Cohen Milstein Sellers and Toll PLLC has been appointed Lead Counsel by Judge James V. Selna of the United States District Court for the Central District of California, on behalf of Lead Plaintiffs Iron Workers Mid-America Pension Plan and Oklahoma Firefighters Pension and Retirement System, and the proposed class of Broadcom Corporation Shareholders challenging the merger of Broadcom with Avago Technologies Limited. Defendants in the action include members of Broadcom’s Board of Directors, the Company’s controlling shareholders Dr. Henry Samueli and Dr. Henry Nicholas, Avago Technologies and the newly formed Avago entities that are involved in the merger.
On January 15, 2016, Cohen Milstein, on behalf of Lead Plaintiffs, together with additional named plaintiff New Jersey Laborers Statewide Pension Fund, filed the Second Amended Consolidated Class Action Complaint asserting claims against Defendants asserting that the Joint Proxy Statement issued by Broadcom and Avago was false and misleading and omitted material information, that Broadcom’s Board of Directors breached their fiduciary duties to shareholders and that the Avago entities and Dr. Nicholas aided and abetted those breaches.
On May 28, 2015, Broadcom announced that it had entered into a Merger Agreement with Avago for $37 billion whereby Avago would purchase all of Broadcom’s common stock. The Merger Agreement provided that shareholders could elect to receive either a combination of cash and ordinary shares in the newly formed company or a restricted equity security that will not be transferable or saleable for a period of one to two years after closing. The cash and ordinary share consideration is subject to proration such that shareholders, regardless of what they elect will likely receive approximately 54% cash and 46% ordinary shares. Those shareholders that elect to receive the restricted units will not be subject to proration, thereby giving them the full consideration they seek at the expense of those that are unable or unwilling to elect those restricted units. As a result, the consideration being offered to Broadcom is patently unfair and is the result of the Broadcom board of directors breaching their fiduciary duties to its public shareholders.
Dr. Samueli and Dr. Nicholas, the original founders of Broadcom, own 99% of Broadcom’s Class B shares which, as a class, were required by California law to separately approve the proposed merger. As a result, Dr. Samueli and Nicholas hold what amounts to veto power over the merger; without their support, the merger could not occur. In exchange for their support, Dr. Samueli and Nicholas wanted special all stock consideration such that they would retain their interest in the newly formed Broadcom entity and would not have to pay taxes because no cash was received. Although the Merger Agreement allows any shareholder to elect the restricted unit consideration, Broadcom itself has already recognized that shareholders will likely be unable or unwilling to take the restricted shares. As a result, practically speaking, the restricted units were created by and are intended for Dr. Samueli and Dr. Nicholas alone.
In addition, the Merger Agreement provides that other members of Broadcom’s Board and senior management will be handsomely rewarded for their part in orchestrating the transaction. Indeed, through the immediate and full vesting of their stock options and restricted stock units, members of the Board and management will receive more than $200 million dollars for their previously locked-up Broadcom shares upon the close of the deal. Certain directors and Company insiders are set to receive millions of dollars of special “change-of-control” payments. Defendant Scott A. McGregor, Broadcom’s President, CEO and director, alone stands to receive more than $95 million in special “golden parachute” payments once the deal is completed. Furthermore, Samueli and Nicholas, as part of the merger, will also receive payment for all of their own costs and expenses, including costs of their personal counsel, incurred in connection with the Transaction.
The consideration provided to shareholders is also inadequate because it does not reflect Broadcom’s strong financial track record and robust growth prospects. Shortly before this transaction was announced on May 28, 2015, on April 21, 2015, the Company announced “double-digit percentage growth” in both net revenue and operating margin for the first quarter of 2015. Based on this positive earnings report, management expected Broadcom to continue its strong financial performance and “deliver top-line growth along with operating margin leverage.”
Specifically, the S-4/A contains materially misleading statements or otherwise fails to provide material information about the Transaction, including that (i) those electing to receive Restricted Exchangeable Units were going to receive greater value than those electing cash or ordinary shares; (ii) the process by which the Merger Agreement was negotiated, particularly the Special Committee’s involvement, was flawed and controlled by Defendants Samueli and Nicholas and their controlling shareholder interests (see infra, ¶108) (iii) Evercore and J.P. Morgan’s fairness analyses at the request of the Special Committee and the Board, respectively, disregarded the disparate treatment of the Restricted Exchangeable Units and their exemption from proration; and (iv) the value of Class A shareholders who are unwilling or unable to surrender their existing liquid common stock and elect the Restricted Exchangeable Units will be further diminished by Class A shareholders like Samueli and Nicholas who elect the Restricted Exchangeable Units. By misrepresenting, or otherwise failing to disclose this material information, Defendants disguised this patently unfair consideration from shareholders in order to gain shareholder approval.
The case name is: In re: Broadcom Corporation Stockholder Litigation, Civ. No. 15-979-JVS, U.S. District Court, Central District of California.
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