On November 25, 2014, the Delaware Court of Chancery granted a motion for summary judgment brought by the defendant directors of Novell, Inc., holding that no genuine issue of material fact remained over the Novell board's conduct of a sale process (In re Novell, Inc. S'holder Litig., Consol. C.A. No. 6032-VCN, (Del. Ch. Nov. 25, 2014)). Although the court had found it reasonably conceivable at the motion-to-dismiss stage that the board had improperly favored one bidder over another, it concluded on summary judgment that the plaintiff stockholders had not established that the board had done so with any improper motives.

The class action case arose from the acquisition of Novell by affiliates of Attachmate Corporation. For a summary of the November 2010 merger agreement, see What's Market, Attachmate Corporation/Novell, Inc. Merger Agreement Summary. Under the terms of the acquisition, Novell stockholders received $6.10 per share in cash, for a total deal value of approximately $2.2 billion.

In late 2009, a rival bidder, Symphony Technology Group, had become interested in acquiring Novell and requested a meeting with the CEO of Novell. In March 2010, before the meeting could take place, the Novell board received an unsolicited offer from private investment fund Elliott Associates to acquire Novell for $5.75 per share in cash. The board rejected the offer but also announced that it would begin exploring strategic alternatives. Four days after that announcement, the board contacted Symphony for the first time about its interest.

In the ensuing months, Novell's financial advisor contacted 52 potential bidders and sent out draft non-disclosure agreements. Attachmate received a draft NDA on March 30, 2010, while Symphony did not receive its draft until April 13, two weeks later. At an early stage in this process, the Novell board also decided that its best chance at closing a favorable deal was through a sale of the entire company to a strategic buyer. The board subsequently rejected Symphony's request to team with a strategic bidder, yet allowed other financial bidders to partner with primary strategic bidders and allowed Attachmate to partner with its private equity stockholders. Only later did the Novell board allow Symphony to discuss financing with Elliott.

As preliminary bids began materializing, the board asked Attachmate and Symphony in August 2010 to submit their best and final offers. Attachmate made offers for both the entire company and for the company minus its open-platform solutions business, while Symphony made a bid only for the latter, though at a higher valuation than Attachmate's comparable offer. Each of the two bidders raised their bids in another round, after which the board asked them to confirm their bids by September 1. Only Attachmate explicitly confirmed its bid on that date, although Symphony denied that it had withdrawn its bid. Novell entered into an exclusivity agreement with Attachmate on the basis of its confirmation, which Novell extended at a later date. During that time period, a board member of Novell who had ties to Attachmate's investors talked to Attachmate about the price ranges that would get a deal done with the board. These discussions produced a $5.25 per share bid from Attachmate. The director did not have any similar type of discussion with Symphony, yet Symphony on its own revised its offer at the end of October to $5.75 per share for the entire company.

The next day, Novell received an expression of interest from Microsoft Corporation to purchase Novell's patent portfolio. The Novell board informed only Attachmate of this development and asked it to make a revised bid on the assumption that the patents would be sold separately. Attachmate made a revised offer of $6.10 per share, which was enough for the board to extend its exclusivity agreement with Attachmate. The board did not inform Symphony of the Microsoft offer nor reply to it about its $5.75 per share offer. Negotiations continued with Attachmate throughout the exclusivity period until the parties reached a merger agreement. The merger closed on April 27, 2011.

The plaintiffs filed suit on August 18, 2011. On January 3, 2013, the Delaware Court of Chancery granted the defendants' motion to dismiss as to some of the allegations in the complaint, including allegations of preclusive deal protections in the merger agreement (see Legal Update, In re Novell: Delaware Court of Chancery Finds Potential Bad Faith by Target Board). However, the Court held in that ruling that the plaintiffs had made a reasonably conceivable claim that the board had breached its fiduciary duties by wrongfully favoring Attachmate over Symphony. The surviving claims alleged that the board had acted in bad faith by engaging in a pattern of discrimination of Symphony. Specifically, the plaintiffs complained of:

For their part, the defendant directors argued that they ran an active sale process in which they made reasonable decisions in pursuit of the best interests of the corporation, and that the plaintiffs had not presented facts that would permit an inference that the board had acted with any improper motive. To the extent that the board made any mistakes, the defendants contended that they could have no liability because they would be exculpated for any breaches of the duty of care under the Section 102(b)(7) provision in the company's certificate of incorporation.

In its post-discovery opinion, the Court granted summary judgment for the defendant directors on the surviving claims. In analyzing and ultimately dismissing the surviving claims, the Court reviewed the board's conduct for reasonableness under the standard of enhanced scrutiny. As mandated by Revlon for change-of-control transactions, the Court placed the burden on the board to demonstrate that it obtained the highest value reasonably available to the stockholders. For the particular purpose of analyzing an allegation of favoritism, the Court emphasized that favoring a bidder is not unreasonable per se, but can be justified "solely by reference to the objective of maximizing the price the stockholders receive for their shares" (In re Topps Co. S'holders Litig., 926 A.2d 58, 64 (Del. Ch. 2007)).

