UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON

Transcription

1 THE HONORABLE JAMES L. ROBART UNITED STATES DISTRICT COURT WESTERN DISTRICT OF WASHINGTON PENNSYLVANIA AVENUE FUNDS, on Behalf of Itself and All Others Similarly Situated, vs. Plaintiff, EDWARD J. BOREY, STEVEN N. MOORE, MICHAEL R. KOUREY, MICHAEL R. HALLMAN, RICHARD A. LeFAIVRE, WILLIAM J. SCHROEDER, FRANCISCO PARTNERS LP, GLADIATOR CORPORATION, FRANCISCO PARTNERS II, LP, FRANCISCO PARTNERS PARALLEL FUND II, LP, VECTOR CAPITAL CORPORATION, VECTOR CAPITAL III, LP, ALEXANDER R. SLUSKY, DAVID STANTON, AND DIPANJAN DEB, Defendants. Case No. :0-cv-01-JLR JOINT MOTION TO DISMISS ON BEHALF OF DEFENDANTS EDWARD J. BOREY, STEVEN N. MOORE, MICHAEL R. KOUREY, MICHAEL R. HALLMAN, RICHARD A. LeFAIVRE, AND WILLIAM J. SCHROEDER NOTE ON MOTION CALENDAR: FRIDAY, MAY 1, 0 ORAL ARGUMENT REQUESTED (CV-0-01) 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

2 Table of Contents (CV-0-01) - Page i TABLE OF CONTENTS Page I. INTRODUCTION... 1 II. BACKGROUND AND ALLEGATIONS... A. The Company... B. Vector Contacts WatchGuard... C. WatchGuard Retains Wachovia Securities, Which Conducts an Auction... D. FP s Final Bid and the Deal with Vector... E. The Proxy... F. The Complaint... III. APPLICABLE LEGAL STANDARDS... A. Rule 1(b)() Standard... B. Plaintiff s Fiduciary Duty Claim Must Be Stated with Particularity... C. Delaware Law Governs... D. Del. C. (b)()... E. The Business Judgment Rule... IV. ARGUMENT... A. The Ratification of the FP Merger by WatchGuard Stockholders Extinguishes Plaintiff s Breach of Fiduciary Duty Claim... B. Plaintiff Fails to State a Claim for Breach of the Duty of Loyalty Because It Does Not Allege Facts Demonstrating That the Director Defendants Had a Material Self-Interest in the Merger... 1 C. Plaintiff Fails to State a Claim for Breach of the Duty of Care The Director Defendants Conducted a Well-Informed, Open Sale Galland Building, Second Ave Seattle WA 1-..1; fax..

3 1. FP and Vector s February 0 Offers Were Given Due Consideration by the Board The Deal Protection Provisions in the FP Merger Agreement Were Reasonable and Did Not Violate the Director Defendants Duty of Care.... The Fairness Opinion.... Plaintiff Has Failed to Plead Facts Showing that the Director Defendants Aided or Abetted Private Equity Defendants Purported Anticompetitive Conduct in Bidding Down the Sale Price of WatchGuard... D. The WatchGuard Certificate of Incorporation Protects the Director Defendants from Liability for Any Breach of the Duty of Care.... V. CONCLUSION Table of Contents (CV-0-01) - Page ii 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

4 TABLE OF AUTHORITIES Page Federal Cases Ballistreri v. Pacifica Police Dep t, 01 F.d (th Cir. 0)... Branch v. Tunnell, 1 F.d (th Cir. )... Concha v. London, F.d (th Cir. )... Conley v. Gibson, U.S. 1 ()... Davis & Cox v. Summa Corp., 1 F.d (th Cir. )... Edgar v. MITE Corp., U.S. ()... Holden v. Hagopian, F.d 1 (th Cir. )... In re Delorean Motor Co., 1 F.d (th Cir. )... In re Silicon Graphics, Inc. Sec. Litig., 1 F.d 0 (th Cir. )... Kaplan v. Rose, F.d 1 (th Cir. ), cert. denied, U.S. ()... Lee v. City of Los Angeles, F.d (th Cir. 01)... Mullis v. United States Bankr. Ct., F.d 1 (th Cir. )... Newman v. Sathyavaglswaran, F.d (th Cir. 0)... Slack v. Fair Isaac Corp., 0 F. Supp. d 0 (N.D. Cal. 0)... Vess v. Ciba-Geigy Corp. USA, 1 F.d (th Cir. 0)... State Cases Ace Ltd. v. Capital Re Corp., A.d (Del. Ch. )..., Aronson v. Lewis, A.d 0 (Del. )..., 1 Ash v. McCall, 0 Del. Ch. LEXIS 1 (Del. Ch. Sept. 1, 00)... Barkan v. Amsted Indus. Inc., A.d 1 (Del. )...,, 1 Brehm v. Eisner, A.d (Del. 00)...,, 1 Cede & Co. v. Technicolor, A.d (Del. )...1 Emerald Partners v. Berlin, A.d 1 (Del. )... Equity-Linked Investors, L.P. v. Adams, 0 A.d 0 (Del. Ch. )... Table of Contents (CV-0-01) - Page iii 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

