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Dodd-Frank

Failure to Provide Audited Financial Statements Precludes Reliance on Corwin

by   |   November 24, 2018

In Re Tangoe, Inc. Stockholders Litigation was one of those situations where everything that could go wrong did.  According to the Plaintiff, the Tangoe directors breached their fiduciary duties to Tangoe stockholders by steering the Company into an ill-advised take-private acquisition with a negative premium by Marlin Equity and recommended the transaction to stockholders in the midst of a storm conjured by the Board’s alleged false filings with the SEC, a failed effort to restate the Company’s financials and correct the false filings, the subsequent delisting of the Company’s stock by the NASDAQ exchange, the near deregistration of the stock by the SEC due to the Board’s ongoing failure to file the restatement, rumblings of a proxy contest that threatened the Director Defendants’ Board seats  and, finally, the enticement of significant equity awards to the Director Defendants that would be triggered only by a change of control.

While I don’t believe it, the Plaintiff dramatically alleged that the Director Defendants, rather than navigate through or around the storm, sailed Tangoe directly “into an iceberg and then faithlessly commandeered the lifeboats, leaving stockholders to drown.”

Ultimately the Director Defendants recommended that stockholders tender into a negative premium deal.  Inevitable litigation followed, and the Director Defendants moved to dismiss the Complaint.  Their showcase argument was that they were entitled to business judgment rule deference under Corwin v. KKR Fin. Hldgs. LLC because a majority of disinterested, fully informed and uncoerced stockholders approved the Transaction.  The Plaintiff claimed Corwin was not applicable because it had pled facts from which it may reasonably be inferred that stockholders were either coerced to tender or did so without the benefit of material information.

The Court found the facts pled supported a reasonable inference that stockholder approval of the negative premium transaction was not fully informed in the absence of audited financial statements and other adequate financial information about the Company and its value. According to the Court there was an information vacuum, which was compounded by the fact that the Company had failed to file multiple 2016 quarterly reports and had not held an annual stockholders meeting for nearly three years.  The Court also noted that Board did not advise stockholders that all forensic accounting had been completed and only a formal audit remained, depriving stockholders the opportunity to wait and see the audited results.

No finding has been made by the Court that the directors engaged in improper conduct as the only question before the Court was whether to grant the Director Defendants’ motion to dismiss.