Comverge Can’t Get Early Exit in Suit Over Deal Protections

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By Michael Greene

Nov. 1 — Comverge Inc. shareholders got a green light to pursue their lawsuit alleging that directors adopted unreasonable deal protection measures when the company was sold to private equity firm H.I.G. Capital LLC for $49 million, the Delaware Chancery Court ruled Oct. 31 In Re Comverge Inc. S’holder Litig. , Del. Ch., No. 7368-VCMR, order issued 10/31/16 .

Vice Chancellor Tamika Montgomery-Reeves refused to dismiss the lawsuit, saying the court needs a more developed factual record to decide whether shareholders were fully informed in approving the transaction.

Under the Delaware Supreme Court’s 2015 ruling in Corwin v. KKR Financial Holdings LLC, 2015 BL 323544, the chancery court has limited review of transactions that are approved by fully informed, uncoerced stockholders. Chancery court judges have relied on Corwin several times in dismissing recent shareholder lawsuits challenging mergers.

The Comverge case, the court said, presented “a complex mosaic of factual issues and questions of law.”

The shareholders claimed they weren’t told that the board didn’t know about certain deal terms or that the company’s then chief executive officer R. Blake Young gave instructions that restricted another potential bidder’s due-diligence requests.

Whether shareholders should have been informed about the board’s understanding of deal terms and Young’s response to due diligence requests remain issues to be resolved in the case, the court said.

Unreasonable Termination Fee?

HIG acquired the Whippany-N.J.-based company that provides software and services to electric utilities in 2014 for $1.75 per share, which was below what investors in the market were willing to pay for the company’s common stock the day before the transaction was announced.

The chancery court in November 2014 dismissed shareholder claims that directors breached their fiduciary duties by selling the company for a price that was too low. However, in that ruling, the court also said it was reasonably conceivable that the board accepted deal protection measures that precluded a topping bidder.

HIG in conjunction with the merger provided Comverge debt that entitled the private equity firm to payments if the company were sold to another bidder.

Shareholders alleged that when taking into account the payments to HIG in connection with the debt, a topping bidder would have to pay a termination fee that amounted to between 18 and 27 percent of the equity value of the transaction.

The chancery court in its Oct. 31 ruling also said it needed more facts before it could address Comverge’s argument that some of the payments on the debt are not deal protection devices.

To contact the reporter on this story: Michael Greene in Washington at mGreene@bna.com

To contact the editor responsible for this story: Yin Wilczek at ywilczek@bna.com

For More Information

The court’s ruling is available at http://src.bna.com/jM2.

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