Case Name:   In Re Supertex, Inc. Shareholder Litigation.

Case No.:       1-14-CV-261803

 

This is a consolidated shareholder class action brought by plaintiffs Bruce and Kathleen Ott (the “Otts”) and High Rate Fund Return (“HRFR”) (collectively “Plaintiffs”) on behalf of the public stockholders of nominal defendant Supertex, Inc. (“Supertex”) against members of Supertex’s Board of Directors, including Henry C. Pao (“Pao”), Benedict C. K. Choy (“Choy”), W. Mark Loveless (“Loveless”), Elliott Schlam, and Milton Feng (the “Individual Defendants”).  The consolidated cases arise out of the attempted sale of Supertex to defendant Microchip Technology Inc. (“Microchip”).

 

Plaintiffs allege that Supertex is a mixed signal semiconductor manufacturer focused on high performance analog and high voltage interface products for use in the medical, flat panel display, automotive, industrial electronics and telecommunications industries.[1]  On February 10, 2014, Supertex and Microchip announced a definitive agreement under which Microchip, through its wholly-owned subsidiary Orchid Acquisition Corporation (“OAC”), will acquire Supertex for $33.00 per share in cash, representing a total equity value of approximately $394 million, and a total enterprise value of approximately $246 million.[2]  Plaintiffs allege the proposed acquisition is grossly inadequate and undervalues Supertex, given its recent strong performance and future growth prospects.[3]  Plaintiffs further allege that the sales process was materially flawed because Pao (Supertex’s co-founder, President, Chief Executive Officer (“CEO”), and director) did not consult or notify the Board or anyone else from Supertex and did not consider other strategic alternatives for the Company.[4]  Plaintiffs allege that Pao unilaterally conducted negotiations with Microchip while only sporadically informing Choy (co-founder, Senior Vice President of Technology and Development, and director of Supertex) of his discussions after the fact.[5]

 

Plaintiffs further allege that Pao hired a highly conflicted financial advisor, Oppenheimer & Co., Inc. (“Oppenheimer”) without consulting or informing the Board, which only ratified the decision at the very last minute.[6]  Plaintiffs allege that Oppenheimer’s fairness opinion for the proposed buyout was based on financial forecasts that were created by Pao, and Oppenhemier was incentivized to render a favorable fairness opinion because a majority of its fee is contingent upon consummation of the sale.[7]

 

Plaintiffs further allege that the full Board was unaware that negotiations for the sale of Supertex were taking place until two and a half weeks before the Merger Agreement was signed, and Supertex failed to attempt to negotiate a price higher than Microchip’s $33.00 per share offer or seek bids from other potentially interested parties.[8]  Plaintiffs further allege that the Board agreed to three unreasonable deal protection devices that served to prevent other bidders from making a successful competing offer and substantially limited the Board’s ability to act with respect to investigating and pursuaing superior proposals and alternatives: (1) a strict no-solicitation provision; (2) a provision that provides Microchip with 5 business days to match any competing proposal; and (3) a provision that requires Supertex to pay Microchip a termination fee of $15.76 million, or 4% and 6.4% of the total equity value and enterprise of the deal in order to enter into a transaction with a superior bidder.[9]

 

Plaintiffs further allege that on February 25, 2014, Supertex filed its Schedule 14A Preliminary Proxy Statements (“Proxy”) with the Securities and Exchange Commission (“SEC”) soliciting Supertex shareholders to vote in favor of the Proposed Transaction, but the Proxy fails to provide material information and/or provides materially misleading information concerning the proposed transaction, rendering the shareholders unable to make an informed decision on their vote.[10]

 

The Otts’ Complaint, filed March 6, 2014, asserts three counts for: (1) breach of fiduciary duties (against the Individual Defendants; (2) breach of fiduciary duty – disclosure (against the Individual Defendants); and (3) aiding and abetting (against Supertex, Microchip and OAC).  Similarly, HRFR’s Complaint, filed March 7, 2014, asserts three causes of action for: (1) loyalty, fair dealing and due care (against the Individual Defendants); (2) claim for failure to disclose (against Supertex and the Individual Defendants); and (3) claim for aiding and abetting breaches of fiduciary duty (against Microchip and OAC).

 

On March 13, 2014, the Otts filed an ex parte application for temporary restraining order preventing the shareholder vote (scheduled for April 1, 2014) from taking place pending a preliminary injunction hearing and for limited expedited discovery.

 

On March 19, 2014, the Court entered the parties’ stipulation to consolidate their actions under the caption In re Supertex, Inc. Shareholder Litigation and to appoint lead counsel.

