1 IN RE TRADOS INCORPORATED : Consolidated Chancery … · 2012. 10. 17. · Trados. For example, at paragraph 30 of the complaint, he alleges that by June 2003, Sequoia had made

1

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN RE TRADOS INCORPORATED : Consolidated SHAREHOLDER LITIGATION : C. A. No. 1512-VCL

- - -

Chancery Courtroom No. 12C New Castle County Courthous e 500 North King Street Wilmington, Delaware Wednesday, August 22, 2012 10:02 a.m.

- - - BEFORE: HON. J. TRAVIS LASTER, Vice Chancellor. - - -

ORAL ARGUMENT ON DEFENDANTS' MOTION FOR SUMMARY JUDGMENT and RULINGS OF THE COURT

- - -

APPEARANCES:

DAVID A. JENKINS, ESQ.ROBERT K. BESTE, III, ESQ.Smith, Katzenstein & Jenkins LLP for Plaintiff Marc Th. Christen

RAYMOND J. DiCAMILLO, ESQ.Richards, Layton & Finger, P.A. -and-DAVID J. BERGER, ESQ.

of the California Bar Wilson Sonsini Goodrich & Rosati, P.C. for Defendants David Scanlan, Lisa Stone,

Sameer Gandhi, Joseph Prang, Joseph Campbell , Jochen Hummel, Klaus-Dieter Laidig, and

Trados Incorporated

- - - --------------------------------------------------- ---

CHANCERY COURT REPORTERS New Castle County Courthouse

500 North King Street - Suite 11400 Wilmington, Delaware 19801

(302) 255-0524

2

CHANCERY COURT REPORTERS

THE COURT: Welcome, everyone.

Mr. DiCamillo, good morning.

MR. DiCAMILLO: Good morning, Your

Honor. I 'd l ike to take a minute to make a few

introductions on my side. I know Your Honor knows

Mr. Berger.

THE COURT: I don't know if anybody

needs to be introduced in this group.

Good to see you, Mr. Berger.

MR. DiCAMILLO: I think you do need an

introduction.

MR. BERGER: Good morning.

MR. DiCAMILLO: I do want to introduce

you to the gentleman seated behind Mr. Berger and

myself. This is Joe Campbell, who is one of the

defendants in the action and former CEO of Trados.

THE COURT: Mr. Campbell, welcome.

Good to see you.

MR. DiCAMILLO: And with the Court's

permission, Mr. Berger wil l be presenting the argum ent

on behalf of defendants this morning.

THE COURT: That's f ine.

MR. BERGER: Good morning, Your Honor.

Thank you for hearing me. I know Your Honor's view s

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

3


on summary judgment, and I 'm well aware of intrudin g

upon Your Honor's t ime on this motion.

I do think my argument's very short

and simple, Your Honor. There's one issue for this

Court to decide. Paragraph 4 of plaintiff's compla int

says, and I quote, "... the Director Defendants

approved the Merger at the behest of certain holder s

of preferred stock who wanted to exit the investmen t

that he had made in the Company. Four of the

Director[s] ... were affil iated with these preferre d

stockholders and served as their designated appoint ees

to the Company's board."

And then it goes on, "The remaining

director simply acquiesced to the wishes of the oth er

defendants, who dominated the Company's board, with out

any regard to his duties to the common stockholders ."

That's the allegation from the

complaint fi led in December of 2008. We're now fou r

years from that t ime, Your Honor. It got plaintiff

past the motion to dismiss; but since that t ime

hundreds of thousands of documents have been produc ed,

dozens of depositions have occurred, including

multiple depositions of several of the defendants; and

it 's now time for plaintiff to come forward with

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

4


record evidence to support this allegation. And I

would submit to Your Honor that he has none.

Under the Court's decision, former

Chancellor Chandler's decision in Orman v Cullman, it

makes clear that summary judgment is the appropriat e

time to reconsider whether plaintiff has satisfied the

duty -- his burden to overcome the presumptions of the

business judgment rule. This is also clear from

then-Chancellor Strine's decision in Live

Entertainment where then-Chancellor Strine --

then-Vice Chancellor Strine made it clear that "...

colorful rhetoric is no substitute for record evide nce

of bad faith or disloyalty."

Because Trados' charter had an

exculpatory provision pursuant to 8 Delaware Code

Section 102(b)(7), defendants are entitled to summa ry

judgment on plaintiff's duty of care claims. And

plaintiff has to come forward with specific evidenc e

to show that defendants acted with bad faith or

disloyalty.

In addition, where there's a sale to a

third party -- and that's what we have here --

plaintiff can only meet his burden to overcome the

business judgment rule by showing record evidence t hat

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

5


the directors had, quote, "... a substantial

self-interest suggesting disloyalty, such as eviden ce

of entrenchment motives, vote sell ing, or fraud ... ";

and plaintiffs must also show that the materially

self-interested directors constituted either a

majority of the board or dominated and controlled t he

board as a whole. Again, that's from Goodwin versu s

Live Entertainment, 1999 Westlaw 64265 at *26.

That's the appropriate standard for

summary judgment here, and it 's confirmed again in

Vice Chancellor Parsons' recent opinion in Zimmerma n.

Now, I know the Court's very familiar

with the factual argument -- with the factual recor d

in this case, and I 'm not going to burden the Court

with a lot of those facts. I think there's just a few

points I want to make clear here.

First, none of the venture capital

f irms are named as defendants. There's no claim of

aiding and abetting liabil i ty here. There's obviou sly

none named as having primary l iabili ty, nor is ther e

any claim that these firms acted improperly, owed a ny

duty to the class, or breached any supposed duty to

the class.

Significantly, there is no claim that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

6


the venture capital firms ever sought to improperly

influence any of the director defendants. And ther e

is certainly no evidence that the venture capital

f irms ever threatened any of the director defendant s,

said that the director defendants would be penalize d,

lose their jobs, lose their positions, or otherwise

suffer any consequences if they did not sell Trados .

There is just no evidence of this in the record.

Indeed, there's not even any

allegation of this in the complaint; but, again, fo r

our purposes here, we need record evidence to show

this. And there is none.

Instead, plaintiff 's core allegation

is that each of the venture capital f irms

independently decided to exit their investment in

Trados. For example, at paragraph 30 of the

complaint, he alleges that by June 2003, Sequoia ha d

made a decision to exit its investment in Trados. At

paragraph 35 of the complaint, plaintiff alleges th at

by early to mid-2004 Wachovia had determined to exi t

its investment in Trados. And in paragraph 36, he

alleges, on information and belief, that by mid-200 4

HgCapital had decided to exit its investment as soo n

as possible.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

7


But there's no allegation that these

firms were on both sides of any transaction -- and

this is not a case involving a controlling sharehol der

-- nor is there an allegation that these venture

capital f irms were all acting in a coordinated

fashion. This makes it different from the situatio n

in Zimmerman, where there were allegations and actu al

record evidence, that the venture capital f irms wer e

acting in a coordinated fashion.

Here, plaintiff 's claim is that

somehow these firms came to an epiphany independent ly

between 2003 and 2004 that they should sell their

stock in Trados. But, again, what's missing is rec ord

evidence to support that. Indeed, Your Honor can g o

through the -- about 150 exhibits that my friend fr om

the other side put in in opposition to our motion.

