-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S0s+M0pIzQJiIJoJldHGXPGLdbOBI/uWxmQXqiia14RtN/Fc5dnAd3swW4zFgJI9 Nfz5FLF7kjf2sHYq/Qir7A== 0001047469-98-037414.txt : 19981016 0001047469-98-037414.hdr.sgml : 19981016 ACCESSION NUMBER: 0001047469-98-037414 CONFORMED SUBMISSION TYPE: SC 14D1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19981015 SROS: NASD SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: QUICKTURN DESIGN SYSTEMS INC CENTRAL INDEX KEY: 0000914252 STANDARD INDUSTRIAL CLASSIFICATION: INSTRUMENTS FOR MEAS & TESTING OF ELECTRICITY & ELEC SIGNALS [3825] IRS NUMBER: 770159619 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1/A SEC ACT: SEC FILE NUMBER: 005-43785 FILM NUMBER: 98726373 BUSINESS ADDRESS: STREET 1: 55 W TRIMBLE ROAD CITY: SAN JOSE STATE: CA ZIP: 951311013 BUSINESS PHONE: 4089146000 MAIL ADDRESS: STREET 1: 55 W TRIMBLE ROAD CITY: SAN JOSE STATE: CA ZIP: 95131-1013 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: MENTOR GRAPHICS CORP CENTRAL INDEX KEY: 0000701811 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER INTEGRATED SYSTEMS DESIGN [7373] IRS NUMBER: 930786033 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1/A BUSINESS ADDRESS: STREET 1: 8005 SW BOECKMAN RD CITY: WILSONVILLE STATE: OR ZIP: 97070 BUSINESS PHONE: 5036857000 SC 14D1/A 1 14D1/A - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 15 TO SCHEDULE 14D-1 TENDER OFFER STATEMENT (PURSUANT TO SECTION 14(D)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) QUICKTURN DESIGN SYSTEMS, INC. (Name of Subject Company) MENTOR GRAPHICS CORPORATION MGZ CORP. (Bidders) COMMON STOCK, PAR VALUE $.001 PER SHARE (including the Associated Rights) (Title of Class of Securities) 74838E102 (CUSIP Number of Class of Securities) ------------------------ WALDEN C. RHINES PRESIDENT AND CHIEF EXECUTIVE OFFICER MENTOR GRAPHICS CORPORATION 8005 S.W. BOECKMAN ROAD WILSONVILLE, OREGON 97070-7777 (503) 685-1200 (Name, Address and Telephone Number of Persons Authorized to Receive Notices and Communications on Behalf of Bidders) COPY TO: JOHN J. HUBER, ESQ. CHRISTOPHER L. KAUFMAN, ESQ. LATHAM & WATKINS LATHAM & WATKINS 1001 PENNSYLVANIA AVENUE, N.W. 75 WILLOW ROAD WASHINGTON, DC 20004 MENLO PARK, CALIFORNIA 94025 (202) 637-2200 (650) 328-4600 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MGZ Corp., a Delaware corporation ("Purchaser"), and Mentor Graphics Corporation, an Oregon corporation ("Parent"), hereby amend and supplement their Tender Offer Statement on Schedule 14D-1 filed on August 12, 1998 (the "Statement"), as amended, with respect to the offer by Purchaser to purchase all outstanding shares of Common Stock, par value $.001 per share, of Quickturn Design Systems, Inc., a Delaware corporation, for a purchase price of $12.125 per share, net to the seller in cash, without interest thereon, as set forth in this Amendment No. 15. Capitalized terms used herein and not defined have the meanings ascribed to them in the Statement. ITEM 10. ADDITIONAL INFORMATION. Item 10(f) of the Statement is hereby amended and supplemented by the following: 1. On October 6, 1998, Parent and the Company participated in a hearing regarding Parent's and Purchaser's application for preliminary injunction in the United States District Court for the Disctict of Delaware. A copy of the transcript of this hearing is attached hereto as Exhibit (a)(28) and is incorporated herein by reference. 2. On October 7, 1998, Parent and the Company participated in a hearing regarding various motions in the Court of Chancery of the State of Delaware, including the Company's motion for summary judgment. A copy of the transcript of this hearing is attached hereto as Exhibit (a)(29) and is incorporated herein by reference. 3. On October 9, 1998, the Court of Chancery of the State of Delaware issued a Memorandum Opinion denying the Company's motion for summary judgment. A copy of the Memorandum Opinion is attached hereto as Exhibit (a)(30) and is incorporated herein by reference. 4. On October 15, 1998, Parent issued a press release, a copy of which is attached hereto as Exhibit (a)(31) and is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(28)Transcript of October 6, 1998 hearing in the United States District Court for the District of Delaware. (a)(29) Transcript of October 7, 1998 hearing in the Court of Chancery of the State of Delaware. (a)(30)Memorandum Opinion of the Court Chancery of the State of Delaware dated October 9, 1998. (a)(31) Press Release dated October 15, 1998. 2 SIGNATURES After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. Dated: October 15, 1998 MENTOR GRAPHICS CORPORATION By: /s/ GREGORY K. HINCKLEY -------------------------------------- Name Gregory K. Hinckley Title: Executive Vice President, Chief Operating Officer and Chief Financial Officer MGZ CORP. By: /s/ GREGORY K. HINCKLEY -------------------------------------- Name: Gregory K. Hinckley Title: Secretary and Chief Financial Officer
3 EX-11.(A)(28) 2 EX. 11(A)(28) 1 1 IN THE UNITED STATES DISTRICT COURT 2 IN AND FOR THE DISTRICT OF DELAWARE 3 - - - 4 MENTOR GRAPHICS CORPORATION : CIVIL ACTION CORPORATION and MGZ CORPORATION,: 5 : Plaintiffs : 6 : v. : 7 : QUICKTURN DESIGN SYSTEMS, INC., : 8 : Defendant : NO. 98-473 (RRM) 9 - - - 10 Wilmington, Delaware 11 Tuesday, October 6, 1998 4:08 o'clock, p.m. 12 - - - 13 BEFORE: HONORABLE RODERICK R. McKELVIE, U.S.D.C.J. 14 - - - 15 APPEARANCES: 16 RICHARDS, LAYTON & FINGER 17 BY: KEVIN G. ABRAMS, ESQ., THOMAS A. BECK, ESQ. and 18 THAD J. BRACEGIRDLE, ESQ. 19 -and- 20 21 22 23 Valerie J. Gunning Official Court Reporter 24 25 2 1 APPEARANCES (Continued): 2 LATHAM & WATKINS 3 BY: MARC W. RAPPEL, ESQ. (Los Angeles, California) 4 5 -and- 6 LATHAM & WATKINS 7 BY: R. BRIAN TIMMONS, ESQ. (Costa Mesa, California) 8 Counsel for Plaintiffs 9 10 MORRIS, NICHOLS, ARSHT & TUNNELL BY: WILLIAM M. LAFFERTY, ESQ. 11 12 -and- 13 WILSON, SONSINI, GOODRICH & ROSATI 14 BY: DAVID J. BERGER, ESQ. and JILL NISSEN, ESQ. 15 (Palo Alto, California) 16 Counsel for Defendant 17 - - - 18 19 20 21 22 23 24 25 3 1 2 P R O C E E D I N G S 3 4 (Proceedings commenced at 4:08 p.m.) 5 6 THE COURT: All right. 7 MR. LAFFERTY: Good afternoon, your Honor. 8 I wanted to take a moment to introduce my co-counsel in 9 the matter, Mr. David Berger. 10 THE COURT: All right. 11 MR. LAFFERTY: And his associate, Ms. Jill 12 Nissen, both of whom have been admitted pro hac vice. 13 Mr. Berger will make the defendant's 14 presentation today, with your Honor's permission. 15 THE COURT: All right. 16 MR. ABRAMS: Good afternoon, your Honor. 17 THE COURT: Good afternoon. 18 MR. ABRAMS: I'd also like to introduce my 19 colleagues seated at counsel table. 20 Mr. Mark Rappel of Latham & Watkins, and Mr. 21 Brian Timmons. 22 In addition, seated in the first row of the 23 courtroom, we have Mr. Jack Zepp and Mr. Kaufman. 24 Mr. Rappel will make the plaintiffs' 25 application for support of preliminary injunction. 4 1 THE COURT: All right. 2 Actually, you can get both victims up at the 3 same time. 4 MR. BERGER: All right. 5 THE COURT: And we'll walk our way through, 6 issue by issue. 7 So pick a topic. 