In Re Plx Technology, Inc. Stockholders Litigation

Facts

PLX (D) was a Delaware corporation that developed and sold specialized integrated circuits. It went public in 1999 and 2008, it suffered major losses. Management made two significant acquisitions, one in 2009 and the other in 2010. Both were disasters. D began developing a new product called ExpressFabric. The Board also began considering strategic alternatives. PLX discussed a potential transaction with IDT. The Board rejected the $5 offer, stating that it 'wanted to continue to execute on its long-term business plan.' D engaged in discussions with Avago about a potential transaction. An activist hedge fund called Balch Hill Partners L.P. disclosed a 9.7% stake in the Company's equity. Balch Hill asserted that 'management should seek a buyer . . . to take advantage of the tremendous market interest in . . . PCI Express switches.' The Board disagreed and announced publicly that the Company's stockholders 'would be best served by continuing to pursue the strategic projects underway' rather than 'affirmatively pursuing a sale.' Balch Hill submitted a slate of nominees to run against the incumbent directors. IDT offered to acquire PLX for $7.00 per share. The Board accepted the proposal, and the parties began due diligence. The parties signed a formal merger agreement. Avago submitted a proposal: an all-cash deal at $5.75 per share. The Board declined to pursue it. Balch Hill announced that it supported the IDT transaction and had sold much of its position. The Federal Trade Commission moved to block the IDTPLX merger on antitrust grounds. After the termination of the deal, D's stock price 'declined precipitously.' Singer, who managed Potomac became interested. He believed D should go back to the competitive bidder. Potomac had acquired its position at prices ranging from $3.46 to $4.55 per share. Potomac sent a strongly worded letter to the Board that D should remain an independent public company and sell. Singer wanted D to open negotiations with the bidder who came forward in the go-shop process. Avago had accumulated a 3.1% stake. Avago met with Singer, D executives, and the next day proposed to acquire D for $6.00 per share in cash. The directors decided to seek an improved offer from Avago. Potomac nominated its slate of candidates. The Board met that same day and reviewed the revised three-year plan. Deutsche Bank presented a valuation range for the Company of $5.25 to $7.78 per share, with a midpoint of $6.41. The downside case ranged from $4.06 to $5.89, with a midpoint of $4.91. Singer offered to settle the proxy contest for two board seats, Singer wanted the Board to 'form a strategic committee of five members to explore all strategic alternatives and appoint his two seats to this committee.' The Board rejected Singer's proposal. Potomac had increased its stake to 7.0% of the Company. The Board decided to formally reject Avago's $6.00 offer. Potomac had increased its stake to 9.4% of the Company's shares. Potomac served a demand for books and records on the Company. In the demand, Potomac asserted that the directors had 'a fiduciary duty to stockholders to explore all strategic alternatives for the Company.' D rejected the demand. On August 15, 2013, the Board resolved to create a Special Committee 'to select advisors and run an affirmative process to consider the sale of the Company.' Deutsche Bank reported to the Special Committee that it had contacted fifteen potential bidders, and nine had executed non-disclosure agreements. All nine expressed significant interest, and Avago expressed a willingness to 'increase [its] offer above $6/share.' Deutsche Bank's base case valued the company at between $8.31 and $11.06 per share, with a midpoint of $9.59. The downside case valued the Company at between $4.83 and $6.27 per share, with a midpoint of $5.50. Cypress Semiconductor Corporation submitted an indication of interest in a cash deal at a 'price per share in the range of $6.50 to $7.50' and requested two weeks of exclusivity. Potomac won the proxy contest. Management provided the directors with its proposed five-year plan. This is an aggressive plan compared to the past couple of years performance. The projections supported standalone valuations for the Company that exceeded Avago's bid. The directors suggested minor changes but otherwise endorsed the projections. Avago announced an agreement to acquire LSI, one of D's competitors that had shown interest in the Company during its earlier quiet shopping process. As a new director, Singer got involved and knew of the LSI restrictions but also knew that Avago was the most likely bidder for D. There is no evidence that Singer or Deutsche Bank shared Avago's plan to return to D after completing the LSI acquisition, or mentioned the valuation of $300 million that Avago was contemplating. During the 4-month quiet period for Avago, Singer behaved himself. Singer was appointed to the reconstituted Special Committee. Singer did not mention the information he had received from Deutsche Bank about Avago's interest. Avago reengaged. Avago believed the then-current PLX stock price already included a takeover premium as a result of Potomac Capital's actions. The Special Committee presented the aggressive projections but omitted the phrase describing the projections as 'aggressive.' Avago had 'no interest in acquiring the company at any valuation near the level' of $7.00 per share. Back and forth resulted in a transaction at $6.50 per share. The parties agreed on the price and entered into exclusive negotiations. A 'new haircut 5-year plan was prepared.' 

These were the projections differences:

Projections: 2014 2015 2016 2017 2018

December $117.5 $139.4 $166.9 $211.5 $271.5

June 2014 $114.7 $130.1 $149.4 $174.9 $208.4

Change ($2.8) ($9.3) ($17.5) ($36.6) ($63.1)

These results made the Avago deal look more attractive. Deutsche Bank gave a presentation that compared the December 2013 Projections and the June 2014 Projections. There is no credible evidence that would support a finding that that the explanation for these differences was ever provided to the other directors. The Merger closed. Ps filed suit naming as defendants PLX's directors, Potomac, Avago, and the acquisition subsidiary that Avago used to effectuate the merger.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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