There is not a single page from any of the document s

that he received from any of the venture capital f i rms

that shows that any of these firms were interested in

sell ing their stock in Trados. What's striking is

that although discovery occurred against all of tho se

firms, nothing, nothing in this record supports the

venture capital f irms were interested in sell ing th eir

stock in Trados.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

8


This is important, because as

plaintiff does not even allege that the venture

capital f irms did not act improperly, if he cannot

show that the venture capital f irms sought to exit

their investments in Trados or that the directors

somehow believed or felt pressured to exit their -- to

exit the venture capital f irms' investment in Trado s,

then plaintiff's entire theory about why the direct or

defendants decided to sell Trados goes up in smoke.

In other words, plaintiff 's notion

that the director defendants breached their duty of

loyalty by acting at the behest of the venture capi tal

f irms in deciding to sell Trados is invalid if you

cannot show with record evidence that the venture

capital f irms were interested in sell ing Trados. A nd

there is nothing in the record to support that.

Indeed, the record evidence -- it 's not only that h e

can't have evidence to support that, the record

evidence is to the contrary.

So both sides, plaintiff and us, put

in some evidence about some of the regular reports

that the individual directors were submitting to th e

various venture capital firms. And throughout thes e

reports -- and there's a few of them in the record --

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

9


each of them suggests that the venture -- that the

director defendants were saying "This is an investm ent

that we can continue for awhile or we can try and s ell

the company." And that's from -- Ms. Stone include s

that in her reports to HgCapital. Even Mr. Gandhi

suggests that in his reports to Sequoia Capital, bo th

in 2003 and 2004. And those are -- that's in our

evidence at Exhibit 61, as well as Ms. Stone's repo rts

at Exhibit 116 of plaintiff 's exhibits.

Finally, I would just urge Your Honor

to, again, note that even plaintiff concedes that n one

of these venture capital f irms had any need for

l iquidity. So what are we left with? Why did the

venture capital f irms -- what is the evidence to

support the notion that the venture capital f irms

wanted to exit Trados? There is none. And that --

that goes to the heart, the core of plaintiff 's cla im.

Now, even if plaintiff could show that

the venture capital firms wanted to sell Trados, th e

legal issue for this motion is whether plaintiff ha s

come forward with any evidence to show that a major ity

of the board had a substantial self-interest, as th at

term is defined by Delaware law. That's the legal

question I intend to address today. And, again, th e

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

10


record on this issue is clear. Plaintiff has no su ch

evidence. I 'm not going to bore the Court with the

definition of "substantial self-interest" under

Delaware law. This Court knows that legal test far

better than I ever could.

Obviously given the provision of the

exculpation clause in Trados' charter, you must loo k

at each director on an individual basis. And that' s

Cede II. For our purposes today, the parties are i n

agreement, I think, that with respect to four of th e

seven directors are what we're looking at. For the

purposes of this motion only, we're going to conced e

that Messrs. Campbell, Hummel, and Prang are not

disinterested, although I would note that all three

were incentivized to achieve the highest value for

Trados' common stockholders in any sale, a fact

plaintiff does not dispute.

Now, I also believe plaintiff does not

dispute that Mr. Laidig is independent. He says th at

Mr. Laidig didn't perform his duty properly; but,

again, as Trados has a charter provision under

102(b)(7), he's got to go far beyond that to state a

claim that Mr. Laidig somehow breached his duty. A nd

I don't think he's even come close to doing it or e ven

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

11


tried.

Thus, this motion really comes down to

the issue of whether Messrs. Scanlan, Ms. Stone, an d

Mr. Gandhi were independent. That's what the issue is

here.

And the legal test is whether they

were self-interested because they were elected to t he

board by three different venture capital investors who

had different classes of preferred stock. And what

plaintiff is trying to do here -- and I suggest it ' s

unprecedented under Delaware law -- is to create a

bright-l ine rule stating that the board was interes ted

because they had affil iations with venture capital

investors. Delaware law has always prided itself o n

its contextual nature of its law, that Delaware avo ids

bright-l ine tests that plaintiff is trying to creat e

here, whether in the context of break-up fees, the

proper way to sell a company, or any of the other

major crit ical corporate law issues that come befor e

this Court every day. Delaware looks at these issu es

in the contextual nature of the context and not by

creating bright-l ine rule.

Yet plaintiff offers no other reason

for the alleged interest of these directors other t han

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

12


they were employees of the venture capital f irms wh ich

held the preferred stock. He does not offer any

evidence that these three directors had any prior o r

subsequent contact with SDL. And he could not make

such a claim. He does not offer any evidence that any

of the three directors benefited directly as a resu lt

of the sale to -- Trados' sale to SDL. And, again, he

could not put forward any such evidence.

To the contrary. After all of the

discovery in this case, plaintiff purports to rely

simply on the law-of-the-case doctrine from former

Chancellor Chandler's opinion in the motion to dism iss

rather than come forward with any new facts obtaine d

in discovery. That's outstanding, given that, agai n,

hundreds of thousands of documents have been produc ed

since the time of that motion to dismiss opinion wa s

written; dozens of depositions have been taken sinc e

the time of that motion to dismiss was written.

And it 's particularly striking, given

that we challenged plaintiff in our opening brief t o

come forward with any evidence to support his core

allegation at paragraph 4 that I read at the openin g

of this argument. And he has none.

Now, again, to the -- the applicable

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

13


test for determining when a director is

self-interested was set forth by Vice -- then-Vice

Chancellor Strine in Live Entertainment. He descri bed

it as follows: "To the extent a plaintiff sharehol der

... challenge[s] the independence of directors base d

solely upon their election by and relationship to a

controll ing stockholder" -- and, again, we don't ha ve

a controll ing stockholder here -- "... he has an

obligation to produce record evidence demonstrating

that the controll ing stockholder's commercial

interests were of such a substantial nature as to

possibly compromise its natural desire to obtain th e

best price for its shares." None of that exists he re.

The Vice Chancellor further noted, as

it 's well-known under Delaware law, that showing th at

the directors were current employees of the current

shareholder is not enough. Plaintiffs must also sh ow

that the directors are "... beholden to the

controll ing shareholder because of personal or othe r

relationships)." That is at *28, and it 's also in

Vice Chancellor Parsons', again, recent decision in

Zimmerman.

So let's go through the three

directors very quickly, and then I 'l l finish up, Yo ur

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

14


Honor.

First, Mr. Scanlan. The key facts

about Mr. Scanlan and his relationship with Wachovi a

are undisputed. Most importantly, for this motion,

Mr. Scanlan had already announced his intention to

leave Wachovia as well as the Trados board to start

his own firm in April of 2005 and only agreed to st ay

on the board through the end of 2005 as a result of

personal requests from Mr. Campbell. The document in

which this is made clear is at Exhibit 148 to

plaintiff 's brief, as well as in Mr. Scanlan's

deposition, which is Exhibit 72 to Mr. DiCamillo's

affidavit. And the fact that Mr. Scanlan started h is

own firm, Silverhawk Capital Partners, in 2005 is a

matter of public record and not in dispute.

Given that Mr. Scanlan had told

Wachovia that he was planning to leave Wachovia and

Trados in 2005, plaintiff needs to come forward wit h

specific evidentiary record evidence to suggest why

Mr. Scanlan was supposedly beholden to Wachovia, gi ven

that he had no financial interest in Wachovia's

investment in Trados and was planning on leaving bo th

Wachovia and Trados by the middle of 2005.