8 MR. RAPPEL: Your Honor, I want to thanks 9 the Court for making the time available to us. I know 10 you're in trial. I also want to apologize for the length 11 of the papers. In a typical case, I can typically say I 12 said it better in my papers than I can say it in oral 13 argument and I will sit down, unless the Court has any 14 questions. 15 In this case, though, I would like to take 16 just a little bit of the Court's time and try to offer 17 more than that. 18 I think the situation before the Court is 19 remarkable. It's certainly remarkable in my experience 20 and all the practitioners that I've talked to about it. 21 And I would like to suggest it's a story with two 22 villains. Initially, I thought that Hambrecht & Quist 23 was the worst of the two. 24 And to substantiate that or to explain that, 25 I'd like to put up a chart from one of their 5 1 presentations. 2 THE COURT: Sure. 3 MR. RAPPEL: I know that's an issue with Mr. 4 Berger, because it does include issue that Quickturn has 5 designated as highly confidential. I think I place the 6 chart, though, so it's viewable to the Court, but not 7 the audience. 8 MR. BERGER: Your Honor, the point is the 9 chart is a page taken from one of the Hambrecht & Quist 10 presentations. It's my understanding that counsel has 11 copies to hand up to your Honor also of the same chart. 12 I'm happy with it to be shown to your Honor, or the chart 13 to be shown to your Honor. I just don't -- it's 14 confidential information to Quickturn and to Hambrecht & 15 Quist and don't wish to have it shown in open court. 16 MR. RAPPEL: Your Honor, for purposes of 17 argument, I would like to be able to refer to the chart. 18 I'm also happy to hand your Honor a copy of it. 19 THE COURT: Why don't you hand it to me first? 20 MR. RAPPEL: Okay. 21 THE COURT: Let's talk about whether it should 22 be protected. 23 MR. RAPPEL: May I approach, your Honor? 24 THE COURT: Yes. 25 (Mr. Rappel handed document to the Court.) 6 1 MR. RAPPEL: I've already given a copy to Mr. 2 Berger. And this is Page 38 of the August 21 presentation 3 by Agent Cue to the Quickturn Board, which is the full 4 text -- the full text of which is included as Exhibit C 5 to our motion for preliminary injunction. 6 THE COURT: All right. And -- 7 MR. RAPPEL: And I have a blowup, your Honor. 8 If I may, I'd like to display it right here. 9 THE COURT: Why should this be protected from 10 disclosure? 11 MR. BERGER: Your Honor, that chart shows the 12 confidential valuations of Quickturn under various 13 scenarios. It's one of the issues that plaintiff is 14 trying -- is arguing here in this motion that we're 15 required to disclose under the federal securities laws. 16 We've not disclosed that information. We don't think 17 it's required and it does include valuations of 18 Quickturn. It's clearly not public information and is 19 proprietary information. 20 THE COURT: I'm not trying to give you a 21 hard time. I'm trying to figure out under the standards 22 under Rule 26 why this shouldn't be disclosed in open 23 court as opposed to someplace else. 24 MR. BERGER: Well, your Honor, one of the 25 issues in the case -- as a matter of fact, the principal 7 1 issue in the case is the valuation of Quickturn, and we 2 don't want other parties to have a sense as to what 3 Quickturn should be valued at or what various valuations 4 Quickturn's various bankers value Quickturn at. And the 5 same dangers that has happened here. Somebody gets ahold 6 of it and says, Oh, I offered a price that's, quote 7 unquote, within the range of fairness. It takes away 8 negotiating leverage for the Quickturn Board in 9 connection with this offer. And potentially in 10 connection with other offers. 11 MR. RAPPEL: Your Honor, our point is really 12 that this chart is inconsistent with what Quickturn wants 13 the shareholders to hear. That is simply the word 14 inadequate with no explanation. 15 I can't understand how disclosure of this 16 chart could possibly reduce the bargaining leverage of 17 Quickturn vis-a-vis Mentor Graphics, because Mentor 18 Graphics' lawyers have that. And obviously, Mentor 19 Graphics' lawyers want to be involved in any 20 negotiations, even if we can't disclose that information 21 to our clients. 22 MR. BERGER: Your Honor, if I can respond to 23 that very briefly, the protective order in this case 24 prohibits clearly Mentor Graphics' attorneys from passing 25 on this information to their clients. To do so would be 8 1 a breach of the protective order. There's no question 2 about that. 3 And so if the argument is that Mentor 4 Graphics' attorneys are going to take this information 5 and pass it on to their clients as a way to tell their 6 clients how much they should bid or how much they 7 shouldn't, that would be -- 8 THE COURT: All right. Let's just assume 9 we'll keep it confidential. And I will just work with 10 this small copy. 11 MR. RAPPEL: Okay. 12 Your Honor, the reason that I've given you 13 this chart is that I think it's the best, most visual 14 summary of the analyses that H&Q did in support of its 15 valuation opinion. And this was presented to the 16 Quickturn Board on August 21. 17 Now, my clients and my opponent's clients 18 paid investment bankers a lot of money to prepare charts 19 like this. But I would submit to your Honor that it's 20 not rocket science. Your average investor, certainly 21 any institutional investor, is going to know what these 22 analyses are, what the typical analyses are that are used 23 by investment bankers in valuing a tender offer. They're 24 going to know that at least these bars are going to be on 25 the chart. 9 1 And they are also going to know where to 2 draw the line for the magic tender offer at 12-1/8. And 3 they're going to think, Well, if the bars are above the 4 line, then the offer is inadequate, and if the bars are 5 hitting the line squarely, then the offer is adequate. 6 And if the bars are over -- I'm sorry -- if the bars 7 are under the line, then that's a home run. 8 Now, if you look at this chart, the Mentor 9 offer is just slamming these bars. In fact, it's over 10 the analysis of comparable premiums paid. The only one 11 that's questionable is discounted cash flow analysis, 12 here on the far right. 13 But, as admitted in the briefs, Quickturn, 14 H&Q, didn't rely on that at all. And the H&Q -- I'm 15 sorry -- the Quickturn Board understood that it was 16 unreliable. 17 So if I were looking at this chart, I could 18 just draw a big red X through this chart on the far 19 right -- I'm sorry -- through the bar on the far right, 20 which is the only one that's even troubling in analyzing 21 our offer. 22 Now, there's another chart which reflects 23 the Board's or reflects H&Q's prior analysis on August 24 17. That appears at Page 30 of Exhibit B to our motion. 25 And if I can, I would just like to hold that one up for 10 1 the Court. 2 THE COURT: All right. 3 MR. RAPPEL: Now, this one (indicating), like 4 the other one, presents -- well, this one only presents 5 two analyses, but it has three cases. There's the base 6 case, an up-side case and a down-side case. Once again, 7 you can see the Mentor offer is just piercing the base- 8 case analysis. It is above the down-side analysis. And 9 it's just a bit below the up-side analysis, which is, as 10 we explain in our papers, based on a 40-percent assumed 11 growth rate. 12 So you consider these two charts. You 13 consider, in fact, all of the H&Q analyses, and it 14 looks -- it looked to me awfully mercenary for H&Q to be 15 giving an inadequacy opinion. It looks to me like they 16 sold out for $750,000. 