Calendar Lines 1 thru 4

Case Name: Stephen Bushansky v. Alliance Fiber Optic Products, Inc., et al.
Case No.: 16-CV-294245

Case Name: Rudy Luck v. Alliance Fiber Optic Products, Inc., et al.
Case No.: 16-CV-294418

Case Name: Rick Doerr v. Peter C. Chang, et al.
Case No.: 16-CV-294681

Case Name: Bahman Khaki v. Alliance Fiber Optic Products, Inc., et al.
Case No.: 16-CV-294833

These related putative shareholder class actions arise from the sale of Alliance Fiber Optic Products, Inc. (“AFOP”) to Corning Incorporated and its affiliates. Before the Court is plaintiffs’ motion for preliminary approval of a settlement.

The Court continued the hearing on plaintiffs’ motion to allow supplemental briefing on certain issues. Supplemental briefs were belatedly filed by plaintiffs and, separately, AFOP itself on November 27, 2017. On December 4, plaintiffs filed a declaration supporting their supplemental brief.

I. Factual and Procedural Background

Headquartered in Sunnyvale, California, AFOP is a Delaware corporation that produces fiber optic components and integrated modules for communications equipment. (First Amended Complaint in Bushansky, Case No. 16-CV-294245 (“FAC”), ¶¶ 2, 11.) On April 7, 2016, the company announced that it had entered into a merger agreement pursuant to which Corning would acquire all of the outstanding shares of its common stock for $18.50 per share, in a transaction valued at approximately $305 million. (Id. at ¶ 3.)

Plaintiffs allege that the transaction undervalued AFOP, with the sale price discounted nearly 14.9% from the company’s 52-week high value of $22.35 per share on July 23, 2015. (FAC at ¶ 4.) They further allege that the individual defendants inappropriately agreed to “lock up” the transaction with deal protection devices, including a strict “no solicitation” provision, an “information rights” provision requiring the company to fully inform Corning of any competing offer within 48 hours, a “matching rights” provision allowing Corning four business days to match any alternative bid, a “no-waiver” provision restricting AFOP from modifying or waiving any material provision of any confidentiality or similar agreement to which it is a party, and a provision establishing a termination fee of $10.55 million. (Id. at ¶ 5.) Plaintiffs also allege that defendants failed to disclose material information to stockholders in the Schedule 14D-9 statement filed with the United States Securities and Exchange Commission on April 21, 2016. (Id. at ¶ 6.) Specifically, the statement omits and/or misrepresents material information concerning (1) the background of the proposed transaction, (2) the data and inputs underlying the financial valuation exercises supporting the fairness opinion provided by AFOP’s financial advisor, Cowen and Company, LLC, and (3) the company’s financial projections, relied on by Cowen. (Ibid.)

According to the FAC, Corning was one of at least four parties that reached out to AFOP in late 2014 and early 2015 on an unsolicited basis; these parties also included Parties A, B, and C. (FAC, ¶ 36.) To facilitate discussions, these parties each entered into confidentiality agreements in late 2014 and early 2015. (Id. at ¶ 37.) The confidentiality agreement executed by Corning, and potentially the other parties, contained certain standstill provisions which would terminate upon the happening of a “Fundamental Change Event” or twelve months from the date of the agreement. (Ibid.)

On March 16, 2015, the board met telephonically to discuss “changing industry dynamics” and the effect of those changes on the company’s viability as a standalone enterprise. (FAC, ¶ 38.) The board directed its financial advisor to contact six strategic parties that the board felt were “most likely to be interested in a transaction,” including Corning and Parties A, B, and C. (Ibid.) However, management directed Cowen to defer contacting Party C based on a subsequent determination “that Party C was not likely to be among the more interested parties.” (Id. at ¶ 40.)

