Riverbed Tech Shareholders Sue Over 'Self-Serving' $3.6B Sale

By Ben Conarck

Law360, New York (February 06, 2015, 2:45 PM ET) -- Riverbed Technology Inc. was slapped with a proposed class action on Thursday accusing executives at the San Francisco software company of misleading shareholders in seeking approval of its recent $3.6 billion take-private deal and of crafting illegal bylaws to quell any potential challenge to the buyout.

The complaint, filed in a California district court, accuses Riverbed’s board of directors of acting in its self-interest by approving its December sale to Thoma Bravo LLC at $21 per share and undervaluing the company to receive insider benefits. Board members are now attempting to sway shareholders by obscuring the web of conflicts of interest behind the process leading up to the deal, the complaint said.

“The only way defendants hope to convince Riverbed shareholders to endorse the flawed and self-serving process and the inadequate proposed consideration is to mislead them by disseminating to them a false and materially misleading definitive proxy statement [in violation of the Exchange Act],” the complaint said.

Plaintiffs have called the $21-per-share price “unfair,” citing Riverbed’s market leading position and the board of directors’ February 2014 rejection of an offer at the same price from hedge fund Elliott Management Corp. which the board described at the time as “undervaluing the company and the company’s future.”

“Nevertheless, 10 months later, the board was willing to accept this exact amount from Thoma Bravo, a long-time partner of Elliott,” the complaint said. “The board accepted this amount despite knowing there were multiple companies interested in acquiring Riverbed.”

The lawsuit pegs the $21-per-share price as a 5.8 percent discount from Riverbed’s 52-week share price high of $22.28 on Feb. 28, 2014. It also quotes Riverbed CFO Ernest E. Maddock explaining that the offering at $21 per share undervalued the company in comparison to its projected growth rates.

The complaint lays out numerous alleged insider benefits, including a two-year extension offer from Thoma Bravo to Riverbed CEO and Board Chairman Jerry M. Kennelly, as well as the return from the sale of a combined illiquid block of 5.47 million shares of Riverbed valued at $115 million belonging to the board of directors and company management.

“In addition, Riverbed’s officers and directors will receive millions of dollars from the vesting of the stock options, performance units, and restricted shares,” the complaint said. “With over $100 million on the line, it is unsurprising that the individual defendants would favor a sale.”

Plaintiffs emphasized Elliot’s position as one of the largest Riverbed stockholders, claiming it will receive over $253.6 million from the sale of its illiquid shares. They also targeted the board’s selection of Goldman Sachs & Co. as a financial adviser, saying they have “repeatedly been involved in Thoma Bravo acquisitions, including serving as the financing for buyers in one transaction.”

According to the complaint, the board agreed to pay Goldman Sachs and its other financial adviser, Qatalyst Partners LP, “outrageous” contingent success fees of $30 million each.

In attacking the definitive proxy statements, plaintiffs claim the document omitted or misrepresented the “unfair and conflicted sales processes” behind the deal, as well as the “inputs and assumptions underlying the financial valuation analyses prepared by Riverbed’s advisors” and the financial projections relied upon for those analyses.

Further, the lawsuit alleges that the board of directors enacted two illegal bylaws to limit and potentially penalize shareholder challenges to the deal.

Plaintiff Seth Olson is represented by Brian J. Robbins of Robbins Arroyo LLP.

Counsel information for the defendants was not immediately available. A request for comment to Riverbed’s San Francisco headquarters was not immediately returned.

The case is Olson v. Riverbed Technology, Inc. et al, case number: 3:15-cv-00562, in the U.S. District Court for the Northern District of California.

--Editing by Patricia K. Cole.

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