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Central Laborer's Pension Fund v. McAfee, Inc.

California Court of Appeals, Sixth District

November 15, 2017

CENTRAL LABORERS' PENSION FUND, Plaintiff and Appellant,
MCAFEE, INC. et al., Defendants and Respondents.

         Santa Clara County Super. Ct. Nos. CV180413, CV180420, CV180597, CV180928 Hon. James P. Kleinberg

          Counsel for Plaintiff/Appellant:Central Laborers' Pension FundRobbins Geller Rudman & DowdRick Atwood, Jr.Randall J. Baron, Maxwell R. Huffman,

          Counsel for Defendants/Respondents:McAfee, Inc.Intel Corporation Gibson, Dunn & Crutcher, Paul J. Collins, Mark A. Perry, Wayne W. Smith, Thomas G. Hungar, Linda D. Lam, Casey J. McCracken

          Counsel for Defendants/Respondents:David DeWalt, Thomas E. Darcy, Denis J. O'Leary, Robert W. Pangia, Carl Bass, Jeffrey A. Miller, Anthony Zingale, Leslie G. Denend, Lorrie M. Norrington, Charles J. Robel, Wilson Sonsini, Rodney G. Strickland, Boris Feldman

          Premo, J.

         This is a class action brought by former public shareholders of security technology company McAfee, Inc. Intel Corporation acquired McAfee in a cash sale at $48 per share for a total of $7.68 billion (merger). Plaintiff Central Laborers' Pension Fund (plaintiff), on behalf of itself and the class, alleges that McAfee, Intel, and the former members of McAfee's board of directors-comprised of nine outside directors and the former president and CEO, David DeWalt (together defendants)-engaged in an unfair merger process contaminated by conflicts. Plaintiff claims that in pursuit of his own self interest, DeWalt withheld material information about negotiations with Intel management from McAfee's board of directors, whose members failed to safeguard the process and who consequently approved an undervalued price per share. Plaintiff also claims that defendants omitted material information from the merger proxy statement on which McAfee's public shareholders relied in voting for the merger.

         The trial court, applying Delaware law, granted summary judgment for defendants. The court found no triable issue of material fact regarding the individual defendants' alleged breaches of fiduciary duty, and concomitantly no liability on behalf of McAfee and Intel for aiding and abetting. Plaintiff challenges the summary judgment as well as an earlier order setting the matter for a trial to the court without a jury.

         For the reasons stated herein, we affirm the judgment as to the nine outside director defendants and reverse the judgment as to DeWalt and the corporate defendants.


         Factual Overview

         The Company

         McAfee was founded in 1989 as a Delaware corporation with headquarters in Santa Clara. At the time of the merger, it was the world's largest dedicated security technology company. David DeWalt joined McAfee in 2007 as president and CEO and served on the board of directors, bringing about 15 years of executive experience in the software industry, including the sale of a company under his leadership. DeWalt's reputation according to one investment bank's analysis was “for building and subsequently selling businesses.”

         The nine other members of the board-defendants Charles Robel, Carl Bass, Thomas Darcy, Leslie Denend, Jeffrey Miller, Lorrie Norrington, Denis O'Leary, Robert Pangia, and Anthony Zingale-were outside, nonmanagement, nonemployee directors with combined executive and board experience in the technology, investment banking, and accounting fields, including dozens of merger and acquisition transactions. None of the independent directors joined Intel as directors or employees after the merger.

         McAfee maintained close working relationships and alliances with numerous technology companies. As part of its regular diligence, the board of directors discussed McAfee's strategic relationships with other technology companies along a “full spectrum of options” from technology partnerships to mergers and acquisitions. It was DeWalt's role to update the board on these ongoing discussions, which he did as part of a “regular review process that the board and management went through... almost every meeting.”

         McAfee and Intel-Business Relationship and Early Merger Discussions

         Before the merger, McAfee had a nearly decade long relationship with Intel as a supplier of security software and a partner in research and development and marketing initiatives. In 2009, the companies agreed to collaborate in developing enhanced security technology using the expertise of both companies through a joint research and development project called “Patmos.” Intel's Software and Services Group, led by the group's general manager and senior vice president Renee James (James), was around this time also considering potential acquisitions as part of Intel's security strategy, including the possibility of acquiring an existing platform security company such as McAfee.