Unidentified members of company management met with representatives of Parties A and B, as well as Corning. (FAC, ¶ 42.) Then, on April 12, 2015, Party B informed the company it was no longer interested in a transaction, citing its view of “the future prospects of the Company.” (Id. at ¶ 43.) On April 20, Party A informed the company that its key business unit, which initially thought the company would be a fit, was no longer interested in a combination with AFOP. (Id. at ¶ 44.) After Parties A and B indicated their lack of interest, Cowen held telephonic discussions with Party C on May 4. (Id. at ¶ 45.) Corning submitted an indication of interest three days later, and AFOP negotiated with it over the following weeks. (Id. at ¶ 46.) On May 19, 2015, Party C informed the company that it was no longer interested in a transaction. (Id. at ¶ 47.) However, negotiations with Corning were suspended after it informed the board that based on its due diligence findings, it could not agree to a valuation in the range that AFOP had indicated. (Id. at ¶ 49.)

The strategic process remained substantively suspended until, between August and December of 2015, unidentified members of AFOP management met with representatives of Party B, Party C, and Corning on numerous occasions. (FAC, ¶ 51.) On December 1, 2015, Party B informed the company it was no longer interested in a potential transaction and on January 5, 2016, Party C did the same. (Id. at ¶ 52.) Corning submitted a new indication of interest, and a meeting with Party D was confirmed for January 26; however, the Party D meeting was postponed due to Corning’s request for exclusivity. (Id. at ¶¶ 53-56.) This exclusivity period expired on February 15, 2016, at which time Party D again confirmed its interest in a potential transaction and asked for a meeting on March 18. (Id. at ¶ 57.) The Party D meeting was scheduled but was again postponed. (Ibid.) The board approved the merger with Corning, including the complained-of deal protection devices, on April 7, 2016. (Id. at ¶ 59.) The merger agreement included a “no-waiver” provision that “restrict[ed] the Company and its subsidiaries from terminating, amending, releasing, modifying or waiving any material provision of any confidentiality or similar agreement to which Alliance or any of its subsidiaries is a party.” (Id. at ¶ 73.)

In April 2016, plaintiffs Stephen Bushansky and Rudy Luck filed suit against AFOP; individual defendants Peter C. Chang, Gwong-Yih Lee, James C. Yeh, Richard B. Black, and Ray Sun; and Corning and its subsidiary, the Apricot Merger Company. In May 2016, plaintiff Bahman Khaki brought a complaint against the same defendants, and plaintiff Rick Doerr sued the individual defendants only. All four actions arise from the same general allegations described above and assert claims for breach of fiduciary duty and (with respect to Corning and Apricot) aiding and abetting breach of fiduciary duty.

The parties agreed to exchange expedited discovery and reached a non-monetary settlement on May 26, 2016, which included a waiver impacting a provision in AFOP’s confidentiality agreement with Party B and AFOP’s agreement to provide supplemental disclosures in connection with the sale. The following day, AFOP filed the supplemental disclosures in Amendment No. 5 to its Schedule 14D-9. The shareholders voted to approve the sale on June 3, and on June 6, 2016, the merger was completed.

Plaintiffs now move for an order preliminarily approving the settlement, provisionally certifying the settlement class and appointing the class representatives, designating class counsel, approving the form and method for providing notice to the class, and scheduling a final fairness hearing.

I. Legal Standard for Approval of a Class Action Settlement

Generally, “questions whether a settlement was fair and reasonable, whether notice to the class was adequate, … and whether the attorney fee award was proper are matters addressed to the trial court’s broad discretion.” (Wershba v. Apple Computer, Inc. (2001) 91 Cal.App.4th 224, 234-235, citing Dunk v. Ford Motor Co. (1996) 48 Cal.App.4th 1794.)

In determining whether a class settlement is fair, adequate and reasonable, the trial court should consider relevant factors, such as the strength of plaintiffs’ case, the risk, expense, complexity and likely duration of further litigation, … 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.

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at pp. 244-245, internal citations and quotations omitted.)

The list of factors is not exclusive and the court is free to engage in a balancing and weighing of factors depending on the circumstances of each case. (Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245.) The court must examine the “proposed settlement agreement to the extent necessary to reach a reasoned judgment that the agreement is not the product of fraud or overreaching by, or collusion between, the negotiating parties, and that the settlement, taken as a whole, is fair, reasonable and adequate to all concerned.” (Ibid., quoting Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1801, internal quotation marks omitted.)

The burden is on the proponent of the settlement to show that it is fair and reasonable. However “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.”

