Saba Software Directors Can’t Shed Suit Over $400M Vector Deal

By Michael Greene

A Saba Software Inc. shareholder can proceed with claims alleging the company’s approximately $400 million acquisition by affiliates of private equity firm Vector Capital Management LP was tainted by conflicts, the Delaware Chancery Court ruled March 31 ( In re Saba Software Inc. Stockholder Litig. , 2017 BL 105912, Del. Ch., No. 10697-VCS, 3/31/17 ).

The ruling is one of the relatively rare instances in which the chancery court allowed the lawsuit even though the deal was supported by a stockholder vote. Vice Chancellor Joseph R. Slights III found that Saba shareholder Gary Poltash adequately alleged that the stockholder vote approving the transaction was “neither fully informed nor uncoerced.”

The court has allowed board members in at least six other cases to escape litigation under the “ Corwin doctrine.” Under the principles enunciated in Corwin v. KKR Financial Holdings LLC, 2015 BL 323544, directors can get an early exit from lawsuits challenging a deal if the transaction is ratified by informed and “uncoerced” stockholders.

“We are pleased with the court’s decision, which allows Saba stockholders to finally have their day in court,” Nichole Browning, a San Diego-based attorney at Robbins Arroyo LLP who is representing the shareholder class, told Bloomberg BNA.

A Saba representative didn’t immediately respond to a request for comment.

Hobson’s Choice

In 2014, Saba settled Securities and Exchange Commission allegations that two former executives engaged in an accounting fraud scheme. As part of the settlement, the company agreed to restate its financial reports. However, it couldn’t meet the SEC deadline to refile, causing its common stock to be deregistered. In 2015, the Redwood Shores, Calif.-based human resources services provider was acquired by Vector affiliates in an all-cash deal.

Poltash claimed that Saba directors orchestrated a rush sale in order to avoid the consequences of the company missing the SEC restatement deadline. He is seeking damages over any wrongdoing found by the court.

In allowing Poltash’s claims to move forward, the court said that Saba shareholders that voted on the transaction were forced to choose between accepting the $9-per-share merger consideration and holding onto deregistered stock. The shareholders had “no practical alternative but to vote in favor of the Merger,” Slights said.

The court found that Poltash sufficiently alleged that the directors failed to inform shareholders about available post-deregistration options. It also determined that there were sufficient allegations that stockholders were wrongfully induced into approving the deal.

“This Hobson’s choice was hoisted upon the stockholders because the Board was hellbent on selling Saba in the midst of its regulatory chaos,” Slights wrote. “Yet the Board elected to send stockholders a Proxy that said nothing about the circumstances that were preventing the Company from filing its restatements and therefore offered no basis for stockholders to assess whether the choice of rejecting the Merger and staying the course made any sense.”

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

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.