Judge OKs Novell investor suit over Attachmate sale

A judge in the Delaware Court of Chancery has ruled that members of Novell's board who approved the company's sale to Attachmate must defend their decision in court against allegations that they acted in bad faith by ignoring competitive offers from other parties.

Novell's board of directors voted to accept Attachmate's $2.2bn takeover bid in November 2010, while at the same time agreeing to sell a portfolio of 882 patents to a consortium led by Microsoft for an additional $450m.

At the time, then-CEO Ron Hovespian told investors that the board had conducted "a thorough review of a broad range of alternatives to enhance stockholder value" and that the combination of the merger with Attachmate and the patent selloff to the consortium represented "the best available alternative."

Novell shareholders approved the deal in February 2011, but it seems not all of them agreed with Hovsepian's characterization of the board's actions. A group of major investors quickly filed suit, including the Oklahoma Firefighters Pension and Retirement System, Louisiana Municipal Police Employees' Retirement System, Operating Engineers Construction Industry and Miscellaneous Pension Fund, and Robert Norman, as Groklaw reports.

The plaintiffs in the suit claim that although the board had winnowed down Novell's suitors to two contenders – Attachmate and "Party C, a private equity firm" – and that both companies had put competitive offers on the table, the board repeatedly favored Attachmate with insider information that was withheld from Party C.

Most notably, Attachmate was told about the patent sale to the Microsoft-led consortium and allowed to adjust its bid accordingly, while Party C was not.

In his ruling on Friday, Judge John Noble found that such information was "not merely of passing interest," and he agreed with the Novell shareholders' assertion that the board's behavior could reasonably be construed to be "so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith."

"As indicated, there may be a plausible explanation for their conduct, but the Court does not have access to those facts," Judge Noble wrote, adding that on these grounds he could not support the defendants' motion to dismiss the case, paving the way for an eventual trial.

Such a decision is actually fairly unusual in Delaware, which is known for its lenient handling of corporations. A "plausible explanation" is about all that Novell's board would have needed to win its dismissal, but it failed to produce one.

Whether this means the matter will be heading to court, however, is by no means certain. Novell's board and its shareholders are always free to head back to the bargaining table to try to hammer out a settlement, and in fact such shareholder lawsuits often end in that way.

And although Judge Noble's ruling looks good for the plaintiffs in the case, not everything has gone in their favor. While the judge agreed to let the case against Novell's board go to trial, he dismissed similar claims against Attachmate and the hedge fund Elliot Associates, which helped finance the merger, on grounds that the plaintiffs failed "to state a claim upon which relief can be granted." ®