5 Goodwin v. Live Entm t, Inc., WL, aff d, 1 A.d (Del. )...1, Harbor Fin. Partners v. Huizenga, 1 A.d (Del. Ch. )..., 1 H-M Wexford v. Encorp, Inc., A.d 1 (Del. Ch. 0)...1, In re Caremark Int l Inc. Deriv. Litig., A.d (Del. Ch. )...1 In re General Motors (Hughes) S holders Litig., No., 0 WL 0 (Del. Ch. May, 0)..., 1 In re General Motors Class H S holders Litig., A.d (Del. Ch. )... In Re Lukens, Inc. S holders Litig., A.d (Del. Ch. )... In re MONY Group Inc. S holder Litig., A.d (Del. Ch. )...1, In re Pennaco Energy, Inc., A.d 1 (Del. Ch. 01)..., 1 In re Sea-Land Corp. S holders Litig., A.d (Del. Ch.)...1 In re Stratus Computer, Inc. Sec. Litig., No. Civ. A. 0-Z, WL (D. Mass. Mar., )... In re The Walt Disney Co. Derivative Litig., 0 A.d (Del. 0)... In re Toys R Us S holders Litig., A.d (Del. Ch. 0)..., 1, In re Western Nat l S holders Litig., No., 00 WL (Del. Ch. May, 00)...1 Kahn v. Roberts, Del. J. Corp. L. (Del. Ch. ), aff d, A.d 0 (Del. ) 1 Kysor Indus. Corp. v. Margaux, Inc., A.d (Del. )... Malpiede v. Townson, 0 A.d (Del. 01)..., Marciano v. Nakash, A.d 00 (Del. )... McMillan v. Intercargo Corp., A.d (Del. Ch. 00)...passim Mills Acquisition Co. v. MacMillan, Inc., A.d (Del. )... Paramount Commc ns, Inc. v. QVC Network Inc., A.d (Del. )..., 1, 1 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 0 A.d 1 (Del. )... Scharf v. Edgcomb Corp., No. 1, WL (Del. Ch. Dec., )...1 Sinclair Oil Corp. v. Levien, A.d 1 (Del. 1)... Table of Contents (CV-0-01) - Page iv 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

6 Solomon v. Armstrong, A.d (Del. Ch. )...1,,, State Statutes Del. C. (b)()...,, Del. C. (h)...1 Federal Rules Fed. R. Civ. P. 1(b)()...1,, 1 Fed. R. Civ. P. (b)...1,, Table of Contents (CV-0-01) - Page v 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

7 Defendants Edward J. Borey, Steven N. Moore, Michael R. Kourey, Michael R. Hallman, Richard A. LeFaivre, and William J. Schroeder ( Director Defendants ) hereby submit this memorandum in support of their Motion to Dismiss the Complaint of Plaintiff Pennsylvania Avenue Funds ( Plaintiff ) pursuant to Federal Rules of Civil Procedure (b) and 1(b)(): I. INTRODUCTION Plaintiff is a former stockholder of WatchGuard Technologies, Inc. ( WatchGuard or the Company ) who voted to approve an all cash merger with Gladiator Corporation ( Gladiator ) ( FP Merger or FP Merger Agreement ). 1 (CV-0-01) - Page 1 of Plaintiff accepted the offer, did not exercise its Delaware appraisal rights, and did not attempt to stop the merger. Nevertheless, Plaintiff now seeks damages from the Company s former directors, claiming that they breached their fiduciary duties by failing to obtain a sufficiently high price for the Company. Plaintiff ignores the fact that the Director Defendants employed a prestigious investment bank, conducted an extensive bidding process for nearly eight months, and obtained a fairness opinion from their bankers prior to the signing of the FP Merger Agreement. The Complaint fails to state a claim for breach of fiduciary duty against the Director Defendants and must be dismissed for at least four reasons: First, the fully-informed vote by the WatchGuard stockholders ratified the conduct of the Director Defendants in connection with the FP Merger, thereby extinguishing any claim for breach of duty. Solomon v. Armstrong, A.d, (Del. Ch. ) (stockholder vote on merger establishes the presumptions that directors acted on an 1 Defendant Francisco Partners, L.P. ( FP ) is a private equity firm organized as a Delaware limited partnership, and is the parent entity of Defendant Gladiator Corporation ( Gladiator ). Compl.. Gladiator, in turn, was formed solely for the purposes of entering into a merger agreement with WatchGuard. Id.. Defendant Vector Capital Corporation ( Vector ) is a private equity firm organized as a Delaware corporation and is the parent entity of Vector Capital III, L.P. ( Vector III ), which purchased 0 percent of the voting securities of Gladiator prior to consummation of the FP Merger. Id. 0-1; see also RJN, Exh. B at 1; RJN, Exh. G. 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

8 informed basis, in good faith, and in the honest belief that the action was in the best interests of the company ). Second, Plaintiff fails to plead facts sufficient to show any breach of the duty of loyalty by the Director Defendants. Plaintiff generally alleges that the Director Defendants obtained personal benefits in connection with the FP Merger, but fails to allege any such benefits. Plaintiff fails to show that the Director Defendants conduct was driven by anything other than a desire to obtain the best possible price for the stockholders. Third, Plaintiff s breach of the duty of care claim also fails. Plaintiff challenges the merger negotiations and the inclusion of deal protection provisions but does not show that the Director Defendants conduct was unreasonable. Rather, as Plaintiff s own allegations reveal, the Director Defendants engaged in an open, well-informed and thorough bidding process. Finally, even assuming that Plaintiff had stated a viable claim for breach of the duty of care, Plaintiff s claim would still fail because under WatchGuard s certificate of incorporation and Delaware law, the Director Defendants cannot be held personally liable for any alleged breach of duty short of intentional misconduct, bad faith, or disloyalty. See Del. C. (b)(). As such, allegations that the Director Defendants breached any duty of care in connection with the FP Merger are not actionable. Accordingly, Plaintiff s Complaint fails to state a claim for breach of fiduciary duty against the Director Defendants and must be dismissed with prejudice. II. BACKGROUND AND ALLEGATIONS A. The Company As alleged in the Complaint, WatchGuard is a Seattle-based internet security company incorporated in Delaware. Compl.. In 0, it had revenues of approximately (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