There are other undisputed facts that

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

15


further demonstrate that Mr. Scanlan was not behold en

to Wachovia with respect to Wachovia's investment i n

Trados. For example, it is undisputed that

Mr. Scanlan had no direct or indirect investment in

Trados, that his compensation was not based in any way

on the performance of Trados; and the decision by

Trados to accept or reject the SDL merger had no

impact on Mr. Scanlan's position at Wachovia.

It is also undisputed that in all of

the discovery in this case, plaintiff cannot point to

a single document or piece of testimony showing tha t

Wachovia ever pressured Mr. Scanlan to try and sell

Trados or that Wachovia, which invested in Trados i n

2000 and 2001, was ever interested in a, quote, "ea rly

exit in Trados," despite the allegation made at

paragraph 35 of the complaint.

Thus, plaintiff has come forward with

nothing, nothing to support his allegation that

Mr. Scanlan was beholden to Wachovia other than the

fact that Mr. Scanlan was working at Wachovia at th e

time the decision to sell Trados was made. And eve n

that claim is dubious, given that Mr. Scanlan had

already announced his intention to leave Wachovia a nd

was just staying on the board of Wachovia at the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

16


request of Mr. Campbell. That's the first director .

The second director, Mr. Gandhi -- or

third, if you count Mr. Laidig. Third is Mr. Gandh i.

Mr. Gandhi has also left Sequoia since this occurre d

and the venture firm he was with at the time of the

merger. He's now with Accel.

THE COURT: When did he leave?

MR. BERGER: He left later, after this

occurred. He left in the last couple of years.

THE COURT: A long time after the SDL

deal or shortly after?

MR. BERGER: Several years after.

Now, once again, plaintiff has no

evidence that Mr. Gandhi was ever pressured or coer ced

in any way, shape, or form by Sequoia to vote in fa vor

of this transaction. Indeed, what is perhaps most

striking about plaintiff 's brief and the evidence h e

submits with it is the complete and utter lack of

evidence concerning his allegation that Mr. Gandhi was

interested in the Trados transaction.

To the contrary. As shown in our

brief and as made clear in Mr. Gandhi's testimony,

what plaintiff does admit is that by 2003, Mr. Gand hi,

too, was thinking of leaving the Trados board and t hat

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

17


there was no evidence of any harm, injury, or coerc ion

from Sequoia as a result of this consideration.

THE COURT: He's the one who seems

most focused -- you know, I 'm -- I 'm with you in te rms

of your categorization. He's the one, though, that

seems most focused on the idea that this company is

going downhil l, "We really don't have any shot at

upside. Let's get back as much of our capital for

Sequoia as we can." I mean, that's at least one

plausible reading of the reports that he is sending

back to Sequoia. Would you agree with that?

MR. BERGER: All with -- except with

respect to the last sentence Your Honor said. And I

want to point out something on that. As late as th e

fall of 2004 and first part of 2005, Mr. Gandhi is

getting e-mail messages -- and it 's in the record - -

from the banker for SDL saying "SDL is interested" --

this is after Mr. Campbell joins the company -- say ing

"SDL is interested in, you know, purchasing or

acquiring Trados." One would think that if Mr. Gan dhi

was really interested in pushing a sale fast, he wo uld

have taken some action with that. Instead, what he

does -- and the record is clear and undisputed on

this -- is he passes those e-mail messages on to bo th

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

18


Mr. Campbell and to the banker for Trados and says,

"You guys handle this. I'm not involved in it."

THE COURT: Yeah. I mean, there

seemed to be a l itt le bit of a sense, though, that he

had basically washed his hands of it, "Look, this

company is done. I 'm done. I got bigger fish to f ry.

If I can get a l i tt le bit of my capital back, I 'm

happy because I 've got more important things to do

than mess around with a dead company," at least --

again, I 'm not saying that's the only way to read

them, but it seemed like that's one way.

MR. BERGER: What's important about

that -- and I think that's -- one could read it tha t

way. What's important about that is Mr. Gandhi is

making his decision as a director of Trados. There 's

no evidence in the record, notwithstanding the fact

that Mr. Gandhi was deposed twice -- and subpoenas

were issued to Sequoia to also produce documents --

that Sequoia ever said to Mr. Gandhi, "You have to

sell this company. You have to get your money out

fast. You have to get off this board. You have to do

anything."

There's evidence that Mr. Gandhi said,

as Your Honor notes, you know, "This company's not

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

19


worth a lot. I 'm not going to go to board meetings

directly unless they're in California. Otherwise I ' l l

attend by phone." Mr. Gandhi explains at length in

his deposition why he thought Trados was not likely to

ever obtain more than $60 mill ion and he thought th is

was a great offer. But that's Mr. Gandhi's decisio n

as a director.

THE COURT: Yeah. That's -- you know,

that's where, again, for -- for summary judgment, I

have diff iculty because part of what I think we wor ry

about is that when people have an interest or

affi l iation, even a loyalty duty to someone who has an

interest, that that colors how they see things.

And so, you know, part of what may

have been on Mr. Gandhi's mind was the idea that he

did have this l iquidation preference and he was goi ng

to get money back in a transaction. A common holde r

isn't in that position. A common holder really onl y

has the option value of betting on, you know, Campb ell

continuing to improve and show revenue -- greater

revenues and profits.

MR. BERGER: Your Honor, that is

precisely why plaintiff was able to defeat the moti on

to dismiss in this case.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

20


THE COURT: Uh-huh.

MR. BERGER: We're now at summary

judgment. What the summary judgment cases make

clear -- and this is Vice -- now-Chancellor Strine in

Live Entertainment and the others -- is that it 's n ot

appropriate to say "Well, because this may happen, he

may have had this view" or, you know, give plaintif f

those types of inferences. He's got to come forwar d

with some record evidence that, in fact, Mr. Gandhi

had those types of interests involved.

What, in fact, we've got is Mr. Gandhi

making clear that he did not profit at all on the s ale

of Trados. And that's clear in the record. And,

again, there's -- there's -- Mr. Gandhi made nothin g

from this sale personally. And there's no evidence

that Sequoia -- and this is really critical. There 's

no evidence that Sequoia was tell ing Mr. Gandhi, "S ell

this company."

THE COURT: And -- I mean, you'd

expect that if there was going to be -- that to be the

case -- I guess sometimes people are lax and put it in

an e-mail; but, you know, one would think that that

would have been a telephone call or a -- you know, a

VC partners meeting, sitting around the table.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

21


So, I mean, I guess where -- because

of the procedural posture -- l ike, if this was a

situation where Sequoia, l ike in TKT, it only helpe d

common and the claim at the pleading stage was thes e

guys are fatigued, they want out, then there had be en

no evidence developed to support that and so you ha d a

deal where there was no differential treatment and you

were at this point just resting on the bare claim t hat

"Oh, Sequoia must have wanted out," I 'd agree with

you.

