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From Securities Regulation Daily, October 21, 2015

Is Goldman to blame for $100M lost in merger miscount?

By Anne Sherry, J.D.

A shareholder failed in most respects to fight a private equity fund’s acquisition of TIBCO Software. The fact that the parties double-counted some shares, thus devaluing total equity by $100 million, was not sufficient for the Delaware Court of Chancery to reform the merger agreement. Furthermore, the directors were exculpated for breaches of the duty of care, although a claim survived against TIBCO’s financial advisor, Goldman Sachs, for aiding and abetting those breaches (In re TIBCO Software Inc. Stockholders Litigation, October 20, 2015, Bouchard, A.).

Background. TIBCO ultimately accepted the offer of the Vista Equity Partners fund of $24 per share, under the parties’ mutual and mistaken assumption that the implied equity value of the merger was $4.244 billion. Without the double-counting, however, the total implied equity value was about $100 million lower. The TIBCO board met with Goldman and concluded that the revised analysis did not affect its recommendation in favor of the merger. Vista forwarded to Goldman the email that it had used to calculate equity value based on the incorrect share count; Goldman allegedly never told the board. Stockholders approved the merger at the $24 per share price.

Having failed to enjoin the merger, the plaintiff filed a second amended complaint bringing claims for reformation of the merger agreement; breach of fiduciary duty against the director defendants; aiding and abetting, professional malpractice and professional negligence against Goldman; and unjust enrichment against Vista and Goldman. The court granted the defendants’ motion to dismiss all but the aiding-and-abetting claim against Goldman.

Reformation. The reformation claim failed as a matter of law because the plaintiff did not demonstrate 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. None of the plaintiff’s state-of-mind evidence indicated that the parties came to an antecedent agreement that was inconsistent with a $24 per share price, and evidence from the merger agreement did not establish a specific prior understanding. Finally, the parties’ statements and reactions about the share count error after the merger agreement was signed, by definition, could not provide evidence of an understanding reached prior to the agreement.

Breach of duty. The plaintiff also failed to plead a non-exculpated claim against the directors; the allegations fell short of the high standard of bad faith. However, the court found it reasonably conceivable that the allegations that the board failed to adequately inform itself would sustain a duty of care claim, which in turn could form the predicate breach for an aiding-and-abetting claim against Goldman. The allegations that the board never considered or explored a reformation claim and failed to ask Goldman basic questions about the circumstances of the share-count error were “troubling” and sufficed to state a claim for breach of the duty of care, even if they did not rise to the level of bad faith. Through its involvement in the meeting after the error was discovered, it was reasonably inferable that Goldman knew that the board was not fulfilling its duty of care to inform itself as to the error. Furthermore, Goldman’s alleged concealment of Vista’s reliance on the error may have created an informational vacuum at the time the board was assessing its options regarding the $100 million shortfall. Goldman’s contingent fee created a powerful motive to keep the board in the dark so as not to jeopardize the deal or the payment of its own fee (if it were found to have a role in the error).

The case is No. 10319-CB.

Attorneys: Stuart M. Grant (Grant & Eisenhofer P.A.), Mark Lebovitch (Bernstein Litowitz Berger & Grossmann LLP), Francis Bottini, Jr. (Bottini & Bottini Inc.) and Juan E. Monteverde (Faruqi & Faruqi LLP) for the Plaintiff. Tamika Montgomery-Reeves (Wilson Sonsini Goodrich & Rosati) for 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 (Richards, Layton & Finger, P.A.) and Yosef J. Riemer, P.C. (Kirkland & Ellis LLP) for Balboa Intermediate Holdings, Balboa Merger Sub, Inc. and Vista Equity Partners V, L.P. Kevin G. Abrams (Abrams & Bayliss LLP) and Paul Vizcarrondo, Jr. (Wachtell, Lipton, Rosen & Katz) for Goldman, Sachs & Co.

Companies: TIBCO Software Inc.; Balboa Intermediate Holdings; Balboa Merger Sub, Inc.; Vista Equity Partners V, L.P.; Goldman, Sachs & Co.

MainStory: TopStory DirectorsOfficers MergersAcquisitions DelawareNews

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