Desai v. Hovsepian et al

Filing 61

Judge Rya W. Zobel: ORDER entered denying 46 Motion to Dismiss; granting in part and denying in part as moot 49 Motion to Stay; granting 51 Motion to Dismiss; granting 56 Motion for Leave to File Document ; Counsel using the Electronic Ca se Filing System should now file the document for which leave to file has been granted in accordance with the CM/ECF Administrative Procedures. Counsel must include - Leave to file granted on (date of order)- in the caption of the document.; grantin g 57 Motion for Leave to File Document ; Counsel using the Electronic Case Filing System should now file the document for which leave to file has been granted in accordance with the CM/ECF Administrative Procedures. Counsel must include - Leave to file granted on (date of order)- in the caption of the document. A status report is due on 7/31/12. (Urso, Lisa)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS

CIVIL ACTION NO. 10-12076-RWZ

In re NOVELL, INC. SHAREHOLDER LITIGATION

ORDER
February 10, 2012
ZOBEL, D.J.
Michael Rosenberg, Mohan Desai, Robert G. Ciancetti, Leslie Jacobs, and
Bruce M. Scotland (collectively, “plaintiffs”) bring this class action as former
shareholders of Novell, Inc., against individual defendants who are all former directors
of Novell (“Novell Directors”),1 and defendant Attachmate Corporation for conduct
arising out of Novell’s merger with Attachmate in 2011.2 Plaintiffs’ Consolidated
Complaint3 contains three counts: Count I - breach of fiduciary duty against the Novell
Directors, and aiding and abetting breach of fiduciary duty against Attachmate; Count II
- violation of section 14(a) of the Securities Exchange Act of 1934 (“§ 14(a)” and “the
1934 Act,” respectively) and Rule 14a-9 against all defendants; and, Count III -

1

Ronald Hovsepian, Albert Aiello, Jr., Fred Corrado, Richard Crandall, Richard L. Nolan, John
W. Poduska, Sr., Patrick S. Jones, Gary Greenfield, and Judith Hamilton.
2
Novell, Inc., and Longview Software Acquisition Corp. (a wholly-owned subsidiary of
Attachmate) are listed as defendants in one of the original complaints and the joint motion to consolidate.
The Consolidated Complaint, however, does not include these defendants as parties; I therefore assume
that they are no longer defendants in this case.
3
Plaintiffs Desai and Rosenberg each filed suit in this matter on December 1 and December 29,
2010, respectively. I consolidated the two actions on March 23, 2011 and appointed lead plaintiffs and
lead counsel on April 27, 2011. The lead plaintiffs filed their Consolidated Complaint on June 15, 2011.

violation of section 20(a) of the 1934 Act (“§ 20(a)”) against all defendants.4
Defendants move to dismiss all claims against them for failure to state a claim,
Docket ## 46, 51, or in the alternative, to stay proceedings pending the outcome of a
class action lawsuit in the Delaware Court of Chancery, In re Novell, Inc. Shareholders
Litigation, Consolidated C.A. No. 6032-VCN (the “state action” or “Delaware action”).5
Docket ## 49, 58. For the reasons enumerated below, Attachmate’s motion to dismiss
is allowed, as is the Novell Directors’ motion for a stay of these proceedings pending
further order of this court.
I. Background
For purposes of this Order, I consider as true the facts as alleged in the
Consolidated Complaint. I also consider documents incorporated by reference therein,

4

Although the Consolidated Complaint contains language suggesting that plaintiffs are only
seeking class relief for Count I, at oral argument they indicated that this language is a “typo” and they are
seeking class relief for all claims. While plaintiffs have yet to correct their filings, I proceed on this
assumption.
5
The Delaware action is a consolidated shareholder class action suit filed on behalf of all former
Novell shareholders, including plaintiffs in this action, challenging the Novell/Attachmate merger. Shortly
after Novell and Attachmate announced the proposed merger, fourteen Novell shareholders brought suit
in the Delaware Court of Chancery. The Chancery Court consolidated these actions on December 20,
2010. The Delaware plaintiffs filed a Consolidated Amended Verified Class Action Complaint on January
6, 2011.
Co-lead plaintiffs in the Delaware action are the Oklahoma Firefighters Pension and Retirement
System, Louisiana Municipal Police Employees’ Retirement System, Operating Engineers Construction
Industry and Miscellaneous Pension Fund, and Robert Norman. Defendants in this action are also
defendants in the Delaware action. Their co-defendants in the Delaware action are Novell, Inc.,
Longview Software Acquisition Corp., Microsoft, CPTN (a consortium of technology companies
organized by Microsoft), and Elliott Associates L.P.
The Delaware complaint contains two counts. Count I is for breach of fiduciary duty against the
Novell Directors by: (a) failing to properly disclose all material facts concerning the proposed transaction
and filing a “false and misleading” proxy statement; (b) agreeing to the patent purchase agreement
without trying to maximize shareholder value in connection with the patent sale; (c) failing to maximize
shareholder value through an “improper and opaque sales process”; and (d) providing disparate
consideration to public shareholders in connection with the sale. Count II is for aiding and abetting a
breach of fiduciary duty against Attachmate, Elliot, Microsoft, CPTN, and “MergerSub.”