Where I become concerned is the fact

that Sequoia did have the right to differential

treatment. And so what -- what I keep coming back to

is why isn't it enough for summary judgment purpose s

to point to differential treatment at the preferred

stockholder level in terms of the preference, plus the

employment relationship? And then instead of, you

know, you and me having the discussion, Mr. Gandhi can

sit there, and I ' l l evaluate him. And I ' l l come aw ay

with that, and I ' l l think either okay, Mr. Gandhi

actually made a good faith business decision that t his

thing wasn't worth a lot. Or I 'l l come away with t he

inference that -- or the finding that, you know, th is

guy washed his hands and gave up on the company.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

22


I mean, isn't that something I have to

decide at trial rather than now?

MR. BERGER: So Your Honor raises

right where I started off. And I 'm glad -- I

shouldn't say to the Court I'm glad you asked that

question, but I am glad you asked that question, Yo ur

Honor.

THE COURT: I ' l l take any compliment I

can get.

MR. BERGER: So will I.

But, Your Honor, that is the

bright-l ine test that I think Delaware abhors. Wha t

you're saying basically, if that's the test that's

adopted, is that any time there is differential

treatment and an employment relationship, it 's

impossible to get summary judgment.

THE COURT: For a majority of the

board, yeah. I mean, again, l ike -- l ike, let's sa y

that if -- because Gandhi is really the swing. I

mean, if -- they really haven't -- I mean, Scanlan and

Stone, you're right. You could make the same

argument. But if you imagine a firm that had three

VCs in the type of -- VC reps in the type situation

we're talking about and four people of the type of

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

23


Klaus-Dieter Laidig, then you wouldn't be in that

problem. But if you have -- if you don't have a bo ard

majority, shouldn't you -- why shouldn't you have t o

come and actually tell your story and be evaluated as

opposed to a getting-out-free trial?

MR. BERGER: I 'm not sure why

Ms. Stone -- and maybe I'm undercutting my own case --

is that much different from Mr. Gandhi here because

Ms. Stone also worked at HgCapital. She had no

personal investment in -- in the Trados investment,

nor did Mr. Gandhi.

THE COURT: You're absolutely right.

I mean --

MR. BERGER: So --

THE COURT: -- to the extent it rests

on if VC plus employment, then triable issues of fa ct,

she's similarly situated. I don't -- I don't think --

I mean, it 's part of the factual inference problem

that I have -- that I have at this stage.

You know, reading her stuff, I don't

have the same sense from the paper record of "I wan t

out" that I do with Gandhi. And that's why I 've be en

focusing more on Gandhi.

MR. BERGER: What's striking -- what's

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

24


so particularly striking about Mr. Gandhi is he say s

back in 2003 that he thinks that this is a company

that's not going to succeed in the long term and

should be sold; but you don't see him pushing for a

sale in 2003, nor do you see him pushing for a sale in

2004.

And so where I -- I guess where I part

company with Your Honor is, to me, plaintiff has th e

burden at this stage. In order to overcome the

business judgment rule, the presumption of the

business ... he has to come forward with something

that says he's breached his duty of loyalty in doin g

it. And just the mere fact of employment relations hip

plus -- again, the differential treatment is not of

Mr. Gandhi personally.

THE COURT: Sure. I get that.

MR. BERGER: That is not -- if

Mr. Gandhi held those shares, I would agree with Yo ur

Honor. But here, what he's got to come forward wit h

is differential treatment and -- of the individual.

And there's no claim -- again, this is where I star ted

off. There's no claim that Sequoia was pressuring

Mr. Gandhi to do anything. Now, Your Honor could s ay

"Well, gee, maybe they were doing it in internal

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25


meetings and it wouldn't" -- "you wouldn't expect i t

to come up in e-mail." That's what gets you past t he

motion to dismiss. It 's not enough to get you past

summary judgment. Summary judgment in this Court,

record evidence.

THE COURT: I mean, it could also --

again, I don't want to suggest anything conspirator ial

or nefarious with Sequoia. I mean, it could also j ust

be that that's the culture, l ike, "That's what we d o.

When we see a deal, when we see a company that ain' t

going to make it, we get our money out and we move on"

so that, you know, nobody at Sequoia had to tell th em

that because that's what you do. You cut your loss es

and you get your capital back and you reinvest it i n

one that -- that might be a good -- you know, bette r

performer.

But, really, it does seem to turn on

is it sufficient at the summary judgment stage to h ave

differential interests plus employment. We'l l see

what Mr. Jenkins has to say. But, really, that's w hat

they've got. And they've got that at least with

Gandhi, with some additional documentary evidence i n

his reports saying things l ike "We're not going to get

our money back except in a sale," et cetera.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

26


MR. BERGER: Now, what he's also

saying -- again, he says it in his reports and he s ays

in his deposition -- he explains why the -- why Tra dos

wasn't going to succeed. But that's right, Your

Honor. I mean, that's -- it 's -- essentially the k ey

point here is whether or not that's enough to get o ver

the hurdle at summary judgment.

THE COURT: Why didn't they take the

value of the common to zero for purposes of the opt ion

pool?

MR. BERGER: So the -- the decision

was made at the -- again, this is made in 2004 befo re

Mr. Campbell joined the company. And this is -- yo u

know, you can't take the option -- you can't take t he

common to zero for an option pool for accounting

reasons. You could have taken it to a bank. They cut

it from a quarter to a dime. That's a pretty

significant cut. You know, there -- there was --

there's always -- when you're trying to value the

private stock for an option issue, there's always a

question there. They didn't have any professional do

it. They just did it, sort of sitting around the

table and having the CFO run some numbers. They

weren't sure; but, you know, they -- it 's always a

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

27


question as to what the actual worth of the private

stock is when you're valuing it for option pools.

THE COURT: I hear you. I

understand.

MR. BERGER: The -- what surprised

me -- just to go back to Mr. Gandhi for a second, a nd

then I 'l l leave him for Ms. Stone.

What plaintiff relies upon for

Mr. Gandhi is the law of the case. I was actually

really surprised to see that in plaintiff 's brief

after all the discovery. You know, he deposed

Mr. Gandhi twice. He got documents from Sequoia. Not

a one in any of these things.

So there's the Sequoia -- the reports

that Mr. Gandhi wrote, but there's nothing from

Sequoia and there's no e-mails from Mr. Gandhi sayi ng

-- you know, at worst, at most, what plaintiff can

show is that Mr. Gandhi was interested in getting o ff

the board. That is not, I would submit to this Cou rt,

a basis to say that he was interested in the

transaction. There's no evidence that he was going to

be penalized for getting off the board or that Sequ oia

was going to take any action against him for gettin g

off the board.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

28


THE COURT: Should -- should I draw

any inference or be concerned at all about the

testimony to the effect that the notion of a

distinction between the common and the preferred ne ver

came up unti l l i t igation, nobody ever really talked

about the common in the boardroom?

MR. BERGER: Your Honor, the -- the

only testimony -- the only submission on that is

Mr. Laidig's -- and I think it 's a misquote or it's

taken out of context, the submission by

plaintiff about Mr. Laidig. And, in fact, however, if

you look at the other deposition transcripts, it 's

clear that they're talking about all of the

stakeholders of the company.

The issue for this company when you're

looking for a sale, you have to consider all the

stakeholders, because while it 's not on the verge o f

bankruptcy -- and, again, Your Honor doesn't need t o

discuss at this point what the future of the compan y

was going to look l ike -- there was a concern among

all of the directors about the employees, the

customers, about the technology, about all of those

things. I think the evidence is that they did look at

the common, but I don't think for the purposes of o ur

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

29


motion today you need to take that into account. I

think for purposes of our motion today what you nee d

to think about and resolve is whether plaintiff has

met his burden to show that the directors breached

their duty of loyalty. This is not a due care case .

