As Strata-gee recently reported, there are currently seven active lawsuits that have been filed against Control4 and their Board of Directors in the wake of their acquisition by SnapAV. In a new DEFA14A filing with the Securities and Exchange Commission last Friday, the company addresses the issue of these lawsuits – saying that they are going to fight them. But then they do something very curious – they file an amendment to their original Schedule 14A filing, their Proxy Statement, with added information that appears to add missing material in response to allegations in the lawsuits filed against them.
Is Control4 trying to end-run the litigation just days before shareholders vote? See more below…
In this new version of their Proxy Statement – which Control4 calls a “Supplement to Definitive Proxy Statement,” I couldn’t help but notice that the company added a lot of information – much of which appeared to be in response to some of the questions, issues, and complaints raised by the multiple lawsuits filed by and for shareholders. Was this a sly attempt to rewrite history and implement an “end-run” around the litigation by adding in the missing information?
It’s an important question, as Control4 is holding a critical “special meeting” of shareholders to vote on the ratification of its “merger” with SnapAV. And that meeting is scheduled to take place in just a matter of days on July 30, 2019 at the company’s corporate offices in Salt Lake City, UT.
A Significant Rewrite of a Proxy That Plaintiffs Called Materially Insufficient
In some cases, this new supplemental document contains sections of the original Proxy Statement reasonably rewritten to account for the changing circumstances…such as, for example, all these new lawsuits that had emerged after the initial filing. The company noted that since the acquisition announcement, a total of eight separate pieces of litigation had been filed against the company, with some including both the company AND the Board of Directors as co-defendants.
These Merger lawsuits include:
- Manasfi v. Control4 Corporation, et al.
- Langford v. Control4 Corporation, et al.
- Rodriguez v. Control4 Corporation, et al.
- Bushansky v. Control4 Corporation, et al.
- Pasternack v. Control4 Corporation, et al.
- Sabatini v. Control4 Corporation, et al.
- Stein v. Control4 Corporation, et al.
- Sterner v. Control4 Corporation, et al.
Of all of these actions, one of them – Manasfi v. Control4 Corporation, et al. – has been voluntarily withdrawn, with no explanation given. But all of the others are still in force and yet to be litigated.
The Four Main Issues Raised by the Merger Lawsuits
And just what are all of these lawsuits about?
“Among other things, the Merger Lawsuits allege that the Preliminary Proxy Statement filed by the Company with the SEC on June 7, 2019 in connection with the Merger (referred to in this proxy statement as the ‘Preliminary Proxy Materials’) and/or the Definitive Proxy Statement filed by the Company with the SEC on June 21, 2019 in connection with the Merger (referred to in this proxy statement as the ‘Definitive Proxy Materials’) fail to disclose allegedly material information concerning (i) certain financial projections relied upon by the Company’s board of directors and Raymond James, (ii) financial analyses conducted by Raymond James, (iii) potential conflicts of interests on the part of Raymond James, and/or (iv) whether the confidentiality agreements executed by the Company and the four potential bidders during the go-shop period contain standstill provisions, all in violation of Section 14(a) and Section 20(a) of the Exchange Act, as well as Rule 14a-9 promulgated thereunder.”Control4, Form 8-k, filed with the SEC on July 19, 2019
The company then goes on to describe what the “relief” that some of these lawsuits seek from the courts – including the desire to postpone or cancel the special meeting of shareholders or to otherwise enjoin the “consummation of the Merger until certain additional information is disclosed to the Company’s stockholders. Others seek to rescind this Merger.”
Control4 Says it Will Fight These Lawsuits; Or Will It?
Control4 notes that it “cannot predict the outcome of the Merger Lawsuits, nor can the Company predict the amount of time and expense that will be required to resolve the Merger Lawsuits.” But it firmly “believes the Merger Lawsuits are without merit and the Company and the individual defendants [the Board of Directors] intend to vigorously defend against them.”
What is fascinating to me is that Control4 then goes on to rewrite sections of their original Proxy Statement or otherwise add details with the new text clearly underlined, that appears to address the issues for which the lawsuits were filed. There are many examples, but let me cover a few prominent ones below.
