Hightower v. SharpSpring, Inc.
| Decision Date | 31 August 2022 |
| Docket Number | 2021-0720-KSJM |
| Parties | LOREN TRENT HIGHTOWER, Plaintiff, v. SHARPSPRING, INC., Defendant. |
| Court | Court of Chancery of Delaware |
LOREN TRENT HIGHTOWER, Plaintiff,
v.
SHARPSPRING, INC., Defendant.
No. 2021-0720-KSJM
Court of Chancery of Delaware
August 31, 2022
Date Submitted: May 24, 2022
Blake A. Bennett, COOCH & TAYLOR, P.A., Wilmington, Delaware; Michael J. Palestina, KAHN SWICK & FOTI, LLC, New Orleans, Louisiana; Counsel for Plaintiff Loren Trent Hightower.
Matthew E. Fischer, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; John L. Kirtley, Charles A. Gordon, Emma J. Jewell, GODFREY & KAHN, S.C., Milwaukee, Wisconsin; Counsel for Defendant SharpSpring, Inc.
POST-TRIAL MEMORANDUM OPINION
McCORMICK, C.
In June 2021, SharpSpring, Inc. ("SharpSpring" or the "Company") announced that it had entered into a merger agreement to be acquired by Constant Contact, Inc. ("CCI"). The plaintiff, who owned stock in SharpSpring at the time, sent a demand pursuant to 8 Del. C. § 220 to inspect SharpSpring's books and records for the purpose of investigating possible wrongdoing in connection with the merger. As a credible basis for investigating wrongdoing, the plaintiff expressed concern that the transaction was tainted by conflicts on the part of the Chief Executive Officer who negotiated the transaction. In response to the plaintiff's demand, SharpSpring produced some formal board materials concerning meetings leading up to the merger agreement but declined to produce other documents requested by the plaintiff. The plaintiff filed this enforcement action. At trial, the plaintiff demonstrated that the board minutes' descriptions of key events did not match up with the proxy's descriptions of those events in important ways. This post-trial decision grants the plaintiff limited inspection of books and records concerning those key events.
I. FACTUAL BACKGROUND
The court held trial on a paper record on May 24, 2022. The record comprises 23 trial exhibits. These are the facts as the court finds them after trial.[1]
A. SharpSpring Commences A Sale Process.
SharpSpring is a cloud-based marketing technology company incorporated under Delaware law.[2] Shares of SharpSpring common stock were traded on the NASDAQ Capital Market under the symbol "SHSP."[3]
In June 2020, a third party expressed interest in making a minority investment in SharpSpring. SharpSpring's Board of Directors (the "Board") declined the offer, but the offer kicked off Board discussions concerning strategic alternatives. In December 2020, SharpSpring hired JMP Securities, LLC ("JMP") to advise on a potential transaction or transactions.[4] Initially, the Board was open to the possibility of SharpSpring acquiring a third party.[5] By the end of January 2021, however, the Board had determined to focus instead on a potential sale of SharpSpring.[6]
In the months that followed, JMP contacted 80 potential acquirers.[7] Fourteen signed a non-disclosure agreement.[8] Seven subsequently indicated they were not interested or became unresponsive.[9] By April 2021, only one party remained actively engaged: CCI, an
online marketing company incorporated under Delaware law.[10] JMP's representatives requested that CCI submit an indication of interest.[11]
B. The Indication Of Interest
On May 4, 2021, CCI submitted an indication of interest to acquire SharpSpring for a price between $17.00 and $19.00 per share.[12] That same day, the Board met to discuss the indication of interest and instructed SharpSpring's Chief Executive Officer, Richard Carlson, to proceed with CCI to find a revised per-share price "ideally in the direction of at least $20.00 per share."[13]
Carlson discussed a price range with CCI's Chief Executive Officer, Frank Vella, on May 6, 2021.[14] CCI responded five days later that it was not willing to pursue the transaction at a price exceeding $19.00 per share and that CCI intended to provide a letter of intent by June 1, 2021.[15]
C. The Transaction Bonus Pool
To prepare its letter of intent, CCI asked JMP to provide an estimate of transaction-related costs that SharpSpring would incur in connection with a merger transaction, including a transaction bonus pool intended to induce Carlson and other SharpSpring
employees to remain with the Company through the completion of the transaction.[16] On May 30, 2021, JMP, Board Chair Steven Huey,[17] Company director Scott Miller,[18] and the Company's outside legal counsel met telephonically to discuss a transaction bonus pool.[19]Carlson did not participate in the May 30 meeting.[20]
After the meeting, Huey and Miller expressed support for a transaction bonus pool in the aggregate amount of $1.5 million.[21] Of this amount, $1.0 million would be payable to Carlson.[22]
D. The Letter Of Intent