2

matters susceptible to judicial notice, and matters of public record, including state court
records. Giragosian v. Ryan, 547 F.3d 59, 65-66 (1st Cir. 2008).
A. The Sale Process and Merger Agreement
Novell is a Delaware software company headquartered in Waltham,
Massachusetts. On March 2, 2010, Novell’s Board of Directors (“the Board”) received
an unsolicited bid from one of Novell’s associated shareholders, Elliott Associates,
L.P., and Elliott International L.P. (collectively, “Elliott”), proposing a purchase price of
$5.75 per share. Later that month, the Board issued a press release announcing
rejection of Elliott’s bid as inadequate. From March through November 2010, the Board
solicited and evaluated purchasers for Novell (“the sale process”). During the sale
process, eight potential buyers, including Attachmate, proposed price ranges from
$5.50 to $7.50 per share. Novell’s financial advisor, J.P. Morgan, also contacted and
evaluated 52 potential buyers, reviewed strategic alternatives, and provided the Novell
Directors with a fairness opinion of Attachmate’s proposal.
On November 22, 2010, Novell announced that it had entered into a merger
agreement with Attachmate. On December 14, 2010, Novell issued a proxy statement
(“the Preliminary Proxy”) explaining the sale process, disclosing the terms of the
merger agreement, and recommending that Novell shareholders vote in favor of the
merger. Novell subsequently amended the Preliminary Proxy on December 27, 2010,
and again on January 14, 2011 (“the Definitive Proxy”). On February 3, 2011, Novell
filed a supplement to the Definitive Proxy, making additional disclosures.

3

Approximately 99 percent of shares voting approved the merger on February 17, 2011.

4

B. Financing and Terms of the Merger Agreement
Attachmate agreed to purchase Novell for $6.10 per share, a transaction valued
at approximately $2.2 billion. The purchase was contingent on the separate but
concurrent sale of a number of Novell’s patents to CPTN, a consortium of technology
companies organized by Microsoft Corporation, for $450 million (“the patent purchase
agreement”). Certain members of Novell’s Board and management stood to gain
financially from the merger, in the form of vested stock options and “lucrative cash
payments” if their employment was terminated after the acquisition. Docket # 45 ¶¶ 5758.
Novell agreed to discontinue any discussions with all other potential acquirers
and not to enter into new discussions (“No Shop” provision); to give Attachmate five
days to match any competing proposals (“Matching Rights” provision); and to pay
Attachmate a $60 million termination fee in the event that Novell received and accepted
a better offer (“Termination Fee” provision). Attachmate agreed to pay Novell a $120
million termination fee (“reverse termination fee”) in the event that Attachmate failed to
consummate the merger.
Elliott and Attachmate entered into a separate agreement whereby Elliott
pledged equity to support Attachmate’s purchase of Novell in the form of Elliott’s 7.1%
ownership in Novell common stock. In return, Elliott would become an equity
shareholder in Wizard Parent, Attachmate’s parent corporation. Francisco Partners,
one of Attachmate’s principal shareholders, also provided equity to finance
Attachmate’s purchase of Novell.
5

