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Fox v. Jamdat Mobile

May 21, 2010

ELLIOT M. FOX, PLAINTIFF,
v.
JAMDAT MOBILE, INC., ET AL., DEFENDANTS AND RESPONDENTS;
v.
NECA-IBEW PENSION FUND, INTERVENOR AND APPELLANT.



APPEAL from the judgment of the Superior Court of Los Angeles County. William F. Highberger, Judge. Affirmed in part and reversed in part. (Los Angeles County Super. Ct. No. BC344364).

The opinion of the court was delivered by: Rubin, J.

Modified and certified for partial publication 06/21/2010 (order attached)

Appellant NECA-IBEW Pension Fund (the Fund) intervened in a stockholder's action filed by Elliott M. Fox (not a party to this appeal) against respondents JAMDAT Mobile, Inc. (JAMDAT), Paul A. Vais, J. William Gurley, Mitch Lasky, Henk B. Rogers and Michael M. Lynton (collectively the individual defendants). Respondents' demurrer to appellant's complaint was sustained without leave to amend. The principal issue is whether Fund's complaint which consists of a single cause of action states facts sufficient for a cause of action for breach of fiduciary duties. We find that it does as to the individual defendants and therefore reverse the judgment as to those defendants. We affirm the trial court's ruling as to JAMDAT.

FACTS

1. Introduction

This proposed class action on behalf of holders of JAMDAT common stock arises out of the acquisition of JAMDAT by Electronic Arts, Inc. (EA) for $27 per share. Both the acquisition process and the price are alleged to have been unfair.*fn1

JAMDAT publishes wireless entertainment applications, including games, ring tones, images and other entertainment applications in the United States and internationally. JAMDAT, a Delaware corporation, is headquartered in Los Angeles. At the time of its acquisition by EA, JAMDAT was still growing, with an internal growth rate in excess of 30 percent, and earned cash at a rate that allowed EA to recoup the purchase money for JAMDAT in a relatively short period of time.

There were more than 24.8 million shares of JAMDAT common stock at the time of the acquisition. The price paid by EA, $27 per share, was only 18.6 percent over JAMDAT's public trading price on the day before the acquisition by EA was announced and it was below JAMDAT's highest share price of $32.50 during the 60 days preceding the acquisition.

Respondent Lasky was JAMDAT's Chief Executive Officer and Chairman of the Board of Directors. Respondents Vais, Gurley and Lynton were directors of JAMDAT. Vais was also a vice president of Apax Managers, Inc., which owned 15.03 percent of JAMDAT stock. Gurley was a managing member of Benchmark Capital Management Co. IV, which owned 10.15 percent of JAMDAT's stock. Respondent Rogers sold a leading wireless publisher, Blue Lava Wireless, to JAMDAT for $137 million; Blue Lava's principal asset was a 15-year worldwide license to the wireless rights for Tetris, one of the most popular games ever made. As a part of this deal, Rogers became a director of JAMDAT. These five individuals constituted the entire board of directors.

Appellant Fund is a shareholder of JAMDAT.

EA owns a valuable stable of video games. The merger of EA and JAMDAT allowed EA to take advantage of both JAMDAT's proprietary technology for mobile game deployment and its expansive mobile game catalog, which included Tetris.

2. August-September 2005

Lasky met for the first time with EA's vice president of corporate development, Owen Mahoney, on August 29, 2005 to discuss the acquisition of JAMDAT by EA. Lasky and Mahoney continued this discussion in September. At the end of September, Lasky met with EA's chief executive officer to discuss the more detailed specifics of an acquisition.

In September, Lasky also entered into discussions with Yahoo about the possible acquisition of JAMDAT by Yahoo.

JAMDAT entered into confidentiality agreements with Yahoo and EA respectively in September and early in October. At the time of the EA agreement, Mahoney asked Lasky whether JAMDAT would enter into an exclusivity agreement with EA; such an agreement, which was eventually concluded, prevented JAMDAT from negotiating with any other potential buyers. At this point, Lasky had not informed the full board of directors that he was contemplating the sale of JAMDAT.