17 Then, we found draft disclosure, and we 18 provided that to the Court, it's Exhibit W-2 our motion. 19 That's a piece that we believe was prepared 20 by Skadden Arps, and it goes through each of the analyses. 21 It's, in essence, like giving these bar charts to the 22 shareholders, but doing so in words. In fact, maybe it's 23 a little bit better, because it explains a little bit 24 about the methodologies that are used to generate all 25 these bars. And that put H&Q's conduct in a different 11 1 light for me. It now appears that Hambrecht & Quist 2 thinks that it's okay to say that it is inadequate as 3 long as the shareholders know where the bars are and 4 where the red X's are if you draw the red X. 5 Exhibit W, this proposed disclosure, does 6 exactly that. 7 Now, that suggests that Hambrecht & Quist 8 doesn't think an adequacy opinion means much and, in 9 fact, that's what Mr. Cleveland testified in his 10 deposition. He said inadequacy simply means that in a 11 transaction, the offer on the table is not the best 12 price. And parenthetically, I would note that it's 13 impossible to exceed Mentor's offer where we've offered 14 to negotiate and to increase our offer if it's justified 15 by due diligence. 16 But here Quickturn instructed Hambrecht & 17 Quist not even to talk to us. So it's almost a 18 self-fulfilling prophecy that you don't have the best 19 offer on the table. 20 But that's maybe a little beside the point. 21 The fact is that the process here is to let the 22 shareholders make up their own mind. And here, Quickturn 23 shareholder body, it's largely institutional. If you 24 provide them with the facts, if you give them the bars 25 and the red X's, they can figure it out. 12 1 Now, remember I said earlier that there are 2 two villains and that's where Quickturn comes in. They 3 refuse to let their lawyers put Exhibit W, to put that 4 disclosure that was written in the 14D9. Instead, they 5 just used the naked opinion. All they wanted the 6 shareholders to hear was the word inadequate. And, so 7 far, that's all they've heard. They don't see the bars. 8 They don't see the red X I drew. Instead, they just get 9 the opinion. In fact, they get a barrage of letters and 10 press releases, 14D9's, proxy statements, saying 11 Quickturn paid Hambrecht & Quist $750,000 and they said 12 Mentor's offer is inadequate. 13 The average shareholder, in fact, any 14 institutional shareholder, knows that you have these 15 bars. They know, or at least they think, that 16 inadequate means that the bars are above this red line 17 for the Mentor tender offer. They don't see this red X. 18 They don't know that Mentor is grazing the bottom of 19 this analysis on the right-hand side. All they hear 20 is inadequate. And I would submit that's misleading. 21 The point, in fact, is capsulized pretty 22 nicely by Justice Souder's opinion in Virginia Bank 23 Shares, where he was dealing with a situation where there 24 was a claim that use of the word high in characterizing 25 an offer was misleading. And if I may, if I can find it, 13 1 I will read that. 2 Justice Souder stated it is no answer to argue, 3 as petitioners do, that the quoted statement on which 4 liability was predicated did not express a reason in 5 dollars and cents, but focused instead on the, quote, 6 indefinite and unverifiable, close quote, term, quote, 7 high, close quote, value, much like the similar claim 8 that the merger's terms were fair to shareholders. The 9 objection ignores the fact that such conclusory terms 10 in a commercial context are reasonably understood to 11 rest on a factual basis that justifies them as accurate, 12 the absence of which renders them misleading. 13 I would submit, your Honor, that inadequate 14 has a much more precise and well understood meaning among 15 shareholders than the term high. The question is, 16 without these bars, are the shareholders going to be 17 misled? I would say you bet they are. The institutions 18 are going to know what the bars are. They're going to 19 know that the investment bankers moved the bars around. 20 For example, I mean, this is explained in Mr. 21 Matthews' affidavit. You can cut this historical 22 trading range bar off at six months or 12 months and 23 just lop about half of the top off of it. And you can 24 make other adjustments to all these bars. These are 25 clearly not the best bars for us. They are the best bars 14 1 for Quickturn. But the point is that, even with the best 2 bars for Quickturn, the offer is not below the bars. 3 Now, to put this in legal context, there are 4 really three cases that have been cited and expanded 5 upon in the briefs. Quickturn's lead authorities are 6 Data Point and Abbey. But I would say that all those 7 cases say, even if you accept Quickturn's gloss on them, 8 is that it is a rare case in which the investment 9 bankers' underlying data -- that is all these bars -- is 10 material. 11 Well, your Honor, this is the rare case. 12 Now, our favorite case in the brief is the Gerber 13 Products case. And in that case, the baby food products 14 company defeated an offer by, in essence, arguing and 15 suing the bidder, because the bidder had paid bribes to 16 foreign dignitaries. I think the euphemism at the 17 time was sensitive payments. 18 After the bidder went away based on this 19 lawsuit, the class action lawyers sued. In the course 20 of that suit, they found out that Gerber had an 21 investment banker's opinion which said that the 22 consideration offered in that case was, quote, 23 substantial, close quote. I don't know what substantial 24 means. I've never heard that term in an investment 25 banker's lexicon. I would submit that it probably 15 1 means something better than inadequate, but precisely 2 what it means, I'm not sure. 3 But the class action lawyers who had the 4 full report said, Well, it's misleading not to have told 5 the shareholders that you had this investment banker's 6 opinion saying that the bidder's tender offer was 7 substantial. 8 And the Court held that that opinion was 9 substantial, but it could have impacted shareholders' 10 opinions whether to tender their shares or to sell in 11 the open market. However, the Court concluded that it 12 was not misleading. The reason the Court said that was 13 that Gerber had never gone out to its shareholders and 14 said that, quote, This bid is inadequate. 15 That's exactly what Quickturn has done here. 16 They go out repeatedly and say this offer is inadequate 17 and they have a Hambrecht & Quist chart and analysis in 18 their pocket that is, I would submit, at least equivalent 19 to an opinion that an offer is substantial. 20 I would also like to talk about the 21 Chris-Craft opinion. I know it's an old one, but it's a 22 good one, in my opinion, and I think it has similar facts. 23 There, the Piper company owned their famous plane company 24 and Chris-Craft comes along and tries to swallow them up 25 and, for whatever reason, they don't want to be acquired 16 1 by that conglomerate. Right after the offer comes in, 2 the Piper family urged shareholders to reject it. And 3 in doing so, they said that the Board had, quote, 4 carefully studied this offer and become convinced that 5 it is inadequate and not in the best interests of Piper 6 shareholders. 