         In March 2010, Intel requested a meeting with McAfee. DeWalt and Gerhard Watzinger, a McAfee executive vice president, speculated that Intel might want to “beat us up about Patmos” because McAfee had not prioritized the project, leading Intel to complain on multiple occasions that McAfee was not meeting the collaboration deadlines. In an e mail to James, DeWalt expressed excitement about the opportunities for security products and the potential for “an amazing partnership.” DeWalt asked if James had an agenda to propose for the meeting and suggested they “expand slightly and review all key business synergies and financial models, ” noting that his chief strategy officer and “head of M&A [Watzinger]” would attend. Watzinger prepared a presentation that included one slide each on “key synergies, ” financial outlook, and “accretive” benefits to revenue and shareholder value. The McAfee employee responsible for the financial outlook slide described it as a “high level, ” “back of the envelope” and nonexpert view of potential benefits.

         James later testified that the McAfee presentation “surprised” her because she anticipated a meeting about the joint development effort. DeWalt testified that the group led by James met “to ask questions about our business in the spirit of partnership, but certainly the questions that were being asked were probably more leading than just a partnership discussion.”

         After the March 2010 meeting, McAfee and Intel management continued their partnership discussions. Intel began vetting investment banks for advisory services in connection with a potential “deal” in the security sector. At one point Intel offered the advisory position to Morgan Stanley. Morgan Stanley declined, noting internally that it anticipated a more lucrative “revenue opportunity” providing sell side advice to McAfee.

         Meanwhile, DeWalt and James stayed in regular contact, which DeWalt understood as “partner oriented” and indicative of Intel's interest in security and in McAfee. A close collaboration began between McAfee and Intel management in a project that was dubbed “Inca.” On April 4, 2010, representatives of both sides met at Intel's headquarters. The objective of the Inca meeting was to provide Intel with “necessary McAfee and technology background to build synergy matrix and [financial] model” and to “[i]dentify top opportunities for combined assets.” The discussion centered on a list of eight joint business opportunities, including Patmos, that each represented a “$1B opportunity.” Inca discussions continued throughout April and May 2010. McAfee added a segment by segment analysis of business opportunities to Intel's technology asset list, highlighting McAfee's “value add” in terms of the eight “Billion Dollar” ideas. In early and mid May 2010, Intel sent detailed inquiries to McAfee on monetization, joint market penetration, and McAfee's growth strategy and revenue direction.

         In May and June 2010, James proposed to Intel's board of directors that Intel engage in acquisition discussions with McAfee. Intel's internal valuation analyses of McAfee as presented to the Intel board of directors in June 2010 reflected a range of values from a standalone price per share of $42 to as high as $56 to $90 per share for “strategic synergies” from an acquisition. The Intel board of directors approved an acquisition offer range of $45 to $49 per share.

         June 11 Proposal at $45 per share

         James met with DeWalt on June 10, 2010 and verbally conveyed Intel's interest in making an offer at the price of $45 per share. DeWalt recalled it as the “first meeting... where there was a strong indication of interest and that there might be an offer to follow.” DeWalt's response to James was “if it didn't start with a five, it was a non starter.” James later testified that “Dave [DeWalt] let me know 45 didn't work.... Dave's words were: It needs to start with a 5.”

         The next day, James sent DeWalt a written request for exclusive negotiating rights and nonbinding proposal to acquire McAfee in a cash offer at $45 per share (June 11 proposal) subject to the completion of due diligence and board and regulatory approvals. The proposed price represented a 43 percent premium over McAfee's stock price, which had fallen since late 2009 and was trading in the low 30s. The June 11 proposal stated that Intel intended to operate McAfee as a standalone subsidiary and to retain “the current management team.” DeWalt notified McAfee board chairman Robel, who called a special meeting for the next day.