On June 2, 2021, CCI transmitted a non-binding letter of intent with a proposal to acquire SharpSpring for $17.00 per share.[23] The proposal assumed that transaction-related expenses would not exceed $10.0 million, which included the bonus pool.[24] The Board met to discuss the proposal the same day.[25] The Board concluded that the proposal was within an acceptable range for entering into exclusivity, and that in light of challenges,
including those relating to recurring revenue, SharpSpring should continue to pursue the transaction.[26]
E. The Revised Proposal, Increased Offer, And Updated Financials
After the Board determined to pursue a transaction with CCI at the June 2 meeting, the Board went into executive session.[27] During executive session, the Board determined to seek JMP's advice on risks associated with making a revised proposal (the "Revised Proposal") that CCI increase its offer to $17.25 per share and the bonus pool to $3 million.[28]The Board determined that if JMP advised that the risk was modest, they would authorize Carlson and JMP to make the Revised Proposal to CCI.[29]
After the June 2 meeting, JMP advised that making the Revised Proposal would not present a material risk that CCI would terminate negotiations.[30] Accordingly, the Board authorized Carlson and JMP to make the Revised Proposal to CCI.[31] In response to communications from Carlson and JMP, CCI offered a price of $17.10 per share and agreed to the increased bonus pool.[32] The Board met again on June 4, 2021, for an update and to discuss the counteroffer.[33]
After the Board received news of CCI's offer of $17.10 at the June 4, 2021 meeting, SharpSpring lowered it 2021 projections.[34]
F. The Merger Agreement
On June 21, 2021, the Board approved a transaction at a price of $17.10 per share and SharpSpring publicly announced the deal.[35] On July 14, 2021, SharpSpring filed a preliminary Schedule 14A Proxy Statement with the U.S. Securities and Exchange Commission, and on July 30, 2021, the Company filed a definitive Schedule 14A Proxy Statement (the "Proxy") with the SEC soliciting stockholder approval of the Proposed Transaction.[36] The merger closed on September 1, 2021.[37]
G. Discrepancies Between The Board Minutes And The Proxy
Athough the Proxy and minutes of the June 2 and June 4, 2021 Board meetings each recount the events between June 2 and June 4, they reflect different accounts of key facts.
1. Whose idea was the Revised Proposal?
According to the minutes, before the Board entered executive session during the June 2, 2021 meeting, Carlson proposed that he direct JMP to go back to CCI with a demand to increase the per-share price to $17.25 and the bonus pool to $3.0 million.[38]
After further discussion, "several Board members noted the potential risk of reverting to [CCI] with these additional requests[.]"[39] Presumably out of the concern that an increased bonus pool might decrease merger consideration, the Board "expressed a desire to discuss the two requests separately, rather than conflate the request relating to merger consideration with the transaction bonus pool request."[40]
By contrast, the Proxy does not mention that Carlson himself proposed the increased per-share price and bonus pool. Nor does the Proxy mention that the independent Board members expressed concern about the proposal. The Proxy states only that the independent directors discussed the terms that would become the Revised Proposal in executive session.[41]
2. Did anyone convey the Revised Proposal to CCI?
According to the minutes, neither Carlson nor JMP ever conveyed a key term of the Revised Proposal, namely that CCI increase its offer price to $17.25 per share. Rather, the minutes reflect that JMP mistakenly asked that CCI increase its offer to a mere $17.10, and then the Board determined not to correct the mistake based on Carlson's recommendation.[42] The minutes state:
Based on instructions from Mr. Huey following the June 2, 2021 Board meeting, Mr. Carlson had discussed with JMP the
proposal to request that [CCI] increase the merger consideration to $17.25 per share and, as a separate and distinct request, to agree to a transaction bonus pool of $3.0 million. After a series of discussions among Mr. Carlson and JMP regarding the proposed request, JMP confirmed to Mr. Carlson and the Board its intention to request that [CCI] increase the purchase price by approximately $1.5 million, and to adjust assumed transaction expenses to include an incremental $1.5 million of transaction bonuses for Company employees, stating its view that such request would not materially put the overall transaction at risk. With the affirmation of the Board, JMP proceeded with the request. Mr. Carlson noted that, based on a misunderstanding on the part of JMP, JMP proceeded to request an increase in the merger consideration to $17.10 per share, rather that the higher amounts previously discussed. Based on his understanding that [CCI] had already discussed and received approval to increase the price to $17.10 per share Mr. Carlson believed that going back again to request an increase to $17.25 would potentially jeopardize...
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