February 22, 2007
Pondering the Mercurial Mercury Interactive Case
Posted by Christine Hurt

So yesterday everyone is chuckling at the fourth-year associate who attached a complaint that was filed under seal to a motion, thereby letting it sit where it would inevitably be found (by someone at the WSJ) and leaked.  However, this is least interesting part of the story to me.  This is the interesting part.

Mercury Interactive was one of the first company to fess up to backdating options, restating earnings by $570 million.  The board formed a special litigation committee which filed a derivative lawsuit on behalf of two shareholders (wow, just like it's supposed to work), against the four former officers who engaged in the backdating.  The board files the complaint in California state court on September 22, 2006.  The defendants fight to have the complaint sealed because it contains fairly incriminating information from emails that talked about using "magic backdating ink" on stock options and stated "the stock price drop made us change the grant date."  OK, so the suit seems to have some legs, if a court thinks that backdating options is either a breach of fiduciary duty of in violation of the California Corporations Code (which brings treble damages).

However, in November 2006, Hewlitt-Packard buys Mercury.  A month or two later, the California court dismisses the suit because the shareholders no longer have standing.  (The acquiring firm by operation of law acquired all the liabilities of Mercury, but apparently the old shareholders had their claimed purchased by operation of law.)  I cannot find a copy of the dismissal order, if there is one, but I would like to ponder it for awhile.

So, I have some questions for the fiduciary duty gurus:  First, what did the board of Mercury want to happen with the suit?  Did they really want it to succeed?  Where they happy to negotiate the acquisition by H-P to make it go away?  Is that some strange conflict of interest for the board to represent the shareholders in litigation but also negotiate an acquisition that will make it disappear?  Second, did the shareholders actually receive as compensation for their shares an amount equal to what they would have gotten (directly or indirectly) if the officers had been found liable and paid damages?  If two shareholders wanted the suit, are these the majority?  Did the board just find away to wash out the litigious shareholders?

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