The Delaware Chancery Court recently issued a rare preliminary injunction delaying the shareholder vote on a proposed merger between QAD, a cloud-based enterprise software company, and the private equity fund Thoma Bravo. The Court required additional disclosures to shareholders but stopped short of enjoining the deal entirely. The case provides useful guidance on conflicts-related disclosure where a controlling shareholder and minority shareholders are “competing” for consideration from a third-party acquirer. It also highlights Delaware’s reluctance to enjoin a transaction that offers shareholders a premium in the absence of a rival bidder, leaving post-closing damages claims as the sole remedy for shareholders who believe the deal involved contractual or fiduciary duty violations.
QAD had two classes of equity, Class A shares and Class B shares. Class A shares had limited voting rights, giving voting control to Class B shares, primarily held by Pam Lopker, a co-founder. Under QAD’s charter, Class A shareholders were protected by a “no less favorable provision” providing that in any merger, “[t]he holders of Class A Common Stock shall be entitled to receive an amount and form of consideration per share no less favorable than the per share consideration, if any, received by any holder of the Class B Common Stock….”
In early 2021, QAD began a formal sale process, forming a special committee and retaining financial advisers. It received a merger proposal from Thoma Bravo. Under the final terms of the offer, all shareholders would receive the same consideration: $87.50 per share, in cash. However, Lopker was allowed to roll $300 million of her QAD shares and $30 million of her children’s shares into equity in the new entity. She also received a board seat. The merger required a majority vote of all outstanding shares as well as a majority of all shares not owned by Lopker, corporate officers, and directors.
In seeking the injunction, the plaintiffs argued that the terms of the merger violated the corporate charter. According to the plaintiffs, Lopker’s right to roll over her shares provided her with both an “amount” and a “form” of consideration more favorable than that provided to Class A shares. They argued that the rollover provided benefits including tax savings and the opportunity to share in the upside of Thoma Bravo’s investment—benefits not available to Class A shareholders.
The plaintiffs also claimed that the special committee of the QAD Board of Directors negotiated with Lopker’s interests in mind, rather than the best interests of the minority shareholders. They pointed to numerous references by committee members to Lopker’s personal financial goals. And they noted that negotiations with Thoma Bravo appeared to seek not simply improved prices for shareholders but also special benefits, such as a board seat, for Lopker. The plaintiffs argued that the proxy sent to shareholders failed to disclose these conflicts, making an informed vote impossible.
The Delaware Chancery Court agreed. In particular, it ordered disclosure of communications indicating that “even before the special committee was formed, a director of QAD provided Thoma Bravo with deal parameters that would personally satisfy Lopker, the controller, from which Thoma Bravo could formulate its bidding strategy.” According to the Court, “[t]he crux of all of these issues is that Lopker’s interests loomed over the [negotiating] process,” and it ordered disclosures that would accurately reflect that fact.
Nevertheless, the Court refused to enjoin the merger entirely. While the Court noted the plausibility of the plaintiff’s contract claim for the breach of the charter provision, it determined that enjoining the merger risked substantial harm to QAD stockholders given the 20% premium offered and the absence of any rival bidder. The Court noted that a contract claim would survive the merger, and it expressed confidence that “after-the-fact money damages” have “some value as a remedial instrument in this case.”
This approach is consistent with a long line of cases in Delaware that have compelled additional disclosure but refused to enjoin a transaction outright for fear that it would jeopardize shareholders’ ability to enjoy the benefits of an otherwise beneficial deal. Such refusals are often in spite of potential violations of fiduciary duty or breaches of contract. As the Delaware Supreme Court has explained, where there is no claim by a rival bidder that it was unable to make a bid, and shareholders are fully informed of all the facts and not coerced, “the Court of Chancery should be reluctant to take the decision out of their hands.” The case reinforces the centrality of an informed shareholder vote, as well as the prudential limits of a court’s equitable power where there may be no better offer available to shareholders.
One final takeaway: The case also adds to a body of caselaw involving independence and corporate aircraft. In 2016, the Delaware Supreme Court found that the co-ownership of a plane by a board member and the controlling shareholder contributed to doubts about the board member’s independence. Sandys v. Pincus, 152 A.3d 124 (Del. 2016). Here, the plaintiffs made a similar argument, suggesting that Lopker’s co-ownership of a plane with a board member demonstrated that the board member was not truly independent. While the Delaware Chancery Court did not ultimately find the plane co-ownership dispositive, this suit, following Sandys, suggests that board members may do well to fly commercial.