In Re Compucom Systems, Inc. v. Stockholders Litigation

Facts

Central Laborer's Pension Fund (P) brought class action against CompuCom, (D) its former board of directors, and CompuCom's former controlling shareholder, Safeguard Scientifics, Inc., alleging breach of fiduciary duty in connection with the sale of D to Platinum Equity Capital Partners, L.P. P alleges that the D board of directors failed to comply with its fiduciary duties when it structured a sale of the company to Platinum under terms that are alleged to have improperly favored Safeguard, the majority shareholder, to the detriment of the minority shareholders. P also alleges that the defendants sought to discourage D shareholders from pursuing their statutory right to an appraisal by disseminating a materially false and misleading proxy statement. D is a Delaware corporation with its principal executive offices located in Dallas, Texas. Safeguard, is a corporation duly existing and organized under the laws of the Commonwealth of Pennsylvania, having its principal executive offices in Wayne, Pennsylvania. Safeguard owned approximately 48% of D's common stock and 100% of CompuCom's preferred stock. Safeguard held 51% of the voting rights of D's stock entitled to vote on the acquisition and 58% of the voting rights with respect to the election of D's directors. P was a beneficial owner of over 72,000 shares of CompuCom stock. Safeguard invested millions of dollars in risky Internet and technology companies. When the Internet bubble burst, the value of Safeguard's investments plummeted. Safeguard had to bail out its once high flying CEO for $26.5 million in margin loans. When that loan became payable, the CEO did not have sufficient assets to satisfy the outstanding balance due. Safeguard began liquidating investment assets in companies in which its CEO also invested, which included D, at “fire sale” prices. This provided the impetus for the sale of D. D's board organized a Special Committee comprised of four purportedly independent directors, Richard F. Ford, Edwin L. Harper, Anthony J. Paoni, and Edward N. Patrone, to sell Safeguard's shares of D, or, in the alternative, put D up for sale. The Committee retained Houlihan Lokey Howard & Zukin Financial Advisors, Inc. as its financial advisor and retained legal and financial advisors to assist the committee in considering strategic alternatives available to D. The company retained Broadview International LLC to act as the financial adviser to the full board. After over 18 months of exploring various strategic alternatives, the Special Committee had not located a suitable deal. In February of 2004, the D board added two members, Michael J. Emmi, and John D. Loewenberg, to the Special Committee. Platinum proposed to pay $5 per share in cash to the non-Safeguard common stockholders, $4.50 in cash for the shares of D common stock held by Safeguard, and $8 million for the shares of D preferred stock, all of which was held by Safeguard. This offer was rejected by Safeguard and the Special Committee. D and Platinum entered into an Agreement and Plan of Merger which provided that each outstanding share of CompuCom's common stock, in a non-discriminatory manner, would be converted into the right to receive $4.60 in cash, and each outstanding share of D's preferred stock would be converted into the right to receive the par value of the preferred ($15 million in the aggregate), plus accrued and unpaid dividends. The total consideration for the transaction was valued at $254 million, of which Safeguard received approximately $128 million. In reliance on the Special Committee's recommendation and Broadview's fairness opinion, the board unanimously approved the Merger Agreement. P alleges that the deal provided no premium to the public shareholders for their shares of common stock. Indeed, the price of $4.60 in cash per common share paid by Platinum represented a discount to D's closing price of $4.84 on May 27, 2004, the day before the proposed acquisition was announced. The public trading price for Ds shares ranged from as low as $4.16 to as high as $5.99. D had more than $264 million in current assets, including cash, cash equivalents, and inventory, and approximately $400 million in total assets on its balance sheet. P alleges that the unfair terms of the acquisition raised the “ire of the investment community.” P does not claim that the Merger Agreement contained strong lock-ups or other deal protection provisions that prevented the emergence of a competing bid. The merger was eventually approved by the company's stockholders.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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