(Wershba v. Apple Computer, Inc., supra, 91 Cal.App.4th at p. 245, citing Dunk v. Ford Motor Co., supra, 48 Cal.App.4th at p. 1802.) The presumption does not permit the Court to “give rubber-stamp approval” to a settlement; in all cases, it 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,” based on a sufficiently developed factual record. (Kullar v. Foot Locker Retail, Inc. (2008) 168 Cal.App.4th 116, 130.)

II. The Settlement Process and the Parties’ Agreement

Between May 4 and 25 of 2016, the individual defendants produced certain confidential documents in expedited discovery, including minutes of meetings of AFOP’s board of directors, Cowen’s engagement letters and presentations to the board, non-disclosure agreements with prospective bidders, and presentations and financial projections prepared by management. Plaintiffs’ counsel retained a financial and valuation expert to evaluate these materials. On May 10, 2016, plaintiffs’ counsel began settlement negotiations with a formal demand letter.

The parties reached an agreement-in-principle on May 26, 2016. The agreement provided for supplemental disclosures to the shareholders in advance of the shareholder vote on June 3, which are discussed further below. In addition, AFOP and Corning waived the standstill provision in Party B’s confidentiality agreement “to the extent that Party B was prohibited from making any confidential proposal to acquire AFOP.” Plaintiffs do not provide Party B’s confidentiality agreement for the Court’s review or indicate whether there was any communication with Party B in the few days between the settlement and the shareholder vote.

The settlement contemplates that plaintiffs will petition the Court for an award of attorney fees and expenses not to exceed $2 million. The settlement includes a broad release of all claims by plaintiffs in their capacities as AFOP stockholders “that arise out of any of the allegations, facts, practices, matters, [etc.] … that are related, directly or indirectly, to the Actions, or the subject matter thereof ….”

The settlement was subject to additional confirmatory discovery, including depositions of defendant and AFOP board member Richard B. Black and of the company’s principal financial advisor at Cowen, Setch Subudhayangkul. These depositions were completed in February 2017 and December 2016, respectively. Plaintiffs’ counsel has now concluded that the settlement is in the best interests of the putative class.

III. Analysis

On October 2, 2017, the Court continued the hearing on this matter and directed plaintiffs to file by November 22:

(1) a redline comparing the supplemental disclosures reflected in Amendment No. 5 to the 14D-9 to the prior disclosures reflected in the original 14D-9 or prior amendments thereto, along with complete copies of the 14D-9 and all amendments and (2) a supplemental memorandum, not to exceed 10 pages in length, addressing (A) the materiality of the supplemental disclosures and the scope of the release in light of [In re Trulia, Inc. Stockholder Litigation (Del. Ch. 2016) 129 A.3d 884 (“Trulia”)] and [In re Walgreen Co. Stockholder Litigation (7th Cir. 2016) 832 F.3d 718], (B) the value of the standstill waiver considering the timing of the settlement and shareholder vote, and (C) the specific facts relevant to an evaluation of the merits of plaintiffs’ claims and the risks of continued litigation.

Both plaintiffs and, separately, AFOP itself beleatedly filed supplemental briefs on November 27. Following an inquiry by the Court, plaintiffs filed the requested redline and associated documents over the noon hour on December 4.

Plaintiffs continue to maintain that both the standstill waiver and the supplemental disclosures provided real value to shareholders and justify approval of the settlement. As described in its supplemental brief, AFOP’s position is that, under the standard announced in Trulia, “the disclosures obtained by Plaintiff have at best minimal value to shareholders.” However, the company maintains that the standstill waiver has “modest” value that warrants approval of the settlement and associated release of claims by the shareholders. AFOP emphasizes its belief that the $2 million in fees requested by plaintiffs’ counsel is excessive, and indicates that it will raise that argument in opposition to plaintiffs’ eventual motion for attorney fees. AFOP’s position is that a fee award of $100,000 would be appropriate.