I think that's what 102(b)(7) provides.

With respect to the final director,

Ms. Stone, again, it 's undisputed that Ms. Stone

received nothing from either Hg or Trados as a resu lt

of the SDL merger. In fact, plaintiff admits at pa ge

7 of his brief that Ms. Stone had no direct or

indirect investment in Trados. As a result, once

again, the sole basis for plaintiff's claim that

Ms. Stone was beholden to HgCapital is that she is an

employee of the firm.

Now, Your Honor, again, if you're

going -- if we're at the point of differential

treatment and employment relationship equals trial,

then we're there, and you know, there's nothing mor e

that I can offer on that.

I don't think that's where Delaware

law is. I don't think that's a bright-l ine test th at

we should establish here. And I think this is the

case where you should say that the plaintiff, as in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

30


Live Entertainment, needs to come forward with reco rd

evidence to show that there is a duty of loyalty

issue.

And, further, the difference, I guess,

Your Honor would point out between Ms. Stone and

Mr. Gandhi, although Mr. Gandhi has it as well and Mr.

-- is Ms. Stone, as late as February 2005, reports to

Hg that an option for Trados was to continue trying to

grow the business and sell the company in 18 months or

more.

Now, Mr. Gandhi says similar things,

that "We've hired a hard-nosed CEO who can look to

grow the business." And so -- and there's no evide nce

that Mr. Gandhi was pressuring Mr. Campbell to try and

sell the business. But, again, as late as 2005

Ms. Stone is tell ing her partners back in London th at

one of the options is to grow the business over the

next 18 months.

Given that we are at summary judgment

-- I think, again, plaintiff received documents fro m

Hg as well as Ms. Stone, obviously deposed Ms. Ston e.

What plaintiff needs here is evidence that he can r ely

upon as opposed to the motion to dismiss stage wher e

he was allowed all the inferences that then-Chancel lor

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

31


Chandler gave him, and there is none.

THE COURT: If you have a choice

between zero -- and admittedly speculative -- but a t

least option value and you've got, you know, some

preliminary trend suggesting that the option value on

the common might be positive, why do you take zero?

MR. BERGER: So, in other words, why

did Mr. Laidig support this transaction.

THE COURT: Right, or why would -- why

would a director, viewing this from the perspective of

equity without a liquidation preference, support th is

transaction?

MR. BERGER: Again, it goes back to my

stakeholder argument, Your Honor. You know, there are

other alternatives for this business, including

that -- and this is what all of the directors

testif ied uniformly in their deposition. And there 's

no contrary evidence supplied. What could have

happened to this company is a year from the time it

was sold, it could be half its size and it could be

worth a lot less, with employees being laid off,

customers being dissatisfied.

Now, plaintiff has his theories about

why -- and he points to the record, you know, the

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

32


budgets and things, you know, about why that -- the

company was going to have a great future. We can g o

back and forth on that. That is, frankly, not an

issue for this motion. I think that's the answer t o

your question. I think all of the directors felt, not

because they were going to get something back from

this transaction, that that's why they sold it; but

all of the directors believed that the alternative,

waiting for a year, would result in a greater harm to

the company, to its employees and other stakeholder s.

And they saw no path to success for the common

stockholders.

Again, remember, the directors are

also the largest common stockholders. So if this

common was going to succeed -- and, again, you don' t

need to reach this point for summary judgment. But if

this company was going to succeed so that the commo n

stockholders would get something, all of the

directors, particularly Mr. Campbell and Mr. Hummel ,

who was the founder, would make far more than what

plaintiff would make off of this case. All of them

had, you know, common stock as well as options that

would be worth a great deal.

So from the context of incentivizing

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

33


the board to make sure that the common would get

something, this was a board that was very much alig ned

to make sure that the common stockholders got -- wo uld

get something if there was a deal there to be had.

But I ...

THE COURT: Yeah. I mean, I tend to

look at this, rightly or wrongly, as there being a --

an incentive to get the best price once you've

embarked on a sale decision and -- and incentive to

make a sale decision as opposed to managing for the

long term.

And I agree with you, that once you're

in the question of is this sale the best sale, then

the MIP, the fact that the preferred didn't get the ir

full l iquidation preference and could participate

afterwards; the fact that the three common folks,

common directors, also had options and shares, all

that gave everybody a reason to push for the best

possible deal. So it's hard for me to believe that

any money was left on the table in terms of how muc h

you could get if you sold at the time they sold. Y ou

know, it 's hard to believe that -- that there's any

reason why I would second-guess the abil ity of thes e

folks to negotiate hard with SDL or any reason to

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

34


doubt that they got the best possible deal, because

once you're in the idea of "We're going to sell," I

totally agree. Everybody's got reasons to max out,

you know.

But that's why I keep coming back to

the stand-alone versus sale decision where, you kno w,

the MIP, it taints -- it doesn't taint. Taint is a

bad word. It skews the incentives of the people in

the boardroom who otherwise would have reason to pu sh

back hard against the preferred to manage the compa ny

long term.

MR. BERGER: So let me answer that in

a couple of ways, Your Honor. First, MIP was adopt ed

in mid-2004 shortly after -- this was proposed befo re

Mr. Campbell came to the table. It was adopted

shortly after Mr. Campbell joined the company.

There's no deadline on the MIP. All r ight? So

there's nothing that said "You have to do a sale by

the end of 2005 or 2006 so that if you don't, we're

going to reduce the payments."

So the MIP is in place, as is common

in a lot of change-of-control plans, for whenever a

sale has occurred. And if there was an abil ity to get

a higher price a year from now, the MIP creates a m uch

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

35


greater incentive to get that higher price because, as

Your Honor properly noted, the percentage goes up a s

the price goes up. So there's no deadline on the M IP

time.

Second answer to that, Your Honor --

again, this is undisputed -- Trados' board, even

before Mr. Campbell was on the board, turned down a n

offer to sell the company in 2004 for $40 million.

Remember, SDL approached Trados to sell the company .

If the board was really determined to sell at any

price, they didn't need to bring on Mr. Campbell.

They didn't need to go through all this. If their

decision was "Let's just get back for the common" - -

"for the preferred what we can and let's just," you

know, to use your expression about Sequoia, "let's

just close down this thing and move on to our next

investment," they had that opportunity. They had t hat

opportunity of $40 mill ion before worrying about

trying to turn it around, before spending more time on

it. They could have done it in the spring of 2005.

They decided not to do that. Instead, they brought on

Mr. Campbell and continued to try and turn around t he

business.

There's no evidence, none -- again,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

36


we're at the point of summary judgment. A lot of

discovery. There's no evidence that said, you know ,

"We're going to have to sell this company in 2005 o r

else," you know, "we just" -- "we just want to be d one

with it."

And that's what's really missing.

What's missing from this case is some piece of pape r,

some documentary evidence, some testimonial evidenc e,

something from any of the venture firms or from any of

the directors that said "We had to sell this compan y

by 2005." There's just no impatience, and there's not

even a motive for impatience.

You know, in some of the cases that

have come before this Court, you've heard about how --

the desire to achieve l iquidity. That's now a very

popular motive by my friends on the plaintiffs' bar

and, Your Honor has seen a lot of that, I 'm sure.

