to be received by TIBCO
stockholders as $24.00 per share. All of these documents reflect an
agreement to a transaction based on a per-share figure, and not based on an
aggregate equity value. This per-share agreement is consistent with the
way in which Goldman, on behalf of TIBCO, was conducting the auction:
on a per-share basis. Based on the preliminary record, at no point in time
did Vista offer a specific aggregate equity value, and at no point in time did
the Board accept a specific aggregate equity value.
Instead, the sale process reflects that Vista and TIBCO understood
that the number of fully diluted shares to be acquired in a transaction, and
thus the aggregate equity value, was a bit of a moving target. For example,
the fact that Goldman had circulated different cap tables for the Company
on August 29, on September 21, and on September 26, demonstrates that
Vista and TIBCO understood that, until there was a definitive agreement,
the number of fully diluted shares was changing, even if only modestly.
Indeed, the Merger Agreement reflects that the parties recognized that the
number of fully diluted shares might further change between signing and
33
closing. Specifically, the Merger Agreement affords Vista a termination
right if any inaccuracies in the Cap Rep at closing would increase Vista’s
total acquisition cost (calculated pursuant to the terms of the Merger
Agreement) by more than $10 million.
Notably, the Merger Agreement does not provide that the
consideration of $24.00 per share would change in proportion to any
increase in the share count after signing. Thus, it is difficult to see how
Vista and TIBCO could be said to have specifically agreed to a fixed
aggregate equity value of $4.244 billion, as Plaintiff claims, when they
agreed in the Merger Agreement that the aggregate equity value could
change.
Vista argues that, rather than specifically agreeing on an aggregate
equity value, Vista and TIBCO agreed to allocate the risk of the Merger’s
aggregate equity value through the representations and warranties, closing
conditions, and termination rights set forth in the Merger Agreement. I
agree. “Merger contracts are heavily negotiated and cover a large number
of specific risks explicitly.” Contractual representations and warranties
“serve [this] important risk allocation function.” Here, through the Cap
Rep and Vista’s corresponding termination right, the parties did just that in
the Merger Agreement with respect to the aggregate equity value in the
Merger. TIBCO also disclosed this concept to its stockholders in the proxy
statement.
*****
In sum, on the preliminary record before me, Plaintiff has failed to
show a reasonable probability that he could prove, by clear and convincing
evidence, that there was a specific agreement between Vista and TIBCO for
$4.244 billion in aggregate equity value. The Merger Agreement
accurately reflects, on this record, the meeting of the minds on the essential
economic term of the Merger: $24.00 per share. 51
51
Id. at *17-19.
34
3. The Parties’ Contentions
Vista, arguing on behalf of all defendants for Count I, advances two theories for
dismissal of the reformation claim. The first theory is premised on standing. 52 The
second theory concerns the sufficiency of the allegations to state a claim for reformation.
Because I resolve this motion based on the sufficiency of the allegations for the
reformation claim, I do not address Vista’s standing arguments.
Vista does not dispute the sufficiency of the allegations of the Complaint with
respect to the first two of the three elements of the reformation claim. That is, Vista does
not dispute that the Complaint sufficiently alleges facts demonstrating that, at the time the
Merger Agreement was signed, (i) Vista thought that the Merger would be consummated
at an aggregate equity value of $4.244 billion, and (ii) TIBCO had the same mistaken
belief. 53 Vista argues instead that Count I is “facially flawed because it fails to plead
52
Vista argues that the reformation claim must be dismissed because it is derivative and
because plaintiff failed to make a demand on the Board. Vista argues in the alternative
that, even if the claim is direct, it must be dismissed because plaintiff represents a class of
third-party beneficiaries to the Merger, whose rights are specifically disclaimed by the
Merger Agreement.
53
The allegations as to these two elements in Complaint are substantially the same as the
record that was before the Court at the time of the PI Opinion. Thus, if these elements
had been contested, I would hold for the same reasons explained in the PI Opinion that
the allegations concerning these two elements are sufficient to survive a motion to
dismiss. See, e.g., McMillan v. Intercargo Corp., 768 A.2d 492, 507 n.67 (when
preliminary injunction motion “was decided on a record identical to that [the Court is]
permitted to consider” on motion for judgment on the pleadings, the Court “need not
revisit [the] examination of the merits other than to indicate [its] agreement with [the]
conclusion”); In Re Wheelabrator Techs., Inc. S’holders Litig., 1992 WL 212595, at *3
(Del. Ch. Sep. 1, 1992) (where record had not changed since the court decided that a
disclosure claim was without merit on a motion for preliminary injunction, court relied on
its prior analysis in dismissing the same claim on a 12(b)(6) motion).
35
facts sufficient to establish that Vista and TIBCO had specifically agreed before signing
the Merger Agreement that the merger would be consummated at an aggregate equity
value of $4.244 billion.” 54 According to Vista, plaintiff cannot plead such facts “because
the Merger Agreement accurately reflects that the only agreement ever reached regarding
the consideration to be paid to TIBCO’s stockholders—$24.00 per share.” 55
Plaintiff responds that “the Complaint sufficiently pleads that the parties had an
agreement to complete a transaction at [an enterprise value of $4.3 billion] and [an equity
value of $4.244 billion] and, due to a mutual mistake regarding TIBCO’s share count, the
Merger Agreement did not accurately capture those material terms of the parties’
intended agreement.” 56 More specifically, plaintiff contends there are nine reasons the
Complaint sufficiently alleges the existence of an antecedent agreement:
1. When Vista made its Final Bid, “it intended to offer and believed it was
conveying to the Board an offer to pay” an equity value of $4.244
billion, “even if it was articulated on a per-share basis.”
2. Vista relied on the mistaken share count in the Final Cap Table in
articulating its Final Bid on a per-share basis.
3. Vista offered and expected to pay $4.244 billion to buy TIBCO in its
entirety.
4. Vista agreed in its Equity Commitment Letter to provide $4.244 billion
to the TIBCO stockholders.
54
Vista’s Op. Br. 21.
55
Id.56
Pl.’s Ans. Br. 40.
36
5. In its Fairness Opinion, Goldman opined on a transaction with an equity
value of $4.244 billion.
6. The Board “accepted the Final Bid,” believing that it was approving an
offer with an equity value of $4.244 billion.
7. The Termination Fee and Parent Liability Cap in the Merger
Agreement were calculated as a percentage of an assumed equity value
of $4.244 billion.
8. After signing the Merger Agreement, defendants described the Merger
internally and to third parties as having and an equity value of $4.244
billion.
9. After they discovered the share count error, defendants were “stunned
that the Merger Agreement did not provide $4.244 billion to TIBCO’s
stockholders.” 57
Although numerous, these nine reasons have one thing in common: none of them pleads
with particularity facts from which it reasonably can be inferred that Vista and TIBCO
had specifically agreed before they signed the Merger Agreement that Vista would pay
anything other than $24 per share to acquire the equity of TIBCO as reflected in the
Merger Agreement.
4. The Complaint Fails to Plead Particularized Facts of an Antecedent
Agreement Inconsistent with the Merger Agreement’s Price Term
Plaintiffs’ nine reasons fall into essentially four categories: (1) evidence of Vista’s
state of mind, (2) evidence of TIBCO’s state of mind, (3) the significance of the
Termination Fee and Liability Cap in the Merger Agreement, and (4) statements that
were made about the Merger Agreement after the fact. I address each category in turn.
57
Id. at 3-4, 41-50.
37
a. Contentions 1-4: Vista’s State of Mind
The first four contentions each concern Vista’s state of mind in making its per-
share offer, which plaintiff contends was based on an inaccurate conception of the
aggregate value Vista expected to pay to acquire TIBCO. These allegations go to show
that Vista made a mistake about how much Vista thought it was bidding and thus provide
evidence of the first of the three elements necessary for plaintiff to establish a claim for
reformation, i.e., that Vista thought that the Merger would be consummated at an
aggregate equity value of $4.244 billion. But these allegations do not demonstrate the
existence of a prior understanding between Vista and TIBCO.
