Goldman had better brace for a bruising in Tibco market cap case

October 21, 2015

(Reuters) – Judges in Delaware Chancery Court have been saying for years that they are not averse to shareholder M&A suits – just to ill-founded challenges to well-conducted transactions. I’ve been writing a lot lately about Chancery’s crackdown on the latter. But the flip side, as Vice-Chancellor Travis Laster said earlier this month when he rejected a disclosure-only settlement involving Aruba Network’s $3 billion sale to HP, is that judges will let promising shareholder cases move forward.

That de facto promise from the judges to the plaintiffs’ bar has just ensnared Goldman Sachs – and based on a previously unreported Oct. 9 shareholder letter to the court, Goldman is going to face some unpleasant allegations about neglecting its client in order to cover its own embarrassing mistake.

The bank was already red-faced (or should have been) as the financial advisor to Tibco, the software company acquired last September by the private equity fund Vista. You probably recall what happened: Tibco and Vista announced a $4.34 billion deal, then backtracked when it turned out Vista’s offer was based on a miscalculation of Tibco’s market capitalization. I’m simplifying, but basically, it turned out that Vista was working from a Tibco-supplied spreadsheet that erroneously double-counted about 4.3 million unvested restricted shares. Because the merger offer was formulated in per-share terms, Vista ended up paying a total of about $4.24 billion – $100 million, or 57 cents-per-share, less than the private equity fund was prepared to cough up.

Investors represented by Bernstein Litowitz Berger & Grossman, Grant & Eisenhofer, Bottini & Bottini and Faruqi & Faruqi tried and failed last fall to block a vote on the lower-price deal, which ended up being approved by 96 percent of Tibco shareholders. Plaintiffs’ firms filed a post-vote complaint in March, claiming that the Tibco board breached its duty to shareholders because directors failed to push Vista to pay the extra $100 million.

Shareholders also alleged Goldman Sachs contributed to the board’s breach of duty because the bank, which headed Tibco’s negotiations with Vista and a second bidder, didn’t inform directors that Vista’s decision about what to pay was based on the fund’s estimation of the total value of the target, not on what Vista was willing to pay per share.

Goldman Sachs, represented by Wachtell Lipton Rosen & Katz and Abrams & Bayliss, moved to dismiss the case, arguing that investors had no aiding and abetting claim because they hadn’t adequately alleged in the first place that Tibco directors breached their duty.

Chancellor Andre Bouchard disagreed. In a 72-page opinion issued Tuesday, he tossed all of the shareholders’ claims against the board. Bouchard said investors had presented a good case that Tibco directors breached their duty of care, but he pointed out that Tibco’s charter and Delaware precedent exculpates directors from liability unless they acted in outright bad faith. Bouchard said plaintiffs hadn’t cleared that high bar. But like Vice-Chancellor Laster in last year’s decision In re Rural/Metro (now under consideration by the state Supreme Court) and Vice-Chancellor Donald Parsons in In re Zale Corporation earlier this month, the chancellor said investors could go after the board’s financial advisor.

“It is reasonably inferable that Goldman, a highly sophisticated investment bank, knew the board was not fulfilling its duty of care to gather all material information reasonably available about the share count error,” Bouchard wrote. “Most significantly, having that knowledge and having served as the primary negotiator with Vista during the bidding process, Goldman then allegedly concealed from the board a critical piece of information: that Vista had confirmed that it relied on the erroneous share information  when it made its final bid.”

Bouchard’s ruling addressed only the allegations in shareholders’ complaint. But in their Oct. 9 letter to the court, plaintiffs’ lawyers laid out in more detail the accusations they intend to level against Goldman and the evidence they’ve obtained to substantiate their allegations. Their hottest assertions: Goldman – which was paid an almost $50 million contingency fee for its work on the Tibco deal – was responsible for supplying the wrong share count tables to Vista, even though the bank’s deal team counted the shares properly in its original valuation tables; and, once the discrepancy over the unvested shares came to light, Goldman tried to squelch Tibco and Vista inquiries about how the wrong share count ended up circulating.

According to the letter, Goldman was more interested in covering up its own supposed mistake on the share count than in informing Tibco’s board that Vista relied on the wrong number to calculate its per-share offer.

The letter quoted deposition testimony from Tyler Kellner, a Vista associate who called and emailed the head of Goldman’s Tibco deal team, Scott Silverglate, once the private equity fund realized the deal proxy statement used a different share count than it had relied upon in reaching a per-share offer price. (The reason Vista submitted its bid in per-share form, according to investors, was because the bid instructions asked for that.)

Kellner allegedly said he sent Silverglate the Goldman-supplied spreadsheet Vista had used to calculate the market capitalization, as well as an email saying Vista couldn’t reconcile that spreadsheet with the share count in the proxy statement. According to investors, Kellner testified that the Goldman banker then called him and said, “‘We should not email on this.'”

That was a telling bit of testimony, according to shareholders. “Why would the financial adviser to the Tibco board’s special committee instruct the purchaser not to commit to writing any further details about the higher price the purchaser had agreed to pay?” the Oct. 9 letter said. “The only reasonable inference is that Goldman was trying to cover its tracks and keep the board from discovering Goldman’s role in causing the inflated share count to be used.”

Shareholders also asserted that Goldman and Tibco’s lead deal lawyer at Wilson Sonsini Goodrich & Rosati told very different stories about whether the bank informed the board that Vista used the wrong share count to calculate a per-share price. “While it is for the court to decide which version of events is the more credible, the record shows that Goldman took numerous actions that seem designed to keep the board from discovering the truth about the share count error, including Vista’s reliance on it,” the Oct. 9 letter said.

Among those actions, according to investors, was failing to tell Wilson Sonsini (or the Tibco board) about Vista’s attempt to reconcile the share count. A Wilson Sonsini lawyer testified that Goldman did not inform him of the Kellner email. Goldman’s Silverglate said he passed on the information in a phone call, but Wilson Sonsini allegedly denied recollection of the call. And when Wilson Sonsini continued to push the bank for information about Goldman’s internal Tibco market capitalization tables, according to shareholders, “Goldman’s legal counsel refused to return Wilson Sonsini’s calls or otherwise respond.”

Right now these accusations are merely allegations, asserted, for that matter, in a letter purporting to respond to Chancellor Bouchard’s request for briefing on a Delaware Supreme Court ruling that has pretty much nothing to do with the plaintiffs’ specific case against Goldman. Goldman has had no formal opportunity to address the assertions in the Oct. 9 letter. When I called Goldman outside counsel Paul Vizcarrondo of Wachtell, he referred me to the bank’s motion to dismiss and declined additional comment.

There will be plenty of time for Goldman to defend its work and its $50 million fee, in other words. But it’s not going to be much fun.

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