7 Well, Chris-Craft sued for an injunction and 8 said you can't just disclose that, because you have an 9 investment banker's opinion. They had hired First Boston. 10 In fact, First Boston had given an opinion to Piper which 11 said that the consideration offered by Chris-Craft was 12 fair and adequate. 13 The District Court denied Chris-Craft's 14 injunction because it held that the term inadequate could 15 not be construed to refer to price. And the explanation 16 for that apparently involved a little bit of Monday- 17 morning quarterbacking, because by that time other 18 bidders -- by the time the thing came up for a hearing, 19 other bidders had appeared and the offer was 20 substantially increased. 21 The District Court opinion explains that 22 any Piper shareholder with a telephone or a newspaper in 23 hand could compare the current market for Piper's shares 24 with Chris-Craft's offer. Thus, if the Piper statement 25 of the inadequacy of the offer were intended to refer to 17 1 price only, it would be more factual than misleading. 2 Well, the Court of Appeals looked at this 3 situation and they respectfully disagreed. They held 4 that any reasonable investor -- in fact, the quote is a 5 reasonable shareholder reading the letter most likely 6 would assume that the reference was to price. They held 7 that that was misleading. In fact, they held it was 8 particularly bad because the pronouncement that the offer 9 was inadequate had come from management. And the Court 10 stated by reason of the special relationship between 11 them, shareholders are likely to rely heavily on the 12 representations of corporate insiders when the 13 shareholders find themselves in the middle of a battle 14 for corporate control. Corporate insiders, therefore, 15 have a special responsibility to be meticulous and precise 16 in their representations to shareholders. 17 I would submit that this case is a lot like 18 that, your Honor. In fact, I would submit that it is 19 worse, for a couple of reasons. 20 The first is that we not only have the 21 credibility of Quickturn's management itself behind the 22 announcement that the offer is inadequate, we also have 23 the additional credibility that shareholders may assign 24 to a pronouncement from an investment banker. 25 Shareholders may not believe management. They may think 18 1 they may want to save their jobs. But they also see, 2 Gee, they paid three-quarters of a million dollars to 3 these experts. If they conclude it's inadequate, maybe 4 I can believe that. So I would say that's twice as bad 5 as Chris-Craft. 6 The second reason that it's worse is that 7 it's not one letter at the outset of the contest. In 8 this case, Agent Cue's opinion has been a centerpiece 9 of Quickturn's opposition to this bid. They describe it 10 in the 14D9. They describe it in the proxy statement. 11 They've sent it to the shareholders, not just once, but 12 twice. So I would say that's over twice as bad. 13 Now, you put all of that together, I think 14 you plainly have a material misrepresentation. You 15 cannot understand the fact that H&Q's opinion says 16 Mentor's offer is inadequate unless you know where the 17 bars are and you know where the red X's are. 18 The shareholders are entitled to see this 19 chart and to have it explained to them. There is a real 20 risk that Mentor will lose this company because 21 shareholders are assuming that the bars are above the 22 red line for Mentor's offer and there aren't any red X's 23 on this analysis. 24 THE COURT: Why don't you wait? Let's stop 25 now and give Mr. Berger a couple minutes. 19 1 MR. RAPPEL: Sure. Thank you, your Honor. 2 Listening to Mr. Rappel's discussion of H&Q's 3 work and the analyses that are contained in there, it 4 contains so many errors, it's hard to know precisely 5 where to begin. 6 Mr. Rappel's argument is surely wrong on the 7 facts. The undisputed testimony and the complete analysis 8 of H&Q shows -- makes clear that H&Q found the offer 9 inadequate for a number of different reasons. 10 They're also wrong in the law. Mr. Rappel 11 says that it's the rare case in which the bars on the 12 chart or additional disclosure is required. And that's 13 correct. We have not found a case, nor have plaintiffs 14 cited any cases, where this type of disclosure that 15 they're seeking has been required. Indeed, the case -- 16 the principal case that they rely on, the Berman versus 17 Gerber Production, does -- as Mr. Rappel says, does not 18 require additional disclosure. 19 I want to talk a little bit about the H&Q 20 analyses and what they mean, because that really is the 21 heart of their argument. 22 When I first got their papers, again, I could 23 not figure out how they continued to repeat this 24 conclusion that H&Q analyses say that the offer is fair 25 or adequate. It's not supported by the testimony. The 20 1 testimony is a hundred percent to the contrary. Mr. 2 Cleveland, in his deposition, says, again, that the offer 3 is inadequate. And he was actually asked specifically 4 what he meant by the offer is inadequate and what did 5 H&Q do to term that the offer was inadequate. 6 And he says -- and I'm reading from Pages 24 7 and 25 of the Cleveland transcript, and it says, quote, 8 We looked at the company's circumstances, its assets, its 9 intellectual property, its customer base, its recognition 10 in the industry, its projections. We talked to management 11 about prospects and then applied all of those inputs to a 12 judgment about the price that had been offered by Mentor 13 and determined that it was not adequate. 14 So it's clear from Mr. Cleveland's testimony 15 it's a wide range of factors that lead to an inadequacy 16 opinion. 17 It's equally true that the chart that Mr. 18 Rappel puts forward does not support his claims. Again, 19 the H&Q analyses that they cite, they certainly do not 20 stand for the proposition that Mentor's offer is fair 21 and adequate. At best, and it's just at best, according 22 to the figures summarized in their reply brief in the 23 chart that they handed your Honor, this graph shows that 24 Mentor's offer is at the low end of some of the summary 25 applied valuations for Quickturn. Merely because it's at 21 1 the low end of some of the summary valuations does not 2 mean anything. 3 And just a couple of examples of that. These 4 valuations are typical of most investment bankers: Very 5 wide. Their comparables M&A transaction spans a range, 6 as your Honor can see, from a low end to just a few 7 dollars to a high end that's considerably higher. 8 The mere fact -- and this is one of the -- 9 one of the charts, one of the blocks that Mr. Rappel and 10 his colleagues say is most important, these comparable 11 M&A transactions. It clearly does not mean that any 12 offer that's between these two valuations is fair and 13 adequate. And merely because their offer falls within 14 the low end of this valuation does not at all mean that 15 the offer -- that Mentor's offer is adequate. 