Plaintiff alleges, for example, that Vista relied on the inaccurate share count in the
Final Cap Table in articulating its Final Bid, meaning that Vista divided the aggregate
amount that it intended to pay for the equity ($4.244 billion) by an inaccurate number of
shares derived from the Final Cap Table (176.8 million) to determine its Final Bid ($24
per share). Given the Complaint’s allegations concerning the methodology Vista used to
calculate its per-share bid and how Vista adjusted its per-share bid in reaction to the
discovery of the LTIP share count error just before submitting its Final Bid, it is
reasonably inferable that Vista based its Final Bid on an aggregate value of $4.244 billion
divided by an inaccurate share count. But even giving full credit to these allegations,
they do not support the existence of a prior agreement between Vista and TIBCO that
the price to acquire the equity of TIBCO was $4.244 billion, or anything other than $24
per share.
38
Indeed, virtually all the evidence plaintiff cites regarding its first four contentions
was internal to Vista and never communicated to TIBCO. 58 The one exception is the
Equity Commitment letter, which plaintiff asserts was “incorporated by reference into the
Merger Agreement” in Section 4.11 of that agreement. 59 Plaintiff, however, misconstrues
the plain meaning of this provision and the Equity Commitment Letter.
Section 4.11 of the Merger Agreement states as follows:
As of the date of this Agreement, Parent [Balboa] has delivered to [TIBCO]
true, correct and complete copies of an executed commitment letter, dated
as of the date of this Agreement, between [Balboa] and Guarantor [Vista V]
(the “Equity Commitment Letter”) pursuant to which [Vista V] has
committed, subject to the terms and conditions thereof, to invest in
[Balboa], directly or indirectly, the cash amounts set forth therein for the
purpose of funding up to the aggregate value of the Merger (the “Equity
Financing”). The Equity Commitment Letter provides that (A) [TIBCO] is
an express third party beneficiary thereof in connection with [TIBCO’s]
exercise of its rights under Section 9.8(b); and (B) subject in all respects to
Section 9.8(b), [Balboa] and [Vista V] will not oppose the granting of an
injunction, specific performance or other equitable relief in connection with
the exercise of such third party beneficiary rights. 60
58
Specifically, plaintiff relies on allegations concerning (i) Vista’s internal hurdle rate,
(ii) its calculation of the aggregate reserve price it could offer given its hurdle rate, (iii)
the Vista Committee’s authorization of a bid for TIBCO at that aggregate reserve price,
(iv) Vista’s division of the aggregate reserve price by the erroneous share count to derive
a per-share bid, (v) testimony of Vista’s COO that it expected to pay $4.244 billion to
acquire the equity of TIBCO, and (vi) Vista’s concession that it relied on the Final Cap
Table when articulating its Final Bid on a per-share basis. See Pl.’s Ans. Br. 41-42.
59
Pl.’s Ans. Br. 43; Tr. of Oral Arg. 91-92 (July 23, 2015).
60
Merger Agreement § 4.11. Section 9.8(b) provides, in relevant part, that TIBCO “shall
have the right to an injunction, specific performance or other equitable remedies in
connection with enforcing [Balboa’s] and [Merger Sub’s] obligations to consummate the
Merger and cause the Equity Financing to be funded to fund the Merger (including to
cause [Balboa] to enforce the obligations of [Vista V] under the Equity Commitment
Letter in order to cause the Equity Financing to be timely completed in accordance with
39
The Equity Commitment Letter provides that Vista V has committed to contribute to
Balboa “an aggregate amount up to $4,859,000,000” in cash. 61 The representation in
Section 4.11 of the Merger Agreement says, in essence, that there is an agreement
between Vista V and its subsidiary, Balboa, to provide enough cash (up to $4.859 billion)
to close the Merger, and that TIBCO is an express third-party beneficiary of that
agreement entitled to enforce its rights against both Balboa and Vista V to obtain that
cash to close the Merger. 62 What the representation in Section 4.11 does not say is that
anything in the Equity Commitment Letter constitutes an agreement between TIBCO and
any Vista entity concerning the amount of consideration to be paid for the equity of
TIBCO. Nor has plaintiff identified any language in the Equity Commitment Letter
reflecting such an agreement.
In discussing Vista’s expectation that it would pay $4.244 billion to acquire the
equity of TIBCO, plaintiff quotes the following passage from Williston: “Legally, for
there to be a mistake, there must be a discrepancy between an offeror’s state of mind and
his offer.” 63 This is merely a necessary—but not a sufficient—condition for pleading a
claim for reformation. Williston also states that “[r]eformation requires an antecedent
and subject to the terms and conditions set forth in the Equity Commitment Letter).” Id.
§ 9.8(b)(i).
61
Nucum Aff. Ex. 7 at TIBCOM00040820 (May 26, 2015). The Equity Commitment
Letter, which is a defined term in the Complaint and is explicitly referred to therein, is
integral to the Complaint. See, e.g., Gerber, 2013 WL 209658, at *1 n.12.
62
Merger Agreement § 4.11.
63
Pl.’s Ans. Br. 41 (quoting 27 Williston on Contracts § 70:5).
40
agreement, which the written instrument attempts to express.” 64 This is the law of
Delaware. As explained above, the Supreme Court in Cerberus specifically held that, in
addition to showing that counter-parties to an agreement shared a mistaken belief, “the
plaintiff must show by clear and convincing evidence that the parties came to a specific
prior understanding that differed materially from the written agreement.” 65 Particularized
allegations of such a “specific prior understanding” are what the Complaint is missing. 66
b. Contentions 5-6: TIBCO’s State of Mind
Plaintiff’s fifth and sixth contentions are that Goldman opined in its Fairness
Opinion that Vista’s Final Bid (stated as $24 per share) equated to an implied equity
value of $4.244 billion in the aggregate, and that the Board accepted that bid believing
that it was approving a transaction that would yield an equity value of $4.244 billion for
TIBCO’s stockholders. Both of these contentions address TIBCO’s state of mind.
Specifically, these allegations provide evidence, as I found preliminarily in the PI
64
27 Williston on Contracts § 70:19.
65
Id. at 1151-52.
66
Plaintiff asks the Court, in essence, to assume there must have been a prior agreement
between the parties on the theory that the determination of a per-share price goes hand-in-
hand with determining what a buyer is willing to pay for a company in the aggregate as a
matter of industry custom (Pl.’s Ans. Br. 44-45 & n.58), citing ASB Allegiance Real
Estate Fund v. Scion Breckenridge Managing Member, LLC, 2012 WL 1869416 (Del.
Ch. May 16, 2012), for the proposition that industry custom should be considered in
deciding a reformation claim. Breckenridge is of no help to plaintiff. In that case, unlike
here, the Court found that terms stated in an email exchange between the parties
constituted “a specific prior contractual understanding that provides the necessary
foundation for reformation.” Id. at *13. The Court applied the established industry
meaning of certain terms simply to construe the email exchange—not to assume the
existence of an antecedent agreement in the absence of any actual evidence of one.
41
Opinion, that TIBCO mistakenly believed that Vista would pay $4.244 billion in total to
acquire the equity of TIBCO in the Merger when it considered Vista’s Final Bid. 67 These
allegations are essentially the flip-side of the plaintiff’s contentions concerning Vista’s
mistaken belief. But for the same reasons discussed above regarding Vista’s state of
mind, these allegations regarding TIBCO’s state of mind do not provide evidence of a
specific prior understanding between Vista and TIBCO that Vista would pay anything
other than $24 per share to acquire the equity of TIBCO.
c. Contention 7: the Termination Fee and Liability Cap
Plaintiff’s seventh contention is that the Termination Fee and Liability Cap in the
Merger Agreement “were undisputably calculated as a percentage of” an implied equity
value of $4.244 billion and, therefore, it would have made no sense to include them in the
Merger Agreement if the parties had intended a transaction that would result in a lower
implied equity value. 68 Plaintiff cites for support minutes from the Board meeting on
October 23, 2014, which note that the Termination Fee and Liability Cap “implied an
enterprise value for the transaction that reflected an overstated capitalization.” 69
Even if one assumes plaintiff has sufficiently alleged a prior understanding
concerning those provisions that is inconsistent with what is stated in the Merger
67
TIBCO, 2014 WL 6674444, at *17.