         In an e mail to Intel's CEO and board subcommittee dated June 11, 2010, James reported “preliminary progress” with McAfee and stated that DeWalt had requested a nonbinding letter of intention to enter into due diligence despite “a price gap to their potential expectations....” In a follow up exchange with Andy Bryant (of Intel), James stated that DeWalt's “expected price” was “50.” Bryant responded that a deal was possible “if that is where he is starting.” James also recounted the meeting to her Intel colleague Donald Harbert, whose notes indicate that James believed the “gap is $5.00” between Intel's indication of interest at $45 and McAfee's expectations for an opening bid. Harbert's notes indicate that McAfee's stock price was “down” and Intel should make an offer “now before the stock goes up.” The notes also reference a retention plan for the “top 41” and that DeWalt would “only want to stay 2 years.”

         McAfee's Response to the June 11 Proposal

         The McAfee board was informed of ongoing joint partnership discussions between Intel and McAfee in the spring of 2010. Several board members testified that Intel had indicated “a stronger interest in security” and a “greater interest beyond the partnering development deal” or product development relationship that “could have the potential to turn into something.”

         Yet several directors described Intel's June 11 proposal as unexpected and a surprise, based on views that Intel was not a likely acquirer and that DeWalt's briefings about discussions with Intel had remained focused on the joint venture. Defendant Robel explained that he thought Intel's increased interest in security and questions about McAfee's business might have been a “fishing expedition” because a combination with Intel was “pretty out of the box.” The board members were not aware of project Inca and management's detailed analysis of potential synergies that could be developed in an Intel acquisition. Robel testified that before the June 11 proposal, the board had not placed a view on a value of the company in a sale “because the board hadn't even considered putting the company in play.”

         The McAfee board met in formal sessions nine times following receipt of the June 11 proposal. At the first special meeting on June 12, 2010, DeWalt reviewed McAfee's relationship with Intel and updated the board on the partnering discussions that had taken place since late February 2010. DeWalt told the board that he believed Intel could be convinced to increase its price per share following initial due diligence. The board at that time retained transactional counsel, Wilson Sonsini, and considered several investment banks to serve as McAfee's financial advisor, ultimately selecting Morgan Stanley. The terms of engagement tied Morgan Stanley's compensation to the acquisition price and provided a higher fee for each per share increase in sale price, with a multi million dollar bonus for a price equal to or greater than $50 per share and a bonus of several times that amount for a sale at $55 per share or more.

         McAfee's board reconvened several days later for an update on the due diligence sessions and McAfee's internal forecast. Morgan Stanley offered its preliminary analysis of the July 11 proposal in view of McAfee's financial performance, possible standalone scenarios, other potential bidders, and Morgan Stanley's valuation of McAfee at between $55.09 per share (base case) to $60.20 per share (high case). Following these discussions, the board decided to reject the June 11 proposal and directed DeWalt to communicate to Intel that $45 per share was inadequate. The focus of the board was to obtain an offer at a price that was “something above $50.” According to defendant Lorrie Norrington, the board “had the specific conversation that 45 was too low and that... it has to start with a five in order for the board to consider the offer.”

         DeWalt and Morgan Stanley separately communicated McAfee's rejection of the $45 offer. DeWalt testified that there was “an impasse” because “Intel wouldn't accept anything that started with a five and we wouldn't accept anything that didn't start with a five....” James similarly recalled that DeWalt told her “that he thought it needed to be in the mid 50s. Fifty two to 54.” James's internal communications with Andy Bryant reflected this understanding of McAfee's position as well, based on conversations with DeWalt and on communications between the financial advisors and legal counsel. In an e mail exchange on June 30, James told Bryant that DeWalt had been unwilling to affirm a price “other than he would work to get his board to say ‘they would do 50'... and we know some of the board is at 52 55.” Bryant advised James to not go to Intel's board of directors for increased authorization “unless we know 50 is ok.”

         James spoke with DeWalt over the July 4th weekend and asked “will 50 get the deal done, if we go back to the board?” DeWalt, according to James, “said, no, 52 to 54. He stuck to it.” James explained that she did not speak with DeWalt for “a couple weeks after” and decided to wait until the second quarter results, noting that McAfee was “in a falling market, their stock was going down, and we knew their quarter wasn't good. So we said: You know what? We see real weaknesses in their business. And we were concerned that we needed to wait and get more data.”

