Big Trouble in Little Delaware

Last November, Bessemer Venture Partners and Insight Venture Partners agreed to acquire enterprise software company Netsmart Technologies Inc. (Nasdaq: NTST) for $115 million. It looked like a typical public-to-private buyout – save for the semi-oddity of venture capital firms doing the buying. No big deal.

But certain Netsmart shareholders believed that the $16.50 per share price was too low, even though it represented a standard premium and was higher than the company had traded since 2004. So they sued, arguing that Netsmart and financial advisor William Blair & Co. had focused almost exclusively on finding a “private equity” buyer, instead of broadening their search to include potential strategic suitors. Netsmart, in its defense, asserted both that a special committee of independent directors had approved the deal, and also that the agreement included a go-shop provision. Again, nothing out of the ordinary – and public shareholders regularly clash and file suit over buyout share prices.

The reason I’m detailing the dispute here, however, is that a Delaware Chancery Court judge on Wednesday ruled in favor of the complaining shareholders. Judge Leo Strine Jr. ordered that the company delay an April 5 shareholder vote on the buyout, until Netsmart provides the court with supplemental information about how the agreement was reached. Included in the required information are financial projections underlying the discounted cash flow analysis by William Blair.
In his opinion, Strine wrote that the Netsmart board’s “failure to engage in any logical efforts to examine the universe of possible strategic buyers and to identify a select group for targeted sales overtures was unreasonable and a breach of their… duties.”
Netsmart, for its part, has spun the ruling like a ball of yarn. It issued a press release yesterday with the headline: “Delaware Court Permits Netsmart Shareholder Vote to Proceed.” The heading and copy indicates that Netsmart will provide the required information in short order, thus permitting the shareholder vote to proceed as planned on April 5. What it doesn’t do is allow for any possibility that Judge Strine will conclude that the information does not adequately support the defense position, at which point he’d likely delay the vote even further.
So far this is an isolated incident, and does not necessarily presage a trend. But there is at least one similar lawsuit sitting on the Chancery Court docket – $2.5 billion buyout of Adesa by Goldman Sachs, Kelso & Co., ValueAct Capital and Parthenon Capital – and I’d have to think that Strine’s initial ruling will increase the likelihood of other disgruntled shareholders to hook up with plaintiff attorneys. Certain law firms already have sent out client alerts on the matter, and we’ll be keeping an eye on any additional developments – including what happens with the Netsmart deal.