Cent. Laborers' Pension Fund v. McAfee, Inc.

• Citation: 17 Cal.App.5th 292,225 Cal.Rptr.3d 249
• Decision Date: 15 November 2017
• Docket Number: H039508
• Court: California Court of Appeals
• Parties: CENTRAL LABORERS' PENSION FUND, Plaintiff and Appellant, v. MCAFEE, INC. et al., Defendants and Respondents.

17 Cal.App.5th 292

225 Cal.Rptr.3d 249

CENTRAL LABORERS' PENSION FUND, Plaintiff and Appellant,

v.MCAFEE, INC. et al., Defendants and Respondents.

H039508

Court of Appeal, Sixth District, California.

Filed November 15, 2017

Robbins Geller Rudman & Dowd, Rick Atwood, Jr., Randall J. Baron, Maxwell R. Huffman, San Diego, for Plaintiff/Appellant Central Laborers' Pension Fund.

Gibson, Dunn & Crutcher, Paul J. Collins, Palo Alto, Mark A. Perry, Wayne W. Smith, Thomas G. Hungar, Linda D. Lam, Casey J. McCracken, Irvine, for Defendants/Respondents McAfee, Inc. Intel Corporation.

Wilson Sonsini, Rodney G. Strickland, Boris Feldman, Palo Alto, for Defendants/Respondents David DeWalt, Thomas E. Darcy, Denis J. O'Leary, Robert W. Pangia, Carl Bass, Jeffrey A. Miller, Anthony Zingale, Leslie G. Denend, Lorrie M. Norrington, Charles J. Robel.

Premo, J.

This is a class action brought by former public shareholders of security technology company McAfee, Inc. Intel Corporation acquired McAfee in a cash sale at $48 per share for a total of $7.68 billion (merger). Plaintiff Central Laborers' Pension Fund (plaintiff), on behalf of itself and the class, alleges that McAfee, Intel, and the former members of McAfee's board of directors—comprised of nine outside directors and the former president and CEO, David DeWalt (together defendants)—engaged in an unfair merger process contaminated by conflicts. Plaintiff claims that in pursuit of his own self-interest, DeWalt withheld material information about negotiations with Intel management from McAfee's board of directors, whose members failed to safeguard the process and who consequently approved an undervalued price per share. Plaintiff also claims that defendants omitted material information from the merger proxy statement on which McAfee's public shareholders relied in voting for the merger.

The trial court, applying Delaware law, granted summary judgment for defendants. The court found no triable issue of material fact regarding the individual defendants' alleged breaches of fiduciary duty, and concomitantly no liability on behalf of McAfee and Intel for aiding and abetting. Plaintiff challenges the summary judgment as well as an earlier order setting the matter for a trial to the court without a jury.

For the reasons stated herein, we affirm the judgment as to the nine outside director defendants and reverse the judgment as to DeWalt and the corporate defendants.

I. FACTUAL AND PROCEDURAL BACKGROUND¹

A. FACTUAL OVERVIEW

1. The Company

McAfee was founded in 1989 as a Delaware corporation with headquarters in Santa Clara. At the time of the merger, it was the world's largest dedicated security technology company. David DeWalt joined McAfee in 2007 as president and CEO and served on the board of directors, bringing about 15 years of executive experience in the software industry, including the sale of a company under his leadership. DeWalt's reputation according to one investment bank's analysis was "for building and subsequently selling businesses."

The nine other members of the board—defendants Charles Robel, Carl Bass, Thomas Darcy, Leslie Denend, Jeffrey Miller, Lorrie Norrington, Denis O'Leary, Robert Pangia, and Anthony Zingale—were outside, nonmanagement, nonemployee directors with combined executive and board experience in the technology, investment banking, and accounting fields, including dozens of merger and acquisition transactions. None of the independent directors joined Intel as directors or employees after the merger.

McAfee maintained close working relationships and alliances with numerous technology companies. As part of its regular diligence, the board of directors discussed McAfee's strategic relationships with other technology companies along a "full spectrum of options" from technology partnerships to mergers and acquisitions. It was DeWalt's role to update the board on these ongoing discussions, which he did as part of a "regular review process that the board and management went through ... almost every meeting."

2. McAfee and Intel—Business Relationship and Early Merger Discussions

Before the merger, McAfee had a nearly decade-long relationship with Intel as a supplier of security software and a partner in research and development and marketing initiatives. In 2009, the companies agreed to collaborate in developing enhanced security technology using the expertise of both companies through a joint research-and-development project called "Patmos." Intel's Software and Services Group, led by the group's general manager and senior vice-president Renee James (James), was around this time also considering potential acquisitions as part of Intel's security strategy, including the possibility of acquiring an existing platform security company such as McAfee.