16 They also did not get their view that H&Q 17 analyses show Mentor's offer to be fair and accurate from 18 the testimony of Quickturn's Directors. Again, they 19 deposed six of Quickturn's eight Directors. In each of 20 these depositions, each of Quickturn's Directors said, 21 based on their understanding and based on their careful 22 and detailed and lengthy analysis of Mentor's offer, it 23 was inadequate, for a wide range of reasons. And they 24 gave them in the depositions. 25 So then we're left back with the original 22 1 question: Where did Mentor get the view that the H&Q 2 analyses shows that the offer is adequate? 3 And, as you read through their briefs, it's 4 clear they got it from one group. They got it from their 5 attorneys. Mentor's attorneys have, in page and page 6 after page of their brief, both in their opening and 7 their reply, they argued their offer is adequate. There's 8 no citation to anything. There's no reference to any 9 analyses. It wasn't until this reply brief finally 10 regarding expert opinion -- we got an expert opinion from 11 a fellow by the name of Gil Matthews, which as your Honor 12 knows, we moved to strike, because it was not shown to us 13 at the time of their opening brief, which is when they 14 should have served it. And they didn't show it to us at 15 that time for a good reason, your Honor. Mr. Matthews' 16 opinion is fundamentally flawed. It contains gross 17 errors and if we had the opportunity to respond to it in 18 real time, if we had the opportunity to take Mr. Matthews' 19 deposition, it would be clear that his opinions, they may 20 be worth the paper they're written on or maybe not. It's 21 a close call. 22 But going back to the beginning, Mentor's 23 attorneys' views about Mentor's offer are not sufficient 24 to overcome the undisputed record that's developed 25 through H&Q's deposition, that's developed through the 23 1 documents, that's developed through the testimony of 2 all of Quickturn's Directors that Mentor's offer is 3 inadequate. 4 If you start from that premise, the argument 5 on the disclosure issue becomes easy. I'm not going to 6 go through the long disclosure. This Court knows it far 7 better than I. But, again, Mr. Rappel said at the very 8 beginning -- and Mentor concedes in its brief -- that, 9 as a general manner, investment bankers' analyses do not 10 need to be disclosed where those analyses support the 11 opinion. That's at Page 13 of their reply brief. 12 Your Honor, as described above, H&Q 13 analyses -- and there are two of them and they are very 14 lengthy -- clearly, unequivocally, support the 15 determination that Mentor's offer is inadequate and 16 that's the end of the story. No disclosure is required, 17 according to Mr. Rappel. 18 Yet even if there was some discrepancy 19 between H&Q's opinion and its analyses, and we would say 20 there is none, there is no disclosure required, because 21 what really is at issue here is H&Q's opinion, not the 22 analyses that underlie it. 23 The Quickturn Board had the right under 24 Delaware law to rely on the opinion that was done by H&Q 25 and assume it was done correctly. The evidence 24 1 demonstrates that this is exactly what the Board did. 2 The Board received H&Q's analyses. It received its 3 opinion and then made its own determinations about the -- 4 whether Mentor's offer was adequate or not. 5 This is not a case which is a professional 6 malpractice action against H&Q. The law is clear that 7 the Quickturn Board is allowed to rely on the opinion, it 8 did so, and then it disclosed fully and completely that 9 opinion. There's no question about that. 10 I want to respond very briefly to the point 11 about the draft disclosure issue that Mr. Rappel raised. 12 That document was done, as best as we can figure out, by 13 H&Q. Interestingly enough, when H&Q was deposed and 14 those documents were produced, there was never a question 15 to the H&Q witness about those documents. There's 16 absolutely no testimony that says that those documents 17 were ever provided to Quickturn. Indeed, there's no 18 testimony that those documents were ever provided to 19 H&Q's attorneys at Skadden Arps. 20 In fact, it's our understanding that that 21 information was not provided to Skadden Arps, nor was it 22 provided to Quickturn. It was just something done by 23 H&Q on its own as they've done several other analyses 24 in connection with their work that they did not share 25 with Quickturn. That's standard practice, and there's 25 1 no evidence to say that information was provided to 2 Quickturn or even H&Q's attorneys. 3 A couple of last points, your Honor. The 4 Berman case which, again, as Mr. Rappel cites, is the 5 key case that they intend to rely on, again, that case 6 states that 14-E is violated if the Board says an 7 offer is inadequate, but has an opinion that the offer 8 is fair and adequate. That's not this case. 9 The Berman case goes on to say that if the 10 investment banker -- if you have a formal opinion that -- 11 if you say is offer is inadequate and you do not have 12 any formal opinion whatsoever, you don't have to disclose 13 that. And if you -- if you say the offer is inadequate 14 and you have a formal opinion that the offer is 15 inadequate, you have to disclose that. That's exactly 16 what we've done. There's nothing in the Berman case 17 that leads to the conclusion that the underlying 18 analyses have to be disclosed. 19 One other key point that's important here. 20 Again, the crux of their argument is that -- and it's 21 all over their reply brief -- is that the only thing 22 the Board did is rely upon H&Q's opinion. Again, 23 there's no factual basis for that. The facts are all 24 to the contrary. As set forth in Quickturn's 14D9, and 25 it's at Pages 4 and 5 of the 14D9 that Quickturn filed 26 1 on or about August 24th. Quickturn lists -- I think I 2 counted 16 different reasons why it found the offer 3 inadequate. Some of them relate to H&Q's analysis, 4 that's for sure. Others of them do not. Others of 5 them relate to Quickturn's intellectual property 6 position, its patents, and a whole host of other 7 reasons. 8 What Quickturn says at the end of that, 9 however, is that, in view of the wide variety -- and 10 I'm reading from Page 5 of the 14D9 -- in view of the 11 wide variety of factors considered in connection with 12 its evaluation of the offer, the Board did not find it 13 practicable to, and did not quantify or otherwise 14 attempt to assign relative weights to the specific 15 factors considered in reaching its respective 16 determinations. And, your Honor, again, that disclosure 17 is fully consistent with the deposition testimony of the 18 Quickturn Directors. Mentor has deposed all but two of 19 the Quickturn Directors, six of eight. And under the 20 cross-examination of Mentor's attorneys, all of these 21 Directors testified that there were a whole host of 22 reasons why they felt the offer was inadequate. H&Q's 23 opinion was one of them, but just one of them. Not 24 greater, equal or less than any others. 25 So to summarize, Mr. Rappel is wrong on the 27 1 facts in terms of what H&Q's analyses show. He's wrong 2 on the facts in terms that H&Q's analyses support 3 clearly and unequivocally the fact that the offer is 4 inadequate and he's wrong on the law. There's no 5 disclosure requirement for these analyses, even under 6 the law that he cites. 