         Correspondence continued between James and DeWalt immediately following the July 4th weekend. DeWalt provided Intel with McAfee's preliminary second quarter results, which he described to James as “very strong, ” adding “Renee, I'm hoping this is exactly the type of ‘good new news' that might help move things forward on your end.” The view internally was more subdued. DeWalt testified the results were “mixed” with McAfee having “missed pretty substantially” analyst expectations in a few key categories but having beat expectations in others. Robel explained that “we believed, and the Street believed, it was not a good quarter. And it was not... there was a cloud around the company's ability to grow in the future.” James also recalled McAfee's second quarter results as being “weak” with “very weak forward guidance.”

         McAfee's board met again on July 8, at which time DeWalt reported a pause in the merger discussions as Intel wished to wait until the full financial statements from McAfee's second quarter became available. Morgan Stanley confirmed DeWalt's information and reported that they had reiterated that Intel would need to increase its $45 per share offer before McAfee would engage in more complete due diligence. Morgan Stanley also reported that one other potential acquirer identified by the board had indicated that it was not interested in pursuing an acquisition. DeWalt apparently did not inform the board about James's inquiry if $50 would “get the deal done” if she went back to Intel's board.

         Revised Offer at $48 per share, Merger Agreement, and Proxy Statement

         Intel revised its acquisition offer to $48 per share in a letter dated July 19 and delivered to DeWalt on July 20. The offer represented a 58 percent premium over McAfee's stock closing price on July 19 and demanded a 30 day exclusivity agreement.

         McAfee's board convened special meetings on July 21 and July 22 to discuss the revised offer. DeWalt reported that based on his discussions with James, Intel “was not willing to further increase its offer” price. Morgan Stanley reported that it had received similar information from Intel's financial advisor and that it believed Intel would withdraw its offer if McAfee sought alternative bids or failed to agree to a 30 day exclusivity period. Morgan Stanley presented a valuation summary and the board discussed the conditions of the offer, market trends for mergers and acquisitions, the interest and ability of other potential acquirers to complete an acquisition, and whether to seek a further increase in the offer price. DeWalt reviewed the second quarter financial results and reasons that revenues had fallen below expectations, as well as several successes that McAfee had achieved that quarter. At the end of the meeting on July 22, McAfee's board authorized negotiations based on the $48 per share offer but directed counsel to seek a shorter term of exclusivity.

         The McAfee board held three special meetings in August to consider aspects of the proposed transaction. DeWalt's compensation and employment agreement with Intel also was negotiated and reviewed by the board's compensation committee. At the meeting on August 18, Morgan Stanley delivered a formal fairness opinion concluding that the acquisition price of $48 per share was “fair from a financial point of view” to the shareholders. The board approved the merger on August 18, 2010. On August 19, Intel and McAfee jointly announced an agreement for Intel to acquire all of McAfee's common stock for $48 per share in cash. The merger agreement included a “fiduciary out” clause that permitted McAfee to terminate the deal if it received a better offer unsolicited.

         The proxy statement dated September 21, 2010, described in relevant part the McAfee Intel joint partnership (Patmos) in 2009 and the meeting between James and DeWalt on June 10, 2010. It described McAfee's process, price negotiations, and communications with Intel between the June 11 proposal at $45 per share and receipt of the revised offer on July 20 at $48 per share, as well as Morgan Stanley's fairness opinion and the board's deliberations and consideration of alternative prospects before approving the agreement on August 18. It did not mention project Inca or pre due diligence discussions or exchanges prior to the June 11 proposal. It also did not mention any $50 per share “overture” but stated that on June 26, James and DeWalt “agreed to revisit valuation discussions at a later date” after DeWalt had indicated that McAfee's board would not be interested in accepting an offer below $50 per share, and James had responded that Intel's board would not support an offer price of $50 per share. The proxy statement summarized details of the merger agreement, including the $230 million termination fee, nonsolicitation (“no shop”) provision, “fiduciary out” provision, and DeWalt's and other executive's employment agreements.

         No other company expressed interest in purchasing McAfee following the merger announcement. On November 2, 2010, McAfee's shareholders approved the merger, with 99.9 percent of voting shares in favor.

         Procedural History

         This class action consolidated several lawsuits filed in the Superior Court of Santa Clara County in August 2010[2] after Intel and McAfee announced the merger agreement on August 19. The plaintiffs did not seek a preliminary injunction to prevent the McAfee shareholder vote from going forward.