In March 2010, Intel requested a meeting with McAfee. DeWalt and Gerhard Watzinger, a McAfee executive vice-president, speculated that Intel might want to "beat us up about Patmos" because McAfee had not prioritized the project, leading Intel to complain on multiple occasions that McAfee was not meeting the collaboration deadlines. In an e-mail to James, DeWalt expressed excitement about the opportunities for security products and the potential for "an amazing partnership." DeWalt asked if James had an agenda to propose for the meeting and suggested they "expand slightly and review all key business synergies and financial models," noting that his chief strategy officer and "head of M&A [Watzinger]" would attend. Watzinger prepared a presentation that included one slide each on "key synergies," financial outlook, and "accretive" benefits to revenue and shareholder value. The McAfee employee responsible for the financial outlook slide described it as a "high level," "back of the envelope" and nonexpert view of potential benefits.

James later testified that the McAfee presentation "surprised" her because she anticipated a meeting about the joint development effort. DeWalt testified that the group led by James met "to ask questions about our business in the spirit of partnership, but certainly the questions that were being asked were probably more leading than just a partnership discussion."

After the March 2010 meeting, McAfee and Intel management continued their partnership discussions. Intel began vetting investment banks for advisory services in connection with a potential "deal" in the security sector. At one point Intel offered the advisory position to Morgan Stanley. Morgan Stanley declined, noting internally that it anticipated a more lucrative "revenue opportunity" providing sell-side advice to McAfee.

Meanwhile, DeWalt and James stayed in regular contact, which DeWalt understood as "partner oriented" and indicative of Intel's interest in security and in McAfee. A close collaboration began between McAfee and Intel management in a project that was dubbed "Inca." On April 4, 2010, representatives of both sides met at Intel's headquarters. The objective of the Inca meeting was to provide Intel with "necessary McAfee and technology background to build synergy matrix and [financial] model" and to "[i]dentify top opportunities for combined assets." The discussion centered on a list of eight joint business opportunities, including Patmos, that each represented a "$1B+ opportunity." Inca discussions continued throughout April and May 2010. McAfee added a segment-by-segment analysis of business opportunities to Intel's technology asset list, highlighting McAfee's "value-add" in terms of the eight "Billion Dollar" ideas. In early and mid-May 2010, Intel sent detailed inquiries to McAfee on monetization, joint market penetration, and McAfee's growth strategy and revenue direction.

In May and June 2010, James proposed to Intel's board of directors that Intel engage in acquisition discussions with McAfee. Intel's internal valuation analyses of McAfee as presented to the Intel board of directors in June 2010 reflected a range of values from a standalone price per share of $42 to as high as $56 to $90 per share for "strategic synergies" from an acquisition. The Intel board of directors approved an acquisition offer range of $45 to $49 per share.

3. June 11 Proposal at $45 per share

James met with DeWalt on June 10, 2010 and verbally conveyed Intel's interest in making an offer at the price of $45 per share. DeWalt recalled it as the "first meeting ... where there was a strong indication of interest and that there might be an offer to follow." DeWalt's response to James was "if it didn't start with a five, it was a non starter." James later testified that "Dave [DeWalt] let me know 45 didn't work. ... Dave's words were: It needs to start with a 5."

The next day, James sent DeWalt a written request for exclusive negotiating rights and nonbinding proposal to acquire McAfee in a cash offer at $45 per share (June 11 proposal) subject to the completion of due diligence and board and regulatory approvals. The proposed price represented a 43 percent premium over McAfee's stock price, which had fallen since late 2009 and was trading in the low 30s. The June 11 proposal stated that Intel intended to operate McAfee as a standalone subsidiary and to retain "the current management team." DeWalt notified McAfee board chairman Robel, who called a special meeting for the next day.

In an e-mail to Intel's CEO and board subcommittee dated June 11, 2010, James reported "preliminary progress" with McAfee and stated that DeWalt had requested a nonbinding letter of intention to enter into due diligence despite "a price gap to their potential expectations ...." In a follow-up exchange with Andy Bryant (of Intel), James stated that DeWalt's "expected price" was "50." Bryant responded that a deal was possible "if that is where he is starting." James also recounted the meeting to her Intel colleague Donald Harbert, whose notes indicate that James believed the "gap is $5.00" between Intel's indication of interest at $45 and McAfee's expectations for an opening bid....