7 For that reason, no additional disclosure 8 should be required. 9 There are other reasons. There are two 10 other reasons -- if your Honor wants to talk about them 11 now, I'm happy to do so -- why no further disclosure is 12 appropriate here. 13 THE COURT: Okay. That's fine. No. You 14 may continue. 15 MR. BERGER: The first is the balance of the 16 hardships. It is clear that it would cause great harm 17 for Quickturn if this information is disclosed. 18 Again, as we started out this argument, this 19 is confidential information. Quickturn is, as a result 20 of Mentor's efforts, both in the proxy contest and 21 potentially in play, to show the world what Quickturn's 22 investment banker found. Even if it's summary of 23 implied valuations, even for just that limited portion, 24 is both misleading and could cause Quickturn substantial 25 harm, because what it means is that anybody could come 28 1 in, as Mentor has, and say, Oh, we're in the middle of 2 some of these ranges, so our offer is fair. 3 First of all, that's preposterous but, second 4 of all, that's what happens, and that's clearly why we're 5 here today. 6 Another problem with the additional 7 disclosure here is the fact that these valuations are 8 all based upon Quickturn's projections. 9 Now, Quickturn does not publicly disclose 10 its internal projections. It does not give them to 11 analysts, for good reason. One, it's not required to. 12 Two, it's the target of lawsuits if it does. It's like 13 with any technology company, there's a host of 14 shareholder class actions waiting to hit if you put out 15 your projections and then you don't hit them. 16 So there's good sound corporate reasons as to 17 why you don't put out your projections. Sometimes 18 companies do put out limited projections in connection 19 with their securities filings, quarterly filings, but 20 those are protected by the private securities litigation. 21 You can put out the disclaimer language. In a tender 22 offer context, that disclaimer doesn't apply. In the 23 proxy offer context, that disclaimer doesn't apply. 24 If Quickturn was forced to put this stuff out, 25 if it didn't hit these projections, it would be liable in 29 1 any type of shareholder lawsuit. So there's tremendous 2 harm and risk of putting this information out in the 3 marketplace. It's not required. 4 And, finally, it's worth noting that Mentor 5 never even addresses the irreparable injury standpoint 6 necessary for an injunction. They basically pass right 7 over it, and there's just no basis. 8 We would be injured. The balance of 9 hardships tips in favor of Quickturn and Mentor has not 10 satisfied the basic element for an injunction, irreparable 11 injury. For those reasons, we don't think further 12 disclosure is required. 13 THE COURT: Why don't we find more cases 14 where courts have required targets to disclose the 15 underlying analysis of the investment bankers to give 16 the opinions? 17 MR. RAPPEL: Your Honor, I think the reason 18 you don't is that it's extremely unfair for an investment 19 banker to issue an opinion in fairness or adequacy which 20 is so directly at odds with their underlying analysis. 21 Mr. Berger said that -- almost a direct 22 quote. At best, we're at the low end of some of these 23 ranges. 24 Well, you've got the picture in front of you. 25 The picture speaks a thousand words. We're going right 30 1 through the middle of those analyses. We're above the 2 premium analysis. 3 I think it is the unprecedented thing about 4 this case and, in fact, I think the reason the Court can 5 feel comfortable if it decides to issue an injunction is 6 that H&Q's opinion of inadequacy is sui generis. It is 7 remarkable that an investment banker could conclude that 8 this offer is inadequate, having crunched the numbers 9 and found out that even the best bars that H&Q can come 10 up with, the analyses which are most favorable to the 11 client, have the tender offer line just going right 12 through the bar or, in some cases, for example, 13 comparable public companies near the top, historical 14 trading range right through the middle premium or above 15 that. 16 So if the Court says where, for example, if 17 you want to draw a line, a majority of the investment 18 bankers' analyses do not support the investment bankers' 19 opinion that the offer is inadequate. And there is 20 some external -- something besides the bars that the 21 investment banker is considering to reach its 22 inadequacy opinion, then that needs to be disclosed to 23 shareholders, because that's an unusual situation. 24 THE COURT: Will I find any decisions where 25 courts require disclosure of the underlying analysis 31 1 beyond the conclusion, beyond a conclusion it's 2 inadequate? 3 MR. RAPPEL: Your Honor -- 4 THE COURT: I haven't seen -- I just have 5 not seen cases where people have pushed for the 6 underlying analysis beyond the -- 7 MR. RAPPEL: I think if your Honor broadens 8 the scope, clearly, Gerber Products, the Court was 9 prepared to order disclosure but for the fact that the 10 target had never said that the offer was inadequate. 11 In the Blasius case that Quickturn cited in 12 its opposition, pre-opposition brief, the target had 13 voluntarily disclosed the analysis. 14 In fact, one would think that an aggressive 15 target in most cases would love to disclose this 16 analysis, because it would support the conclusion that 17 the offer is inadequate. 18 This is the rare case, because the analysis 19 doesn't support the view that it's inadequate. I guess 20 I would offer one other opinion to the Court. I don't 21 think we highlighted it sufficiently in our brief, but 22 it's the Humana decision. There, the Court said that 23 the offer was inadequate and there was a real question 24 whether the consideration that was offered by the bidder, 25 which was debentures, was worth, I think, $25 or 32 1 something materially less than $25. 2 And in that case, Humana had received an 3 investment banker's opinion that a proper valuation of 4 this debenture placed it above the current stock price 5 of the target company. And the Court in that case said 6 that the failure to disclose that analysis was materially 7 misleading and it issued an injunction, requiring 8 disclosure of the fact that the bidder's offer properly 9 valued, even though it was an odd piece of paper, was, 10 in fact, above the offer price. 11 THE COURT: All right. Do you have any 12 additional comments? 13 MR. BERGER: Your Honor, just one. Again, 14 the entire premise of their argument is that this one- 15 page document supports the notion that Mentor's offer 16 is fair and adequate. There's no testimony to support 17 that. 18 Mr. Cleveland, the author -- the lead banker 19 for H&Q, testified exactly to the contrary. All they've 20 got now to support this is their lawyers' arguments. 21 Lawyers and bankers are a different breed, I would submit. 22 Also, the last-minute affidavit of Mr. Matthews. 23 As you know, your Honor, we filed a motion to 24 strike that affidavit. It seems to us fundamentally 25 unfair that they should get to put that in at the last 33 1 minute with their reply papers. If you take away Mr. 2 Matthews' affidavit, they have no factual basis, no 3 factual predicate to support the notion that this piece 4 of paper says the offer is adequate. It does not. Mr. 5 Cleveland testified about that. So did Quickturn's Board 6 of Directors. I don't understand the basis for their 7 argument. 