6

C. Greenfield
Gary Greenfield, one of the Novell Directors, was once an operating partner of
Francisco Partners, and since 2003 has been CEO of GXS, Inc., a subsidiary of
Francisco Partners. During the sale process, Greenfield also had a “continuing
passive interest in certain of Francisco Partners’ investment funds,” although, in
September 2010, he “did not have definitive information as to which fund or funds of
Francisco Partners might be used to finance [the proposed merger with Attachmate].”
Docket # 52 Ex. A at 38. On September 21, 2010, the Board determined, with
Greenfield abstaining, that his “continued participation in the [sale] process would be
beneficial and enhance [the Board’s ability] to consider and pursue [Novell’s and its
stockholders’] best interest.” Id. The Board also “ratified” Greenfield’s “prior
participation as a member of the Board in deliberations and decisions relative to the
process.” Id. On or about October 21, 2010, at the request of Novell Director Crandall,
Greenfield contacted Francisco Partners to ask that Attachmate reconsider a
transaction for the purchase of Novell.
On November 21, 2010, the Board, with Greenfield abstaining, voted to approve
the Attachmate merger and resolved to recommend that Novell shareholders do
likewise. Subsequent to the announcement of the merger, Greenfield “advised Novell
that he had received notice that certain funds of Francisco Partners in which he was a
passive investor would be participating in the acquisition of Novell.” Id. at 76-77.
Francisco Partners “agreed to waive Greenfield’s commitment to co-invest to fund the
acquisition of Novell.” Id. at 77.
7

II. Attachmate’s Motion to Dismiss
A pleading must contain a “short and plain statement of the claim showing that
the pleader is entitled to relief.” Fed. R. Civ. P. 8(a)(2). “To survive a motion to dismiss,
a complaint must contain sufficient factual matter, accepted as true, to state a claim to
relief that is plausible on its face.” Ashcroft v. Iqbal, 129 S. Ct. 1937, 1949 (2009)
(internal quotation marks omitted). The facts pleaded must allow the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged. Id. The
court will identify and disregard any statements in the complaint that are either “legal
conclusions couched as facts or bare bones recitals of the elements of action.” Harron
v. Town of Franklin, 660 F.3d 531, 535 (1st Cir. 2011)(citing Iqbal, 129 S.Ct. at 194950, and Ocasio–Hernández v. Fortuño–Burset, 640 F.3d 1, 12 (1st Cir.2011)).
A. Aiding and Abetting Claims Against Attachmate
Plaintiffs allege that the Novell Directors breached their fiduciary duties of care
and loyalty by failing to maximize shareholder value of Novell through the sale process.
They allege that Attachmate aided and abetted such breach by the Novell Directors.
To survive Attachmate’s motion to dismiss, the complaint must allege facts that satisfy
the four elements of an aiding and abetting claim: (1) the existence of a fiduciary
relationship; (2) a breach of the fiduciary's duty; (3) knowing participation in that breach
by the defendants; and (4) damages proximately caused by the breach. Malpiede v.
Townson, 780 A.2d 1075, 1096 (Del. 2001)(internal quotations omitted).
“A third party may be liable for aiding and abetting a breach of a corporate
fiduciary's duty to the stockholders if the third party ‘knowingly participates’ in the
8

breach.” Id. “Knowing participation in a board's fiduciary breach requires that the third
party act with the knowledge that the conduct advocated or assisted constitutes such a
breach.” Id. at 1097 (citing Assoc. Imports v. ASG Indus., Inc., 1984 WL 19833, at * 12
(Del. Ch. June 20, 2984)(“[K]nowledge and intentional complicity therein by [the third
party] of the breach by [the fiduciary] are essential.”), aff’d sub nom. Hubbard v. Assoc.
Imports, Inc., 497 A.2d 787 (Del. 1985)). “Similarly, a bidder may be liable to a target's
stockholders for aiding and abetting a fiduciary breach by the target's board where the
bidder and the board conspire in or agree to the fiduciary breach.” Id. at 1097-98
(emphasis added).
Only two allegations implicate conduct by Attachmate and are therefore relevant
to the claim against it. First, plaintiffs claim that the Novell Directors permitted
defendant Greenfield to negotiate with Attachmate on Novell’s behalf despite knowing
of his affiliation with Francisco Partners. Second, they allege that the Novell Directors
“allowed” Elliott to finance the acquisition by exchanging Novell common stock for
rollover shares in Attachmate’s parent company, Wizard Parent LLC, thereby securing
for Elliott a “material financial benefit” not shared by Novell’s other public shareholders.
Docket # 45 ¶¶ 8, 54. Plaintiffs argue that Attachmate “knowingly participated” in the
Novell Directors’ alleged breach because Attachmate “knew” of Greenfield’s affiliation
with Francisco Partners and “knew” that Elliott was receiving rollover shares in Wizard
Parent. Neither argument establishes that Attachmate “knowingly participated” in a
breach of fiduciary duty by the Novell Directors.