9 $. million, and employed about 0 people. See RJN, Exh. L at, (WatchGuard Technologies, Inc. 0 -K). In the third quarter of 0, the Company implemented a two-year reorganization plan to achieve long-term revenue growth and to enhance its competitive position in the network security market. See RJN, Exh. B (WatchGuard Technologies, Inc., Definitive Notice and Proxy Statement (Form DEFM1A) (Sept. 1, 0) ( Proxy Statement ) at ). The Company stated publicly on several occasions that, after completion of the reorganization plan, it would determine whether it should remain an independent public company, consolidate by acquiring other companies, or explore a potential sale or merger of the Company. Id. The ultimate choice would be driven by which option would best maximize shareholder value. Id. B. Vector Contacts WatchGuard In March and April of 0, WatchGuard was contacted by a representative of Vector Capital Corporation ( Vector ), who expressed an interest in a strategic transaction with WatchGuard. Id. Vector is an investment fund, which eventually ended up owning 0% of Gladiator. See RJN, Exh. G. In May of 0, in order to maintain control over the bidding process, WatchGuard announced the adoption of anti-takeover provisions which would expire if not adopted by the shareholders at the May 0 shareholder meeting. Id. In June 0, WatchGuard received another unsolicited inquiry from a private investor group. Id. In August 0, WatchGuard was contacted by a representative of a strategic party, who expressed interest in a possible strategic transaction. Id. Defendant Directors engaged in discussions with each of these parties to ascertain their respective levels of interest in a transaction. Id. at -. No specific proposals were made by any party, but these inquiries led WatchGuard to contact six investment banking firms and request an See Request for Judicial Notice in Support of on Behalf of Defendants Edward J. Borey, Steven N. Moore, Michael R. Kourey, Michael R. Hallman, Richard A. LeFaivre, and William J. Schroeder filed concurrently herewith. (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

10 assessment of the strategic alternatives available to WatchGuard and an overview of the current market environment. Id. at. C. WatchGuard Retains Wachovia Securities, Which Conducts an Auction In December 0, WatchGuard ultimately decided to retain an investment banker and selected Wachovia Securities ( Wachovia ) to assist the Director Defendants in exploring strategic alternatives available to it. Id.; Compl.. Wachovia was instructed to actively solicit third parties regarding their interest in a transaction involving WatchGuard. See RJN, Exh. B at -0; Compl.. Wachovia then contacted seventeen potential strategic parties, including network security solutions providers, communications equipment companies, and infrastructure software vendors. Id. at. Only five indicated any interest in further discussions regarding a potential strategic transaction with WatchGuard. Id. Of the five, none submitted a definitive indication of interest. See id. at -. In fact, Wachovia s efforts yielded only two preliminary non-binding indications of interest. Id. at. FP, which had a significant ownership stake in one of the seventeen strategic parties, submitted a non-binding and conditional bid. Id. In March 0, Wachovia began targeted discussions with eighteen selected private equity funds (including FP and Vector) and two additional potential strategic parties not previously contacted. Id. In addition to the statements of interest from FP and Vector, several other funds also expressed preliminary interest in a potential strategic combination or sale transaction involving WatchGuard. See id. at -. Ultimately, none of the aforementioned funds submitted bids to acquire WatchGuard. Id. On May, 0, the shareholders of WatchGuard (which by now included a substantial number of hedge funds watching the merger activity) voted to reject the antitakeover provisions that the Board had previously adopted, clearly putting the Company in play in the market. Id. at. On May, 0, FP submitted a revised non-binding and conditional bid for $ per share. Id. at. Then on May, 0, Vector submitted a (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

11 written non-binding and conditional all-cash bid for $. per share. Id. at -. This was Vector s first concrete proposal. Id. at -. Vector s May, 0 bid was made public because it was attached to a Schedule 1D. Id. at ; Compl., ; RJN, Exh. F (Vector Capital III, L.P., General Statement of Acquisition of Beneficial Ownership [Amended] (Form SC 1D/a), Exh. to the filing (May 1, 0)). On June, 0, FP lowered its bid from $ to $.0, while Vector reduced its bid from $. to $. per share. See RJN, Exh. B, at -. On June 0, 0, WatchGuard directed Wachovia to communicate to each of FP and Vector, the only bidders left, its willingness to accept a bid for $ per share or greater for the sale of WatchGuard. Id. at. D. FP s Final Bid and the Deal with Vector On July 1, 0, FP submitted a revised unconditional all-cash bid for $. per share. Id. at. With this reduced bid in hand, WatchGuard contacted Vector to determine if it was willing to make an offer higher than the $. per share proposed by FP. Id. Vector demurred. Id. at. On July, 0, WatchGuard announced a definitive agreement to be acquired by FP for cash consideration of $. per share, or approximately $ million in total. Id. at 1. After the Board had approved the merger with FP, Vector sent an to Wachovia stating its intention to provide a revised proposal. Id. Vector s failed to specify any proposed offer price. Id. Believing Vector s overture to be illusory and fearing the further erosion of potential transaction value, the WatchGuard Board decided to proceed with the FP Merger. Id. at 0-1. On August, 0, FP disclosed that it had entered into an agreement with Vector, pursuant to which Vector and its affiliates would own 0% of WatchGuard and that Vector and its affiliates had agreed to vote its shares (.% of WatchGuard common stock) for approval of the FP Merger. See id. at 0-1; Compl. ; RJN, Exh. G (Gladiator Corporation, General Statement of Acquisition of Beneficial Ownership [Amended] (Form SC 1D/A), Exh. to the filing (Aug. 1, 0)). (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

