Mercier v. Inter-Tel (Delaware), Inc.

• Decision Date: 14 August 2007
• Docket Number: C.A. No. 2226-VCS.
• Citation: 929 A.2d 786
• Parties: Vernon A. MERCIER, et al., Plaintiffs, v. INTER-TEL (DELAWARE), INCORPORATED, Norman Stout, Alexander Cappello, J. Robert Anderson, Jerry W. Chapman, Gary D. Edens, Steven E. Karol, Robert Rodin and Agnieszka Winkler, Defendants.
• Court: Court of Chancery of Delaware

929 A.2d 786

Vernon A. MERCIER, et al., Plaintiffs, v. INTER-TEL (DELAWARE), INCORPORATED, Norman Stout, Alexander Cappello, J. Robert Anderson, Jerry W. Chapman, Gary D. Edens, Steven E. Karol, Robert Rodin and Agnieszka Winkler, Defendants.

C.A. No. 2226-VCS.

Court of Chancery of Delaware, New Castle County.

Submitted: August 8, 2007.

Decided: August 14, 2007.

Michael Hanrahan, Esquire, Paul A. Fioravanti, Jr., Esquire, Tanya Pino Jefferis, Esquire, Laina M. Herbert, Esquire, Prickett, Jones & Elliott, P.A., Wilmington, Delaware; Attorneys for Plaintiffs.

Marc A. Topaz, Esquire, Lee D. Rudy, Esquire, Michael Wagner, Esquire, James H. Miller, Esquire, Schiffrin, Barroway, Topaz & Kessler, LLP, Radnor, Pennsylvania, Of Counsel for Plaintiffs.

A. Gilchrist Sparks, III, Esquire, S. Mark Hurd, Esquire, Jay N. Moffitt, Esquire, Kevin M. Coen, Esquire, Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware, Attorneys for Individual Defendants.

Stephen C. Norman, Esquire, John F. Grossbauer, Esquire, Kevin R. Shannon, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Attorneys for Defendant Inter-Tel (Delaware), Incorporated.

Stephen D. Alexander, Esquire, J. Warren Rissier, Esquire, Jennifer Sepic, Esquire, bingham McCutchen LLP, Los Angeles, California, Of Counsel for Defendants.

OPINION

STRINE, Vice Chancellor.

I.

In this decision based on a preliminary injunction record, I conclude that well-motivated, independent directors may reschedule an imminent special meeting at which the stockholders are to consider an all cash, all shares offer from a third-party acquiror when the directors: (1) believe that the merger is in the best interests of the stockholders; (2) know that if the meeting proceeds the stockholders will vote down the merger; (3) reasonably fear that in the wake of the merger's rejection, the acquiror will walk away from the deal and the corporation's stock price will plummet; (4) want more time to communicate with and provide information to the stockholders before the stockholders vote on the merger and risk the irrevocable loss of the pending offer; and (5) reschedule the meeting within a reasonable time period and do not preclude or coerce the stockholders from freely deciding to reject the merger.

In the course of so deciding, I conclude that, consistent with the directional teaching of cases like MM Companies, Inc. v. Liquid Audio, Inc.,¹ In re MONY Group, Inc. S'holder Litig.,² and Chesapeake Corp. v. Shore,³ the Blasius standard should be reformulated in a manner consistent with using it as a genuine standard of review that is useful for the determination of cases, rather than as an after-the-fact label placed on a result. Such a reformulation would be consistent with prior decisions recognizing the substantial overlap between and redundancy of the Blasius and Unocal standards,⁴ and would have the added benefit of creating a less prolix list of standards of review. Recognizing, however, that the Supreme Court's recent decision in Liquid Audio continued to employ the "compelling justification" language of Blasius within the context of an appropriate Unocal review of director conduct that affects a corporate election touching on corporate control, I also find that directors fearing that stockholders are about to make an unwise decision that poses the threat that the stockholders will irrevocably lose a unique opportunity to receive a premium for their shares have a compelling justification — the protection of their stockholders' financial best interests — for a short postponement in the merger voting process to allow more time for deliberation.

Therefore, the plaintiff's request for a preliminary injunction application based on the contrary assumption — that directors have no discretion as fiduciaries to reschedule a vote once a stockholder meeting is imminent and the directors know that the vote won't go their way if it is held as originally scheduled — is denied.

II.

A.

