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From Securities Regulation Daily, November 26, 2018

Company’s delisting, award timing bolster breach-of-duty case

By Anne Sherry, J.D.

A Tangoe, Inc. stockholder adequately pleaded that he and similarly situated class members were not fully informed when they tendered their shares at a steep discount in the face of the stock’s impending SEC deregistration. Corwin cleansing therefore did not apply, the Delaware Court of Chancery ruled, and the plaintiff’s allegations about the timing of equity awards stated a claim for a non-exculpated breach of the directors’ duty of loyalty (In re Tangoe, Inc. Stockholders Litigation, November 20, 2018, Slights, J.).

Tangoe woes. Tangoe was a Delaware corporation that provided IT and telecom software and services. In March 2016, the company announced that the SEC had detected false statements in its financials and that it would have to restate its financials for 2013, 2014, and the first three quarters of 2015. The next day, a private equity firm, Marlin, acquired 3 million shares of Tangoe’s stock, and soon it had accumulated a 10-percent stake. The company’s delay in completing its restatement caused Nasdaq to delist the stock and the SEC to threaten deregistration. With a restatement looking unlikely, and the company barred by SEC rules from making equity awards while it was pending, the board shopped the company for sale and created a new incentive plan for the directors that would be triggered on a change of control.

Marlin emerged as the most likely buyer, but its offer dropped from $9 per share to $6.50 after the stock was delisted. A majority of shareholders tendered their shares at the recommended $6.50, which represented "a negative premium against every conceivable benchmark prior to Tangoe’s delisting," the court wrote. The complaint alleges that the directors breached their fiduciary duties by failing to maximize stockholder value in the sale and failing to disclose to stockholders all information material to the decision to tender their shares.

The directors retorted that Corwin cleansed the transaction because it was approved by a majority of disinterested, fully informed, and uncoerced stockholders, and that alternatively the plaintiff failed to plead a non-exculpated claim for breach of the duty of loyalty. Both arguments failed at the pleading stage.

Business judgment presumption inapplicable. As to the Corwin argument, the plaintiff adequately pleaded that the stockholder vote was not fully informed. First, although the law does not require audited financials, it was reasonably conceivable under the circumstances that a reasonable stockholder would have deemed them important when deciding whether to approve the transaction. The "information vacuum," compounded by the company’s failure to file quarterly reports or hold annual stockholder meetings, supported an inference that the approval was not fully informed. Second, stockholders were left in the dark as to whether, much less when, the company would complete its restatement.

The court did not reach the question of whether the stockholders’ approval was the product of coercion, but hinted at a belief that it was. In a footnote, it cited two cases, including one with the same lead plaintiff as the Tangoe case, as illuminating the circumstances that render a vote "situationally" or "structurally" coerced.

Breach of the duty of loyalty. With Corwin cleansing out of the picture, the plaintiff needed to plead a non-exculpated claim for breach of fiduciary duty; in other words, a claim that the director defendants breached their duty of loyalty. The plaintiff did so by alleging that the new equity incentive plan motivated the directors to sell the company not because a sale was in stockholders’ best interests, but because it was the most likely path to generous equity awards. The timing of the awards bolstered this theory of self-interest, as the new incentive plan awards were approved soon after the deadline to earn Nasdaq’s regulatory compliance. Soon after, Tangoe entered into a confidentiality agreement with Marlin.

A second source of director conflict alleged in the complaint was the possibility of proxy contests by Marlin and a group of stockholders representing 4 percent of Tangoe’s common stock. Delaware courts are reluctant to find that directors are not entitled to the business judgment presumption simply because they operate under the threat of a proxy contest, but against the other allegations in the complaint, this fact had relevance at the pleading stage.

The case is No. 2017-0650-JRS.

Attorneys: Kurt M. Heyman (Heyman Enerio Gattuso & Hirzel LLP) and Jason M. Leviton (Block & Leviton LLP) for Matthew Sciabacucchi. Catherine G. Dearlove (Richards, Layton & Finger, P.A.) for James Foy, Gerald Kokos, Ronald Kaiser, Noah Walley, Jackie Kimzey, Richard Pontin, David Coit and Gary Golding.

Companies: Tangoe, Inc.

MainStory: TopStory CorporateGovernance CorpGovNews GCNNews DirectorsOfficers ExecutiveCompensation FiduciaryDuties DelawareNews

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