A. Standstill Waiver

In their supplemental brief, plaintiffs state that “[t]he relief provided by the waiver of standstill provisions always occurs in relatively close proximity to a shareholder vote, but particularly close to the expiration of a tender offer,” which can remain open for only 20 business days pursuant to federal regulations. Citing unpublished Delaware Court of Chancery materials that were not provided to the Court and AFOP’s original Schedule 14D-9, plaintiffs argue that because “Party B had engaged in at least a dozen conversations with AFOP and its financial advisor regarding a potential acquisition, and had already seriously considered acquiring AFOP,” eight days was a sufficient amount of time for it to determine whether it wished to submit an offer. Plaintiffs provide no further assessment of the standstill waiver in their supplemental briefing.

AFOP’s supplemental brief is somewhat more helpful to the Court’s assessment of this portion of the settlement. Similar to plaintiffs’ initial briefing, it explains that the “Don’t Ask/Don’t Waive” (“DADW”) provision at issue was contained in Party B’s confidentiality agreement dated October 15, 2014 and amended in September 9, 2015. The company did not enter into an agreement containing such a DADW provision with any of the other interested parties, which explains why the waiver provided by the settlement was as to Party B only.

AFOP explains generally that standstill provisions are employed to maximize shareholder value by obtaining bidders’ best and final offers at a set time, to avoid lowball bids. Used in connection with standstill provisions, “DADW provisions prohibit a party from even making a confidential request to waive the standstill. This is to avoid a situation where a bidder makes a confidential request to make a topping bid, knowing that the target’s board will feel obliged to grant the waiver in order to obtain higher value for its shareholder, effectively vitiating” the standstill provision. (AFOP’s Supp. Br. at p. 4.)

Like plaintiffs’ briefs, AFOP’s brief discusses several unpublished Delaware Court of Chancery decisions (several of which are not readily available to the Court on Westlaw) without providing them for the Court’s review. In particular, AFOP discusses In re Genomics Shareholder Litigation (C.A. 7888-VCL, Del. Ch. November 27, 2012) (“Genomics”) as “a blueprint on how courts can calculate the value [standstill waivers] could have to shareholder.” AFOP indicates that in Genomics, the Chancery Court “considered the deal size, the statistical probability of a topping bid, the number of parties that conducted due diligence, the statistical likelihood of the percentage increase in price if a topping bid occurs, and the effort expended in litigating the case” in valuing a standstill waiver. But neither AFOP nor plaintiffs address these factors in the context of the specific waiver negotiated here, or provide the Court with any analysis supporting their conclusion that the waiver has actual value because there was some likelihood that Party B might have submitted a topping bid in the time provided.

One Court of Chancery opinion that is available to the Court, In re Celera Corp. Shareholder Litigation (Del. Ch., Mar. 23, 2012, No. CIV.A. 6304-VCP) 2012 WL 1020471, aff’d in part, rev’d in part on another ground (Del. 2012) 59 A.3d 418 (“Celera”), merits discussion. Like this action, Celera involved a non-monetary settlement of claims related to a tender offer, which included “therapeutic benefits” like standstill waivers as well as supplemental disclosures. In Celera, a settlement was reached on April 18, 2011 that provided for: “(1) reduction of the Termination Fee from $23.45 million to $15.6 million; (2) modification of the No Solicitation Provision to invite competing offers from the potential bidders subject to the Don’t–Ask–Don’t–Waive Standstills; [and] (3) extension of the tender offer for seven days, from April 25 to no earlier than May 2, 2011….” (At *6-7.) In analyzing the settlement, the court considered how all of these concessions worked together, in light of the overall landscape of deal protection devices in that case, to create real value for shareholders. (At *20-22; see also In re Compellent Technologies, Inc. Shareholder Litigation (Del. Ch., Dec. 9, 2011, No. CIV.A. 6084-VCL) 2011 WL 6382523 [awarding fees in case where “the settlement shifted the agreement’s protective array from the aggressive end of the spectrum towards the middle”; discussing expert declaration, published studies, and several deal protection concessions in addition to a standstill waiver]; In re Del Monte Foods Co. Shareholders Litigation (Del. Ch., June 27, 2011, No. CIV.A. 6027-VCL) 2011 WL 2535256, at *14 [discussing empirical data yet denying without prejudice interim fee application where plaintiffs “obtained a limited injunction barring the defendants from proceeding with the stockholder vote on the Merger for a period of 20 days and, in the interim, from enforcing the no-shop, match right, and termination fee provisions in the Merger Agreement”].) A similar analysis is called for here.

