Mercier v. Inter-Tel (Delaware), Inc.

929 A.2d 786 (Del.Ch. 2007)

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Nature of the Case

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Facts

Inter-Tel sells high-tech phone systems and provides communications services to businesses and government agencies. Mihaylo, the founder, remains Inter-Tel's largest stockholder, owning 19% of its shares. During 2005, Inter-Tel received several soft overtures from potential buyers. These included Mitel, one of Inter-Tel's leading competitors. In February 2006, Mihaylo resigned as CEO. Mihaylo soon sought re-election to the Inter-Tel board. He also proposed a non-binding resolution calling on the board to sell Inter-Tel to the highest bidder. Mihaylo, along with a partner, Vector Capital made an offer to buy all of Inter-Tel's shares for $22.50 each. The Special Committee rejected this bid. Mihaylo and Vector then offered to raise their bid to $23.25 per share if the Special Committee committed to selling Inter-Tel to the highest bidder who emerged during a 30-day sale process. It rejected the bid and also stated that the 30-day process was not value-maximizing because other bidders would be disadvantaged by Mihaylo's much greater opportunity for due diligence. By late 2006, both Mitel and Francisco Partners were again expressing interest. By January 2007, the two had paired up, with Francisco Partners being prepared to act as a financial partner for Mitel in acquiring Inter-Tel. They had indicated a willingness to purchase Inter-Tel for $25 per share, subject to their receipt of due diligence. Extensive due diligence and negotiations were conducted between Mitel and Inter-Tel. The Special Committee told Mitel that $25 per share was insufficient. Mitel eventually countered with $25.50. The Special Committee rejected that price and Mitel threw in another dime per share, raising the bid to $25.60. Vector Capital suggested it would pay $26.50 per share after due diligence and that Mihaylo was not part of its proposal. Vector Capital sent another e-mail messages, floating the tantalizing prospect of a bid of over $27 if it could receive due diligence and indicating its likely unwillingness to present a topping bid if a merger agreement with another party was signed up. Considering everything including past offers, the Special Committee voted to recommend approval of a 'Merger Agreement' with Mitel. The full board voted the same way, with Mihaylo dissenting, and his two nominees Puri and Urish abstaining. The Merger Agreement contained a no-shop provision that was subject to a fiduciary out permitting the Inter-Tel board to consider an unsolicited alternative proposal that was reasonably likely to lead to a superior proposal. The fiduciary out soon came in handy. Vector Capital sent an unsolicited letter to Inter-Tel expressing interest in purchasing it for $26.50. The Special Committee promptly made the required determination necessary to facilitate Vector Capital's access to due diligence. But Vector Capital then withdrew its expression of interest. Vector Capital then sent another letter renewing its interest at the price of $26.50 per share. The Special Committee again made the required finding and entered into a confidentiality order granting Vector Capital access to non-public information. Vector Capital's interest was made public, prompting the market price of Inter-Tel's shares to rise above $27 a piece on hopes of a higher-priced deal. A meeting to consider the Mitel Merger would be held on June 29. On June 19, Institutional Shareholder Services recommended that stockholders vote against the Mitel Merger. ISS based its recommendation in part on its dissatisfaction with Inter-Tel's failure to run a full-blown auction in advance of signing up with Mitel, and ISS's intuition that more value could be extracted from Mitel if Mitel felt the pressure of a 'no' recommendation. At least five days before June 29, the Special Committee began seriously considering the possibility of a postponement of the vote. By June 28, it was clear that no such change would happen. In voting to reschedule, the Special Committee was aware that if the vote were held that day, the Merger would be soundly defeated. It delayed the vote precisely so that it could have more time to convince the stockholders to support the Merger. On June 30, the full Inter-Tel board met and ratified the rescheduling of the meeting. The new meeting date was set for July 23, and a new record date of July 9 was adopted. The board also determined to hold an annual meeting on September 12 if the Merger was not approved. On August 2, the special meeting on the Merger was actually held. Over 87% of the outstanding shares were voted. Over 62% of Inter-Tel's 27.3 million outstanding shares were voted in favor of the Merger, with about 25% against.