In what is the latest variant of coronavirus-Related D&O claims, a plaintiff shareholder has filed class action lawsuit in Delaware State Court against the board of media technology Xperi with respect to the company’s planned merger with TiVo Corporation. Among other things, the plaintiff alleges that the defendant board members breached their fiduciary duties by failing to provide investors with adequate disclosures about the impact of the coronavirus outbreak on the deal and failing to reassess the deal in view of the fact that the pandemic represents a “Material Adverse Event” under the merger agreement. A copy of the plaintiff’s May 15, 2020 complaint can be found here. Alison Frankel’s May 18, 2020 post about the lawsuit on her On the Case blog can be found here.
On December 18, 2019, well before the existence of the coronavirus outbreak emerged, Xperi and TiVo entered an agreement for a $3 billion stock-for-stock merger. On April 22, 2020, Xperi issued the final proxy statement with respect to the merger. The special meeting to vote on the merger is scheduled for May 29, 2020.
On May 15, 2020, Xperi shareholder Local 464A United Food and Commercial Workers Union Pension Fund filed a class action complaint in the Delaware Court of Chancery against the individuals on Xperi’s board of directors. The complaint purports to be filed on behalf of a plaintiff class consisting of all holders of Xperi’s common stock as of February 21, 2020.
The complaint raises a number of allegations about the planned merger in light of the coronavirus outbreak that came to light after the merger was first announced.
First, after noting that Xperi’s board has not met to discuss the proposed merger since it approved the merger agreement in December 2019, the complaint alleges that the board “breached its duty of loyalty by deliberately failing to fulfill its contractual and fiduciary obligations to assess whether TiVo, in light of the pandemic and its economic fallout, has suffered a MAE under the Merger Agreement that would enable Xperi to terminate the merger agreement.” (An MAE is a “Material Adverse Effect.”)
Second, the complaint alleges that the Xperi board did not act in good faith in not considering the competing February 21, 2020 all-cash acquisition proposal from Metis Ventures LLC. (Metis is headed by an individual who service as Xperi’s CEO prior to June 2017.)
Third, the complaint alleges that there are material misrepresentations and omissions in the proxy statement and in the two companies’ respective 10-Qs for the first quarter. Specifically, the complaint alleges that the proxy’s disclosures about the potential effects of the pandemic on Xperi, TiVo, and the proposed combined company, are “misleading and inadequate.” The complaint alleges further that the defendants “stubborn refusal” to provide “known facts” about the effect of the coronavirus outbreak on the two companies “creates an inference that they are not acting in good faith and are deliberately deceiving the Xperi shareholders.”
The complaint further alleges that on April 3, 2020, the plaintiff presented a demand letter to Xperi’s board in which the plaintiff detailed the board’s failures, including the board’s failures to meet and consider the impact of the COVID-19 pandemic on the proposed merger, and also including the inadequacy of the disclosures in the then-current version of the proxy. Xperi refused the demand.
The complaint alleges that the board is allowing the proposed merger to move toward the planned May 29, 2020 shareholder vote “without any good faith considerations or compliance with the Board’s contractual and fiduciary obligations in light of the COVID-19 pandemic.”
The plaintiff’s complaint seeks to recover damages for the class; equitable relief “depriving Defendants of all benefits they realize as a result of the Combination aided by their breaches of the fiduciary duty of loyalty”; and attorneys’ fees.
Readers know that I have been tracking coronavirus-related securities class action lawsuits (see my most recent post on that topic, here). But though this lawsuit is coronavirus-related, and though it has been filed a class action, it does not involve alleged violations of the securities laws. Rather, the plaintiff alleges violations of the board’s fiduciary duties under applicable Delaware law.
And though the complaint alleges that the defendants breached their fiduciary duties, the complaint is not filed as a shareholder derivative action – it is filed as a direct action. That is, rather than seeking the recovery of damages on behalf of the corporation (as would be the case in a derivative lawsuit), this lawsuit seeks recovery of damages on behalf of the plaintiff class.
In her blog post about this lawsuit to which I linked above, Alison Frankel says that the new lawsuit “appears to be the first shareholder M&A class action to alleged directors breached their duties in response to COVID-19.” (It is the first one of this type as far as I know, too.).
From my perspective, this case illustrates the kind of scrutiny corporate boards are going to be under as a result of the pandemic. The overt presumption of the plaintiff’s complaint is that boards have a legal obligation to reconsider past strategic decisions in light of the disruption that the pandemic has caused – and not only that boards have an obligation to reconsider past decisions, but that the failure to do so represents a breach of fiduciary duty.
It has been my expectation that the pandemic would lead to claims against corporate boards, beyond just securities claims, including mismanagement claims and other types of claims based on alleged breaches of board duties. In forming this expectation, it was not my thought that there would be claims based on failure to anticipate the pandemic; rather, I have been expecting claims based on how companies and their boards respond to and act or fail to act in response to the pandemic. This new lawsuit is based on a premise that boards have an obligation to adjust to the new circumstances and reconsider prior actions in light of the changed circumstances. I expect that there will other claims like this as well.
This claim relates to the M&A context, and there may be other M&A claims alleging that directors breached their fiduciary duties in response to the coronavirus outbreak. However, allegations of the type raised in this case will not be limited just to the M&A context, the alleged failure to adjust and reconsider will arise in other contexts as well.
One question that occurred to me as I read this complaint is to wonder what the plaintiff’s objective is here. The plaintiff is not expressly trying to stop the scheduled shareholder vote; there is no request in the complaint for injunctive relief to stop the merger. (In her blog post, Frankel includes a statement by the plaintiff’s attorney who filed the complaint as saying that there is not enough time for an expedited TRO hearing given Delaware’s COVID-19 rules of operation.)
I think the clue to what the plaintiff is after is its allegation that the board breached its fiduciary duty by failing to meet and consider whether TiVo has caused a Material Adverse Effect that would permit Xperi to terminate the merger. It looks to me like the plaintiff is trying to use the litigation as a way to force Xperi’s board to declare that a MAE has occurred.
The plaintiff may also be pushing for additional disclosure. The complaint objects to the proxy’s failure to disclose the “actual and potential effects of the COVID-19 pandemic on Xperi, TiVo, and the proposed combined company.” Even though the plaintiff is not expressly trying to block the shareholder vote, it is in effect asking how the Xperi shareholders can be asked to vote on the proposed merger without better information on what the impact of the pandemic is going to be on the merged company.
Of course, the plaintiff may simply (or in addition) be seeking damages, especially with respect to the alternative proposed all-cash acquisition opportunity.
In any event, this new lawsuit does represent an interesting example of yet another type of pandemic-related D&O litigation. There undoubtedly are many more types of pandemic-related litigation to come.