12 E. The Proxy WatchGuard delivered its Proxy Statement to stockholders on September, 0. Id. at. The Proxy Statement contains not only details of all of the relevant events leading to the WatchGuard acquisition by Gladiator, but also outlines the specific terms of the agreement, perceived benefits and risks of the transaction, and the basis for the WatchGuard Board s recommendation of shareholder approval of the FP Merger. RJN, Exh. B at 1-. Most importantly, the Proxy Statement details the exhaustive bidding process engaged in by the WatchGuard Board, which produced FP s all-cash bid of $.. See id. at -. With this information in hand, WatchGuard stockholders voted to adopt the Agreement and Plan of Merger, dated as of July, 0, by and among the Company, Gladiator and Warrior Merger Sub. Inc., a wholly owned direct subsidiary of Gladiator, on October, 0. Compl. 1; RJN, Exh. K (Certificate of Merger). F. The Complaint On December, 0, Plaintiff filed its complaint. Plaintiff asserts a single claim against the Director Defendants breach of fiduciary duty. Plaintiff claims that the Director Defendants breached their fiduciary duty by allegedly (1) failing to take steps to conduct an adequate sale; () failing to provide an open bidding process; () approving an inferior deal; () failing to make disclosures regarding the acquisition of WatchGuard; () allowing or encouraging the purported collusion between FP and Vector; and () failing to prevent waste of WatchGuard corporate assets. See Compl.. As will be seen, the allegations do not state a claim. III. APPLICABLE LEGAL STANDARDS A. Rule 1(b)() Standard To prevail on its motion to dismiss, Director Defendants must demonstrate that Plaintiff has failed to allege facts that would entitle it to relief on a particular claim. See Conley v. Gibson, U.S. 1, - (); Fed. R. Civ. P. 1(b)(). Dismissal can be based on the lack of a cognizable legal theory or the absence of sufficient facts alleged under (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

13 a cognizable theory. Ballistreri v. Pacifica Police Dep t, 01 F.d, (th Cir. 0). With the exception of conclusory allegations not supported by the facts (Holden v. Hagopian, F.d 1, (th Cir. ), the Court must accept all material allegations in the complaint as true and construe them in the light most favorable to the nonmoving party. See Newman v. Sathyavaglswaran, F.d, (th Cir. 0). However, the Court need not accept unreasonable inferences or unwarranted deductions of fact. See Holden, F.d at ; In re Delorean Motor Co., 1 F.d, 1 (th Cir. ). Finally, a court need not accept as true, allegations that contradict facts which may be judicially noticed. See Mullis v. United States Bankr. Ct., F.d 1, 1 (th Cir. ). In making its determination, the Court should not operate in a vacuum. Rather, the Court should properly consider documents whose contents are alleged in the complaint and whose authenticity no party questions, but which are not physically attached to the [plaintiff s] pleading. In re Silicon Graphics, Inc. Sec. Litig., 1 F.d 0, (th Cir. ) (citing Branch v. Tunnell, 1 F.d, (th Cir. )). The Court may also consider those documents for which it may take judicial notice, including matters of public record such as records of administrative bodies. See Lee v. City of Los Angeles, F.d, (th Cir. 01). B. Plaintiff s Fiduciary Duty Claim Must Be Stated with Particularity Plaintiff s allegations against the Director Defendants sound in fraud and are therefore subject to the heightened pleading requirements of Fed. R. Civ. P. (b) ). Rule (b requires that, [i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Fed. R. Civ. P. (b) ). The particularity pleading requirement of Rule (b) applies not only to claims denominated as fraud claims, but also to all claims that are predicated on allegations of fraudulent conduct. Vess v. Ciba-Geigy Corp. USA, 1 F.d, 1-0 (th Cir. 0); Slack v. Fair Isaac Corp., 0 F. Supp. d 0, -1 (N.D. Cal. 0) (stating that claims relying on defendants misleading and (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

14 deceptive conduct sound in fraud and thus trigger Rule (b), even though those claims do not necessarily give rise to a cause of action for deceit at common law). Allegations of breach of fiduciary duty that are premised on claims of intentional omission and misrepresentation designed to induce reliance, like those alleged here by Plaintiff, sound in fraud and are therefore subject to the strictures of Rule (b). Concha v. London, F.d, (th Cir. ); see also In re Stratus Computer, Inc. Sec. Litig., No. Civ. A. 0-Z, WL, at * (D. Mass. Mar., ) (dismissing a claim for breach of fiduciary duty that rested on allegations of fraud for failure to satisfy Rule (b)). To comply with Rule (b), Plaintiff must state precisely the time, place, and nature of the misleading statements, misrepresentations, or specific acts of fraud. Kaplan v. Rose, F.d 1, 10 (th Cir. ) (citations omitted), cert. denied, U.S. (). C. Delaware Law Governs Delaware law governs adjudication of Plaintiff s breach of fiduciary duty claims because WatchGuard is a Delaware corporation. Under the internal affairs doctrine, only one state should have the authority to regulate a corporation s internal affairs matters particular to the relationships among or between the corporation and its current officers, directors, and shareholders because otherwise a corporation could be faced with conflicting demands. Edgar v. MITE Corp., U.S., (). Thus, Delaware law governs the instant claims concerning the corporate duties of the Director Defendants. See, e.g., Davis & Cox v. Summa Corp., 1 F.d, 1 (th Cir. ) (noting that fiduciary obligations of directors, is an internal affair of a corporation and is therefore subject to the law of the state of incorporation.). D. Del. C. (b)() Under Del. C. (b)(), a corporation may eliminate or limit the personal liability of directors for all breaches of fiduciary duty other than for breach of the duty of loyalty, failure to act in good faith, intentional misconduct, and certain other violations. (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

