Private Equity

Potential buyers in take private transactions should view the recent decision by Vice Chancellor Glasscock of the Delaware Court of Chancery, In re: Riverbed Technology, Inc. Stockholders Litigation, as a warning that they may not be able to settle shareholder litigation in Delaware solely by making supplemental disclosure and paying plaintiff’s attorneys’ fees. Although the court ultimately approved the settlement in Riverbed Technology, the opinion focused heavily on the specific facts of the matter and suggested that in a different factual scenario, the court may have rejected a settlement containing a broad release of shareholder claims solely in exchange for supplemental disclosure and attorneys’ fees.

Buyers have two main goals in shareholder litigation, first, to avoid a scenario where the transaction does not close on schedule (or at all) and second, to eliminate the threat of future litigation. The customary practice of settling shareholder lawsuits with broad releases in exchange for supplemental disclosure and the payment of attorneys’ fees has historically provided comfort to potential buyers that any shareholder litigation would likely result in these goals being achieved. However, in light of Riverbed Technologies, potential buyers should not assume that such a settlement will be possible, particularly if the target has run a flawed process.

One of the key takeaways of this case is that it is incumbent on a buyer in a take private transaction to understand the process run by the target and ensure that the process is defensible as any actual or potential issues with the target’s process could diminish or delay a buyer’s ability to obtain a broad release of future shareholder claims or otherwise settle shareholder litigation solely by providing supplemental disclosure and paying attorneys’ fees. Such diligence should include (i) establishing that the target’s board of directors successfully satisfied their Revlon duties by using reasonable efforts to obtain the highest value for shareholders, (ii) understanding management’s role in negotiating the transaction terms relative to that of the target’s board of directors, (iii) verifying that all actual and potential conflicts of interests of the target’s financial advisors and the target’s management team have been fully disclosed to the target’s board of directors and (iv) understanding whether the target’s board of directors followed best practices throughout the sale process and evaluating the potential exposure if the board of directors fell short of such standards.