9

1. Greenfield and Conflict of Interest
The allegation that Greenfield was a “conflicted” director on its own does not
satisfy the “knowing participation” requirement because plaintiffs fail to allege that
Greenfield dominated or controlled Novell’s Board. See Malpiede, 780 A.2d at 1084,
1098 (noting that “the amended complaint does not allege that the lone conflicted
director dominated the three other directors who approved the merger;” affirming
dismissal of aiding and abetting claim for lack of “knowing participation” where, among
other things, “there is no dispute that only one of the [target company’s] directors who
approved the merger had a conflict of interest, and that director did not dominate or
control the others”).
Plaintiffs attempt to compare this case to Gilbert v. El Paso Co., 490 A.2d 1050,
1057-58 (Del. Ch. 1984), in which the court denied summary judgment for the
defendant bidding company on a civil conspiracy claim6 because the bidder extracted a
“valuable concession,” the terms of which clearly benefitted only the target company’s
management and not its shareholders. Unlike the defendant in Gilbert, Attachmate is
not alleged to have offered the Novell Directors any benefit at the expense of Novell’s
shareholders.
The complaint alleges that Greenfield discussed the transaction with Attachmate
and that Attachmate entered into a financing arrangement with Elliott. These
allegations do not fairly permit the inference that Attachmate actually facilitated a
breach by the Novell Directors or conspired to do so. See Malpiede, 780 A.2d at 1098
6
The elements of the civil conspiracy claim at issue in Gilbert are identical to those for aiding
and abetting a breach of fiduciary duty. 490 A.2d at 1057.

10

(affirming dismissal of aiding and abetting claim where there was “no indication in the
amended complaint that [the bidder] participated in the board's decisions, conspired
with board, or otherwise caused the board to make the decisions at issue”).
The allegations that certain directors could be entitled to “lucrative cash
payments” as a result of the merger likewise fail to establish liability for Attachmate
because plaintiffs do not allege that Attachmate induced or agreed to these payments
in exchange for the Directors’ support of the merger, or that Attachmate otherwise
exploited a conflict of interest on the Board. Morgan v. Cash, 2010 WL 2803746, at *5
(Del. Ch. July 16, 2010)(rejecting aiding and abetting claim where plaintiff pled no facts
plausibly indicating that third party “induc[ed]” or “pressed” for bonuses for the target
company’s managers in exchange for their support of the merger deal).
Plaintiffs also allege that the directors breached their fiduciary duties by
agreeing to the “No Shop,” “Matching Rights,” and “Termination Fee” provisions, the
terms of which benefitted Attachmate. Even if the presence of these provisions in the
merger agreement were to constitute a breach by the Novell Directors, plaintiffs fail to
establish aiding and abetting liability by Attachmate in the absence of allegations from
which I could reasonably infer that Attachmate colluded with members of the Board to
secure these provisions. Morgan, 2010 WL 2803746, at *8 (citing the “long-standing
rule that arm’s-length bargaining is privileged and does not, absent actual collusion and
facilitation of fiduciary wrongdoing, constitute aiding and abetting”)(emphasis added).
2. The Attachmate/Elliott Financing Arrangement

11

Plaintiffs do not allege how, by engaging in a financing arrangement with Elliott,
Attachmate aided and abetted a breach of fiduciary duty by the Novell Directors. Save
for plaintiffs’ conclusory allegations that the Novell Board “permitted” and “allowed”
Elliott to gain a financial benefit, there are no allegations that the financing
arrangement between Elliott and Attachmate was anything other than an independent
deal between two separate companies. That the deal ultimately facilitated the financing
of the acquisition of Novell by Attachmate does not demonstrate that Novell was
responsible for or, in any way, involved in the deal. Since plaintiffs fail to offer factual
allegations sufficient to allege a “breach” by the Novell Directors in connection with the
financing arrangement between Elliott and Attachmate, there can be no aiding and
abetting by Attachmate in this regard. In re Transkaryotic Therapies, Inc., 954 A.2d
346, 371 (Del. Ch. 2008) (one cannot aid or abet a breach that does not exist.)7
B. The 1934 Act Claims Against Attachmate
1. Section 14(a) and Rule 14a-9(a)
Plaintiffs premise their 1934 Act claims against Attachmate on two theories:
“primary” liability under § 14(a)8 and Rule 14a-9(a)9—for material misstatements and/or
7