15 Delaware courts have consistently held that the adoption of a charter provision, in accordance with Section (b)(), bars recovery of monetary damages from directors for a shareholder claim that is based exclusively upon establishing a violation of the duty of care. See, e.g., Malpiede v. Townson, 0 A.d, (Del. 01). Courts have held that such an exculpatory charter provision should be applied at the pleading stage to guarantee that the defendant directors do not suffer discovery [when] the plaintiffs have stated a non-cognizable damages claim for a breach of the duty of care. McMillan v. Intercargo Corp., A.d, 01-0 (Del. Ch. 00); see also In re General Motors Class H S holders Litig., A.d, (Del. Ch. ) (dismissing duty of care claims); Malpiede, 0 A.d at - ( The purpose of this statute was to permit stockholders to adopt a provision in the certificate to free Directors of personal liability in damages for due care violations. ). E. The Business Judgment Rule Under Delaware law, the business judgment rule normally requires judicial deference to board decisions: [u]nder normal circumstances, neither the courts nor the stockholders should interfere with the managerial decisions of the directors. Paramount Commc ns, Inc. v. QVC Network Inc., A.d, (Del. ); see also Aronson v. Lewis, A.d 0, 1 (Del. ), overruled on other grounds by Brehm v. Eisner, A.d (Del. 00) (the business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company ). When a board of directors undertakes to sell a company, however, before the presumptions of the business judgment rule apply, Delaware law requires the court to determine if the directors conduct was reasonable under the circumstances. Paramount, A. d at. Enhanced scrutiny applies to ensure that the directors complied with the fiduciary duty to seek the maximum value reasonably attainable for stockholders in a change of control context (the so-called Revlon duty). Revlon, Inc. v. MacAndrews & Forbes (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

16 Holdings, Inc., 0 A.d 1, 1 (Del. ); Mills Acquisition Co. v. MacMillan, Inc., A.d, 1 (Del. ). In reviewing a board s conduct during a sale, the court must be mindful that its task is to examine whether the directors have undertaken reasonable efforts to fulfill their obligation to secure the best available price, and not to determine whether the directors have performed flawlessly. In re Pennaco Energy, Inc., A.d 1, 0 (Del. Ch. 01). Thus, even under the enhanced scrutiny standard, so long as a board undertakes a sale transaction in good faith, with due diligence and in a reasonable manner, business judgment protection will apply. Barkan v. Amsted Indus. Inc., A.d 1, 1 (Del. ). As shown below, Plaintiff cannot claim that the Director Defendants breached their Revlon duties. IV. ARGUMENT A. The Ratification of the FP Merger by WatchGuard Stockholders Extinguishes Plaintiff s Breach of Fiduciary Duty Claim First, and most importantly, Plaintiff s breach of fiduciary duty claim must fail because the WatchGuard shareholders approved the FP Merger. Fully informed shareholder approval eliminates all claims. See, e.g., Solomon, A.d, 1 (noting that when shareholders make a fully informed decision about the merits of a transaction, their approval ratifies the actions taken by the directors of the corporation in furtherance of that transaction). Upon ratification, liability for any alleged breach of duty is extinguished, and the protections of the business judgment rule are reinstated. Id. at 1-1 ( breaches of the duty of care can be entirely extinguished by informed shareholder ratification ); In re General Motors (Hughes) S holders Litig., No., 0 WL 0, at * (Del. Ch. May, 0) (stockholder ratification of a transaction has the effect of maintaining the presumptions of the business judgment rule). Moreover, application of the ratification defense is proper at the pleading stage. See, e.g., Solomon, A.d at 1 (dismissing complaint); General Motors (Hughes), 0 WL 0, at * (dismissing complaint). (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

17 As the Delaware Chancery Court has explained: [T]he effect of untainted stockholder approval of the Merger is to invoke the protection of the business judgment rule and insulate the Merger from all attacks. Harbor Fin. Partners v. Huizenga, 1 A.d, 0 (Del. Ch. ). As such, Plaintiff s claim that the Director Defendants breached their fiduciary duty in connection with the FP Merger is barred. See Solomon, A.d. at 1-1; Harbor Fin. Partners, 1 A.d at 0 (Del. Ch. ) (citing Marciano v. Nakash, A.d 00, 0 n. (Del. )) (stating that upon ratification by fully informed, disinterested stockholders, judicial review is limited to issues of gift or waste with the burden of proof upon the party attacking the transaction). Plaintiff has failed to allege any facts that would revive its breach of fiduciary duty claims against the Director Defendants. Here, Plaintiff alleges that the Director Defendants failed to disclose material facts and events relating to the [FP] Merger. Compl.. But, Plaintiff fails to allege any disclosure deficiencies in the proxy materials provided to WatchGuard stockholders in advance of the October, 0 special meeting at which the FP Merger was approved by a majority vote. In fact, Plaintiff concedes that the proxy materials describe extensive discussions and negotiations between the Director Defendants and potential suitors. See, e.g., Compl.. 1 Plaintiff does not, and cannot, establish a claim of waste against the Director Defendants. To establish waste, Plaintiff must show that the exchange was so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration. In re The Walt Disney Co. Derivative Litig., 0 A.d, (Del. 0) ( Disney ) (quoting Brehm v. Eisner, A.d, (Del. 00)). Moreover, the Board s decision must be upheld unless it cannot be attributed to any rational business purpose. Sinclair Oil Corp. v. Levien, A.d 1, (Del. 1). Plaintiff s waste claim hinges entirely upon a single assertion that the Director Defendants failed to adopt a suitable process for consideration of offers to purchase WatchGuard or otherwise take measures to avoid wasting of WatchGuard s assets. Compl.. As discussed in Section IV(C), the Director Defendants engaged in a thorough and wellinformed sale process to attain the best possible value for stockholders. See RJN, Exh. B at -1. Because Plaintiff cannot show that Director Defendants conduct in selling WatchGuard was unreasonable, its waste claim fails. As of August, 0, the record date,,1, shares of WatchGuard Common Stock were issued and outstanding.,,1 (.% of outstanding shares) were present at the October, 0 Special Meeting of the Shareholders to vote on the FP Merger.,,00 (.% of outstanding shares) voted for the FP Merger. 1, (0.% of outstanding shares) voted against the FP Merger. 1, (0.0% of outstanding shares) abstained. (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

