3.in-re-comverge-memorandum-opinion-11.25.2014

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN RE COMVERGE, INC.

SHAREHOLDERS LITIGATION ) ) CONSOLIDATED C.A. No. 7368-VCP

Date Submitted: March 19, 2014

Date Decided: November 25, 2014

Carmella P. Keener, Esq., P. Bradford deLeeuw, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Seth D. Rigrodsky, Esq., Brian D. Long, Esq., Gina M. Serra, Esq., RIGRODSKY & LONG, P.A., Wilmington, Delaware; James R. Banko, Esq., FARUQI & FARUQI, Wilmington, Delaware; James S. Notis, Esq., Kira German, Esq., GARDY & NOTIS, LLP, Englewood Cliffs, New Jersey; Juan E. Monteverde, Esq., FARUQI & FARUQI, LLP, New York, New York; Shannon L. Hopkins, Esq., Sebastiano Tornatore, Esq., LEVI & KORSINSKY LLP, New York, New York; Attorneys for Plaintiffs.

A. Thompson Bayliss, Esq., ABRAMS & BAYLISS LLP, Wilmington, Delaware; Timothy A. Duffy, P.C., KIRKLAND & ELLIS LLP, Chicago, Illinois; Attorneys for Defendants H.I.G. Capital, L.L.C., Peak Holding Corp. and Peak Merger Corp.

Thomas A. Beck, Esq., Gregory P. Williams, Esq., Rudolf Koch, Esq., Kevin M. Gallagher, Esq., Christopher H. Lyons, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; John L. Latham, Esq., Robert L. Long, Esq., Susan E. Hurd, Esq., ALSTON & BIRD LLP, Atlanta, Georgia; Attorneys for Defendants Comverge, Inc., Alec G. Dreyer, Joseph M. O?Donnell, John McCarter, R. Blake Young, Nora Mead Brownell, A. Laurence Jones, John Rego, Rudolf J. Hoefling, David R. Kuzma and James J. Moore.

PARSONS, Vice Chancellor.

This is a stockholder challenge to the now-completed merger between Comverge, Inc. and a financial acquirer. The plaintiffs, who owned Comverge common stock before the merger‘s closing, charge the members of the Comverge board of directors with breaching their fiduciary duties in connection with the merger. The plaintiffs contend that the defendants conducted a flawed sales process and unreasonably decided not to sue the acquirer for alleged breaches of a non-disclosure agreement, both of which resulted in an inadequate merger price. The plaintiffs further allege that the directors agreed to unreasonable deal protection measures that precluded the possibility of a topping bid, including termination fees and related payments that, by the plaintiffs‘ accounting, amounted to 13% of the equity value of the transaction. The plaintiffs also accuse the acquirer of aiding and abetting those fiduciary breaches.

The director defendants and the acquirer have moved to dismiss the complaint under Rule 12(b)(6) for failure to state a claim. In this Memorandum Opinion, I conclude that it is not reasonably conceivable that the board of directors, the disinterestedness and independence of which is not in question, acted in bad faith with respect to the sale process. Because the company has an exculpatory charter provision, I therefore dismiss this aspect of the plaintiffs‘ claims. I deny the directors‘ motion to dismiss, however, as it relates to the deal protection measures. In that regard, I find it reasonably conceivable based on the record currently before me that the plaintiffs could show that the termination fee structure, including a convertible bridge loan provided by the acquirer, was unreasonable and had an impermissibly preclusive effect on potential alternative bidders.

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Regarding the aiding and abetting claims against the acquiring company, I grant the motion to dismiss because, even assuming there was a predicate breach of fiduciary duty by the directors, the plaintiffs have not alleged non-conclusory facts that conceivably would support a claim that the acquirer knowingly participated in those breaches.

Lastly, I deny as moot the plaintiffs‘ motion to strike one of the documents proffered by the defendants. I did not consider that document in reaching any of the conclusions contained in this Memorandum Opinion.

I.