I determine only that the allegations in the Consolidated Complaint regarding the
Elliott/Attachmate financing deal are insufficient to establish breach by the Novell Directors. Plaintiffs
muster other allegations—separate from those regarding the Elliott/Attachmate deal—in support of their
claims for breach of fiduciary duty against the Novell Directors. I make no ruling as to the sufficiency of
those allegations.
8
Section 14(a) of the Exchange Act, 15 U.S.C. § 78n(a), makes it unlawful to “solicit. . . any
proxy or consent or authorization in respect of any security (other than an exempted security) registered
pursuant to section 78l of this title,” in “contravention of such rules and regulations as the [Securities and
Exchange] Commission may prescribe as necessary or appropriate in the public interest or for the
protection of investors[.]”
9
Rule 14a-9(a), 17 C.F.R. § 240.14a-9(a), provides: “No solicitation subject to this regulation
shall be made by means of any proxy statement, form of proxy, notice of meeting or other
communication, written or oral, containing any statement which, at the time and in the light of the
circumstances under which it is made, is false or misleading with respect to any material fact, or which

12

omissions in a proxy—and “control person” liability under § 20(a),10 under which any
person who controls a party responsible for a securities violation is jointly and severally
liable with the primary violator. The first theory founders on plaintiffs’ concession at
oral argument that their theory of liability against Attachmate for material misstatements
and/or omissions in Novell’s proxy materials rests on Attachmate’s alleged “ability to
control” Novell after the two entered into the merger agreement. In other words,
Attachmate’s liability under § 14(a) and Rule 14a-9(a) hinges on it having control over
Novell’s proxy materials. Since plaintiffs’ theory of liability against Attachmate is wholly
derivative, Attachmate cannot be held liable for a primary violation of § 14(a) or Rule
14a-9(a) without plaintiffs adequately pleading control of Novell by Attachmate.
2. Section 20(a)
Under § 20(a), plaintiffs must show: (1) an underlying violation of the securities
laws by the controlled entity; and, (2) control of the primary violator by the defendant. In
re Stone & Webster, Inc. Securities Litigation, 414 F.3d 187, 194 (1st Cir. 2005). See
also In re Boston Scientific Corp. Securities Litigation, 708 F.Supp.2d 110, 129
(D.Mass. 2010) (“[Th]e plain terms of section 20(a) indicate that it only creates liability
derivative of an underlying securities violation.”).
Paragraph 97 of the Consolidated Complaint alleges that Attachmate “had direct
supervisory control over composition of the Proxy and the information disclosed
omits to state any material fact necessary in order to make the statements therein not false or misleading
or necessary to correct any statement in any earlier communication with respect to the solicitation of a
proxy for the same meeting or subject matter which has become false or misleading.”
10
Section 20(a), 15 U.S.C. § 78t(a), provides, in relevant part: “Every person who, directly or
indirectly, controls any person liable under any provision of this chapter or of any rule or regulation
thereunder shall also be liable jointly and severally with and to the same extent as such controlled person
to any person to whom such controlled person is liable . . . .”

13

therein, as well as the information that was omitted and/or misrepresented in the
Proxy.” Plaintiffs argue that they are “not required to plead more to state a section 20(a)
claim,” and cite to Maher v. Durango Metals, Inc., 144 F.3d 1302, 1306 n.8 (10th Cir.
1998), which states that “courts generally agree that the plaintiff need only show the
power to control the transaction underlying the alleged securities violation and not the
exercise of that power.” (emphasis added). Plaintiffs misstate the standard for
establishing “control” as a matter of law in the First Circuit, which requires that the
alleged controlling person actually exercise control over the violator. Aldridge v. A.T.
Cross Corp., 284 F.3d 72, 85 (1st Cir. 2002)(“To meet the control element, the alleged
controlling person must not only have the general power to control the company, but
must also actually exercise control over the company.”)(citing Sheinkopf v. Stone, 927
F.2d 1259, 1270 (1st Cir.1991)(“For [the defendant] to be liable ... there must be
‘significantly probative’ evidence that the [defendant] exercised, directly or indirectly,
meaningful hegemony over the ... venture ....”)(internal citation omitted)). In Aldridge,
even certain defendants’ status as controlling shareholders was not enough to
establish § 20(a) liability “in the absence of some indicia of the exercise of control over
the entity primarily liable” or facts which indicated they were “actively participating in
the decisionmaking processes of the corporation. . . .” 284 F.3d at 85 (emphasis in
original).
Maher does not help plaintiffs. Even by the Tenth Circuit’s standard, plaintiffs
fail to plead the “control” element. The Maher court held that plaintiff failed to plead
facts sufficient to establish control when he did not allege that “COM possessed even
14