68
Pl.’s Ans. Br. 45-46.
69
Id. at 45.
42
Agreement, 70 such allegations do not demonstrate a specific prior understanding on the
term for which reformation is sought here, namely the per-share price specified in Section
2.7(a)(ii) of the Merger Agreement. On this issue, plaintiff admits that, with the
exception of the initial nonbinding indication of interest Vista expressed on August 30, 71
Vista only bid on a per-share basis without expressing to TIBCO any assumption about
the number of shares it expected to pay for in conjunction with its bids. 72 Put differently,
plaintiff does not (and cannot) allege that Vista ever submitted a bid for a $4.244 billion
implied equity value. To the contrary, plaintiff acknowledges (as he must) that “Vista’s
Final Bid was necessarily expressed in the ‘per share’ language needed to communicate
with stockholders and the market.” 73
In sum, for me to find a specific prior understanding concerning the price term in
the Merger Agreement, there must have been an offer by Vista to purchase all the TIBCO
shares on the basis of an implied equity value of $4.244 billion, and an acceptance of
such an offer by TIBCO. The Complaint, however, does not allege the existence of any
such offer or acceptance.
70
As I noted in the PI Opinion, plaintiff may have been able to establish that the
Termination Fee and Liability Cap provisions should be reformed based on the fact that
the parties negotiated those two terms as a percentage of an assumed $4.244 billion
equity value, but plaintiff did not seek such relief. TIBCO, 2014 WL 6674444, at *19
n.166.
71
See Compl. ¶ 41 (“Vista’s initial [August 30] proposal included an express assumption
about the approximate number of shares of outstanding common stock and stock-based
awards to be acquired.”).
72
See Compl. ¶¶ 48, 73-74.
73
Pl.’s Ans. Br. 15.
43
d. Contentions 8-9: Post-Agreement Statements by Parties
Plaintiff’s final two contentions concern events occurring after the Merger
Agreement was signed, specifically (1) statements Vista, TIBCO and Goldman made
internally and to third parties before the share count error was discovered reflecting that
they each (mistakenly) understood the implied equity value of the transaction to be
$4.244 billion, 74 and (2) defendants’ reactions after discovering the share count error, in
particular Goldman’s presentation of a revised fairness opinion at a reduced equity value
($4.144 billion) from what Goldman previously had believed ($4.244 billion), and the
Board’s consideration of the same. By definition, neither of these events, which occurred
after the Merger Agreement was signed, provides evidence of an understanding reached
before the Merger Agreement was signed. The statements Vista, TIBCO and Goldman
made before the share count error was discovered concerning the value of the transaction
simply provide further evidence along the lines discussed above that each of the
defendants held a mistaken belief concerning the equity value implied by Vista’s Final
Bid of $24 per share.
Focusing on events occurring after the share count error was discovered, plaintiff
argues that “[i]f the Merger Agreement did not contain a reformable mistake altering the
effect of the parties [sic] intended agreement, Goldman would not have needed to redo its
74
The statements to third parties that plaintiff references consist of Vista’s statements to
rating agencies and lending sources that it would be acquiring TIBCO for “$4.3 bn.,”
Goldman’s September 29, 2014 “case study” describing the Merger as having a $4.244
equity value, and the joint press release that Vista and TIBCO issued to announce the
transaction, describing it as a $4.3 billion deal. Pl.’s Ans. Br. 46.
44
analysis or opine that the [Merger] was fair.” 75 This is a non sequitur. The legal standard
for establishing a claim of reformation is exacting and has no bearing on whether or not it
would be prudent for a Board and its financial advisor to revisit their analysis of a
transaction after discovering that one of their assumptions was mistaken. Indeed, it
would have been irresponsible for them not to undertake that inquiry.
*****
Taking all nine of the above contentions into account, plaintiff asserts that the
facts here “are very similar” to those that caused the Supreme Court in Cerberus to find
triable issues that could sustain a claim for reformation. 76 I disagree. In Cerberus, the
Court identified evidence of an actual prior understanding between the parties on the
specific deal term for which reformation was sought (i.e., to reform a merger agreement
so that the selling stockholders would receive the proceeds from certain options and
warrants). Specifically, the trial record in Cerberus contained evidence that the seller’s
CEO had stated in writing before signing the merger agreement that “having the proceeds
from the options and warrants go to MTI’s stockholders was a condition to further
negotiations,” to which buyer’s CEO “responded in his handwritten note on that writing:
‘This looks fine.’” 77 The Supreme Court went on to explain that “[a]bsent any evidence
that this term was eliminated in the negotiation (and there is none on this record), it is
75
Pl.’s Ans. Br. 47.
76
Id. at 49.
77
Cerberus, 794 A.2d at 1153.
45
certainly a permissible inference that the parties had a prior agreement relative to the
proceeds from the options and warrants.” 78
Here, despite having the benefit of discovery, plaintiff has failed to identify any
similar evidence of a specific prior understanding inconsistent with the price term in the
Merger Agreement. To repeat, the Complaint is devoid of any allegation that Vista
specifically offered to pay $4.244 billion (or any other aggregate amount) for the equity
of TIBCO or that TIBCO accepted any offer expressed in terms of an aggregate value.
Instead, as plaintiff admits, Vista’s Final Bid was expressed in terms of a per-share price
of $24 unaccompanied by any express assumption about the implied equity value of that
bid. The final Merger Agreement accurately reflected the per-share price Vista offered
and that TIBCO accepted, and accurately reflected (in the Cap Rep) the number of
TIBCO’s shares outstanding on a fully diluted basis.
The first sentence of the Cerberus decision framed the issue to be analyzed as one
“based upon an alleged mistake of fact in the drafting” of a merger agreement. 79 In
recognition of the need for caution before a court will step in to modify the unambiguous
terms of a contract, one negotiated here by highly sophisticated parties, the Supreme
Court articulated a strict three-part analysis requiring proof of a specific prior
understanding by clear and convincing evidence. This stringent test is consonant with
substantial Delaware authority recognizing that reformation is only available when there
78
Id.79
Id. at 1143.
46
has been a “mistake” in reducing a specific agreement of the parties to writing. 80
Although I am sympathetic to plaintiff’s position given the apparent willingness of Vista
to spend an additional $100 million to acquire the equity of TIBCO, the bottom line fact
remains that plaintiff has failed to allege, as he must to sustain a claim for reformation,
facts demonstrating the existence of an antecedent agreement inconsistent with the price
term of the Merger Agreement. Accordingly, Count I fails to state a claim for relief.
C. Count II: Breach of Fiduciary Duty against the Director Defendants
Count II of the Complaint asserts that the Director Defendants breached their
fiduciary duties to TIBCO by failing to correct, or even to approach Vista in an attempt to
correct, the share count error once it was discovered, and by failing to adequately inform
themselves in the wake of this discovery. Plaintiff argues that these failures violated the
Director Defendants’ duty under Revlon to obtain the highest value reasonably obtainable
for the Company in a change of control transaction.
In Malpiede v. Towson, the Delaware Supreme Court explained that enhanced
scrutiny under Revlon does not change the nature of the fiduciary duties owed by
directors:
80
See Waggoner v. Laster, 581 A.2d 1127, 1135 (Del. 1990) (“[R]eformation is
appropriate, when an agreement has been made . . . but in reducing such agreement or
transaction to writing . . . the written instrument fails to express the real agreement or
transaction.”) (citation omitted); Interim Healthcare, 2003 WL 22902879, at *7
(“[R]eformation is appropriate when the parties mistakenly believed that the written
instrument properly memorialized their agreement when, in fact, it did not.”); Lions Gate
Entm’t Corp. v. Image Entm’t Inc., 2006 WL 1668051, at *8 (Del. Ch. June 5, 2006)
(“The purpose of reformation is to make an erroneous instrument express correctly the
intent of, or the real agreement between, the parties.”) (citation omitted).