The plaintiff, Vernon Mercier, in this class action seeks to preliminarily enjoin the consummation of a stockholder approved merger in which Inter-Tel, Inc. will sell itself to Mitel Networks Corporation in an all cash, all shares merger for $25.60 a share (the "Mitel Merger"). Mercier owns 100 shares of Inter-Tel, which he has held since 1999.⁵

Inter-Tel describes itself as a:

single-point-of-contact, full-service provider of IP and converged voice, video and data business communications platforms, multi-media contact center applications, remote control software to provide real-time communications and instantaneous, browser-to-browser Web conferencing and help desk support solutions. Inter-Tel also provides a wide range of managed services, including voice and data network design and traffic provisioning, local and long distance calling services, custom application development, maintenance, leasing, and support services for its products.⁶

As I grasp it, this essentially means that Inter-Tel sells high-tech phone systems and provides communications services to businesses and government agencies. Inter-Tel was founded over thirty-five years ago by Steven G. Mihaylo. Mihaylo remains Inter-Tel's largest stockholder, owning 19% of its shares. Although the plaintiff's arguments often echo those made by Mihaylo, Mihaylo himself is not a plaintiff in this or any other lawsuit involving Inter-Tel. Mihaylo has not been deposed in the case and has not submitted affidavit testimony.

For the past several years, Inter-Tel has been the subject of a tumultuous struggle between Mihaylo and Inter-Tel's independent board majority. The parties have not burdened the court in their injunction papers with an explanation of why and how the waters first became roiled.

What is clear is that since 2005, Inter-Tel's future has been up for grabs. During 2005 itself, Inter-Tel received several soft overtures from potential buyers. These included Mitel, one of Inter-Tel's leading competitors, which could expect to capture synergistic gains if it merged with Inter-Tel. The Mitel contact was not new, as Inter-Tel and Mitel had discussed the possibility of merging two years before.

Among the other parties that contacted Inter-Tel during 2005 was the private equity firm Francisco Partners. In autumn 2005, a special committee of independent directors was formed to consider the various expressions of interest Inter-Tel had received. Eventually, things got serious with one bidder. But, at the same time, the Inter-Tel board was internally riven, with a majority of the board wanting Mihaylo, who had served as Inter-Tel's CEO since its founding, to retire from that position. Eventually, both the interested bidder and Mihaylo went away, but only one did so permanently.

In February 2006, Mihaylo resigned as CEO. In early March, he resigned as a director. By that time, the interested bidder had ultimately decided not to make a firm offer. Whether the obvious strife between the corporation's founder and the board majority had an effect, the record does not reveal.

But what transpired is suggestive of that possibility. Upon resigning as director, Mihaylo filed a Schedule 13D indicating that he was considering his alternatives regarding his investment in Inter-Tel. Because of that, the Inter-Tel Special Committee remained active, given the possibility that Mihaylo himself might propose a strategic alternative. On the heels of Mihaylo's filing, another party made an expression of interest.

Mihaylo soon sought re-election to the Inter-Tel board, indicating his intent to elect a slate of three directors, including himself, to Inter-Tel's board, at the 2006 annual meeting.⁷ He also proposed a non-binding resolution calling on the board to sell Inter-Tel to the highest bidder.

In May 2006, the Inter-Tel board reached a settlement with Mihaylo. Mihaylo's proposed slate was seated on the board, and the board was expanded from 10 to 11 members. Mihaylo was also guaranteed the right to have his advisors and financial sponsors obtain access to reasonable due diligence in order to facilitate his ability to make an acquisition proposal. Furthermore, the settlement agreement provided that Inter-Tel would convene a special meeting at Mihaylo's request if he wished to have a stockholder vote on a proposal calling for the board to sell the company.

Importantly, the agreement permitted the board to exclude Mihaylo and his nominees, Kenneth L. Urish and Anil K. Puri,

from any discussions, and from receipt of any materials regarding, Inter-Tel's value and the strategic plan upon which such value would in part be based, Inter-Tel's relationship with Mr. Mihaylo, and the consideration of any proposal to acquire Inter-Tel from Mr. Mihaylo or any other person, in each case until Mr. Mihaylo filed a Schedule 13D disclosing that he no longer had an intent to increase his shareholdings or otherwise acquire Inter-Tel.⁸

Consistent with that agreement, the board constituted a new "Special Committee," which was comprised of the other eight directors. The Special Committee's Chairman was Alexander Cappello, who was also the Chairman of the Board. The executive who succeeded Mihaylo as CEO, Norman Stout, also served on the Special Committee. The remaining six members of the Special Committee were and remain non-employee, outside directors whose independence has not been challenged by the plaintiff. The Special Committee retained UBS, which had been advising the board majority before the settlement, as its financial advisor.

Throughout the late spring and summer of 2006, the Special Committee fielded acquisition inquiries from a variety of sources. Most notable was a formal expression of interest that Mihaylo, along with a partner, Vector Capital, made on June 14, proposing to buy all of Inter-Tel's shares for $22.50 a piece. After more due diligence, Mihaylo and Vector reiterated this bid on July 28. On August 11, the Special Committee rejected the bid as...