Merger Arb: News from Delaware’s Chancery Court

lawDelaware’s Chancery Court seems to be acting in effective (if unconscious) alliance with the federal courts in seeing to it that mergers between publicly owned U.S. corporations will become less risky propositions than they have long been.

As I noted here in the October 8 post, a federal court in Ohio recently delivered a rebuke to the Federal Trade Commission when it denied a request for a preliminary injunction that would have blocked the merger of Steris Corp with Synergy Health. That is part of a broader trend toward a new permissiveness for mergers that would once have been verboten on antitrust theories.

The day after we posted my account of Steris Corp. … well, to be clear, I’m making no cause-effect claim here, but – the very next day, October 9th, the Court of Chancery struck an explicit blow against sue-on-every-deal by dismissing the case of In re Aruba Networks.

This is a new contribution to a long-running trend in that state’s laws: a higher level of hostility for investors’ lawyers who bring merger related litigation routinely at the announcement of merger, the so-called sue-on-every-deal phenomenon. Often these lawsuits are settled quickly with counsel fees and additional disclosure about the transaction. That allows everybody to declare victory in any particular case, but the practice does as a whole add costs and friction to merger activity.

Fitting into a Plan

On March 2 of this year, Hewlett-Packard Co. through a wholly owned subsidiary, Aspen Acquisition, announced that it was going to buy Aruba Networks at a cash price of $24.67 a share.

Aruba, headquartered in Sunnyvale, California and publicly owned since 2007, is chiefly in the business of selling enterprise wireless local area network (LAN) equipment, although it has other ancillary lines of business that have arisen through its own mergers. For example, it entered the market for wireless security when it bought Network Chemistry and that for wireless network management software when it bought AirWave.

HP’s decision to buy Aruba was on its face a reasonable one. Last October, after all, HP announced a new strategic direction that involves a split between its more traditional lines (printers and PC boxes) on the one hand and its newer emphases (enterprise products and services) on the other. A year later, the company says it is on course to making this separation official on November 1. The purchase of Aruba fits neatly into the mission of one of the new entities, Hewlett Packard Enterprise.

It was so logical, indeed, that there seemed little point in suing HP for pursuing that matter. The better play was to sue Aruba’s board for agreeing to it, or agreeing at too low a price, or … something. Accordingly, within days after the announcement, the busy Delaware bar filed seven class action lawsuits with the Chancery Court, claiming that the members of Aruba’s board had violated their fiduciary obligations. On April 10th these actions were consolidated into In re Aruba Networks.

No Blockbusters

Working according to form, the two sides executed a stipulation on July 1st providing for the settlement of the action and submitted the stipulation to the court.

The “supplemental disclosure” won as consequences of these actions and this settlement doesn’t reveal any real blockbuster bits of news. For example, Aruba added to the end of the forth full paragraph on p. 39 of a proxy statement the following undramatic news: “Mr. Neri [HP senior vice president and general manager, technology services] indicated that HP viewed Messrs. Orr [Dominic Orr, Aruba’s CEO] and Melkote [Keerti Melkote, Aruba’s head of products and partnerships] as integral to the value of Aruba’s business and that HP expected that Messrs. Orr and Melkote would continue to operate the combined wireless business as a semi-autonomous business unit following a potential acquisition. Mr. Neri and other representatives of HP reiterated this expectation during subsequent meetings with Mr. Orr in September and October 2014.”

The court in Delaware clearly doesn’t believe that eliciting this sort of thing should earn the plaintiffs’ attorneys their fees. Vice Chancellor Laster in particular has, in his own words, “been giving these [cases] a hard look for a while now,” and with Aruba the court puts its foot down. The settlement is rejected, the case dismissed.

For merger arbs, the usual ambivalence presumably applies. As judges at both the state and the federal level lower various barriers to deal making activities, opportunities for arb increase, but the profitability of any of them considered in itself is likely to decrease to the extent regulatory and litigation risk decreases.



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