No motive to achieve l iquidity.

Plaintiff admits liquidity wasn't even necessary he re.

Why would the venture capital f irms take a quick ex it

if they thought this company could be worth more a

year from now? At this stage there needs to be

evidence they needed to do that, they wanted to do

that, or why they would make that decision.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

37


And, again, Ms. Stone goes through it

in her deposition at length. We've quoted it in ou r

brief. But she talks about the risk/reward issue t hat

she's thinking about for the company as a whole. A nd

then she talks about it in terms of a common

stockholder, because HgCapital held a lot of common

shares, far more common shares than any of the

plaintiffs. And she says, you know, "We go through

that every day." And here, the decision was made j ust

on a risk/reward basis. And she's the one who said ,

you know, "We could continue running this for anoth er

18 months," as late as February 2005.

And so what plaintiff needs to do in

order to prevail in this case, in order to defeat t his

motion is come forward with some record evidence th at

shows why the -- he doesn't -- on behalf of the

venture firms, why these directors wanted to sell a t

this particular t ime other than they thought it was

the best bid for the company.

THE COURT: Great. Thank you. Why

don't I hear from Mr. Jenkins.

MR. BERGER: Two minutes on the -- on

appraisal, or you don't want to hear that at all?

THE COURT: I got to be honest, I

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

38


wasn't too inspired by the appraisal issue. I thin k

to the extent -- I mean, really, to me, it -- it be gs

the question of this whole implicit minority discou nt

issue. I mean, the -- the premium has several

components. The premium is -- a control premium ha s

part synergy value. It has part value of different ial

management, differential strategy, just the idea th at

we can make these assets better if we manage them o n a

stand-alone basis. It has, you know, some potentia l

idea of unpursued opportunities. And what you real ly

don't have here because of the concentrated VC

ownership, but in the case of a public company, you

have the -- the reduced agency costs from concentra ted

ownership.

If -- and I know there's a Delaware

Supreme Court case on it, there's about four or fiv e

Chancery Court cases on it that say minority stock,

trades in a minority position; therefore, implicit

minority get discount, got to true it up.

Larry Hamermesh and Mike Wachter have

written three articles explaining that that idea ha s

no support in f inance theory. It sort of slipped i nto

Delaware law in a case that Larry actually l i tigate d

and didn't oppose it because the other side made th e

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

39


argument it was favorable to him. And then it's

gotten picked up and has a mind of its own.

If I 'm bound to apply implicit

minority discount, as one could very well believe

based on the Supreme Court case, at a minimum, then it

seems to me that I can't do summary judgment at thi s

stage because of the multiple valuation metrics and

the fact that at least some -- I mean, I could sit

here at trial and have to decide okay, how much of the

premium was X, how much of the premium was Y, and

where is the valuation going to float as a result o f

that?

If you cut out the implicit minority

discount and that's right, I don't see where there' s

any damages here because it 's only correcting for t he

-- the implicit minority discount gets these guys u p

above the premium.

You haven't had a chance to argue,

Mr. Jenkins hasn't had a chance to think about, nob ody

has had a chance to address whether I have to follo w

this implicit minority discount thing. So I 'm not

about to do that at this stage of the case. But I

do -- I am convinced, Mr. Berger, that if that is

right, then there are sufficient credibil ity and

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

40


weighing issues about how to treat the premium and how

to correct for that discount, that I can't just giv e

you summary judgment on it.

So I think in the interests of t ime, I

would like to -- to hear --

MR. BERGER: Okay.

THE COURT: -- from Mr. Jenkins on

that.

MR. BERGER: Thank you, Your Honor.

MR. JENKINS: Good morning, Your

Honor. May it please the Court. David Jenkins for

Marc Christen and the class. Your Honor knows

Mr. Beste.

THE COURT: I do. Good to see you,

Mr. Beste.

MR. BESTE: Good afternoon, Your

Honor. Good morning. Sorry.

THE COURT: Sti ll morning.

MR. JENKINS: I had to look to make

sure.

THE COURT: And that's no comment on

Mr. Berger's argument. I don't want anybody thinki ng

that that was a dig at him for saying he was

long-winded or something. It 's absolutely not.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

41


MR. JENKINS: No, it wasn't, nor on my

part. Very straightforward.

MR. BERGER: I know what to expect

when I come to this Court, Your Honor.

(Laughter)

MR. JENKINS: I agree with Mr. Berger

on a couple of points. Summary judgment we have to

rely on evidence, documents, deposition transcripts ;

and we get inferences. I think he indicated that w e

only get inferences at the motion to dismiss stage.

No. We get reasonable inferences at the summary

judgment stage as well. And we have to show -- and we

believe we have -- that a majority of the board was --

had their abili ty to analyze this transaction

independently wiped out for one of three reasons.

That is, we can show that they were acting in bad

faith. We can show that they lacked independence. We

can show that they had a self-interest in the

transaction.

Defendants have conceded that Joseph

Campbell, Jochen Hummel, and Joseph Prang had a

self-interest for purposes of this motion only. We

move on. I'm going to cover the three of them,

however, in the sum of my further arguments. Let m e

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

42


go to the three bases. And I ' l l do bad faith,

independence, and interest in that order.

It 's -- we argued in our answering

brief -- and, you know, bluntly, defendants really did

not come to grips with it -- that there was -- ther e's

a bad faith component here. It applies to all the

directors. And the directors have to show that the y

acted faithfully to all the stockholders, not just the

preferred stockholders but also the common

stockholders.

The evidence is overwhelming that the

board of directors paid no real interest to the com mon

stockholders when they were deciding to do a deal

here. We know from Delaware law that there's a num ber

of things they could have done. They don't have to do

anything in particular. We know that there is a

broad -- they have a broad number of choices, but

they've got to do something to show that they

understood that they represented the common

stockholders as well as the preferred stockholders and

that they looked at the common stockholders' intere sts

in this transaction.

We rely on Chancellor Chandler's

motion to dismiss argument -- I mean -- excuse me - -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

43


opinion for a number of points, one of which is how

can you do worse than zero? I 'm a common stockhold er.

I get zero in this deal. Why not go forward? Yes,

the defendants point out -- Lisa Stone is actually the

best of this -- there's risk going forward. Of cou rse

there is, but there's also reward for the common

stockholders. I ' l l get to this later. I get it th at

the preferred stockholders as stockholders can say

"I'm not wil l ing to take the further risk. Let's t ake

what we can now and move on." They have the absolu te

right to say that. But the directors, whether the

appointees of the preferred stockholders or otherwi se,

do not. They have to consider, based on equity-lin ked

investors and the Chancellor's decision in Trados i n

this case, we say they have to consider the common

stockholders first.

But I don't think the Court --

THE COURT: I -- I would define it as

you have to consider the equity as an undifferentia ted

slug without preferential rights, because once you

folks start thinking about preference rights, you

think about contract rights. So it's just not the

common. I mean, you could imagine there being

multiple classes of stock, but you have to think of it

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

44


as an undifferentiated block of equity and maximize

the value of that undifferentiated block rather tha n

looking to protect someone's contractual preference ,

which only gets contract protection, not fiduciary

protection.