18 Plaintiff has no basis upon which to claim that the shareholder approval of the FP Merger was uninformed or otherwise tainted. In the Proxy Statement delivered to WatchGuard stockholders, the Director Defendants disclosed not only material information regarding the FP bid, e.g., terms, and basis for the Board s recommendation for stockholder approval thereof but also information regarding competing bids received from other parties, including Vector, prior to the WatchGuard Board s approval of the FP bid on July, 0. See RJN, Exh. B at -. For example, the Proxy Statement details Wachovia s solicitation of seventeen strategic parties and eighteen private equity firms and explains how all of the potential strategic parties declined to pursue an acquisition of WatchGuard and all of the private equity firms other than FP and Vector declined to pursue an acquisition of WatchGuard. Id. at. The disclosures in the Proxy Statement are so extensive, in fact, that Plaintiff has relied upon them in crafting its complaint against the Director Defendants. See, e.g., Compl. -. Because Plaintiff did not and cannot state a viable disclosure claim, the Director Defendants conduct in connection with the merger is ratified. See., e.g., Harbor Fin. Partners, 1 A.d at 0 ( In and of itself, the fact that a defendant has proven that a Proxy Statement s disclosures are adequate to justify a Rule 1(b)() dismissal should ordinarily be sufficient to meet [their] burden. ); General Motors (Hughes), 0 WL 0, at *1 (noting that plaintiffs failure to state a claim for inadequate disclosure necessarily satisfied defendants burden with respect to ratification). Accordingly, Plaintiff s claim for breach of fiduciary duty is extinguished. B. Plaintiff Fails to State a Claim for Breach of the Duty of Loyalty Because It Does Not Allege Facts Demonstrating That the Director Defendants Had a Material Self-Interest in the Merger Even if the shareholders somehow failed to ratify the FP Merger, Plaintiff fails to state a claim for breach of the duty of loyalty. To state a claim for a breach of the duty of loyalty, Plaintiff must plead, at minimum, specific facts demonstrating that the Director Defendants had a material self-interest in the FP Merger. See Goodwin v. Live Entm t, Inc., (CV-0-01) - Page 1 of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

19 WL, at *, aff d, 1 A.d (Del. ) (quoting Cede & Co. v. Technicolor, A.d, - (Del. ) ( Cede II )). Evidence of mere self-interest is insufficient. Id. (citing Cede II, A.d at ). Rather, Plaintiff must plead facts demonstrating substantial self-interest, suggestive of disloyalty by the Director Defendants. Id. (citing Cede II, A.d at -). Here, Plaintiff has failed to allege any facts in support of its claims that the Director Defendants place[d] personal benefit above the interests of their shareholders, (Compl. ) engaged in self dealing, (Compl. ) or abdicated their fiduciary responsibility by disloyalty. Compl.. Instead, Plaintiff relies entirely on conclusory allegations regarding the Director Defendants purported selfish motives and standard merger deal provisions to bolster its claim. Neither approach is sufficient to state a claim for breach of the duty of loyalty. First, the inclusion of standard deal provisions like the indemnification clause in the FP Merger Agreement does not taint the Board s actions with a presumption of self interest. See, e.g., In re Sea-Land Corp. S holders Litig., A.d, 0 (Del. Ch.), aff d, A.d 1 (Del. ) (stating that indemnification is commonplace in corporate affairs and does not increase a director s wealth. ). In fact, Delaware s corporation code authorizes liberal indemnification provisions for officers and directors of its corporations for sound policy reasons that benefit all of a corporation s constituencies. Scharf v. Edgcomb Corp., No. 1, WL, at * (Del. Ch. Dec., ). Further, as noted by the Sea-Land court, an indemnification provision in a merger agreement that does not offer materially greater protection than that previously available to directors, does not provide an incentive for directors to breach their duty of loyalty. Sea-Land Corp., A.d at 0. Plaintiff makes an individualized allegation of potential self-interest against former WatchGuard CFO Bradley E. Sparks. See Compl Mr. Sparks is not named as a defendant in the instant lawsuit (see id. 0 (incorrectly identifying Mr. Sparks as a Defendant )), nor is he represented by us. Consequently, any allegations related to Mr. Sparks in his capacity as a former WatchGuard Officer or otherwise will not be addressed here. (CV-0-01) - Page 1 of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

20 Here, the indemnification rights in the FP Merger Agreement existed prior to the FP Merger, and the covenants in the FP Merger Agreement merely carried them forward. Compare WatchGuard Technologies, Inc. Restated Certificate of Incorporation, Art. (RJN, Exh. A) and FP Merger Agreement (RJN, Exh. H.). Second, Plaintiff criticizes the Director Defendants decision to adopt an executive bonus package for 0. Compl.. But, because Delaware law authorizes a board to set executive compensation, the Board s decision to set the 0 bonus package is protected by the business judgment rule. See Del. C. (h) (authorizing directors to fix their remuneration); 1() (authorizing a corporation to compensate its officers and agents); Paramount, A.d at (noting that the business judgment rule demands judicial deference to Board decisions). Nor has Plaintiff shown how this was self-interested for the vast majority of the Board. Third, Plaintiff alleges that the Director Defendants were motivated to broker a coalition between Vector and [FP] because it would guarantee certain future personal benefits to the Directors including the accelerated vesting of options and restricted stock. See Compl., 0. Accelerated vesting of options is standard practice in merger transactions. See In re Western Nat l S holders Litig., No., 00 WL, at *1 (Del. Ch. May, 00); In re Pennaco Energy, Inc. S holders Litig., A.d 1, 0 (Del. Ch. 01) (denying injunction relating to accelerated vesting schedule). Moreover, the options held by the Director Defendants were issued pursuant to option plans which provided for acceleration upon any change of control. See RJN, Exh. D (WatchGuard 00 Stock Option Plan..1); RJN, Exh. E (WatchGuard RapidStream, Inc. Stock Option Plan 1(c)); RJN, Exh. C (WatchGuard Amended and Restated Stock Incentive Compensation Plan..1). Since the option acceleration provision was not unique to the FP Merger, Plaintiff cannot claim that it motivated the Director Defendants to favor the FP bid over others. (CV-0-01) - Page 1 of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