Control4’s Supplement Adds Material Merger Lawsuits Say was Missing
For example, the last paragraph on page 49 Of the original Proxy Statement contained the following language:
During the 30-day go-shop period, which expired at 11:59 p.m. New York City time on June 7, 2019, the Transaction Committee, with the assistance of Raymond James, engaged in active and extensive solicitation of 70 potential bidders (comprising 35 strategic parties and 35 financial sponsors, including Parties A, B and C), which resulted in four potential bidders each entering into a confidentiality agreement with the Company (including Party A). Neither of Parties B or C elected to participate in the go-shop process. Each of the four parties that entered into a confidentiality agreement with the Company was provided access to an online data room containing nonpublic information regarding the Company and the opportunity to have access to Company management.Original Proxy Statement
To this section, in the new Supplemental Proxy, Control4 now adds:
During the 30-day go-shop period, which expired at 11:59 p.m. New York City time on June 7, 2019, the Transaction Committee, with the assistance of Raymond James, engaged in active and extensive solicitation of 70 potential bidders (comprising 35 strategic parties and 35 financial sponsors, including Parties A, B and C), which resulted in four potential bidders each entering into a confidentiality agreement with the Company (including Party A). None of these four confidentiality agreements contain a standstill provision. Neither of Parties B or C elected to participate in the go-shop process. Each of the four parties that entered into a confidentiality agreement with the Company was provided access to an online data room containing nonpublic information regarding the Company and the opportunity to have access to Company management.Supplemental Proxy Statement
Newly Added Info Addresses Plaintiffs ‘Standstill’ Complaint
Re-read that quote from the Supplement above and you’ll find that Control4 admits that one of the issues from the lawsuits is: “…[item] (iv) whether the confidentiality agreements executed by the Company and the four potential bidders during the go-shop period contain standstill provisions, all in violation of Section 14(a) and Section 20(a) of the Exchange Act, as well as Rule 14a-9 promulgated thereunder.”
The existence of a “standstill” agreement was questioned by one or more of the Merger litigants for a variety of reasons, including that it may have bought the company more time to negotiate with other parties. Of course, now with this added text, we see that there was no standstill provision. This seems added to perhaps undercut a legal argument from one or more of the Merger Lawsuits – but in so doing, also could be construed as acknowledging that the original Proxy Statement was insufficient.
Supplement Speaks to Raymond James Item (ii) Allegation
There were multiple new statements added in the document related to Raymond James (their financial advisors) attesting to “Raymond James professional judgment and experience” to help explain their conclusions. This statement was added almost verbatim in to sections on page 61 (“These companies were selected and these multiples were applied based on Raymond James’ professional judgment and experience.”) and 62 (“These transactions and these multiples were applied based on Raymond James’ professional judgment and experience.”) of the document.
There were new statements that sought to add detail as to how forecasts were created and the manner in which Raymond James relied upon them…as raised in item (ii) of some of the Merger litigation. To this statement on page 62 of the original Proxy Statement: “Additionally, Raymond James performed an analysis of the balance of the Company’s federal and Utah Net Operating Losses (‘‘NOLs’’) and research & development (‘‘R&D’’) tax credits (assuming no limitation under Section 382 of the Internal Revenue Code of 1986, as amended) as of the periods contemplated by the Control4 Projections to evaluate the additional potential enterprise value of the Company’s standalone tax attributes on a present value basis,”…the company added this greater detail, “ranging from $16.8 million to $17.3 million. Raymond James’ analysis was based on the Control4 Projections that excluded stock-based compensation expense and incorporated balance sheet information as of April 30, 2019, which reflected zero debt and total cash of $73.0 million.”
Many of the lawsuits complained that there was a lack of explanation as to how the projections CEO Martin Plaehn and company management developed were used and what they comprised. Again, the company appears to have sought to work this new and more detailed information into the new supplemental Proxy Statement.
New Supplement Seems to Respond to Item (iii) Complaint
Finally, many of the litigants were highly suspicious of Raymond James as Control4’s financial advisor in this transaction, as the company admitted in item (iii) of their summary of the Merger litigation. Why? Because Raymond James had also worked for Hillman & Friedman, the private equity company that owns SnapAV, in the past as well.
In this new supplemental Proxy Statement, Control4 attempts to quell that unease by adding more information about Raymond James relationship with Hillman & Friedman. On page 64, the company added this sentence: “During the two years preceding the date of Raymond James’ written opinion, Raymond James has not been engaged by, performed services for or received any compensation from SnapAV.”
Does Control4’s Supplemental Filing Confirm Proxy Statement Deficiencies?
In creating this new supplemental Proxy Statement with newly added material facts, it appears that Control4 may have been attempting to cut the legs out from under the lawsuits filed against them. Yet it would seem that a savvy lawyer working for the Merger litigants could convince a judge that the fact that Control4 has added this information only serves to confirm that the original Proxy statement was missing certain critical material information for shareholders to consider.
Whether this gambit by Control4 succeeds or not…remains to be seen.