Qualcomm Inc.’s board of directors is facing an investor-driven suit for asking a U.S. national security panel to review Broadcom Ltd.’s hostile takeover attempt.
This is the first case filed against Qualcomm’s directors relating to the request, and more claims of breaches of fiduciary duty could follow.
A complaint filed late March 8 in Delaware Chancery Court accuses the chipmaker’s 11 sitting directors of using the U.S. government to block a board election and entrench themselves.
The incumbent directors “conspired with protectionist politicians to have the Committee on Foreign Investment in the U.S. (CFIUS) order the last-minute postponement” of a March 6 stockholder meeting where the vote was scheduled to occur, the complaint said.
Qualcomm investor James Evans filed the class action, which alleges that the directors “knew they were going to lose” seats on the board at the March 6 meeting and had CFIUS develop an order to postpone the election.
Evans is asking the court to issue an injunction against “any further defensive measures,” and to void any “purported election of any of the incumbent directors.” He’s also seeking damages for the class, including “for the billions of dollars the stockholders have lost” due to “deliberate entrenching and dishonest misconduct resulting in the loss of a transaction with Broadcom.”
Those types of claims “are at the core of hostile takeover litigation,” Georgetown Law School professor Robert Thompson, told Bloomberg Law.
The involvement of the secretive CFIUS, however, makes it “much harder for the challenger to litigate,” Thompson said. A lawsuit alleging that Qualcomm’s CFIUS filing constitutes a breach of fiduciary by its directors and is an attempt at entrenchment “would be a long shot at this point.”
Whatever the odds, “we’ve never had a case like that,” he added.
Broadcom said March 5 that neither its executives nor Qualcomm’s investors were told that Qualcomm asked for a CFIUS review of the potential merger in late January. CFIUS analyzes the national security implications of cross-border mergers.
Broadcom pointed to a potential legal violation. “This can only be seen as an intentional lack of disclosure – both to Broadcom and to its own stockholders,” the Singapore-based chipmaker said in a statement.
Qualcomm’s shareholder meeting was postponed until April 5 after the Treasury Department sent a letter to both companies’ attorneys ordering a delay. Broadcom criticized the move as an attempt by Qualcomm’s board to delay the director elections and “entrench” itself. The shareholder vote could replace as many as six incumbent directors with Broadcom’s handpicked nominees, greasing the wheels for a proposed $117 billion merger.
Treasury’s letter says Broadcom has been communicating with CFIUS since February, a contrast from the company’s statement that it didn’t know about the review until two days before the slated shareholder meeting. Qualcomm, in its public responses to Broadcom’s accusations, didn’t say it disclosed the CFIUS filing to its stockholders.
Representatives for both Qualcomm and Broadcom didn’t respond to interview requests.
Ripe for Litigation
These recent developments could spur multiple lawsuits. “Usually in hostile takeovers there is some potential for litigation,” said Afra Afsharipour, a University of California, Davis Law School professor who specializes in transactional and corporate law.
Such cases are often brought either on behalf of that company’s stockholders or by the acquirer, she told Bloomberg Law.
“The real claim would be that [Qualcomm’s] directors are doing all they can to insulate themselves from being displaced” in the board election, Lawrence Hamermesh, a professor emeritus at Widener University’s Delaware Law School, told Bloomberg Law.
According to Afsharipour, other avenues for litigation could include lack of disclosure claims under federal securities laws.
But CFIUS’s involvement in the deal could complicate failure-to-disclose securities claims. Corporate executives demur on earnings calls when asked about CFIUS, saying they’re not allowed to divulge anything. CFIUS itself makes no public statements about the deals it’s reviewing or how it reaches its conclusions.
San Diego-based Qualcomm, like many public companies, is incorporated in Delaware. A provision in its bylaws requires lawsuits against its directors to be brought in Delaware Chancery Court, a favorite venue of corporations for its expertise in complex business litigation.
Historically, “litigation over defensive tactics in hostile bids has been in state law,” Thompson said. “And that has generally been favorable to targets.”
In Delaware court, “a lot of deference is given to the board,” said Afsharipour. If the board has “gone through all of the steps for proving that they did due diligence” in deciding against the merger, “the chances under Delaware law is that the board can put up these defenses.”
“I think that the risks of [Qualcomm’s] board being held accountable are fairly low,” she said. “Boards will rarely lose in these scenarios.”
The Broadcom-Qualcomm ownership battle hearkens back to the hostile takeover bids of the 1980s, but any lawsuits filed would be a “new subset” of takeover litigation, Thompson said.
“What makes this interesting is that it’s a hostile deal, and there haven’t been hostile takeover attempts involving CFIUS yet,” he said. Any challenger bringing a claim against Broadcom will be required to “win a case that hasn’t been made before.”