March 8, 2011
In re: Atheros Communications: Disclosure Relating to Financial Advisor Fees and Analyses
From Kevin Miller of Alston & Bird, a member of our Advisory Board:
On March 4th, the Delaware Chancery Court (VC Noble) issued an injunction prohibiting Atheros from holding a meeting of its stockholders to vote upon a merger agreement with Qualcomm pursuant to which Atheros would be acquired by Qualcomm for $3.1 billion in cash in In re: Atheros Communications. Based on a preliminary record, the Court enjoined the stockholder vote pending the distribution of curative disclosures regarding (i) the fees to be paid to Atheros’ financial advisor and (ii) the timing and extent of discussions with the President and CEO of Atheros with respect to his future employment by Qualcomm.
“Stockholders should know that their financial advisor, upon whom they are being asked to rely, stands to reap a large reward only if the transaction closes and, as a practical matter, only if the financial advisor renders a fairness opinion in favor of the transaction. . . .Defendants point out that contingent fees are customary. As set forth above, they are. Defendants argue that there is no magic contingent percentage that mandates something more than a disclosure that a “substantial portion” of the fee is contingent. Defendants are correct in this assertion as well. The Court, however, need not, in its current effort, draw any bright line. That fixing such a line might be difficult, if perhaps impossible, does not necessitate a conclusion that disclosure of the contingency percentage is always immaterial and of no concern. . . . coupled with the contingent fee concerns set forth above, the stockholders should be afforded an opportunity to understand fully the nature and means by which Atheros will compensate [its financial advisor]. Thus, that would include the amount of the fee as well.”
The Court rejected claims that the proxy statement relating to the merger contained material omissions regarding (i) the use of street forecasts rather than financial projections prepared internally by Atheros and (ii) the discount rate utilized in the discounted cash flow analysis performed by Atheros’ financial advisor. Here’s the proxy supplement.
“[Atheros’ financial advisor] decided that, under the methodology it employed, the internal projections were not useful because they would not allow for an “apples to apples” comparison with the information available for comparable transactions. Thus, it instead used only the Street Projections in its valuation analysis. The Plaintiffs may disagree with that decision, but, as the Court has observed, “[t]here are limitless opportunities for disagreement on the appropriate valuation methodologies to employ, as well as the appropriate inputs to deploy within those methodologies. Considering this reality, quibbles with a financial advisor’s work simply cannot be the basis of a disclosure claim.” [quoting In re 3Com]
The Court also rejected plaintiff’s request for an injunction based on allegations that the Board breached its fiduciary duties by implementing an inadequate sales process resulting in an unfair price.
“On the whole, there is nothing in the record to indicate that the Board acted unreasonably. It was an independent board with deep knowledge of the Company’s industry and it employed a robust and sophisticated process. As a result, the Court will not second-guess the Board’s conduct, and the Plaintiffs have failed to demonstrate any reasonable probability of success on the merits of their price and process claims.”