Despite being provided with the opportunity to submit supplemental briefing on this issue, the parties have failed to provide the Court with context such as the full content of the confidentiality agreement with Party B; an explanation of why Party B but no other interested party was required to agree to a DADW provision; a discussion of the actual likelihood that Party B would submit a topping bid in eight days considering the history of its interactions with AFOP, its apparent ability to submit a public bid even before the waiver, and any due diligence it had conducted; an update on whether Party B actually learned of the standstill waiver considering the other deal protection devices that remained in place and whether any response or confidential offer was received from Party B; and an overview of how the standstill waiver altered the overall landscape of deal protection devices in this case. Consequently, the Court still lacks sufficient information to independently evaluate whether the standstill waiver portion of the settlement has any real value. It will not grant preliminary approval based on this aspect of the settlement at this time.

B. Supplemental Disclosures

As discussed in the Court’s prior order, Trulia announced the Chancery Court’s repudiation of its past approach to disclosure settlements, the routine approval of which the court found to “have caused deal litigation to explode in the United States beyond the realm of reason.” (In re Trulia, Inc. Stockholder Litigation, supra, 129 A.3d at p. 894.) The court indicated that

practitioners should expect that disclosure settlements are likely to be met with continued disfavor in the future unless the supplemental disclosures address a plainly material misrepresentation or omission, and the subject matter of the proposed release is narrowly circumscribed to encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.

(Id. at p. 898, italics added.)
Again, while no published California opinion has yet addressed the impact of Trulia, the Court finds its reasoning and the reasoning of Walgreen to be compelling and will evaluate the settlement before it pursuant to the standard adopted by those authorities.

Here, as summarized in counsel’s original declaration, the supplemental disclosures pertain to: (1) the standstill waiver as to Party B; (2) specific line items related to generally accepted accounting principles (“GAAP”) associated with the March and April 2016 financial projections discussed in the 14D-9; (3) an explanation that AFOP estimated $4 million in capital expenditures for 2016-2019 and $6 million for 2020, with an annual increase in working capital of roughly 0.7% of revenue; (4) an explanation of the factors considered in revising the April 2016 projections, including preliminary results from the first quarter of 2016 and management’s perception of increased risk to the company’s business; and (5) the provision of company-by-company multiples in the 14D-9’s Analysis of Selected Publicly Traded Companies and Analysis of Selected Transactions. The Court must evaluate whether these supplemental disclosures plainly added to the “total mix” of information available to shareholders in evaluating the sale to Corning. (See Zirn v. VLI Corp. (Del. 1996) 681 A.2d 1050, 1056 [materiality of disclosures is evaluated based on whether there was a substantial likelihood that the disclosure would have significantly altered the “total mix” of information made available to shareholders].)

With regard to the standstill agreement with Party B, the original 14D-9 disclosed the existence of confidentiality agreements with Party B and others and the existence of a standstill provision with Corning, but the supplemental disclosures stated for the first time that “[t]he confidentiality agreement with Party B contains a standstill agreement obligating Party B to refrain from various actions related to acquisition of control of the Company (“Standstill”), such as making proposals to acquire the Company, buying shares, and engaging in a proxy contest, and further prohibits Party B from making any public or private request that the Company waive the standstill restrictions.” However, without the missing context discussed in section III(A) above, the Court is unable to evaluate the value of this disclosure to shareholders.

With regard to the financial disclosures, “under Delaware law, when the board relies on the advice of a financial advisor in making a decision that requires stockholder action, those stockholders are entitled to receive in the proxy statement a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely.” (Trulia, supra, 129 A.3d at p. 900, internal quotations omitted.) Trulia further explained:

A fair summary, however, is a summary. By definition, it need not contain all information underlying the financial advisor’s opinion or contained in its report to the board. Indeed, this Court has held that the summary does not need to provide sufficient data to allow the stockholders to perform their own independent valuation. The essence of a fair summary is not a cornucopia of financial data, but rather an accurate description of the advisor’s methodology and key assumptions. … [D]isclosures that provide extraneous details do not contribute to a fair summary and do not add value for stockholders.