the power to control Durango, but rather that COM, by virtue of its agreement with
Durango, possessed only the ability to acquire that power.” 144 F.3d at 1305-06
(emphasis in original). Construed liberally, the facts plead in the Consolidated
Complaint at most suggest that Attachmate had the ability to acquire the power to
control Novell.
Furthermore, the allegations in paragraph 97 are conclusory and insufficient to
meet Iqbal’s pleading standard. Paragraphs 95 and 98 of the Consolidated Complaint
– which allege that Attachmate had access to copies of the proxy, the ability to prevent
issuance of or correct allegedly misleading statements, and input in the proxy’s
descriptions of information reviewed and considered by the Novell Directors – are
likewise too bare to pass muster. See Penalbert-Rosa v. Fortuno-Burset, 631 F.3d 592,
595 (1st Cir. 2011); S.E.C. v. Tambone, 597 F.3d 436, 442 (1st Cir. 2010).
Plaintiffs simply fail to plead facts suggesting that Attachmate actually exercised
control over Novell’s proxy materials or actively participated in Novell’s decisionmaking
process. The motion to dismiss the 1934 Act claims against Attachmate is allowed.
III. Novel Directors’ Motion to Stay
I grant Attachmate’s motion to dismiss as to all counts because the Consolidated
Complaint is clearly bereft of allegations sufficient to state a claim against it. Plaintiffs
claims against the Novell Directors are not as obviously deficient; thus, I deny their
motion to dismiss and consider their alternative motion to stay.
The Novell Directors have moved for a stay under the abstention doctrine set
forth in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976),
15

and its progeny. Docket # 58. The Colorado River doctrine permits federal courts to
abstain in certain “exceptional circumstances” from hearing cases when a first-filed,
parallel state court action is pending. 424 U.S. at 818. The doctrine is rooted in
“considerations of ‘[w]ise judicial administration, giving regard to conservation of
judicial resources and comprehensive disposition of litigation.” Id. at 817 (internal
citations omitted).
If I determine that the federal and state court actions are “parallel,” I must then
weigh several factors in deciding whether exceptional circumstances are met. In re:
Brooks Automation, Inc. Derivative Litigation, No. 06-10943, slip op. at 2-3 (D.Mass.
Dec. 22, 2006). They are: (1) whether either court has assumed jurisdiction over a res;
(2) the inconvenience of the federal forum; (3) the desirability of avoiding piecemeal
litigation; (4) the order in which the forums obtained jurisdiction; (5) whether state or
federal law controls; and, (6) the adequacy of the state forum to protect the parties'
rights. Villa Marina Yacht Sales, Inc. v. Hatteras Yachts, 947 F.2d 529, 532 (1st Cir.
1991)[“Villa Marina I”]. The First Circuit has also considered a seventh factor: the
“vexatious or reactive nature of the federal lawsuit.” Elmendorf Grafica, Inc. v. D.S.
America (East), Inc., 48 F.3d 46, 50 (1995). “No one factor is necessarily
determinative; a carefully considered judgment taking into account both the obligation
to exercise jurisdiction and the combination of factors counseling against that exercise
is required.” Colorado River, 424 U.S. at 818-19.
A. Parallel Proceedings