8 That's it, your Honor. Thank you. 9 THE COURT: Do you have anything else? 10 MR. RAPPEL: Your Honor, I would only make one 11 point and that is that Mr. Berger does not deny -- Mr. 12 Berger doesn't deny -- nor do I think he can -- that 13 Quickturn has made this inadequacy opinion, naked 14 declaration of inadequacy, the centerpiece of 15 Quickturn's negotiations with shareholders, nor do I hear 16 him denying that your typical shareholder, particularly 17 an institution, institutional or other sophisticated 18 investors own something like 68 percent of Quickturn's 19 stock at last count. They're going to know what the bars 20 are and they are going to know what inadequacy means to 21 them. If you tell them this offer is inadequate, they're 22 going to make some assumptions about where the lines are 23 and where the bars are and that the bar is above the line. 24 That is just not the case here. That's what makes this 25 the rare case. That's what requires disclosure. 34 1 THE COURT: Actually, that brings up again -- 2 I'm back to the question about the protective order and 3 the extent to which information disclosed in litigation 4 is confidential or not confidential. 5 Your affidavit that you filed is under seal 6 or is it not under seal on valuation? 7 MR. RAPPEL: It is under seal, your Honor. 8 THE COURT: That's because it's based on 9 information you received from the other side? 10 MR. RAPPEL: Yes, your Honor. We're doing 11 our best to abide by the protective order. 12 MR. BERGER: Your Honor, one other point here 13 that's relevant. 14 Mentor would not give us, withheld on the 15 basis of a privilege, their similar information. So 16 although now they're pushing for public disclosure of our 17 investment bankers' analyses, it's worth noting that 18 Mentor has an investment banker, too, Solomon Smith 19 Barney, who presumably, if what counsel says is right, is 20 the case, they prepared their same valuation analyses. 21 They have not even given that to us in litigation, never 22 mind seek public disclosure of that. I don't see any 23 public disclosures, Solomon Smith Barney's valuations 24 for Quickturn, and I didn't even see them in connection 25 with the litigation. 35 1 There are two other points that are in their 2 motion. I don't know if your Honor wants to hear 3 argument on those. They didn't mention them much in 4 their reply papers. It concerns the additional 5 disclosures of the repricing of stock options for 6 Quickturn as well as for the analyst's report issued by 7 Hambrecht & Quist in July. 8 THE COURT: I'm happy to hear about them, if 9 you want to pursue them. If you don't, that's okay. 10 MR. RAPPEL: Your Honor, I'd be happy to make 11 a presentation on those. I think I would be derelict if 12 I didn't. 13 THE COURT: Okay. 14 MR. RAPPEL: I will try and be more brief. 15 What we're talking about here is, first of all, an 16 analyst's report that was prepared by the same company 17 that prepared that chart. That is an H&Q analysis or an 18 H&Q analyst prepared a report on July 15 of this year 19 which said that Quickturn stock was quote fully valued, 20 close quote, at 7.50 a share. At about the same time, 21 the Quickturn Board repriced a slew of options. They 22 repriced those at $7.43. And, as a matter of Delaware 23 law, that's not just a reference to the market, that's 24 a determination that the essential value of the company 25 is reflected by that $7.43 price. 36 1 Quickturn's basic response to this is, Who 2 cares? We've already disclosed it. 3 I would submit that there is no reason to 4 suspect that your average shareholder received the 5 Hambrecht & Quist report. I think it's also fair for 6 the Court to conclude that it's unlikely that the 7 average shareholders waded through the 10Q that they 8 filed to get to one of the financial footnotes to read 9 this in little tiny print that they had repriced their 10 options. 11 The shareholders didn't have somebody, like 12 Hambrecht & Quist, to remind them that Hambrecht & Quist 13 had repriced its options. In fact, that's exactly what 14 Hambrecht & Quist did when they prepared their August 17 15 book for the Board. They explicitly referred to the fact 16 that Hambrecht & Quist had issued this opinion saying the 17 company was fully valued at $7.50 a share. 18 Now, the only -- sorry, your Honor. I lost 19 my place for a second. 20 All Quickturn had to do to bring this 21 attention to the attention of shareholders was put a cross- 22 reference in their 14D9 or their proxy statement to the 23 10Q in that footnote or to the Hambrecht & Quist opinion. 24 And, in fact, the Shell opinion, which they cite, held 25 that the disclosure was adequate because shell in that 37 1 case did precisely that. That's at Page 64 of the slip 2 opinion. 3 And you wouldn't know that from reading 4 their characterization of the case in their brief, but 5 that's okay. The key decision on this point is the Texas 6 International case, Bertoglio versus Texas International. 7 There, the Court -- I'm sorry -- there, the company had 8 bad earnings during the first quarter. And they put those 9 earnings in a 10Q and filed it with the SEC, and they also 10 put out a press release. They didn't, however, include it 11 in their supplemental proxy materials for a battle that 12 was going on at the time. 13 And the Court noted that and said that, 14 quote, the supplemental proxy material was sent to Texas 15 International shareholders on May 19. It made no 16 mention of the first-quarter loss, nor did it refer to 17 the form 10Q or the May 15 press release. 18 From that, the Court confronted exactly the 19 argument that Quickturn makes here and concluded, unlike 20 the Total Mix cases relied upon by TI, the press release 21 informed 10Q containing the first-quarter results were 22 not mailed directly to each TI shareholder, nor was this 23 the type of information of which those shareholders were 24 presumably aware. Rather, this was recent news, unknown 25 even to TI management before May 15, disseminated in a 38 1 fashion by TI, that by no means gave fair notice to 2 each shareholder. Accordingly, it is held that TI failed 3 to disclose the fact of the first-quarter loss in this 4 proxy contest. 5 The real risk here is that a material 6 percentage of the shareholders, and perhaps a lot of 7 institutions, just don't know about this H&Q analysis 8 or the repricing of the options. 9 Now, the only other question before the Court 10 is whether those numbers are material. And here, 11 Quickturn argues that the 7.50 and 7.43 figures are 12 simply, in essence, spot quotes on the market. Well, 13 that's just plain wrong with respect to the Hambrecht & 14 Quist report. They said that this company is fully 15 valued at 7.50 a share. That's an assessment of the 16 investment value by the company. And it's also true 17 the option repricing. 