Netezza The Latest To Face Shareholder Discontent
Within days of the announcement that computer giant IBM would purchase Marlborough data storage company Netezza Corp. for $1.7 billion, what has become the natural follow-up story broke across newswires: A shareholder filed suit trying to stop the deal.
It’s become commonplace that when a publicly traded company is bought out, there is at least one disgruntled shareholder balking at the deal. Usually the contention is that the price is not high enough or that management failed to appropriately shop for other suitors. Sometimes shareholders are upset about so-called “sweetheart deals” for management.
Rite Of Passage
Locally, Netezza is not the first to face ire from shareholders. In a high-profile case, Marlborough-based 3Com Corp. faced five shareholder lawsuits when a deal was announced that it would be acquired by Hewlett-Packard. Despite the legal drama, the 3Com-HP deal closed in April 2010.
The reality today, according to James Donnelly, a partner at the Worcester-based law firm of Mirick O’Connell, is that any time a public company is purchased, management must take care.
Lawsuits are “very common,” Donnelly added. “Some people say it shows that plaintiffs are a bunch of savages, while others may point to a board of directors or top executives being more worried about themselves than their shareholders.”
In the Netezza case, shareholder Anthony Kolton and his lawyer from Prickett Jones & Elliott PA of Delaware allege that the purchase price from IBM does not reflect Netezza’s long-term growth. It also alleges that a termination penalty provision in the agreement is unfair to shareholders.
Security At A Price
IBM’s $1.7-billion offer represents about $27 per share for the company. Netezza made a $4.9-million profit on $63 million in revenues during the most recent quarter, a 43-percent increase in sales and a drastic turnaround from the $333,000 loss the company reported during the same time last year.
The day before the IBM deal was announced, Netezza’s stock closed at $24.60. Since then it’s been hovering above the $27-per-share bid price.
Kolton’s lawsuit also takes issues with the so-called termination penalty within the buyout agreement. Specifically, Netezza has agreed to pay a $56 million penalty if the deal doesn’t go through. Such a provision, according to the lawsuit, will deter management from seeking higher offers.
Such “lock-up” penalties are not uncommon, said Donnelly of Mirick O’Connell. When a company such as IBM or NetApp invests time and resources to propose such an acquisition, it wants to protect that investment.
“They don’t want to be pouring their resources into a project, then find out someone has come in for an extra dollar per share (and ruined the deal),” Donnelly said.
But, Donnelly said, termination clauses can be overdone. Lock-up fees can give companies less incentive to seek other deals. And, at the very least, they give even more reason for disgruntled shareholders to protest the deal.
However, termination penalties didn’t stop Hopkinton-based EMC Corp. from engaging in a bidding war last year.
EMC’s rival, California-based NetApp, entered into a $1.5 billion agreement to purchase Data Domain, which develops data deduplication products used in storage. The agreement included a $57-million penalty clause if Data Domain backed out of the deal.
Not wanting a competitor to scoop up Data Domain, EMC countered with a 20-percent higher offer worth $1.8 billion. NetApp countered with a $1.9-billion offer comprised of stock options and cash. Within weeks EMC placed an all-cash $2.1-billion winning bid, which included the company paying the $57-million termination fee.
Even smaller deals can lead to unhappy stockholders. Just ask Joseph MacDonough, former president of Westborough Bank. In late 2008 the holding company of Hudson Savings Bank offered to purchase Westborough Bank.
After Hudson Savings made a bid, a Toronto-based shareholder of Westborough Bank’s holding company made a 17-percent higher offer to block the merger. MacDonough said, looking back, the shareholder’s activism was to be expected.
“In the world of public companies, you’re never going to be able to please everyone,” he said. “It’s not surprising there would be a disgruntled shareholder.”
The board of directors of Westborough Bank, despite the higher offer from the Canadian shareholder, allowed the merger to proceed, forming a new bank called Avidia Bank, which is based in Hudson.
“From a management perspective, all you can really do is be open and transparent about the process and be willing to listen to all the shareholders,” he said. “But at the end of the day if you do what’s right for the company, things usually work out.”
Legal Wrangling
While angry shareholder lawsuits are common, that does not necessarily mean they work.
“I get the sense that a lot of suits are filed, but you don’t see a lot of them being successful,” said Charles Yon, a partner in the Framingham office of the law firm Bowditch & Dewey LLP.
Donnelly said that shareholders, generally speaking, should have more to support their case than a claim that the offer price is too low. Instead, for shareholders looking to stop a deal, they may be better off trying to convince a majority of the other shareholders to block the purchase.
“It can be an uphill battle,” Donnelly said. “There can often be an apathetic majority (of shareholders) who are perfectly happy to take the money and run.”
So, how can companies deter shareholder discontent about a deal?
One piece of advice: Follow the rules, said Thomas Dougherty, a lawyer in the Boston office of the law firm Skadden, Arps, Slate, Meagher & Flom LLP.
The goal of any management team or board of directors must be to get the best deal possible for both the company and its shareholders. If the board of directors or managers of a public company enter into an agreement to be purchased, management has a fiduciary duty to ensure that the transaction is completed within the laws and regulations of the government. In the so-called “Revlon Rule,” born out of a 1986 landmark case in Delaware Supreme Court involving the cosmetic beauty company, justices outlined the duty of management to strike a deal in the best interest of shareholders that is still used today.
Just what is a good deal for shareholders, however, can be up for interpretation.
One important factor, Dougherty said, is a company being open and willing to listen to counteroffers to a purchase.
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