47
Revlon neither creates a new type of fiduciary duty in the sale-of-control
context nor alters the nature of the fiduciary duties that generally apply.
Rather, Revlon emphasizes that the board must perform its fiduciary duties
in the service of a specific objective: maximizing the sale price of the
enterprise. Although the Revlon doctrine imposes enhanced judicial
scrutiny of certain transactions involving a sale of control, it does not
eliminate the requirement that plaintiffs plead sufficient facts to support the
underlying claims for a breach of fiduciary duties in conducting the sale. 81
More recently, in In re Cornerstone Therapeutics Inc., Stockholder Litigation, the
Supreme Court held that where, as here, a plaintiff seeks only monetary damages, the
plaintiff “must plead non-exculpated claims against a director who is protected by an
exculpatory charter provision to survive a motion to dismiss, regardless of the underlying
standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness
standard, or the business judgment rule.” 82
The Director Defendants are exculpated from monetary liability for a breach of the
duty of care under TIBCO’s Certificate of Incorporation. 83 Plaintiff concedes,
furthermore, that the Complaint “does not allege that the Director Defendants were
interested or lacked independence.” 84 Thus, to state a non-exculpated claim for breach of
81
780 A.2d 1075, 1083-84 (Del. 2001).
82
115 A.3d 1173, 1175-76 (Del. 2015).
83
Article 9(a) of TIBCO’s Amended and Restated Certificate of Incorporation states:
“To the fullest extent permitted by the Delaware General Corporation Law as the same
exists or as may hereafter be amended, a director of the Corporation shall not be
personally liable to the Corporation or its stockholders for monetary damages for breach
of fiduciary duty as a director.” Sorrels Aff. Ex. B, Art. 9(a) (Apr. 2, 2015). “The court
may take judicial notice of the certificate in deciding a motion to dismiss.” McPadden v.
Sidhu, 964 A.2d 1262, 1273 n.28 (Del. Ch. 2008).
84
Pl.’s Ans. Br. 67 n. 134.
48
the fiduciary duty of loyalty against the Director Defendants, plaintiff must plead facts
sufficient to demonstrate that that they acted in bad faith.
The standard for demonstrating that disinterested directors acted in bad faith is a
high one. As the Supreme Court held in Lyondell:
Only if [the directors] knowingly and completely failed to undertake their
responsibilities would they breach their duty of loyalty. . . . Instead of
questioning whether disinterested, independent directors did everything that
they (arguably) should have done to obtain the best sale price, the inquiry
should [be] whether those directors utterly failed to attempt to obtain the
best sale price. 85
In so holding, the Supreme Court quoted with approval then Vice-Chancellor Strine’s
observation that “[i]n the transactional context, a very extreme set of facts would seem to
be required to sustain a disloyalty claim premised on the notion that disinterested
directors were intentionally disregarding their duties.” 86 Plaintiff acknowledges the high
bar to pleading bad faith. According to plaintiff, he must at least “show that the
‘fiduciary’s actions were so far beyond the bounds of reasonable judgment that it seems
essentially inexplicable on any ground other than bad faith.’” 87
Plaintiff advances two theories in support of its fiduciary duty claim, specifically,
that (1) “the Board did not even attempt to recover the $100 million in consideration that
Vista had agreed to pay TIBCO,” and (2) the Board “failed to adequately inform itself
85
Lyondell, 970 A.2d at 244.
86
Id. at 243 (quoting In re Lear Corp. S’holder Litig., 967 A.2d 640, 654-55 (Del. Ch.
2008)).
87
Pl.’s Ans. Br. 71 (quoting In re Novell, Inc. S’holder Litig., 2013 WL 322560, *10
(Del. Ch. Jan. 13, 2013) (internal quotations omitted)).
49
about the circumstances of the Share Count Error and what options and strategies it had
to potentially capture some or all of the $100 million.” 88 In my opinion, neither theory
alleges sufficient facts to sustain a duty of loyalty claim for bad faith conduct, but it is
reasonably conceivable that the allegations underlying the second theory would sustain a
duty of care claim for which the Director Defendants would be exculpated but that could
form the predicate breach for an aiding and abetting claim.
As an initial matter, it is plainly incorrect for plaintiff to assert that Vista “had
agreed” to pay the $100 million at issue in this case. The only agreement in front of the
Board was the Merger Agreement, which unambiguously provided for a per-share price
of $24 for a fixed—and accurate—number of TIBCO shares that implied an aggregate
equity value of $4.144 billion. The real question underlying plaintiff’s first theory is
whether the Board’s decision not to engage with Vista in an effort to recover some or all
of the additional $100 million they believed the transaction would yield was so far
beyond the bounds of reasonable judgment as to be inexplicable on any ground other than
bad faith. In my opinion, it was not.
The obvious risk of engaging with Vista to seek to modify the Merger Agreement
was that Vista might have used such an overture as an opportunity to repudiate the $24
per share transaction reflected in the Merger Agreement—one that Goldman had opined
was fair (before and after the share count error was discovered), that the plaintiff himself
88
Pl.’s Ans. Br. 67, 69; see also Compl. ¶ 159.
50
views as a “good outcome,” 89 and that over 96% of TIBCO’s stockholders voted to
approve. 90 Put differently, the difficult decision the Board was confronted with was
whether it was worth putting at risk a binding $24 per share transaction that would yield
$4.144 billion for TIBCO stockholders (about 97.5% of a $4.244 billion equity value) to
try to obtain some or all of an additional $0.57 per share (about 2.5% of such a value).
This risk calculation logically would take into account numerous factors, such as
the Board’s assessment of its likelihood of prevailing on a reformation claim if push
came to shove, as well as dynamics in the industry or the markets at the time (such as the
state of debt markets where Vista was looking to finance part of the transaction) that
might influence Vista’s reaction to an overture from the Board. Even if one viewed the
risk of jeopardizing the transaction on the table by engaging with Vista to be minor, it
was a risk that a reasonable person could not ignore, and the significance of which
reasonable minds could disagree on in good faith. Given these practical realities, and the
absence of any credible argument why the concededly disinterested and independent
members of TIBCO’s Board would be motivated to disregard their fiduciary duties, the
facts pled in the Complaint do not come close in my view to demonstrating that the
89
Pl.’s Ans. Br. 28 n. 7.
90
TIBCO Software Inc., Current Report (Form 8-K/A) (Dec. 5, 2014). The Court may
take judicial notice of the results of the vote reported in TIBCO’s SEC filings because
they are not reasonably subject to dispute. See, e.g., In re Gen. Motors (Hughes)
S’holder Litig., 897 A.2d 162, 170 (Del. 2006) (“it was proper for the Court of Chancery
to take judicial notice of the publicly available fact, reported by GM in a Form 10–Q filed
with the SEC, that a majority of both classes of GM stockholders voted to approve the
Hughes transactions.”).
51
members of the Board intentionally disregarded their duties by failing to renegotiate with
Vista.
Plaintiff’s second line of attack—that the Board failed to adequately inform itself
in the wake of the discovery of the share count error—presents more difficult questions.
Plaintiff alleges, for example, that the Board never considered or explored a reformation
claim and failed to ask Goldman such basic questions as (i) how the share count error
occurred, (ii) whether it was Goldman’s fault or not, (iii) whether Goldman had discussed
the error or its implications with Vista, or (iv) whether Goldman believed Vista should or
would pay the full $4.244 billion the Board believed it had secured for TIBCO’s
stockholders. 91 These allegations are troubling. Given, however, that the Board met
twice after the share count error was discovered to assess and respond to the situation, on
October 11 and 23, including at least once with Goldman, it is not reasonably conceivable
in my judgment that the disinterested and independent members of the Board could be
found to have entirely disregarded their fiduciary duties thereby acting in bad faith or, in
the words of Lyondell, that they “utterly failed to attempt to obtain the best sale price.”