21 Finally, Plaintiff makes an individualized allegation of self-interest against former WatchGuard Director, Edward J. Borey, noting that Mr. Borey would receive a financial benefit package upon termination or resignation within eighteen months of Watchguard s sale. Compl But Plaintiff conveniently ignores the fact that Mr. Borey s severance package was included in his original employment agreement with WatchGuard, dated June 0, 0 (RJN Exh. I) and was not triggered exclusively by the FP Merger. See RJN, Exh. I (a). (CV-0-01) - Page 1 of As such, any allegations of potential self-interest against Mr. Borey cannot be predicated on a financial severance benefits package that pre-dated the FP Merger by more than two years. See Compl Plaintiff has failed to sufficiently allege that the Director Defendants possessed improper motives in negotiating the terms of the FP Merger. As such, Plaintiff s breach of loyalty claim must be dismissed. C. Plaintiff Fails to State a Claim for Breach of the Duty of Care The standard for establishing a breach of the duty of care is high. In re Caremark Int l Inc. Deriv. Litig., A.d, (Del. Ch. ) (describing breach of the duty of care as possibly the most difficult theory in corporation law upon which a plaintiff might hope to win a judgment ). To prevail, Plaintiff must allege facts that establish that the Director Defendants acted with reckless indifference to or a deliberate disregard of the whole body of stockholders or actions which are without the bounds of reason. Kahn v. Roberts, Del. J. Corp. L., (Del. Ch. ), aff d, A.d 0 (Del. ); see also Aronson v. Lewis, A.d 0, 1 (Del. ), overruled on other grounds by Brehm v. Eisner, A.d (Del. 00) (holding that a breach of duty of care claim requires plaintiff to allege specific facts demonstrating that the Board acted wrongfully or consciously determined not to act, thereby permitting the alleged wrongdoing to occur). As used in Mr. Borey s employment agreement, Cause and Good Reason are defined in the Amended and Restated Stock Incentive Compensation Plan (RJN, Exh. C)). Neither definition ( Cause or Good Reason ) specifies or is limited to the FP Merger (RJN, Exh. C.,.). 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

22 In the context of the sale of a company, no single blueprint exists that directors must follow to fulfill their duty of care. Rather, a board has latitude in determining the method of sale most likely to produce the highest value for the stockholders. Barkan, A.d, 1 (stating that a stereotypical approach to the sale of a company is not to be expected). Indeed, courts will respect the broad power of the Board to make decisions in the process of negotiating and recommending a sale of control transaction, so long as the Board is informed, motivated by a good faith desire to achieve the best possible transaction, and proceeds reasonably. Equity-Linked Investors, L.P. v. Adams, 0 A.d 0, (Del. Ch. ). To conduct a proper sale, a board need only observe the significant requirement of fairness for the purpose of enhancing general shareholder interests. Barkan, A.d at 1-. For example, directors may approve a transaction without conducting an active market survey so long as they possess a body of reliable evidence with which to evaluate the fairness of the transaction. Id. at 1; In re Toys R Us S holders Litig., A.d (Del. Ch. 0) ( Toys ) (upholding directors sale decision based on a months-long publicly announced search that did not specifically invite offers). Moreover, when a Board makes it publicly known that a company may be for sale and no rival bids are forthcoming, the Board may proceed with the sole outstanding bid without performing a market check as to the fairness of that bid. See, e.g., Barkan, A.d at 1 ( [W]hen it is widely known that some change of control is in the offing and no rival bids are forthcoming over an extended period of time, that fact is supportive of the Board s decision to proceed. ). Finally, using deal protection provisions will not defeat the fairness inquiry so long as they are reasonably related to the objective of getting the highest price for the shareholders. Toys, A.d at 00-01; see also, e.g., Kysor Indus. Corp. v. Margaux, Inc., A.d, (Del. ) (approving termination fees provision); Ace Ltd. v. Capital Re Corp., A.d, (Del. Ch. ) (concluding that the use of a no-shop provision is perfectly understandable, if not necessary, if good faith business transactions (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

23 are to be encouraged. ); H-M Wexford v. Encorp, Inc., A.d 1, 1 (Del. Ch. 0) (approving voting agreement). Here, in selling WatchGuard to FP, the Director Defendants fulfilled their duty of care by engaging in a thorough and well-informed sale process. See RJN, Exh. B at -1. Consequently, Plaintiff cannot allege that the Board acted with reckless indifference or outside the bounds of reason in connection with the FP Merger. 1. The Director Defendants Conducted a Well-Informed, Open Sale Plaintiff alleges that the Director Defendants failed to encourage an open bidding process. Compl.,,. In doing so, Plaintiff has conveniently ignored the fact that the Board publicly disclosed its intention to evaluate long-term strategic alternatives to maximize shareholder value, including a potential sale of WatchGuard, as early as 0. See RJN, Exh. B at. As part of that process, the Board engaged Wachovia in December 0 as its exclusive financial advisor to assist with its review of strategic alternatives. Id. at. In evaluating competing bids, the Board not only relied on its own knowledge of the Company and network security industry but also consulted extensively with Wachovia. Id. at, -1; see also MONY Group Inc. S holder Litig., A.d, n. (citing McMillan, A.d, 0 n. (reliance on investment bank for financial advice in evaluating bids supports determination of reasonableness of board action). Further, the Board met on numerous occasions with various companies and private equity firms to discuss a potential combination or sale transaction involving WatchGuard. See RJN, Exh. B at -1. The Board s well-informed and thorough evaluation and active pursuit of all offers shows that the Director Defendants fulfilled their fiduciary duty to the stockholders to attain the best sale price reasonably available. (CV-0-01) - Page 1 of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