 

On March 20, 2014, the Court entered the parties’ stipulation regarding discovery and motion for preliminary injunction.  Under the stipulation, Supertex agreed to produce various categories of unprivileged documents including: board materials, minutes and resolutions adopted at each of the meetings of Supertex’s Board of Directors at which the proposed merger with Microchip was discussed; presentations by Oppenheimer to the Board in connection with these Board meetings; Oppenheimer’s engagement letter; change of control agreements for seven of Supertex’s senior officers; Supertex’s business plan for the current fiscal year; a spreadsheet used as the basis for providing guidance to Supertex’s shareholders in January 2014 with respect to the current quarter; and due diligence materials provided by Supertex to Microchip in connection with the merger.[11]  Supertex also agreed to make Loveless and Pao available for deposition on March 21, 2014.[12]  Plaintiffs agreed to withdraw the TRO application and produce documentary evidence of continued ownership of Supertex common stock by Plaintiffs from February 7, 2014 to the present, and non-privileged documents created or received from January 1, 2013 to the present in their possession related to Supertex other than documents prepared by Supertex.[13]  The stipulation also set a hearing and briefing schedule for a motion for preliminary injunction.

 

On March 24, 2014, Plaintiffs filed their motion for preliminary injunction to enjoin the proposed transaction.  On March 26, 2014, the motion for preliminary injunction was withdrawn.

 

On April 1, 2014, at the Special Meeting of Supertex’s shareholders, approximately 98.4% of the Supertex shares that voted were voted in favor of the merger.  Approximately 87.46% of the total outstanding Supertex shares were voted.

 

On April 17, 2014, Plaintiffs took the deposition of Michael Lippert, a director and representative of Oppenheimer.

 

The parties now move for preliminary approval of the class action settlement and class notice and for provisional certification of the settlement class.

 

Under the Stipulation of Settlement,[14] Supertex agreed to disclose certain information (the “Supplemental Disclosures”) in Definitive Additional Materials on Schedule 14A, which Supertex filed with the SEC on March 26, 2014.  The Supplemental Disclosures included the following:

 

• Information regarding potential conflicts of interest of the board, including that as a result of a February 7, 2014 amendment to Supertex’s 2009 Equity Incentive Plan, 19,000 options held by each outside director would vest upon closing of the merger, of which 9,000 would have vested without the amendment to the February 7, 2014 amendment, and 10,000 would vest due to the amendment;
• Information regarding Supertex’s financial forecasts, including (a) that management typically prepared a one-year forecast in late March of each year in connection with the annual budget for the subsequent fiscal year which was presented to the Board for its review and approval, (b) that the Management Case forecast was developed by Dr. Pao and Choy, the only management team members then aware of the proposed merger, at Oppenheimer’s request for purposes of its discounted cash flow analysis, (c) that the outside directors were never involved in the development of the one-year forecasts included within the annual fiscal year budgets or with the Management Case, and (d) that at the Board meeting held on February 7, 2014, the Management Case, including its underlying assumptions, was presented to the Board for its information since the Management Case had provided the basis for Oppenheimer’s discounted cash flow analysis;
• Information regarding potential conflicts of interest of Supertex’s financial advisor, including that in the event of a breach by Microchip of its obligation to conduct the merger, Oppenheimer would be entitled, pursuant to its January 14, 2014 engagement letter, to twenty percent (20%) of any damages recovered by Supertex in litigation or via settlement;
• Information regarding the financials of Supertex, including that it does not currently expect any material adjustments to its fiscal year 2011 and 2012 federal income tax filings which were subject to an IRS audit, based on preliminary interactions with the IRS; and
• Information regarding the sale process and changing nature and risks of Supertex’s business during the sale process, including (a) the Board’s determination not to grant Microchip exclusivity in Supertex’s non-disclosure agreement with Microchip dated January 14, 2014, and management’s view on the benefit thereof and (b) that Supertex believes it competes primarily on the basis of product innovation and responsiveness to changing needs of customers, and as a result, Supertex strives to work with customers to learn of their future requirements so that it can develop products that they will design into their systems, and even if Supertex does achieve a design win, the customer’s system may never go into volume production due to various reasons or the production volume may be smaller than Supertex had anticipated.

 

Supertex also agrees to pay Plaintiffs’ counsel $550,000 in attorney’s fees and expenses.[15]

 

The proposed method of notice to the putative class is through individualized mailing of the “Notice of Pendency and Proposed Settlement of Class Action” form.[16]

 

Discussion

 

The well-recognized factors that the trial court should consider in evaluating the reasonableness of a class action settlement agreement include ‘the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, the risk of maintaining class action status through trial, the amount offered in settlement, the extent of discovery completed and the stage of the proceedings, the experience and views of counsel, the presence of a governmental participant, and the reaction of the class members to the proposed settlement.’ [Citations.]  This list ‘is not exhaustive and should be tailored to each case.’ [Citation.]”  (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 128.)  “[A] presumption of fairness exists where: (1) the settlement is reached through arm’s-length bargaining; (2) investigation and discovery are sufficient to allow counsel and the court to act intelligently; (3) counsel is experienced in similar litigation; and (4) the percentage of objectors is small.  [Citation.]”  (Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794, 1802.)

