(Reuters) - Shareholders of the entertainment technology company Xperi sued board members Friday in Delaware Chancery Court, alleging that the company’s directors breached their duties by failing to re-evaluate Xperi’s planned $3 billion stock-for-stock merger with Tivo in light of the COVID-19 pandemic. The suit also claims that Xperi’s board failed to provide shareholders with adequate disclosures about the coronavirus’ impact on the deal and accuses Xperi directors of too hastily dismissing a billion-dollar offer in February from a company headed by Xperi’s former CEO.
The Xperi suit appears to be the first shareholder M&A class action to allege directors breached their duties in response to COVID-19, based on my review of complaints in the Stanford Securities Class Action database. There have been more than a dozen shareholder M&A class actions filed since April, most of them asserting routine claims about inadequate financial or accounting disclosures. (Nearly all of the complaints were filed by the plaintiffs' firms Rigrodsky & Long and RM Law.) A prospective class action filed earlier this month by a shareholder of Gilat Satellite Networks mentioned the economic fallout from COVID-19 as part of its allegation that Gilat’s merger partner Comtech Communications failed to provide sufficient disclosures. But the Xperi complaint seeks to hold the board specifically liable for allegedly failing to assess and disclose the impact of the virus on a previously announced deal.
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A spokesman for Xperi declined to comment on the shareholder suit via email. Skadden Arps Slate Meagher & Flom represented Xperi in the Tivo deal negotiations and will be representing the board in the shareholder litigation.
Xperi shareholders are slated to vote on the Tivo deal – which will leave them with only 46.5% of the merger company even though the merged company will be led by Xperi’s senior management and will use the Xperi name – on May 29. Shareholder lawyer Lee Rudy of Kessler Topaz Meltzer & Check said by email that the prospective lead plaintiff, the Local 464 United Food and Commercial Workers Union Pension Fund, will not seek a temporary restraining order to block the shareholder vote because there’s not enough time for an expedited proceeding under Delaware’s COVID-19 rules of operation. (You may remember that last week Vice Chancellor Joseph Slights denied a motion for an expedited proceeding to decide whether COVID-19 constituted a material adverse event for American Express Global Business Travel; Vice Chancellor Slights has also been assigned the new Xperi suit.)
Xperi and Tivo reached their merger agreement on December 18, before COVID-19 was identified in China. Both companies have said in subsequent filings that they’re not certain of the impact the virus will have on their businesses or on the merged entity. The complaint alleges that their “stubborn refusal to provide in the proxy known facts about the effects of COVID-19 on Xperi and TiVo creates an inference that they are not acting in good faith and are deliberately deceiving the Xperi stockholders.”
The suit faults Xperi directors for allegedly failing to convene a board meeting to assess whether the pandemic is a material adverse event under the merger agreement, noting that several buyers in big M&A deals have invoked MAE clauses in attempts to renegotiate or escape from transactions negotiated before the pandemic’s economic consequences. Although the Tivo deal is billed as a merger of equals, the complaint alleged, Xperi is technically the acquirer – and its shares declined after the deal was announced, in contrast to Tivo’s rise in share price.
Xperi received a competing all-cash offer for $1.2 billion on Feb. 21 from Metis Ventures, which is headed by an executive who served as Xperi’s CEO until June 2017. The board announced on Feb. 23 that it had decided not to engage in discussions with Metis because it did not believe Metis’ non-binding proposal was likely to result in a better deal for Xperi shareholders. The new suit alleges that some Xperi board members may have been conflicted because they expect to retain seats after the Tivo merger.
Shareholders asserted in the new complaint that they served a demand to see Xperi’s books and records on April 6 but the company rejected the demand. In late March, when COVID-19 lockdowns had just begun, Wachtell Lipton Rosen & Katz partner William Savitt told me it was “implausible, impracticable and unethical” for shareholders to make books-and-records demands on corporations swamped by COVID-19 concerns, prompting shareholder lawyer Randall Baron of Robbins Geller Rudman & Dowd to retort that COVID-19 isn’t a free pass for businesses.
It looks like the Xperi case will be an early test of what the courts think of that debate.
The views expressed in this article are not those of Reuters News.