MR. JENKINS: And they did not do that

here -- and I think it 's undisputed -- we would be

arguing the same at trial. What could the director s

have done so that --

THE COURT: They could end up being

right. I mean, they could end up proving at trial

that this thing was worth zero.

MR. JENKINS: That is correct, Your

Honor. That is the risk we take at going to trial.

We understand that. Typically -- and as Mr. Berger

has conceded here -- valuation is not something tha t's

typically handled on summary judgment because you h ave

competing valuation theories. Neither of the exper ts

has testif ied. It's tough to do on summary judgmen t.

The directors did nothing to protect

the interests of the common stockholders. They cou ld

have set up a special committee. They had a direct or

who would fit in, Klaus-Dieter Laidig. They didn't

set one up. They didn't even -- apparently never

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

45


thought to consider it. They could have had a

fairness opinion from an investment banker, fairnes s

to the common stockholders' point of view. I suspe ct

that would have been difficult to get, but they nev er

even tried. To go beyond that, they never even got a

valuation with respect to the merger.

They could have put -- made this deal

contingent on a majority of the common stock. A

majority of the common stock, indeed, a significant

majority was held by people unaffi liated with the

preferred stockholders. They could have done that.

If they had done that and succeeded, I don't think I

get by a motion to dismiss, let alone summary

judgment; but, again, they didn't do it and they ne ver

even considered it.

Nor did they do anything of the

following: We hear in some of the directors'

testimony -- and we heard in the brief -- about how

"Well, the directors considered the risk-reward rat io

of going forward and determined it 's better to sell

now." One would have thought that there would be

documents to support that. A risk/reward ratio goi ng

forward, you have to determine all r ight, what do w e

think the company can do? What sort of valuation c an

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

46


be achieved in the future? What's the risk of

achieving that? That is normally done on pieces of

paper and not in your head. There are no such piec es

of paper; no such analysis was done. Nobody sat do wn

and said, "Hmm, we can sell for 60 million today. We

can sell for 70 mill ion next year" or "Could we sel l

for 70 mill ion next year" -- and let me stop there to

say the -- as of the merger date, the liquidation

preferences were approximately 58 mill ion. Then yo u

have the management incentive plan on top of that.

But shortly above 60 million, the common stockholde rs

start to share. So one would think that a director ,

thinking of the interests of the common stockholder s,

would be sitt ing down and saying, "I can't do this in

my head. I have to figure out what is the reasonab le

valuation going forward and is there any realistic

chance that the common stockholders will be able to

share in the value of the company?" No such analys is

was done. As I said, that has to be done on paper.

No such piece of paper was ever produced in this

action.

Some of the directors have testified

that essentially they thought about it in their min ds.

That's tough to do. I don't know how you do

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

47


valuations in your mind. So there was nothing done to

protect the common stockholders.

We've cited a couple of instances in

the -- in the -- in our brief where two of the

directors, Klaus-Dieter Laidig and, to a lesser

extent, Lisa Stone, both, sort of, admitted the

obvious. Nobody really focused on the common

stockholders.

Mr. Laidig -- and Mr. Berger said I

took this out of context, but I really did not.

Mr. Laidig testif ied that it was the best thing to do

to sell the company. This is me asking him a

question. He said, "It 's the best thing to do to s ell

the company."

I asked him: "Does that include the

common stockholders?" for obvious reasons.

He testified that the difference

between the common stockholders and preferred

stockholders only came up when this case was fi led.

And I happen to believe him. I think that is the

correct analysis. These -- whether they were --

whether the directors were influenced by the fact t hat

they were either put on the board by preferred

stockholders, whether they were influenced by the - -

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

48


the management was influenced by the fact that this

deal put real money in their pocket right now, ther e

was no risk going forward, I don't know. I think b oth

of those are probably truth there.

THE COURT: But, I mean, I don't think

it 's uncommon, something that you see in cases, we see

and you see them in literature and just in discussi ons

generally, for people who hold a preference to beli eve

that when the value of the company is south of the

preference, that they own the company, quote unquot e,

because all the value supposedly belongs to them

because it doesn't achieve higher than the preferen ce.

So, you know, it wouldn't be surprising for people to

have been thinking in that mindset at the time and,

therefore, not to have thought about the common

because of the belief that the value of the company

couldn't get north of the l iquidation preference.

MR. JENKINS: Let me push back on

that, if I may, Your Honor. And that's where I go

into "and then they have to do some sort of analysi s

to do that." It 's just not the price today. It 's --

THE COURT: It 's so obvious it is, you

know. That's why, l ike, if this thing comes in and

it 's a real stinker, l ike, if you want to buy, you

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

49


know, Laster Lawn Care Enterprises, you don't need to

do a valuation of that company.

(Laughter)

THE COURT: You know, it just depends

on how clear it is that the company is in extremis.

MR. JENKINS: But it isn't that clear

here. The company was doing better. It had proble ms

down through the middle of 2004. Mr. Campbell, to his

credit, came in and got things moving again. Reven ue

went way up at the end of 2004 and 2005. He -- we' ve

cited in our brief to his statements at the time,

"We're having record quarters in revenue. We're

having record profits." This is early 2005. They

took -- they borrowed a bunch of money 2004 and cou ld

take it in two tranches. They took the first. The y

didn't need to take the second. Their cash on-hand

was well above their optimistic forecasts. Things, at

least on the surface, were looking up.

And if you look at the documents at

the time, they are consistent with the fact of a

company that had reversed course under Mr. Campbell 's

leadership and was positioned for further growth.

I agree, at trial the Court, after

weighing all the evidence, may decide "The valuatio n

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

50


really isn't there. There's no damages here." I

don't think that's going to happen, but there's a

theoretical possibil ity.

But what is -- what is in the record

shows Trados did not need to be sold. There is no

document, contemporaneous or otherwise, that says

Trados needed to be sold at the time.

Summing up here, given all of this --

we're going to argue the same at trial; but given a ll

this, I don't see how the board of directors could

legitimately say "We acted faithfully to the common

stockholders' interests." If they had done thoroug h

valuations and -- which they did not -- and showed

that "Look, this company was going downhill.

60 million is the most it would ever achieve on any

realistic basis," they would have something to argu e.

They did none of that.

Given the fact that they did

nothing -- and it 's their burden to do something.

They're the directors. They have to do something.

And given the fact that the company looks, to all

outward appearances, to be on an upward trajectory in

late 2004, early 2005, the directors did not do wha t

they should have done, which is consider the common

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

51


stockholders' interests. That covers all seven of

them. That gets them right there. If the Court

agrees with me, we're done.

Let me move on to independence and

interest in this. Based on -- Mr. Berger has said

there's no reason why the common -- the preferred

stockholders wanted to exit. Sure, there's -- ther e's

reasons here. Mr. Gandhi hinted at some of them. He

said, "I 'm tired of this investment. I want to mov e

on." I think that's a fair inference from it. Tha t

could have applied to all the preferred stockholder s.

Ms. Stone said, "We took, you know, a risk/reward

ratio, and we decided this was the best we were goi ng

to get for our investment," except that she didn't do

what she should have done, which is actually do the

analysis.

They thought -- I suspect that if we

had them all under truth serum, several of them wou ld

say "I really thought that we got the best deal." But

what they didn't do was analyze specifically to say

what could be realistically achievable in the futur e.

That was not done, and that absence of that, I thin k,

ends the motion right there.