 

Here, the settlement appears to have been reached through arm’s-length bargaining between experienced counsel after the exchange of fairly extensive written discovery, the depositions of Loveless and Pao on March 21, 2014, and the filing of papers in connection with the preliminary injunction motion.

 

“Although [t]here is usually an initial presumption of fairness when a proposed class settlement … was negotiated at arm’s length by counsel for the class, … it is clear that the court should not give rubber-stamp approval.  Rather, to protect the interests of absent class members, the court must independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interests of those whose claims will be extinguished.  To make this determination, the factual record before the … court must be sufficiently developed… . The proposed settlement cannot be judged without reference to the strength of plaintiffs’ claims.  The most important factor is the strength of the case for plaintiffs on the merits, balanced against the amount offered in settlement.  The court must stop short of the detailed and thorough investigation that it would undertake if it were actually trying the case, but nonetheless it must eschew any rubber stamp approval in favor of an independent evaluation.”  (Kullar, supra, 168 Cal.App.4th at p. 130, internal citations and quotation marks omitted.)

 

Here, the settlement is for Supplemental Disclosures regarding the sales process.  The breach of fiduciary duty claims allege a flawed sales process in which Pao unilaterally negotiated the sale with a personal friend (Microchip’s CEO), the Supertex Board remained largely aloof and unaware, and the Oppenheimer fairness opinion was based on unreliable financial projections, and was tainted by Oppenheimer’s conflicts of interest.  The disclosure claims allege that there were inadequate disclosures in the February 25, 2014 Proxy soliciting the Supertex shareholders to vote in favor of the proposed buyout.  Plaintiffs submit that the Supplemental Disclosures represent a majority of the material information sought in their disclosure claims, which allowed the shareholder vote to be based on complete information.  Plaintiffs concede that it would have been more difficult to preclude consummation of the merger based on the claim of inadequate sales price due to the defense of the business judgment rule.  Plaintiffs also submit that the settlement for Supplemental Disclosures averted potentially difficult obstacles like having to prevail on the preliminary injunction motion and post a large bond to secure the injunction.  The Court finds that Plaintiffs sufficiently balance the strength of their case on the merits against the settlement to support preliminary approval.  Plaintiffs submit they will brief the issue in greater detail prior to the final approval hearing, and Plaintiffs should discuss the materiality of the Supplemental Disclosures under the relevant legal standards.  (See Rosenblatt v. Getty Oil Co. (Del. 1985) 493 A.2d 929, 944.)

 

The Court also has an independent right and responsibility to review the attorney fee provision of the settlement agreement and award only so much as it determines reasonable.  (Garabedian v. Los Angeles Cellular Telephone Co. (2004) 118 Cal.App.4th 123, 127-128.)  “Even where the parties agree as to the amount of attorney fees in such a settlement agreement, courts properly review and modify the agreed upon fees if the amount is not reasonable.”  (Id.)  Here, the parties agreed on $550,000 in attorney’s fees.  Although the case was filed in March of this year, the case involved significant discovery and law and motion work.  The Court grants preliminary approval of the $550,000 amount, subject to final approval based on billing records submitted prior to the final fairness hearing.  (See Lealao v. Beneficial Cal. Inc. (2000) 82 Cal.App.4th 19, 46-47 [discussing lodestar cross-check].)

 

Regarding the class notice procedures, notice by first class mail is reasonably calculated to give due notice to the proposed class.

 

The content of a class notice is subject to court approval.  If class members are to be given the right to request exclusion from the class, the notice must include the following:

 

A brief explanation of the case, including the basic contentions or denials of the parties;
A statement that the court will exclude the member from the class if the member so requests by a specified date;
A procedure for the member to follow in requesting exclusion from the class;
A statement that the judgment, whether favorable or not, will bind all members who do not request exclusion; and
A statement that any member who does not request exclusion may, if the member so desires, enter an appearance through counsel.

 

(Cal. Rules of Court, rule 3.766(d).)  Here, the Notice is Exhibit C to the Stipulation of Settlement and it reasonably complies with rule 3.766(d) in all respects.

 

Plaintiffs move to certify a settlement class of all persons or entities who owned Supertex common stock on February 7, 2014 and all of their successors in interest and transferees, immediate and remote, through and including April 1, 2014, but not Defendants or any persons or entities related to or affiliated with Defendants.