That said, these allegations are sufficient, in my view, to state a claim for a breach of the
Director Defendants’ duty of care.
In the celebrated Disney case, this Court explained that the “fiduciary duty of care
requires that directors of a Delaware corporation ‘use that amount of care which
ordinarily careful and prudent men would use in similar circumstances,’ and ‘consider all
91
Compl. ¶¶ 117-18.
52
material information reasonably available’ in making business decisions, and that
deficiencies in the directors’ process are actionable only if the directors’ actions are
grossly negligent.” 92 This Court has defined gross negligence in the context of a duty of
care claim involving corporate fiduciaries to mean “reckless indifference to or a
deliberate disregard of the stockholders” 93 or actions that are “without the bounds of
reason.” 94 In the context of a motion to dismiss, then-Vice Chancellor Strine explained
that gross negligence “requires the articulation of facts that suggest a wide disparity
between the process the directors used . . . and [the process] which would have been
rational.” 95
Here, accepting the Complaint’s well-pled allegations as true for purposes of this
motion, as I must, they portray a sufficiently wide gulf between what was done and what
one rationally would expect a board to do after discovering a fundamental flaw in a sale
process such that it is reasonably conceivable plaintiff could meet the gross negligence
standard. One rationally would expect, for example, the Board to press Goldman, which
was responsible for negotiating with potential bidders and interacted directly with Vista,
for a complete explanation concerning the circumstances of the share count error (e.g.,
92
In re Walt Disney Co. Deriv. Litig., 907 A.2d 693, 749 (Del. Ch. 2005), aff’d, 906 A.2d
27 (Del. 2006) (internal citations omitted).
93
Rabkin v. Philip A. Hunt Chem. Corp., 547 A.2d 963, 970 (Del. Ch. 1986) (quoting
Allaun v. Consol. Oil Co., 147 A. 257, 261 (Del. Ch. 1929) (internal quotations omitted)).
94
Rabkin, 547 A.2d at 970 (quoting Gimbel v. Signal Companies, Inc., 316 A.2d 599,
615 (Del. Ch. 1974), aff’d, Gimbel v. Signal Companies, Inc., 316 A.2d 619 (Del. 1974)).
95
Guttman v. Huang, 823 A.2d 492, 508 n. 39 (Del. Ch. 2003).
53
what caused it, who was responsible, etc.) and for whatever information it could provide
concerning Vista’s understanding of the share count error. This information logically
would have aided the Board in assessing, with the assistance of its counsel, the
Company’s options vis-à-vis Vista and/or Goldman to secure as much as possible of the
additional $100 million of equity value it thought the transaction would realize.
Armed with a more complete picture of the situation, the Board would have been
better equipped to consider, among other things, the risks of reengaging with Vista, of
pressing a claim against Vista or Goldman, or whether to change its recommendation to
stockholders before the Merger vote. What the disinterested members of the Board
ultimately would do with this information presumably would be a matter of business
judgment, and the failure to seek this information is not indicative of bad faith in my
view for the reasons discussed earlier, 96 but the failure to make such basic inquiries does
raise litigable questions over whether the Board acted in a grossly negligent manner and
thus failed to satisfy its duty of care during the period between the discovery of the share
count error and closing of the Merger. 97
96
See In re Walt Disney Co. Deriv. Litig, 906 A.2d 27, 66 (Del. 2006) (“[t]here is no
basis in policy, precedent or common sense that would justify dismantling the distinction
between gross negligence and bad faith.”); see also id. at 64-65 (“to afford guidance we
address the issue of whether gross negligence (including a failure to inform one’s self of
available material facts), without more, can also constitute bad faith. The answer is
clearly no.”)
97
See, e.g., Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914, 938 (Del. 2003) (“The
Directors of a Delaware corporation have a continuing obligation to discharge their
fiduciary responsibilities, as future circumstances develop, after a merger agreement is
announced.”)
54
In sum, because the members of the Board were concededly disinterested and
independent and the Complaint fails to plead a reasonably conceivable basis for
establishing that they acted in bad faith, and because the Board is exculpated from
liability for a breach of the duty of care under TIBCO’s charter, Count II fails to state a
claim for relief. Given, however, that the allegations of the Complaint would sustain a
duty of care claim against the Director Defendants, I next address plaintiff’s aiding and
abetting claim against Goldman.
D. Count IV: Aiding and Abetting against Goldman
Count IV of the Complaint asserts that Goldman, as the Company’s financial
advisor, aided and abetted the Director Defendants in breaching their fiduciary duties.
“To succeed on a claim for aiding and abetting a breach of fiduciary duty, Plaintiff must
prove: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s duty,
and (3) knowing participation in that breach by the non-fiduciary.” 98 For the reasons
explained previously, plaintiff has adequately alleged a breach of the fiduciary duty of
care that the Director Defendants owed to TIBCO, which this Court has held can form the
predicate for an aiding and abetting claim. 99 Thus, factors (1) and (2) are satisfied and
the analysis of whether Count IV states a claim against Goldman turns on whether the
98
Zimmerman v. Crothall, 62 A.2d 676, 711 (Del. Ch. 2013).
99
In re Rural Metro Corp. S’holders Litig., 88 A.3d 54 (Del. Ch. 2014) appeal docketed,
No. 140, 2015 (Del. argued Sep. 30, 2015) (finding financial advisor liable for aiding and
abetting directors’ breach of the duty of care); see also Houseman v. Sagerman, 2014 WL
1600724, at *8 (Del. Ch. Apr. 16, 2014); Goodwin v. Live Entm’t, Inc., 1999 WL 64265,
at *28 n.22 (Del. Ch. Jan. 25, 1999).
55
Complaint sufficiently alleges that Goldman knowingly participated in the Director
Defendants’ alleged breach.
“To demonstrate the ‘knowing participation’ element of an aiding and abetting
claim, it must be reasonably conceivable from the well-pled allegations that ‘the third
party act[ed] with the knowledge that the conduct advocated or assisted constitute[d] . . .
a breach [of fiduciary duty].’” 100 The requirement of participation can be established if
the alleged aider and abettor “participated in the board’s decisions, conspired with [the]
board, or otherwise caused the board to make the decisions at issue.” 101
Plaintiff asserts that Goldman, with full knowledge of the Director Defendants’
duties to obtain the highest value reasonably attainable for TIBCO’s stockholders, knew
from its participation in the October 11 board meeting that the Board had failed to inform
itself about the share count error because the Board “did not ask Goldman any relevant
questions about how the error occurred or what might be done about it.” 102 Most
significantly, plaintiff specifically alleges that Goldman learned on October 15, through
email correspondence with Vista, that Vista had relied on the erroneous share count in the
Final Cap Table in making its Final Bid, but never informed the Board about this critical
fact. 103 According to the Complaint, the failure to provide this information to the Board
100
Lee v. Pincus, 2014 WL 6066108, at *13 (Del. Ch. Nov. 14, 2014) (quoting Malpiede,
780 A.2d at 1097).
101
Malpiede, 780 A.2d at 1098 (Del. 2001).
102
Pl.’s Ans. Br. 72; see Compl. ¶¶ 108, 118
103
Compl. ¶¶ 113-14, 119.
56
is confirmed by minutes of the October 23 Board meeting, which state “it was still
unknown if either Vista or Sponsor B used an incorrect share count in arriving at their
per share bids.” 104 In my view, these allegations are sufficient to satisfy the knowing
participation element of an aiding and abetting claim.
In Rural Metro, the Court, based on a careful analysis of the aiding and abetting
jurisprudence of this Court dating back over forty years and principles of tort law, held
that if a “third party knows that the board is breaching its duty of care and participates in
the breach by misleading the board or creating the informational vacuum, then the third
party can be liable for aiding and abetting.” 105 Here, plaintiff has pled facts from which,
in my view, it is reasonably conceivable that it could sustain such a claim.