16

For the federal and state actions to be parallel, the case law does not require
absolute identity of the parties and issues, only substantial similarity. Brooks
Automation, slip op. at 3 (citing Interstate Material Corp. v. City of Chicago, 847 F.2d
1285, 1288 (7th Cir. 1988)). See also Villa Marina I, 947 F.2d at 533.
Plaintiffs argue that, in order for the state and federal actions to be parallel, the
former must dispose of all claims brought in the latter. I have previously considered
and rejected this argument. Brooks Automation, slip op. at 4 (declining to follow In re
Comverse Tech., No. 06-CV-1849, 2006 WL 3193709 (E.D.N.Y. Nov. 2, 2006)).
Plaintiffs also contend that because this case involves claims over which the
federal courts have exclusive jurisdiction (i.e., the 1934 Act claims), the two cases
cannot be “parallel” as a matter of law and a stay is not appropriate. Although some
jurisdictions have held as much,11 the First Circuit has not, and this court has, in the
past, reached the opposite conclusion. See Brooks Automation, slip op. at 7 (citing
Lorentzen v. Levelor Corp., 754 F.Supp. 987, 992-94 (S.D.N.Y. 1990), and Int’l Jensen,
Inc. v. Emerson Radio Corp., 1996 WL 494273 (N.D. Ill. 1996)). See also Will v.
Calvert Fire Insurance Co., 437 U.S. 655, 664 (1978). All defendants in this action are
defendants in the Delaware action; named plaintiffs are members of the putative class
of plaintiffs in the Delaware action. The claims in both actions are predicated on the
same underlying facts; namely, allegations that the Novell Directors failed to maximize
shareholder value in the merger with Attachmate, and made material misstatements

11

See, e.g., Andrea Theatres, Inc. v. Theatre Confections, Inc., 787 F.2d 59, 62 (2d Cir. 1986);
Medema v. Medema Builders, Inc., 854 F.2d 210, 213-14 (7th Cir. 1988); Minucci v. Agrama, 868 F.2d
1113, 1115 (9th Cir. 1989).

17

and/or omissions in proxy statements issued by Novell preceding the merger. As
discussed below, the issues to be adjudicated are substantially the same, if not
identical. I therefore rule that the federal and state actions are parallel and proceed to
weigh the Colorado River factors.
B. The Colorado River Factors
The first and seventh factors are neutral; there is no res at issue, and the record
discloses no evidence that this suit is “vexatious or contrived.” See Jimenez v.
Rodriguez-Pagan, 597 F.3d 18, 28 (1st Cir. 2010)(discussing “neutral” factors).
Although federal law governs two of the three claims here, the weight of the fifth factor
(whether state or federal law controls) is mitigated by the potential preclusive effect of a
state court decision adverse to plaintiffs, as discussed below. As for the second factor,
I am not persuaded that Massachusetts is a “decidedly more convenient” forum than
Delaware. Docket # 55 at 9. While Novell is located in Massachusetts and two of the
Novell Directors reside here, none of the plaintiffs do and Attachmate is based in
Washington. The remaining factors weigh decisively in favor of abstention.
1. Piecemeal Adjudication and Protection of Parties’ Rights
Most compelling is that a stay will avoid needless and wasteful piecemeal
litigation while still protecting the parties’ rights. Count I—for common law breach of
fiduciary duty—rests entirely on interpretation and application of Delaware state law in
which Delaware courts have an important interest and expertise and on which the
potential for harmful and inconsistent rulings exists.
Plaintiffs argue, however, that a stay will not avoid piecemeal adjudication
18