         1.Operative Complaint

         The operative, consolidated amended complaint (complaint) was filed on January 6, 2011, after McAfee's shareholders voted in favor of the merger on November 2, 2010, but before the deal closed after regulatory approvals. The complaint asserted a single cause of action for breach of fiduciary duties and aiding and abetting, claiming that the 10 individual defendants, [3] aided and abetted by McAfee and Intel (both Delaware corporations), breached their fiduciary duties of care, loyalty, candor, good faith and independence by failing to ensure a fair process and by depriving McAfee's public shareholders of the true and fair value of their McAfee stock.

         The complaint alleged that DeWalt “in particular” acted out of self interest during the merger process in order to ensure his gains in an acquisition, and that he allegedly kept the other board members “in the dark” throughout the merger process-including by concealing information about management's exchanges with Intel on the value of McAfee's prospects and future products and by effectively “capping” McAfee's price expectations at $50. The complaint further alleged that the individual defendants, who stood to receive accelerated vesting of their stock upon completion of the merger “at a value of over $3 million, ” accepted a “rubber stamp fairness opinion” by Morgan Stanley regarding the $48 per share offer.

         It alleged that in order to protect the deal with Intel, defendants entered into a merger agreement that was “steeped in preclusive deal protection provisions designed to guarantee that Intel did not lose its preferred position.” These included a “ ‘No Shop' ” provision that required McAfee to discontinue any discussions with other potential acquirers, a “ ‘Matching Rights' ” provision that gave Intel five days to match any competing acquisition proposals that McAfee might receive, and a “ ‘Termination Fee' ” provision in which McAfee would pay Intel $230 million if it accepted a higher offer despite the no shop provision.

         The complaint also alleged that defendants withheld material information in proxy statements, depriving McAfee's shareholders of information about the flawed sales process, conflicts of interest that burdened the board and its advisors, McAfee's intrinsic value and prospects going forward, material benefits that defendants and McAfee management would secure only if the acquisition succeeded, and the flawed financial analysis supporting Morgan Stanley's fairness opinion.

         The complaint in sum asserted that (1) defendants were motivated by lucrative personal gains, (2) the acquisition price of $48 per share was unfair and undervalued below McAfee management's own estimates, (3) the proxy statements to McAfee's public shareholders omitted material information about the merger process and the basis for Morgan Stanley's fairness analysis, and (4) defendants consequently breached their fiduciary obligation to obtain the highest value reasonably available for McAfee's shareholders.

         The trial court overruled demurrers to the consolidated amended complaint on June 29, 2011.

         Trial Setting

         In January 2012, the trial court granted plaintiff's motion to intervene, certified the class, and appointed plaintiff as class representative. Several months later, defendants moved to amend certain pretrial and trial setting orders to specify that the case would be tried to the court in a bench trial. Defendants argued that plaintiff was not entitled to a jury trial because under Delaware law, breach of fiduciary duty claims are equitable in nature and are subject to the exclusive jurisdiction of the Delaware Court of Chancery, with no right to a trial by jury in that court. Plaintiff opposed the motion and argued, in an effort to secure a jury trial, that although Delaware law applies as to issues of corporate governance, California law mandates the right to a jury trial, as determined by the legal or equitable nature of the claims in the case. The trial court rejected plaintiff's argument that its fiduciary duty claims were legal in nature and granted defendants' motion to amend, setting the matter for a trial to the court without a jury.[4]

         In August 2012, the court denied a motion by plaintiff for leave to file a second amended complaint.

         Summary Judgment

         Defendants moved for summary judgment (Code Civ. Proc., § 473c)[5] on August 3, 2012. Defendants framed the shareholder class action as “no different” from the “rash of lawsuits” that follow most announcements of sale of a publicly traded company and claim that the sale is the product of an “ ‘unfair process' ” at “an ‘unfair price.' ” Defendants submitted declarations and exhibits in support of the motion and requested judicial notice of certain regulatory filings and of stock prices at time points before and after Intel's acquisition offer.