A. BACKGROUND1 The Parties

Plaintiffs, Gary K. Schultz and Saravanan Somlinga, purportedly were stockholders of Comverge, Inc. (―Comverge‖ or the ―Company‖) at all relevant times. Defendant Comverge was a Delaware corporation with its principal place of business in Norcross, Georgia. Each of Comverge‘s ten directors—R. Blake Young, Nora Mead Brownell, Alec G. Dreyer, Rudolf J. Hoefling, A. Laurence Jones, David R. Kuzma, John T. McCarter, James J. Moore, Joseph M. O‘Donnell, and John S. Rego (collectively, the ―Board‖ or the ―Director Defendants,‖ and together with the Company, the ―Comverge Defendants‖)—also are named Defendants. Of the ten directors, only Young, the President and CEO, was employed by the Company. Defendant H.I.G. Capital, L.L.C. 1 Unless otherwise noted, the facts recited herein are drawn from the well-pled

allegations of the Verified Consolidated Second Amended Class Action Complaint (Docket Item 115) (the ―Complaint‖), together with the documents integral thereto, and are presumed true for purposes of this Memorandum Opinion.

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(―HIG‖), a Delaware limited liability company, is a private equity and venture capital firm with approximately $8.5 billion under management. Defendants Peak Holding Corp. and Peak Merger Sub are HIG affiliates and Delaware corporations (together, ―Peak,‖ and collectively with HIG and the Board, ―Defendants‖).

B.

1. Facts Comverge needs liquidity

This case concerns HIG‘s acquisition of Comverge in early 2012. Before the acquisition, Comverge offered ―intelligent energy management‖ or ―IEM‖ solutions, through which commercial, industrial, and residential customers can match electricity use with the cost of purchasing electricity at a given time, thereby adjusting their energy usage to save costs. Utility companies also use IEM technology to monitor power consumption and adjust power distribution to prevent outages during peak times. Comverge traded on NASDAQ under the ticker ―COMV‖ from April 2007 until the buyout was completed. The Company‘s April 2007 IPO price was $18 per share. On March 23, 2012, the last trading day before the deal was announced, Comverge stock closed at $1.88 per share. The Company had been accumulating annual net losses despite steadily increasing revenues of $98.8 million, $119.4 million, and $136.4 million for 2009, 2010, and 2011, respectively.

By late 2010, Comverge needed capital. At that time, it had two credit facilities secured by the Company‘s assets: (1) a loan from Silicon Valley Bank (the ―SVB Loan‖), entered into in 2008; and (2) a subordinated loan from Partners for Growth III, L.P. (―PFG‖). In early 2010, the SVB Loan was amended and its revolving credit facility was

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increased from $10 million to $30 million to fund general working capital and other corporate activities. In November 2010, Comverge and PFG entered into a second debt agreement (the ―PFG Note‖), which provided for $15 million in notes convertible into Comverge common stock at a conversion price of $5.46 per share. Among other things, the PFG Note gave PFG the right to block any acquisition proposal, and required the Company to meet certain minimum capitalization requirements set by PFG.

During the same time period, Comverge hired J.P. Morgan Securities LLC (―JP Morgan‖) as its financial advisor, and through the beginning of 2011, JP Morgan canvassed potential investors for their interest in acquiring a twenty percent equity stake in the Company. Of the twenty-five potential investors contacted, five strategic companies and five financial buyers executed confidentiality agreements, but none expressed an interest in the proffered minority equity position. One of the potential investors did submit, however, a non-binding indication of interest in acquiring the entire Company for $7 per share. That triggered a brief sales process between May and July 2011 in response. According to JP Morgan‘s analysis at that time, a reasonable price would have been closer to $9 per share. The Company then hired UBS Securities LLC (―UBS‖) to provide a fairness opinion, but UBS concluded that it could not give such an opinion as to the bidder‘s final offer based on Comverge‘s financial projections. Ultimately, the potential bidder and the other interested parties dropped out of the process.

Thereafter, the Company considered various alternatives for meeting its increasingly pressing capital needs, including a public offering of equity and the issuance

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