 

Under California Rules of Court, rule 3.769(c) and (d), the Court has discretion to order certification of a provisional settlement class after the preliminary settlement hearing.  California Code of Civil Procedure Section 382 governs the certification of a class in California and sets forth two requirements: “(1) There must be an ascertainable class; and (2) there must be a well-defined community of interest in the question of law and fact involved affecting the parties to be represented.”  (Daar v. Yellow Cab (1967) 67 Cal.2d 695, 704.)  To clarify the “community-of-interest” standard, the California Supreme Court has used language from Rule 23 of the Federal Rules of Civil Procedure, in stating the requirements as follows: “(1) predominant questions of law or fact; (2) class representation with claims or defenses typical of the class; and, (3) class representatives who can adequately represent the class.”  (Richmond v. Dart Indus., Inc. (1981) 29 Cal.3d 462, 470.)

 

Ascertainable Class:  “The trial court must determine whether the class is ascertainable by examining (1) the class definition, (2) the size of the class and (3) the means of identifying class members.”  (Miller v. Woods (1983) 148 Cal.App.3d 862, 873.)  “Class members are ‘ascertainable’ where they may be readily identified without unreasonable expense or time by reference to official records.”  (Rose v. City of Hayward (1981) 126 Cal.App.3d 926, 932.)  Here, the class members are ascertainable by reference to Supertex’s records for its shareholders during the relevant class period.

 

Numerosity:  The numerosity requirement is met if the class is so large that joinder of all members would be impracticable.  (See Richmond, supra, 29 Cal.3d at p. 470.)  Here, Plaintiffs submit that as of February 24, 2014, there were over 11 million shares of Supertex stock outstanding held by 85 holders of records record, which does not include shareholders who held Supertex stock in street name.[17]  Plaintiffs demonstrate that joinder of all potential plaintiffs would not be practical.

 

Predominant Questions of Fact and Law:  “A class may be certified when common questions of law and fact predominate over individualized questions.  [Citation.]  As a general rule if the defendant’s liability can be determined by facts common to all members of the class, a class will be certified even if the members must individually prove their damages.  [Citation.]”   (Hicks v. Kaufman & Broad Home Corp. (2001) 89 Cal.App.4th 908, 916.)  There is little doubt that all of the common shareholders of Supertex share a community of interest under the facts of this case and that common questions of law and fact would predominate this litigation as Supertex and the Individual Defendants owed fiduciary duties to all of the shareholders in connection with the proposed transaction, and their liability, if any, would likely have been subject to common proof.

 

Typicality:  A class representative’s claim must be “typical” but not necessarily identical to the claims of other class members.  It is sufficient that the representative is similarly situated so that he or she will have the motive to litigate on behalf of all class members.  (See Classen v. Weller (1983) 145 Cal.App.3d 27, 45.)  Plaintiffs’ claims appear to be typical of the class, as they are all Supertex shareholders contesting the proposed transaction for the same reasons.

 

Adequate Representation:  “Adequacy of representation depends on whether the plaintiff’s attorney is qualified to conduct the proposed litigation and the plaintiff’s interests are not antagonistic to the interests of the class.”  (McGhee v. Crocker-Citizens Nat. Bank (1976) 60 Cal.App.3d 442, 450.)  As discussed above, Plaintiffs’ counsel submits evidence of their experience in similar litigation.  There is no reason to believe that Plaintiffs have any special defenses or interests that would render their interests antagonistic to the rest of the Supertex shareholder class.

 

The Court finds that the proposed class meets the criteria for certification.  Notably, the Stipulation of Settlement only provides a means for objecting to the settlement, not opting out.[18]  In Bell v. Am. Title Ins. Co. (1991) 226 Cal.App.3d 1589, the Court of Appeal held that California trial courts may approve non-opt-out class action settlements if the prosecution of separate actions by individual class members would create a risk of inconsistent or varying adjudications which would establish incompatible standards of conduct, and whenever the case was predominantly for injunctive relief.  Here, non-opt-out certification is appropriate because the settlement agreed upon certain disclosures to shareholders in connection with the proposed transaction, and a potential opt-out could seek to require additional or different disclosures, in contravention of the settlement.  Thus, an opt-out could subject Defendants to inconsistent standards of conduct.

 

For all of these reasons, the Court preliminarily approves this class action settlement, including Plaintiffs’ proposed schedule of events:

 

• Notice mailed to class members – 14 calendar days after preliminary approval;
• Last day for class members to object – 21 calendar days before final approval hearing;
• Filing date for final approval papers – 7 calendar days prior to final approval hearing;
• Final approval hearing – September 19, 2014.