(At pp. 900-901.)

Trulia went on to hold that the provision of individual company multiples in an analyses of precedent transactions and public trading prices—as in supplemental disclosure 5 here—was not material. (At pp. 904-906.) That leaves supplemental disclosures 2-4, which are all found in the chart at pages 27-28 of the redline provided by plaintiffs. While AFOP’s financial advisor testified that management’s forecasts of the company’s tax rate and of depreciation and amortization were material or significant to him in providing his opinion, he never characterized any of the omitted information as “critical” or expressed an opinion about whether it was necessary to shareholders’ understanding of the disclosures that were provided. Shareholders were, in fact, provided with management’s estimates of earnings before interest, taxes, depreciation and amortization (“EBIDTA”) and “Unlevered After-tax Cash Flow” calculated using the variables at issue. As stated in Trulia, shareholders need not be provided with every variable used to perform financial analyses so long as they are provided with a fair summary of the methodology and key assumptions that were used. (See Bushansky v. Remy International, Inc. (S.D. Ind. 2017) — F.Supp.3d —-, 2017 WL 3530108, at *7 [omission of projected taxes and other variables was not material; “Trulia explains that the Definitive Proxy does not need to disclose all projections relied on by [a financial advisor]”].) The cases plaintiffs cites with regard to the complete omission of cash flow projections are not to the contrary—here, plaintiffs were provided with cash flow projections. Plaintiffs have not shown that the omitted variables rendered the financial projections that were disclosed inadequate. (See Trulia, supra, 129 A.3d at p. 898 [“it should not be a close call that the supplemental information is material”].)

In light of the above, the Court will not preliminarily approve the settlement based on the supplemental disclosures.

C. Final Comments on the Proposed Settlement

Having received more information about the proposed settlement through the parties’ supplemental briefing, the Court agrees with AFOP that the heart of the matter is the standstill waiver and associated disclosure of Party B’s confidentiality agreement. The Court remains open to the prospect that this aspect of the settlement provided real value to shareholders, as would justify the broad release associated with the settlement and an award of attorney fees.

However, despite being provided with an opportunity to provide supplemental briefing on this issue, plaintiffs continue to rely on general argument to the effect that any standstill waiver necessarily provides a material benefit to shareholders, no matter the practical likelihood that it increased the chances of a topping bid in a given case considering the overall landscape of deal protection devices in play and the circumstances of the potential bidder to whom it applied. While the Court recognizes that a lower showing on this point is required at preliminary approval versus upon an attorney fee request (the context of many of the Delaware cases discussed above), it remains obligated not to “give rubber-stamp approval” to settlements, but to “independently and objectively analyze the evidence and circumstances before it” based on a sufficiently developed factual record. (Kullar v. Foot Locker Retail, Inc., supra, 168 Cal.App.4th at p. 130.) The Court required a fuller and more specific showing by plaintiffs to perform its duty. It further expects that more fully addressing this critical issue at this juncture will aid both the Court and the parties in fairly and efficiently resolving future motions for final approval of the settlement and for attorney fees. Finally, there does not appear to be any time sensitivity associated with approving the settlement. The Court will thus deny plaintiffs’ motion without prejudice to its renewal based on a more thorough and specific analysis of the value of the standstill waiver in light of the particular circumstances of this case.

IV. Conclusion and Order
The motion for preliminary approval is DENIED WITHOUT PREJUDICE. Any future motion for preliminary approval should address the specific concerns raised by the Court in this order, and should focus on the value of the standstill waiver and associated disclosures given the particular circumstances in this case, as opposed to relying on general or hypothetical arguments. In particular, a future motion for preliminary approval must address the value of the standstill waiver in light of the deal size, the statistical probability of a topping bid, the number of parties that conducted due diligence, and the statistical likelihood of the percentage increase in price if a topping bid occurs. The parties should also provide the Court with copies of any unpublished Delaware authorities on which they rely in the future.

The Court will prepare the order.