         Plaintiff in response raised no evidentiary objections but purported to dispute many of defendants' 185 material facts and raised 153 additional disputed material facts in support of its opposition. Plaintiff argued that triable issues of material fact precluded summary judgment, particularly concerning (1) strategic, informational, and timing disadvantages that McAfee faced in its haste to evaluate an offer that “ ‘surprised' ” and “ ‘shocked' ” the board members (despite McAfee's collaboration with Intel management on project Inca to identify and value strategic synergies), (2) DeWalt's “outright” rejection of James's $50 per share overture, which allegedly caused Intel to “freeze” discussions at a critical juncture, (3) DeWalt's alleged concealment of the $50 per share overture and the project Inca discussions from the board, and (4) the board's acceptance of Morgan Stanley's fairness analysis despite obvious reliance on “ ‘street' ” valuations that undervalued the company because they “had no idea about the billions of dollars of additional value uncovered during the Project Inca discussions.”

         The trial court granted judgment in favor of defendants on November 2, 2012. The court noted there was no dispute that the McAfee charter contained an exculpatory provision pursuant to section 102, subdivision (b)(7) of the Delaware General Corporation Law (8 Del. Code, § 102(b)(7)) shielding the independent directors from monetary liability for breaches of the duty of care.[6] Beginning with the alleged breach of the duty of loyalty, the trial court found that plaintiff failed to raise a triable dispute as to the independent directors. The court cited undisputed evidence that the directors were highly qualified and experienced outside directors who met multiple times throughout the process and retained and relied upon financial and legal advisors. The court found no evidence that the board had abandoned its oversight function or that DeWalt dominated or controlled the independent directors. The court reasoned that Delaware law does not necessarily prohibit a board from relying on an interested manager to negotiate a merger and there was no evidence that the transaction was unfair to the corporation or had betrayed some confidential relationship.

         Regarding DeWalt, the court found that DeWalt's interest in the merger did not present a disqualifying conflict, particularly because Intel's interest in retaining McAfee management was disclosed in the June 11 proposal, and DeWalt's employment terms were negotiated after the board accepted the $48 price per share offer and were approved by the compensation committee. The court found no evidence that DeWalt's failure to notify McAfee's board about project Inca and the synergy discussions with Intel was the result of self interest or placed McAfee “at a strategic disadvantage.” The court found that DeWalt's rejection of James's overture of a $50 per share sale price could not be “reasonably construed as anything but negotiating for an authorized, higher amount, not an effort to drive McAfee's expectations lower, ” since it was undisputed that DeWalt actually “sought a higher price in the ‘$52 to $54' range.” The court thus concluded that there was no triable issue regarding DeWalt's alleged manipulation of the disinterested majority of the board.

         Having found no triable issues of material fact related to the fiduciary duty claims, the court concluded there was no basis for relief for any alleged disclosure violations and that McAfee and Intel could not be liable for aiding and abetting. The trial court entered judgment for defendants on February 13, 2013. Plaintiff timely appealed.


         Plaintiff asserts that in deciding the motion for summary judgment, the trial court disregarded its fundamental task to construe the evidence and draw all reasonable inferences in favor of the nonmoving party. Plaintiff contends that the court drew improper inferences in defendants' favor and granted summary judgment in the face of several triable issues of fact concerning defendants' conduct and the information supplied to McAfee shareholders before the merger vote. Defendants respond that plaintiff's portrayal of the merger process derives from speculation and guesswork, and is unsupported by evidence sufficient to create a triable issue of material fact.

         A. Summary Judgment and Standard of Review

         A motion for summary judgment provides “a mechanism to cut through the parties' pleadings in order to determine whether, despite their allegations, trial is in fact necessary to resolve their dispute.” (Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 843 (Aguilar).) The trial court must grant a motion for summary judgment “if all the papers submitted show that there is no triable issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.” (§ 437c, subd. (c); Schachter v. Citigroup, Inc. (2009) 47 Cal.4th 610, 618 (Schachter).) To demonstrate the existence of a triable issue of material fact, the party opposing the motion must present evidence that “would allow a reasonable trier of fact to find the underlying fact in favor of the party opposing the motion in accordance with the applicable standard of proof.” (Aguilar, supra, at p. 850.) In making its determination, “the court may not weigh the plaintiff's evidence or inferences against the defendants' as though it were sitting as the trier ...

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