Specifically, through its involvement in the October 11 meeting, during which the
Board allegedly failed to press Goldman for basic information concerning the
circumstances of the share count error, it is reasonably inferable that Goldman, a highly
sophisticated investment bank, knew the Board was not fulfilling its duty of care to
gather all material information reasonably available about the share count error. Most
significantly, having that knowledge and having served as the primary negotiator with
Vista during the bidding process, Goldman then allegedly concealed from the Board a
critical piece of information: that Vista had confirmed that it relied on the erroneous
104
Id. ¶ 119.
105
Rural Metro, 88 A.3d at 97.
57
share information in the Final Cap Table when it made its Final Bid. 106 In my opinion, it
is reasonably conceivable that the alleged failure to disclose this material information to
the Board created an informational vacuum at a critical juncture when the Board was still
assessing its options vis-à-vis Vista or Goldman to secure some or part of the $100
million equity value shortfall. The testimony of TIBCO director West, for example,
suggests that the Board may have pursued a different course in its assessment of the
Company’s options in October 2014 if it had been made aware of this fact. 107
According to plaintiff, an obvious motive for Goldman to conceal this information
was its desire to protect its $47.4 million fee, almost 99% of which was contingent on the
transaction closing. The Complaint further alleges that Goldman was not entitled under
its Engagement Letter to $6 million of this fee amount attributable to TIBCO’s
convertible notes, 108 and that Goldman thus was motivated to curry favor with Vista—
with which Goldman had a close relationship 109—by not throwing sand in the gears of
106
Goldman heavily disputes this assertion, and claims it conveyed this information to
the Board’s counsel. See TIBCO, 2014 WL 6674444, at *11 n.116. On the present
motion, however, I am constrained by the well-pled allegations of the Complaint. Thus,
resolution of this issue must await a more developed factual record.
107
See Compl. ¶ 120.
108
The Complaint alleges that Goldman was not entitled under the terms of its
Engagement Letter to receive 1% of the $600 million face value of the convertible notes
because no consideration was paid to the noteholders in the transaction or, alternatively,
because no noteholder received compensation exceeding the exercise price of the notes.
Compl. ¶¶ 127-35.
109
The Complaint alleges that the co-founders of Vista are both former Goldman
bankers, that seven of Vista’s thirteen principals are former Goldman bankers, that
Goldman advised Vista on a $2 billion acquisition in 2012, and that Preliminary Proxy
58
the transaction so that Vista (as the acquirer of TIBCO) would not object to TIBCO
paying the allegedly inflated $47.4 million fee.
Goldman protests that the contingent nature of its fee cannot demonstrate a motive
to aid and abet a breach of fiduciary duty because banker contingent fees are routine. It is
assuredly common to pay bankers contingent fees, but that does not mean that the
contingent nature of such a fee here (particularly when the level of contingency is 99%)
did not provide Goldman a powerful incentive in the circumstances of this case to refrain
from providing information to the Board that (i) potentially would jeopardize what
Goldman likely perceived to be a “done deal” after the October 11 Board meeting at
which it reaffirmed the Fairness Opinion, or (ii) may have caused the Board to seek a fee
reduction (or forfeiture) from Goldman depending on its role in the share count error.
These allegations, combined with alleged facts concerning the $6 million component of
the fee attributable to the convertible notes and the benefit to Goldman of not acting at
cross-purposes with Vista to secure that component, raise a reasonable inference at this
stage of the proceedings that Goldman was motivated to create an informational vacuum.
Goldman contends that alleging it did not inform the Board that Vista relied on the
Final Cap Table in making its Final Bid does not mean the Board did not infer this
information from other sources, such as a spreadsheet attached to the Equity
disclosed that “Affiliates of Goldman Sachs also may have co-invested with [Vista
affiliates] . . . from time to time and may have invested in limited partnership units of
[Vista] affiliates . . . from time to time and may do so in the future.” Compl. ¶¶ 125-26.
59
Commitment Letter or the joint press release announcing the transaction. 110 At the
motion to dismiss stage, however, it is reasonable to infer that the Board did not make
such an inference, especially given the fact that the minutes of the October 23 Board
meeting show that it was still uncertain about what numbers Vista had relied on. Even if
the Board might have been able to draw such an inference from these or other sources,
moreover, Vista’s admission that it had relied on the incorrect share numbers in the Final
Cap Table—information that allegedly was conveyed exclusively to Goldman—was
information of a qualitatively different character because it would remove any doubt on
the question and foreclose Vista from denying the fact if the Board chose to reengage
with Vista.
*****
In sum, for the reasons explained above, I conclude it is reasonably conceivable
from the facts alleged in the Complaint that Goldman was motivated to and intentionally
created an informational vacuum by failing to disclose material information to the Board
at a critical time when it was evaluating and reconsidering its options concerning whether
it could act to secure some or all of the $100 million in additional equity value that the
110
The spreadsheet showed that Vista calculated a $4.244 billion equity value for the
transaction by multiplying $24 per share by 176,817,153 fully diluted shares outstanding.
Compl. ¶ 84; Pl.’s Mot. for Prelim. Inj. Ex. 21 at GS00011572 (Nov. 17, 2014). The
joint press release stated that the enterprise value of the transaction was approximately
$4.3 billion, which corresponds to a $4.244 equity value. Compl. ¶ 100; Pl.’s Mot. for
Prelim. Inj. Ex. 1 (Nov. 17, 2014).
60
Board mistakenly believed it had obtained when approving the Merger. 111 As such, the
Complaint sufficiently alleges a claim for aiding and abetting the Director Defendants’
duty of care. Accordingly, the motion to dismiss Count IV for failure to state a claim for
relief is denied.
E. Count V: Professional Malpractice against Goldman
Count V of the Complaint asserts that Goldman is liable to a putative class of
TIBCO’s stockholders for professional malpractice and negligence for failing to timely
discover and correct the share count error as part of its financial advisory services.
Plaintiff argues that this claim arises under the law of California, where TIBCO is
headquartered and where the allegedly negligent services were rendered. In particular,
relying on the California Supreme Court’s 1958 decision in Biakanja v. Irving, plaintiff
argues that “the determination of whether a professional owes a duty to third parties not
111
Goldman places substantial reliance on Houseman v. Sagerman for its finding that just
because “KeyBanc [the financial advisor] did not directly furnish information to Mr.
Houseman does not support an inference that KeyBanc knew Mr. Houseman or any other
director was acting uninformedly in evaluating the transaction.” 2014 WL 1600724, at
*9. Houseman is distinguishable for two reasons. First, the alleged failure to provide
information in Houseman was only to a single director, not to the entire board or to the
company itself. See id. (“[L]ack of disclosure of certain facts to Mr. Houseman and to
the Universata stockholders is unavailing, because the Plaintiffs fail to adequately plead
that KeyBanc created an ‘informational vacuum’ assisting the Universata Board in
breaching its duty of care.”). Second, KeyBanc’s engagement in Houseman was far more
limited than Goldman’s in the present case, diminishing the likelihood that it would be as
involved in the bidding process and thus serve as such a critical source of information to
a board. See id. at *2 (engagement limited to “assisting in due diligence and identifying
additional parties that could have an interest in acquiring the Company”), id. at *3
(“KeyBanc did not prepare a written presentation summarizing its work, nor did it present
a formal fairness opinion”) (internal quotation marks and alterations omitted).