In terms of independence, I agree with

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

52


Your Honor. The best one we have is Mr. Gandhi. H e

has said several things from which this Court could

conclude, should you have to reach there, that he w as

focused on things other than the best interests of the

company. He was clearly the most aggressive in

wanting to get out. He made clear -- this is at

Exhibit 94 -- that Mr. Campbell 's mission was to

architect an M and A exit as soon as possible. Tha t's

one of his statements to Sequoia.

I should stop there. I don't think

it 's important for the purposes of this motion -- a nd

Mr. Berger said we had discovery from the -- from t he

preferred stockholders. That is technically true. We

got what, a couple dozen documents from Mentor

Capital, Mr. Prang -- that's really not relevant no w

-- a few more from Sequoia. We got a fair amount f rom

Ms. Stone's firm, Mercury Capital. We didn't get a

lot of documents. I 'm presuming they don't exist. I

don't think it's important right now; but I didn't

want to allow the Court to think yeah, we had a lot of

documents and there's nothing in there. We got a f ew

documents from several of the firms.

As long as I'm there, let me point out

one other thing. We did have a lot of discovery in

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

53


this case, hundreds of thousands of documents and l ots

of depositions. Much of that was taken before the

motion to dismiss was decided. This was init ially an

appraisal action. It was not a breach of f iduciary

duty action. In the appraisal action, after much

problems, we eventually got a lot of discovery.

Mr. Berger's office did provide us with additional

discovery after the motion to dismiss was decided i n

this case. We had taken a number of depositions,

including Mr. Campbell 's deposition and Mr. Gandhi' s

deposition, prior to the motion to dismiss being

decided. We took others thereafter.

So I 'm not relying upon law of the

case here. We put it in because this is an unusual

situation. In our complaint --

THE COURT: Let me -- let me say why I

think you did it, and then you can tell me if i t 's

wrong.

MR. JENKINS: Okay.

THE COURT: It seemed to me your pitch

was "A motion to dismiss, usually just based on

allegations. Here we actually based it on evidence ."

MR. JENKINS: That's correct, Your

Honor.

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

54


THE COURT: "We attached documents,

too. So if the former Chancellor has said that you

can draw an inference from those documents, that

inference which could be drawn at the complaint sta ge

is also drawable at the summary judgment stage."

MR. JENKINS: Your Honor has said it

more directly than I was going to. Thank you.

THE COURT: Well, you were going to

say it more eloquently.

MR. JENKINS: Eloquent --

THE COURT: I was more direct.

MR. JENKINS: You were more direct and

shorter, which is probably more to the point.

Also, going back to Mr. Gandhi, we

also have documents in which he said that, bluntly,

Sequoia does not own enough of the company to gener ate

a meaningful return. And we also have his admissio n

that he was spending too much time on Trados.

I don't think the Court has to get

there, but that's enough to show that Mr. Gandhi ha d

interests other than the best interests of the

stockholders when he was deciding the merits of thi s

merger.

With both Mr. Stone [sic] and Ms. --

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

55


Mr. Scanlan, we have less in the record. The same

probably holds true with both of them. And, again,

I 've covered both of them with respect to the bad

faith. But both Ms. Stone and Mr. Scanlan did have

investments in their funds. Ms. Stone owned

10 percent of Mercury. She admitted she could be

removed from the firm by the vote of her partners.

And Mr. Scanlan also had -- excuse me. Mr. Scanlan

was a partner in Wachovia Capital Partners, and he

participated within their portfolio. So both

Ms. Stone and Mr. Scanlan had some investment inter est

in this -- in this matter. It isn't huge and I 'm n ot

resting heavily on it, but it does exist.

In terms of their independence,

Ms. Stone testif ied that she was a board designee o f

Mercury representing Mercury clients' interests. N ow,

maybe she just misspoke or maybe at trial she can

explain that "No; I was representing all the

stockholders' interests." But I think at this poin t

on summary judgment, we can use that to show no, sh e

wasn't interested in the common stockholders. She was

interested in her clients at Mercury.

And I understand that. You know, I

understand preferred -- directors appointed by

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

56


preferred stockholders think that there's -- their

f irst allegiance is to the person who puts them on the

board. This is not the first t ime I've seen that.

But it 's just not right under Delaware law, and at

least for purposes of summary judgment, I think we

have enough here to question their independence.

Your Honor doesn't want to hear

anything on the appraisal. So unless Your Honor ha s

further questions, I -- that is my presentation.

THE COURT: What about Mr. Berger's

Live Entertainment point, that employment plus

differential treatment at the affi liate level shoul d

be enough, it should get you past a motion to dismi ss

but that's it?

MR. JENKINS: I 'm thinking, Your

Honor.

THE COURT: No; that's f ine. I mean,

it may just be you disagree with that legal point. I

don't know.

MR. JENKINS: I don't think I need to

disagree with that because the differential treatme nt

winds up in the bad faith, which I don't think Live

Entertainment spoke to at all. I mean, we have tha t

here, which they didn't -- which, you know, bluntly ,

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

57


few other cases have.

Differential treatment alone plus

employment, it 's a matter of drawing inferences at

this level of summary judgment. And differential

treatment plus employment is a lot. We have certai nly

more with Gandhi. We have differential treatment p lus

employment plus statements that are just inconsiste nt

with his duties as a director.

With Ms. Stone and Mr. Scanlan we have

fewer of the statements. I agree with that.

Mr. Berger and I actually agree on one point. We h ave

fewer statements, but we stil l have a situation in

which both Ms. Stone and Mr. Scanlan could be remov ed

if they -- by, respectively, Mercury and Wachovia - -

if they did something their partners disagreed with .

I do not have a direct document from either Mercury or

Wachovia saying "Do this or you'l l be fired." Thos e

rarely happen.

THE COURT: You just wouldn't expect

to see that, and it 's not something that historical ly

we've required in the employment context. I mean,

again, you have a duty as an agent or as an employe e

to represent the person by whom you are employed. And

it 's that -- that's what, in the controller context --

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

58


I know this isn't a controller case. I'm not using it

for the entire fairness idea. That's why the

employees of the controller on the subsidiary board

are viewed as confl icted, even if they don't get an y

personal benefit out of the deal, because they have a

duty that runs to the person on the other side of t he

transaction.

So I guess this is really musings for

Mr. Berger on reply. But I don't think you have to

tell a punishment story.

MR. JENKINS: I hope not, because at

least with -- well, with all three of them, we have

nothing direct, "Do this or else."

THE COURT: I actually don't think --

and this is -- this is another thing that maybe -- and

this is a question for you. Do you think it

necessarily means that Stone gets held l iable for

damages? I mean, don't I -- won't I have to --

doesn't her interest work for purposes of viewing t he

transaction as whether it's entirely fair or not? But

then in terms of assessing her liabil i ty for damage s,

don't I have to ask the question of whether there w as

conscious wrongdoing as opposed to, I mean, a lack of

appreciation for the importance of the common?

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

59


MR. JENKINS: There's clearly --

THE COURT: One is going to get you

all the way.

MR. JENKINS: There is clearly a

distinction between an analysis of

interest/independence/bad faith at the summary

Documents

1 IN RE TRADOS INCORPORATED : Consolidated Chancery … · 2012. 10. 17. · Trados. For example, at paragraph 30 of the complaint, he alleges that by June 2003, Sequoia had made