Opponents of the proposed merger between Data Domain (NASDAQ: DDUP) and NetApp (NASDAQ: NTAP) will get their day in court.
A Delaware Court of Chancery judge ruled late last week that a lawsuit opposing the merger has enough merit to move ahead on an expedited basis, and he scheduled a hearing on a preliminary injunction for Aug. 13.
The lawsuit, filed by Grant and Eisenhofer P.A. on behalf of the Police and Fire Retirement System of Detroit, claims that Data Domain gave preference to NetApp — through measures such as a termination fee and restrictions on soliciting other bids — that has thwarted a rival bid from EMC (NYSE: EMC) and failed to maximize shareholder value, claims denied by attorneys for Data Domain.
“I need only determine if plaintiff has stated a sufficiently colorable claim to justify proceeding on an expedited schedule,” Judge William Chandler wrote in a June 26 decision. “…Plaintiff has alleged facts that state a colorable claim that the Data Domain board is favoring one bidder over others, thereby deterring bids from third parties that could provide greater value to Data Domain shareholders.”
Data Domain has argued that shareholders aren’t facing irreparable harm because they will be able to vote on the NetApp merger, but Chandler wrote that “The opportunity for a shareholder vote sometime in the future, however, does not address the alleged current deterrent effect of the deal protection measures.”
Chandler noted that “a plaintiff faces a significant burden in showing that a board acted in bad faith,” but he added that “in cases such as this one, the shareholders’ only realistic remedy for certain breaches of fiduciary duty in connection with a sale of control transaction may be injunctive relief.”
Some observers have speculated that geographical proximity and an East Coast-West Coast culture clash are behind Data Domain’s apparent preference for NetApp, but Data Domain has argued that it risks losing a sure deal with NetApp if it opens formal negotiations with EMC.
On another front in the takeover battle, EMC and NetApp are still waiting to hear if the FTC has any antitrust issues with their bids for Data Domain. NetApp claims that EMC’s bid could face antitrust scrutiny, a view largely dismissed by analysts. If the FTC decides that a lengthy review is warranted in EMC’s case, that could help tip the scales in NetApp’s favor.
EMC has offered $30 a share in cash for Data Domain, while NetApp has offered roughly the same amount in cash and stock. Neither side has raised its bid, but some analysts speculate that EMC could raise its bid as a merger vote nears.
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