61
in privity with the professional ‘is a matter of policy and involves the balance of various
factors,’” which he contends weigh in his favor here. 112
In Biakanja, a notary preparing a will for his client failed to have it properly
attested. As a result, the decedent’s sister inherited only an eighth of the estate instead of
the entire estate to which she would have been entitled had the will been valid. The
California Supreme Court held that the notary was liable to the decedent’s sister, despite
a lack of privity of contract with her. The Court stated that “[t]he determination whether
in a specific case the defendant will be held liable to a third person not in privity is a
matter of policy and involves the balancing of various factors,” which include:
[1] the extent to which the transaction was intended to affect the plaintiff,
[2] the foreseeability of harm to him, [3] the degree of certainty that the
plaintiff suffered injury, [4] the closeness of the connection between the
defendant’s conduct and the injury suffered, [5] the moral blame attached to
the defendant’s conduct, and [6] the policy of preventing future harm. 113
Applying these factors, the Biakanja Court held that, having drafted the will, the
defendant should have foreseen that its faulty execution would harm the decedent’s sister,
and that her inability to inherit the full estate was the direct result of the defendant’s
negligent drafting and unauthorized practice of law. 114 Here, relying on the broadly
stated factors enumerated in Biakanja, plaintiff argues in a single paragraph that
Goldman should be held to account directly to TIBCO’s stockholders because “it was
foreseeable that any miscalculation of the number of shares outstanding when
112
Pl.’s Ans. Br. 78 (quoting Biakanja v. Irving, 49 Cal. 2d 647, 650 (Cal. 1958)).
113
Biakanja, 49 Cal. 2d at 650.
114
Id. at 651.
62
establishing the Merger price would directly reduce the price each stockholder would
receive.” 115
Goldman, which does not object to the application of California law for purposes
of this motion, 116 argues that plaintiff lacks standing to assert a professional malpractice
claim against it because such a claim belongs exclusively to its client which, as stated in
its Engagement Letter, was the Special Committee. Goldman further emphasizes that the
Engagement Letter expressly disclaims that Goldman owed any duties to TIBCO’s
stockholders:
You recognize that Goldman Sachs has been retained to act as financial
advisor to the Special Committee, and our engagement hereunder is not on
behalf of, nor intended to create any relationship with, or duty to, any other
person, including affiliates or stockholders of the Company. 117
As to plaintiff’s reliance on Biakanja, Goldman asserts that later decisions have limited
its application to professionals (like contractors and architects) whose services have
caused physical harm. 118 I consider this issue next.
In 1992, in a thorough reconsideration of the policies animating its earlier decision
in Biakanja, the California Supreme Court held in Bily v. Arthur Young & Co. 119 that an
auditor did not owe a general duty of care to investors of a corporation for which it
115
Pl.’s Ans. Br. 79.
116
See Goldman’s Op. Br. 15 n. 6; Goldman’s Reply Br. 10 n. 9.
117
Miller Aff. Ex. 1 (Engagement Letter) at GS00000006 (Apr. 2, 2015).
118
Tr. of Oral Arg. 177-79 (July 23, 2015).
119
Bily v. Arthur Young & Co., 834 P.2d 745 (Cal. 1992).
63
performed auditing services. The court specifically declined to extend Biakanja’s
foreseeability-based test to “permit all merely foreseeable third party users of audit
reports to sue the auditor on a theory of professional negligence,” limiting the auditor’s
liability under a theory of general negligence to its client. 120 The court referenced one of
its earlier decisions that drew a distinction between physical and nonphysical harm to
eloquently explain the limitations of a foreseeability-based test:
[F]oreseeability . . . is endless because [it], like light, travels indefinitely in
a vacuum. [It] proves too much . . . Although it may set tolerable limits for
most types of physical harm, it provides virtually no limit on liability for
nonphysical harm . . . It is apparent that reliance on foreseeability of injury
alone in finding a duty, and thus a right to recover, is not adequate when the
damages sought are for an intangible injury . . . . 121
The Bily Court cited three central public policy concerns motivating its holding:
(1) exposing auditors to negligence claims “from all foreseeable third parties” would
cause “potential liability out of proportion to fault;” (2) the sophisticated investors,
creditors and others who read and rely on auditors reports could “rely on their own
prudence, diligence and contracting power, as well as other informational tools,” to
protect themselves; and (3) the “dubious benefits of a broad rule of liability” as compared
to a likely increase in cost and decrease in availability services. 122 Significantly, Bily
120
Id. at 761.
121
Id. at 762 (quoting Thing v. La Chusa, 771 P.2d 814, 823 (Cal. 1989)) (internal
quotation marks and alterations omitted).
122
Bily, 834 P.2d at 761, 765, 767.
64
suggested its holding would apply to other professional “suppliers of information and
evaluations:”
Accountants are not unique in their position as suppliers of information and
evaluations for the use and benefit of others. Other professionals, including
attorneys, architects, engineers, title insurers and abstractors, and others
also perform that function. And, like auditors, these professionals may also
face suits by third persons claiming reliance on information and opinions
generated in a professional capacity. 123
Following Bily, California courts have seized on that language to decline to allow
third parties to sue other professional service firms. In 1997, a California intermediate
court quoted that portion of Bily to hold that a law firm was not liable for negligence to a
non-client, stating simply: “We assume, therefore, that the [Bily] court intended its
discussion of liability of third parties to be considered in a case such as the one now
before us.” 124 In 1998, the California Supreme Court applied Bily to find no negligence
liability to third parties for a title insurer. It put the principle more broadly, holding that
“[w]ith rare exceptions, a business entity has no duty to prevent financial loss to others
with whom it deals directly. A fortiori, it has no greater duty to prevent financial losses
to third parties who may be affected by its operations.” 125
The Ninth Circuit has interpreted California law to impose similar limitations on
the application of Biakanja in view of Bily and later decisions. For example, in Glenn K.
Jackson Inc. v. Roe, based on its examination of post-Bily precedents, the Ninth Circuit
123
Id. at 770.
124
B.L.M. v. Sabo & Deitsch, 55 Cal. App. 4th 823, 830 n.3 (Cal. App. 1997).
125
Quelimane Co., Inc. v. Stewart Title Guaranty Co., 960 P.2d 513, 533 (Cal. 1998).
65
affirmed a trial court’s finding that an accountant owed no duty to a third party it had
audited for its client, stating that “the limitations Bily placed on the Biakanja factors
apply widely to those who supply or evaluate information to limit their liability to even
foreseeable third parties who have an interest in their work product.” 126 Eight years later,
the Ninth Circuit similarly declined to find that a firm providing actuarial services owed a
duty of ordinary care to non-clients, stating that “California law sharply limits the duty of
ordinary care imposed on a supplier of information to non-clients.” 127
Plaintiff has not cited any case in which a court has extended the reasoning of
Biakanja to permit a third party to sue a financial advisor for malpractice. The only post-
Bily decisions plaintiff has identified in which courts have sustained claims under
Biakanja (against a general contractor and an architect) both involved physical damage to
property. 128 Relying on an unpublished decision of a California intermediate court,
126
273 F.3d 1192, 1199 (9th Cir. 2001).
127
Paulsen v. CNF Inc., 559 F.3d 1061, 1077 (9th Cir. 2009). The Ninth Circuit
considered the California Supreme Court’s decision in Quelimane, discussed above, as
well as decisions in Cabanos v. Gloodt Assocs., 942 F.Supp. 1295, 1308-10 (E.D. Cal.
1996) (appraiser owed no duty of ordinary care to third party); Sanchez v. Lindsey
Morden Claims Services, Inc., 72 Cal. App. 4th 249 (1999) (insurer-retained claims
adjuster owed no duty to insured); and Soderberg v. McKinney, 44 Cal. App. 4th 1760,
1768 (1996) (“While Bily involved the liability of accountants (or auditors), we see no
reason why its discussion should be limited to that group of professionals.”).
128
See Burch v. Superior Court, 223 Cal. App. 4th 1411 (Cal. 2014) (permitting
homebuyer to sue general contractor for property damage caused by a construction
defect); Beacon Residential Cmty. Ass’n. v. Skidmore, Owings & Merrill LLP, 327 P.3d
850 (Cal. 2014) (permitting homeowners association to sue primary architect for design
defects causing property damage). But see Weseloh Family Ltd. P’ship v. K.L. Wessel
Constr. Co., Inc., 125 Cal. App. 4th 152, 164-73 (Cal. 2004) (applying Bily to find that
66
Goldman argues that the only California decision either party has cited regarding
professional negligence claims against a financial advisor in the merger context
(coincidentally, against Goldman) made clear that such a claim only could be asserted by
the client. 129 That decision, however, did not discuss Biakanja and its progeny or analyze
the question in any meaningful sense. 130
Having carefully reviewed the cited case law, it is my opinion that California law
would not afford TIBCO’s stockholders standing to sue Goldman on a negligence theory
for an economic loss based on the policies articulated in Biakanja over half a century ago.