24 FP and Vector s February 0 Offers Were Given Due Consideration by the Board Plaintiff further contends that the Director Defendants failed to respond meaningfully to Vector and FP s February 0 offers and, as a result, missed the opportunity to accept an offer at a substantial premium above market price. Compl.,. But, as reflected in the Proxy Statement, Director Defendants did respond in a reasonable manner to FP and Vector s initial offers. See RJN, Exh. B at -1. The Board evaluated and discussed these offers during a Board meeting attended by Wachovia. Id. at. Additionally, a Board representative met with Vector to more fully discuss Vector s interest in WatchGuard. Id. at. Further, the Board maintained an on-going dialogue with both FP and Vector while continuing to seek and evaluate other bids with the intent of securing the best possible value for the shareholders. Id. at -1. Indeed, the Director Defendants acted reasonably in considering all options available to the Company prior to accepting the FP offer of $. per share. See id. at -1. The fact that the final FP offer was lower than earlier bids, is not, by itself, indicative of a breach of fiduciary duty by the Director Defendants. See Toys, A.d at 01 ( If a board selected one of several reasonable alternatives, a court will not second guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board s determination. ); Paramount, A.d at (a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. ) (emphasis added). Moreover, the Board s decision to accept FP s bid of $. per share without a subsequent market check was reasonable given the failure of its extensive efforts to generate serious interest from other parties. See RJN, Exh. B at -1; see also Barkan, A.d at 1. Here, after contacting more than seventeen companies and eighteen private equity As previously noted, Vector s February 1, 0 offer constituted nothing more than a non-binding proposal expressing general interest in acquiring WatchGuard without specified terms. RJN, Exh. B at. Vector did not make a concrete offer until May,, 0. Id. at -; Compl.. (CV-0-01) - Page 1 of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

25 firms to solicit indications of interest in a possible strategic transaction with WatchGuard, all but FP and Vector declined to pursue an acquisition of WatchGuard, and Vector ultimately failed to submit a concrete competing proposal. See RJN, Exh. B at -1,. On this record, the Board fulfilled its fiduciary duty of care in identifying the best price reasonably available to stockholders.. The Deal Protection Provisions in the FP Merger Agreement Were Reasonable and Did Not Violate the Director Defendants Duty of Care Plaintiff cannot salvage its breach of fiduciary duty claim by alleging that the Director Defendants breached their duty of care by agreeing to certain deal protection provisions, such as the termination fee and no-shop provision. Compl.,. Indeed, the Complaint is devoid of any facts explaining how these measures prevented any of the Director Defendants from discharging their fiduciary duties. It is well settled that a board is within its right and authority to agree to deal protections so long as its decision to do so was reasonably directed to the objective of getting the highest price, and not by a selfish or idiosyncratic desire by the Board to tilt the playing field towards a particular bidder for reasons unrelated to the stockholders ability to get top dollar. Toys, A.d at Here, the Complaint fails to offer any facts that impugn the Board s motivation for agreeing to these customary provisions. The % termination fee in the FP Merger Agreement falls well within the range of termination fees that have been approved by Delaware courts. RJN, Exh. H (WatchGuard -K, Item 1.01) (stating that termination fees can total no more than $ million of aggregate In its Complaint, Plaintiff identifies four deal protection provisions that it claims were enacted to discourage and/or prevent alternative deals from surfacing. Compl.. The fourth so-called deal protection provision, identified by Plaintiff as (d), is not triggered exclusively by termination of the FP Merger Agreement and, consequently, cannot be criticized as such. In characterizing (d) as a deal protection provision, Plaintiff is attempting to recast a standard enforcement or specific performance contract provision as a defensive measure triggered solely by termination of the FP Merger Agreement. Compare Compl. with RJN, Exh. H (FP Merger Agreement, dated July, 0,. (enforcement provision thereto)). By its own terms, this enforcement provision applies to violations of any provision of the FP Merger Agreement, including but not limited to violations of., which prohibits solicitation of competing transactions. As such, there is no basis for Plaintiff s contention that the enforcement provision to the FP Merger Agreement constitutes an unreasonable deal protection provision. (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..

26 $ million (approximately) total deal value); Goodwin, WL, at * (holding a termination fee totaling.% reasonable); Ace, A.d, -0 (Del. Ch. ) (noting that a.% termination fee did not discourage a bidder from making a topping bid). Delaware courts have also approved no-shop provisions, like the one here. See RJN, Exh. H (FP Merger Agreement, dated July, 0,.(b)). For example, in In Re Lukens, Inc. S holders Litig., A.d (Del. Ch. ), the court dismissed a breach of fiduciary duty claim in a case where a merger agreement contained a no-shop provision conditioned upon a fiduciary-out clause. There, as in the FP Merger Agreement (RJN, Exh. H.(b)), the fiduciary-out clause permitted the Board to take action on any unsolicited superior proposal from a third party, thus permitting the Director Defendants to fulfill their Revlon duties. Id. at. Similarly, support agreements, like those here (see RJN, Exh. H (WatchGuard -K, Item 1.01); RJN, Exh. J (Support Agreement)), have also been approved by Delaware courts where [n]o director signed the Voting Agreement in his capacity as a director. H-M Wexford, A.d at 1; see also RJN, Exh. J (Support Agreement) (Director Defendants executed Support Agreement and Irrevocable Proxies as WatchGuard shareholders). As such, Plaintiff has failed to plead facts sufficient to support a claim that the deal protection provisions included in the FP Merger Agreement were unreasonable under the circumstances or that they violated the Director Defendants fiduciary duties in connection with the FP Merger.. The Fairness Opinion The Director Defendants decision to approve the FP offer of $. per share is further bolstered by the fact that the Board retained a reputable and experienced financial advisor in connection with the sale of WatchGuard and considered Wachovia s fairness opinion in making its decision. See RJN, Exh. B at, -; Annex B (Wachovia s Fairness Opinion, dated July, 0). Wachovia s fairness opinion was attached to the (CV-0-01) - Page of 00 Galland Building, Second Ave Seattle WA 1-..1; fax..