because the 1934 Act claims must be adjudicated in federal court regardless of the
outcome of the Delaware action. They insist that the Delaware action can never fully
dispose of the 1934 Act claims because federal and state law regarding disclosure in
connection with proxy solicitations are not “identical.”
Their argument misses the point. Although federal disclosure law may not
parallel that under Delaware common law in every respect, both require proof that an
alleged misstatement or omission was “material.” Crucially, “the Delaware courts
recognize the same standard of ‘materiality’ as the Supreme Court recognized for §
14(a) claims in TSC Industries Inc. v. Northway, Inc., 426 U.S. 438, 445-49 (1976).” Int’l
Jensen, 1996 WL 494273, at *4 (N.D. Ill. 1996)(citing Bershad v. Curtiss-Wright Corp.,
535 A.2d 840, 846 (Del. 1987), Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del.
1985), and Mills v. Electric Auto-Lite Co., 396 U.S. 375, 383-85 (1970)). Where both
this court and the Delaware court must determine the “materiality” of any alleged
misrepresentation or omission on the same set of facts using the exact same standard,
the risk of piecemeal adjudication is real. As in Int’l Jensen, “the issues involved in
these cases, even though they stem from different sources of law, are substantially the
same. It is therefore unnecessary for both courts to act upon these claims.” 1996 WL
494273, at *6.
Furthermore, a decision by the Delaware court could provide a predicate for
collateral estoppel of plaintiffs’ 1934 Act claims. “[A] state court judgment may in some
circumstances have preclusive effect in a subsequent action within the exclusive
jurisdiction of the federal courts.” Marrese v. American Academy of Orthopaedic
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Surgeons, 470 U.S. 373, 380 (1985). See also Becher v. Contoure Laboratories, Inc.,
279 U.S. 388, 391-92 (1929); Brown v. Felsen, 442 U.S. 127, 139, n. 10 (1979); Clough
v. Rush, 959 F.2d 182, 187 (10th Cir. 1992). As the Supreme Court noted in
Matsushita Elec. Indus. Co., Ltd. v. Epstein, 516 U.S. 367, 383-84 (1996): “Congress
plainly contemplated the possibility of dual litigation in state and federal courts relating
to securities transactions. . . . [and] said nothing to modify the background rule that
where a state-court judgment precedes that of a federal court, the federal court must
give full faith and credit to the state court judgment.”
There is no reason to believe that the Delaware Chancery Court will not fairly and
completely adjudicate the facts underlying the plaintiffs’ disclosure claims; notions of
comity militate otherwise. While it is impossible to predict at this juncture the exact
preclusive effect in this litigation of a judgment reached by the Chancery Court, any
decision adverse to the plaintiff could moot or otherwise expedite disposition of plaintiffs’
federal claims, while still protecting the parties’ rights. See Int’l Jensen, 1996 WL 494273,
at *4. Wise judicial administration commands a stay. See Klein v. Walston & Co., 432 F.2d
936, 937 (2d Cir. 1970); Rogers v. Desiderio, 58 F.3d 299, 302 (7th Cir. 1995).
2. Order in Which Forums Obtained Jurisdiction
Given the progress of the Delaware action, the fourth factor – the order in which
the forums obtained jurisdiction – also weighs in favor of a stay. This factor “should not
be measured exclusively by which complaint was filed first but rather in terms of how
much progress has been made in the two actions.” Currie v. Group Insurance Com’n,
290 F.3d 1, 10 (1st Cir. 2002)(citing Moses H. Cone Mem’l Hosp. v. Mercury Constr.
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Corp., 460 U.S.1, 21 (1983)). On December 27, 2010, plaintiffs in the Delaware action
filed a motion for expedited proceedings including expedited discovery and a request
for injunctive relief. The Chancery Court issued a scheduling order on January 6,
2011. The parties engaged in expected discovery, which resulted in the production of
over 93,000 documents (1.5 million pages), including over 63,000 documents (over
900,000 pages) from Attachmate alone. The Delaware plaintiffs also deposed Novell
Director (and defendant) Judith Hamilton on January 10, 2011. They ultimately
withdrew their request for a preliminary injunction due to Novell’s agreement to make
additional disclosures in its proxy materials.
Plaintiffs acknowledge that discovery has been produced in the Delaware action,
but argue that such discovery is “easily transferable” to this action. Docket # 55 at 10.
The fact that discovery can be transferred is not enough to negate the weight of this
factor. Villa Marina I, 947 F.2d at 535. This factor favors abstention.
While I am mindful of the “heavy presumption favoring the exercise of
jurisdiction,” Villa Marina Yacht Sales, Inc. v. Hatteras Yachts, 915 F.2d 7, 13 (1st Cir.
1990), exceptional circumstances are present in this case and a stay of all claims
against defendant Novell Directors is appropriate.
IV. Conclusion
Attachmate’s Motion to Dismiss (Docket # 51) is ALLOWED. The Motion to
Stay Proceedings (Docket # 49) is ALLOWED as to Novell Directors and DENIED AS
MOOT as to Attachmate. The Novell Directors’ Motion to Dismiss (Docket # 46) is
DENIED without prejudice. Each defendant’s Motion for Leave to File a Reply (Docket
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## 56, 57) is ALLOWED. The case is stayed pending further order of this court.
Counsel shall file a status report on or before July 31, 2012.

February 10, 2012

/s/Rya W. Zobel

DATE

RYA W. ZOBEL
UNITED STATES DISTRICT JUDGE

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