The post-Bily decisions rendered over the past twenty-three years suggest instead that
liability for professional service firms to third parties under California law tends to be
limited to instances of physical harm or property damage, rather than economic loss.
This is a classic distinction in tort law, where in “situations in which the plaintiff has
neither suffered personal injury nor damage to tangible property . . . American law is
generally opposed to recovery on a negligence theory.” 131 This distinction also was the
engineering firm that designed retaining wall owed no duty to property owner for
property damage).
129
See Carrigan v. Goldman, 2011 WL 4600382, at *3 (Cal. Ct. App. Oct. 6, 2011)
(“complaints regarding . . . [the] performance by Goldman Sachs in its role as financial
advisor . . . for professional malpractice or otherwise” are “not direct claims [that may be
pursued by stockholders] but derivative ones belonging to [Goldman’s client].”).
130
The focus of the Carrigan decision was whether plaintiff had stated a claim against
Goldman for aiding and abetting a breach of fiduciary duty, which the court considered
as a matter of Delaware law.
131
Herbert Bernstein, Civil Liability for Pure Economic Loss Under American Tort Law,
46 Am. J. Comp. L. 111, 112 (1998).
67
starting point for the Bily Court, as it examined Chief Justice Cardozo’s analysis in the
seminal Ultramares case, which “distinguished between liability arising from a ‘physical
force’ and ‘the circulation of a thought or the release of the explosive power resident in
words.’” 132 Bily and the subsequent cases have largely preserved that distinction,
whereby professional service firms have been found liable in the construction context—
when their negligence causes direct harm to person or property—but not when they
provide “a broadly phrased professional opinion based on a necessarily confined
examination of client-provided information” or act as “suppliers of information and
evaluations for the use and benefit of others.” 133 For these reasons, Count V fails to state
a claim for relief under California common law in my opinion.
F. Count VI: Unjust Enrichment against Vista
Count VI of the Complaint asserts that, because Vista paid $100 million less to
acquire the stock of TIBCO than it expected to pay, it was unjustly enriched by that
amount. Vista contends that this claim should be dismissed for several reasons, including
because a contract—the Merger Agreement—comprehensively governs the parties’
relationship in this case. I agree.
The primary case on which plaintiff relies, Great Hill Equity Partners IV, LP v.
SIG Growth Equity, provides a helpful summary of Delaware law on unjust enrichment:
132
Bily, 834 P.2d at 753 (quoting Ultramares Corp. v. Touche, 174 N.E. 441, 445 (N.Y.
1931)).
133
Beacon, 327 P.3d at 860 (quoting Bily, 834 P.2d at 765, 770) (internal quotations
omitted).
68
“Unjust enrichment is defined as the unjust retention of a benefit to the loss
of another, or the retention of money or property of another against the
fundamental principles of equity and good conscience.” It was developed
“as a theory of recovery to remedy the absence of a formal contract.” To
plead a claim for unjust enrichment, a plaintiff must plead “(1) an
enrichment, (2) an impoverishment, (3) a relation between the enrichment
and impoverishment, (4) the absence of justification, and the absence of a
remedy provided by law.”
*****
In evaluating unjust enrichment claims, Courts conduct a threshold inquiry
“as to whether a contract already governs the parties’ relationship.” “If a
contract comprehensively governs the parties’ relationship, then it alone
must provide the measure of the plaintiff’s rights and any claim of unjust
enrichment will be denied.” If the validity of that agreement is challenged,
however, clams of unjust enrichment may survive a motion to dismiss.
Further, this Court has recognized that, “[i]in some situations, . . . both a
breach of contract and an unjust enrichment claim may survive a motion to
dismiss when pled as alternative theories of recovery.” This may be the
case where a plaintiff pleads a right to recovery “not controlled by contract”
or where “it is the [contract], itself, that is the unjust enrichment. 134
Here, a comprehensive agreement indisputably governs the parties’ relationship in
the form of the 87-page Merger Agreement, Section 2.7(a)(ii) of which sets forth the
per-share price to be paid for each outstanding share of TIBCO common stock as of the
effective date of the Merger. There is, perhaps, no better evidence of this than the fact
that the plaintiff’s lead claim in this case is to reform the Merger Agreement to increase
the aggregate purchase price for TIBCO equity by $100 million, or $0.57 per share price.
Plaintiff seeks to avoid the obvious conclusion that a formal contract defines the
parties’ relationship by seizing on the parts of the quote from Great Hill set forth above
stating that an unjust enrichment claim may survive a motion to dismiss even if a
134
2014 WL 6703980, at *27 (Del. Ch. Nov. 26, 2014) (internal citations omitted).
69
comprehensive contract is in place “[i]f the validity of that agreement is challenged” or
“it is the [contract], itself, that is the unjust enrichment.” 135 Assuming, arguendo, that
plaintiff’s claim for reformation constitutes a challenge to the “validity” of the Merger
Agreement, the reformation claim fails to state a claim for relief for the reasons explained
above and, thus, no legally viable challenge to the Merger Agreement remains.
Having been unable to state a legally cognizable claim to reform or otherwise
challenge the price term of the Merger Agreement, plaintiff also has failed to plead an
absence of justification for Vista to expect the terms of the Merger Agreement to be
honored. This would be true even if Vista did have a mistaken belief about how much it
would pay for all of the equity of TIBCO when it signed the Merger Agreement. This
result may seem harsh when considering notions of fairness from a 64,000 foot level, but
either there is a legal basis to reform the Merger Agreement or there is not. Having found
that plaintiff has failed to plead such a basis in this case, the conclusion logically follows
that the comprehensive contract that governs the parties’ relationship here must alone
determine the measure of plaintiff’s rights in this case. For these reasons, Count VI fails
to state a claim for relief.
135
This latter phrase comes from McPadden v. Sidhu, 964 A.2d 1262, 1276 (Del. Ch.
2008). There, a stockholder asserted claims for breach of fiduciary duty and unjust
enrichment challenging the corporation’s (i2) sale of a subsidiary to a former officer
(Dubreville). The case is inapposite because the Court expressly did not decide whether
a binding contract governed the subject matter of the unjust enrichment claim. Id. (“even
if there is a contract between Dubreville and i2, which I do not decide . . .”).
70
G. Count VII: Unjust Enrichment against Goldman
Count VII of the Complaint asserts that Goldman was unjustly enriched by at least
$6 million on the theory that convertible notes of TIBCO having a face value of $600
million should not have been included as part of the “aggregate consideration” on which
Goldman was entitled to a 1% transaction fee under its Engagement Letter. Application
of the same principles of unjust enrichment stated above dictate that this claim be
dismissed because it is undisputed that a contract signed by Goldman, TIBCO and the
Special Committee—the Engagement Letter—governs this dispute. Indeed, the
Complaint specifically alleges that Goldman’s enrichment stems from the fact that its fee
was “calculated . . . inconsistent with the terms of the Engagement Letter.” 136 Thus,
whatever the merits may be of plaintiff’s contention that the convertible notes should not
have been included in the calculation of Goldman’s transaction fee, that claim is entirely
controlled by the meaning of the contractual terms set forth in the Engagement Letter.
For this reason, Count VII fails to state a claim for relief.
IV. CONCLUSION
For the foregoing reasons, defendants’ various motions to dismiss Counts I, II, V,
VI and VII of the Complaint for failure to state a claim for relief are granted, and
Goldman’s motion to dismiss Count IV is denied.
IT IS SO ORDERED.
136
Compl. ¶ 186.
71