3. October 2005

On October 7, 2005, Lasky disclosed for the first time to the full board that he had been talking to EA and Yahoo about a possible sale of JAMDAT. Lasky did not tell the board, however, about the confidentiality agreements with EA and Yahoo, nor did he disclose that he was considering giving EA exclusivity.

On October 19, 2005, JAMDAT hired Credit Suisse First Boston (Credit Suisse) as its financial advisor in connection with the sale of JAMDAT. Credit Suisse agreed to work on a contingency basis, i.e., Credit Suisse would be paid only if it offered a fairness opinion or if a transaction was consummated. Credit Suisse would be paid $1.5 million if it stated that a proposed acquisition was fair, or 1 percent of the overall acquisition price if there was one. The incentive for Credit Suisse obviously was to recommend an acquisition since only then would Credit Suisse be paid. This was not disclosed in the proxy statement.*fn2

Even though JAMDAT's board delegated to Credit Suisse the sole responsibility to negotiate with prospective buyers, Lasky continued to be the sole negotiator with EA with whom he continued to deal with directly. As the complaint puts it: "Thus, it is no surprise at all that the Acquisition [by EA] included a guaranty of continued employment for Lasky, and the opportunity to roll over his equity into EA." In fact, Lasky was employed by JAMDAT after the acquisition.

4. The First Offers

On October 25, 2005, EA offered to buy JAMDAT for $25 per share. At the same time, EA made clear that it would continue to negotiate only on an exclusive basis.

The next day, Yahoo offered $22 to $26 per share. Yahoo's offer was contingent only upon the completion of due diligence; Yahoo did not request exclusivity.

On October 27, 2005, Credit Suisse reported that it had contacted Microsoft, Viacom and News Corp., all of whom were interested in JAMDAT.

On the same day, Lasky persuaded the board to reject Yahoo's bid. Although Lasky pressed for giving EA exclusivity, the board did not go along with this. Credit Suisse backed Lasky.

JAMDAT entered into a confidentiality agreement with News Corp. on November 1, 2005.

5. Yahoo and EA

During November 2005, Yahoo and EA continued on their respective paths. Yahoo carried on with its due diligence and prepared a draft agreement, which it submitted to JAMDAT. Toward the end of the month, Credit Suisse informed the board that a higher offer was expected from Yahoo and that it was nearing the end of its due diligence.

EA, on the other hand, continued to insist on exclusivity and made no other overt moves. Early in November, Lasky told JAMDAT's board that his real reason for engaging in a "one-sided negotiating position with EA" was that EA had promised Lasky and other members of management "lucrative compensation packages that included continued employment and the opportunity to roll over their holdings in [JAMDAT] into EA post-Acquisition."

In the middle of the month, Lasky, without board approval, negotiated the terms of an exclusivity agreement with EA. Also toward the end of November, Lasky informed the board that EA had started due diligence.

On November 21, 2005, JAMDAT's board instructed Credit Suisse to inform Yahoo that it had to respond with a new offer within a matter of hours. Yahoo explained that it could not make a revised offer until its executive committee met on November 23, 2005. The proxy statement represented that Yahoo had declined to make a higher offer, while the truth was that Yahoo had asked for more time.

6. JAMDAT Shares Appreciate; EA gets Exclusivity

At the end of November 2005, Credit Suisse reported to JAMDAT's board that a $5 appreciation in JAMDAT's shares, if it proved to be sustained, would affect Credit Suisse's analysis of the fairness of EA's proposal.

Rather than losing the EA deal by virtue of the rise in JAMDAT stock, JAMDAT's board now authorized Lasky to sign an exclusivity agreement with EA. "Thus, even though Yahoo had not been allowed the necessary time to make a revised offer, and several other entities stood poised to make competing bids for [JAMDAT], the Board authorized Lasky to enter into an exclusivity agreement with EA and effectively end any semblance of a competitive bidding process." The agreement "ensured ...


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