The Court added that the analysis under Revlon also involves a review of the board's "true motives," to "smoke out pretextual justifications for improperly motivated decisions" (In re Dollar Thrifty S'holder Litig., 14 A.3d 573, 598 (Del. Ch. 2010)). But while the Court introduced this reference to motives within the context of review of the board's conduct to determine if it had breached its duty of care under Revlon, the bulk of the Court's analysis of motives was more relevant to the second step of determining whether the board had acted in bad faith. This second step was necessary because the certificate of incorporation of Novell contained a Section 102(b)(7) exculpation provision, which would exculpate the directors even if they did fail to satisfy their Revlon duties, unless they acted in bad faith. The Court added that because the standard for breach of the duty of care is gross negligence, a bad faith act must constitute something "qualitatively more culpable" than even that (In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 66 (Del. 2006)). The examination of motives was therefore most relevant for determining whether the board had acted egregiously enough to have committed bad faith acts under Delaware law.

To determine whether the board had acted with bad faith, the Court cited the three examples of bad faith described in Disney:

In litigation over M&A deals, the dispute usually centers on the third example of bad faith, as when the plaintiff claims that the board failed to satisfy its Revlon duties because it "utterly failed to attempt to obtain the best price" (Lyondell Chem. Co. v. Ryan, 970 A.2d 235, 244 (Del. 2009)). Here, however, the plaintiff stockholders did not claim that the Novell board had not even tried to satisfy its Revlon duties, or that it knowingly violated any positive law. Rather, their claim turned on whether the board had acted on some motive other than advancing the best interests of the corporation. The Court therefore examined whether the board's seeming favoritism toward Attachmate was motivated by a reason that would take its decision-making outside a range of reasonableness. In this regard, the Court followed the lead of its decision earlier this year in Chen v. Howard-Anderson, where the Court explained in detail how the Lyondell standard only informs one type of allegation of bad faith (87 A.3d 648, 683 (Del. Ch. 2014); see Legal Update, Chen v. Howard-Anderson: Chancery Court Describes Limits of Exculpation in Revlon Deals, Suggests Business Judgment if Vote Fully Informed).

With this standard for bad faith in mind, the plaintiffs argued that the board's various demonstrations of deference to Attachmate and unresponsiveness to Symphony, especially when viewed "holistically," could only be explained as a desire on the board's part to help its favored bidder, Attachmate. The Court acknowledged that "some facts seem troubling" and that some of the board's individual decisions may have constituted a breach of the duty of care. However, the Court emphasized that the plaintiff's theory for bad faith required a showing of not only unreasonable actions, but of motivation by some improper purpose. The Court held that the plaintiffs had offered no evidence of such an improper motive.

In making this finding, the Court reviewed some of the board's more troubling actions and found that they could be rationalized as the decisions of a board that concluded in good faith that a sale to Attachmate would maximize value for the stockholders. These included the decisions to continue to grant exclusivity to Attachmate and to allow a director with ties to Attachmate to convince Attachmate to raise its bid. Of significance for the Court was that the board had met no fewer than 25 times once it announced it was exploring strategic options and that it had consulted repeatedly with its legal and financial advisors. Without the Court actually saying so, the board's overall conduct apparently created something of an aura of good will that covered its more questionable decisions and placed them within a "realm of reasonableness," even though any questions over the particulars of the process belong more directly in Lyondell cases. Most significant, though, was the fact that the plaintiffs had not supplied a factual basis for questioning the board's motives.

The Novell decision serves as another reminder of the deference generally shown by the Delaware Court of Chancery towards unconflicted boards of directors, even when analyzing their conduct under enhanced scrutiny. By and large, a board that consults with its advisors, meets regularly, remains informed of the market for corporate control of the company and documents its thought process in real time in the minutes will be given wide latitude to make decisions that survive post-closing scrutiny. Even to the extent that some decisions fail to satisfy the duty of care, a Section 102(b)(7) provision will exculpate the directors absent disloyalty or bad faith.

Doctrinally, the decision supports the approach described in Chen v. Howard-Anderson for analyzing whether a board that may have breached its duty of care is considered to have acted in bad faith. In most complaints against boards alleging failure to satisfy Revlon duties, the plaintiff relies on Lyondell, alleging that the board utterly failed to attempt to obtain the best price. The Chen decision explained in detail how a plaintiff can also allege bad faith without relying on the Lyondell formulation, by instead alleging that the board acted for a purpose other than advancing the best interests of the corporation. Novell provides an example of how the court will analyze this type of allegation. In cases relying on this theory, the court will demand evidence that the board acted with an improper motive, even though various individual decisions by the board might be open to challenge. Without this evidence, the court will not second-guess the decisions of a board that acted reasonably, if imperfectly.

In a more banal vein, Novell demonstrates that just because the court allows an allegation to survive a motion to dismiss, the plaintiff will not necessarily succeed without bringing further evidence after discovery. Here, although the court found it reasonably conceivable for purposes of ruling on a motion to dismiss that the board had acted improperly by favoring Attachmate over Symphony, it ultimately found no material issue as to the court's motives.