18 As a matter of Delaware law, the Quickturn 19 Board would have committed waste if it simply looked to 20 the market and said, Well, gee, the market is down a 21 little bit, let's reprice some options at 7.43. To 22 avoid waste, the Board was required to conclude that 23 that price reflected a fair assessment of the value of 24 the stock on the day the options were repriced. And if 25 7.50 or 7.43 is the real value, even without a control 39 1 premium, then it strongly suggests that Mentor Graphics' 2 offer is fair, because, remember, the fourth bar on the 3 chart is the comparable premium bar. That bar is below 4 Mentor Graphics' offer. 5 Well, if you recalculate that bar based on a 6 7.50 price instead of an $8 price, which was the basis 7 for this bar, the bar is going to be even farther below 8 the Mentor Graphics' line. 9 So I would submit that the shareholders also 10 need to know about the Hambrecht & Quist report and the 11 option repricing, and that the Court ought to order that 12 as well. 13 MR. BERGER: Your Honor, very briefly, because 14 it is late in the day, again, there are so many flaws in 15 the argument, it's hard to know where to begin. 16 To start with, both the option repricing and 17 the analyst's report were fully disclosed. There's no 18 question about that. They were publicly disclosed. The 19 analyst's report came out a few weeks before the offer. 20 It's done by an H&Q research analyst, a lone person who 21 follows the industry. I'm sure your Honor is familiar 22 with analysts' reports. They come out all the time. It 23 is a public document. Anybody these days who has a 24 computer can pick up the analyst's report very, very 25 easily. 40 1 The same is true with disclosure concerning 2 the option repricing. On the one hand, again, Mr. Rappel 3 says that we've got sophisticated institutional investors 4 who own a fair amount of Quickturn. On the other hand, he 5 says they're probably not aware of what's going on. 6 The option repricing was in Quickturn's 10Q. 7 It was filed the day after Mentor mentioned its tender 8 offer. It's disseminated to shareholders through, again, 9 easily picked up through the Internet. 10 We're arguing your Honor, could anyone on a 11 computer easily go into Edgar and pick it up? And 12 that's what shareholders do. The issue of option 13 repricing in particular is always a very important issue 14 for institutions. They are well aware of it. Indeed, 15 in this instance, the Quickturn disclosure on the option 16 repricing made clear we're not going to reprice options, 17 again absent shareholder approval, precisely because the 18 institutions care so much about this issue. 19 And, again, we look for factual arguments as 20 to how either the analyst's report or the option 21 repricing value of the company are some indication of 22 the value of Quickturn as a whole in a sale. There is 23 none. It's completely -- it's totally again lawyers' 24 rhetoric. It's completely apart from the undisputed 25 record. 41 1 That record, whether it's testimony of Mr. 2 Cleveland, the H&Q representative, who talked at length 3 about the H&Q report, made clear why his -- his differ. 4 Made clear there's an ethical wall between the analyst's 5 team on the one hand and the banking team on the other. 6 Made clear that the banking team has access to non-public 7 material financial information that the analyst obviously 8 does not have and explained in very clear and lucid terms 9 why there's a difference in valuations, to the extent 10 there is a difference. Analysts look at very short-term 11 stock price. An investment banker valuing their company 12 as a whole looks at very different factors. The same 13 with option repricing. The notion that option repricing 14 represents anything more than a repricing to the value of 15 the stock on a particular day is ludicrous. 16 I hear Mr. Rappel saying that there is some 17 claim out there for corporate waste, if it doesn't do 18 something. Again, I don't see any stockholder suing us 19 for corporate waste. I don't see Mr. Rappel -- this is 20 not a corporate waste case. This is a disclosure claim. 21 And the disclosure claim here is that we didn't disclose 22 the repricing of options. 23 But that claim is just false because we did, 24 in fact -- and it's a matter of public record -- 25 disclose the day after the tender offer was made in our 42 1 filing with the SEC, which is distributed on the Internet, 2 the full facts about the option repricing. 3 I guess in summary, your Honor, when you look 4 at Mentor's arguments, all of Mentor's arguments are 5 based upon the factual speculation of its attorneys. 6 There is no factual record to support either the theory 7 that H&Q's analyses are improper or the argument that the 8 analyst's report somehow shows the value of the company, 9 or that the repricing of options somehow shows something 10 other than the price of the stock on that day. There is 11 no factual support anywhere for any of those arguments, 12 and yet that's the linchpin of all of their claims for 13 additional disclosure. 14 Until they get some facts to support that and 15 the undisputed facts are clear. I mean, it's not even a 16 situation where we have differing facts, which I suggest 17 to your Honor is not a basis for an injunction, because 18 they have not shown a likelihood of success on the merits. 19 Here, the undisputed facts are all to the contrary. And 20 all they've got against it is the rhetoric of their 21 counsel. That is not a basis for an injunction. That's 22 it, your Honor. 23 THE COURT: Do you want to take a minute and 24 just tell me where we are in the dispute between the 25 parties? What's going on? Chancery Court -- 43 1 MR. BERGER: Our motion for summary judgment 2 is to be heard tomorrow, your Honor. We're looking 3 forward to that hearing. There are a couple of other 4 motions to be heard on that and then we're back before 5 this Court again on the 21st in connection with our 6 motion for preliminary injunction. We've scheduled a 7 shareholder meeting for January 8th, 1999. We 8 pre-released our earnings and revenues for the quarter. 9 It is a public release. They beat market expectations. 10 And one of the largest and most sophisticated 11 institutional investors, the state of Wisconsin 12 Investment Board, has come out too and said they believe 13 the offer is inadequate and that they are not tendering 14 their shares to the offer. They are our second-largest 15 shareholder and I believe they're Mentor's second- 16 largest shareholder. They are not tendering. 17 THE COURT: Do you have any additional 18 information? 19 MR. RAPPEL: The largest shareholder is 20 urging Mentor Graphics to negotiate. I believe the State 21 of Wisconsin Investment Board does not know about these 22 charts. And my concern is that, if they don't see these 23 charts, we may not be able to change their mind. I 24 think there's an extremely high likelihood that if we 25 can show them these charts, if we can show them the H&Q 44 1 performed analyses that skewed these bars as best we 2 could and we still come up hitting right through the 3 middle of them, that they would think twice about 4 characterizing our offer as inadequate and think twice 5 about not tendering their shares. 6 THE COURT: I appreciate your presentation. 7 I will let you know. I will turn this off. I will see 8 people when I see you. 9 MR. BERGER: Thank you, your Honor. 10 (Hearing concluded at 5:15 p.m.) 11 - - - 12 13 14 15 16 17 18 19 20 21 22 23 24 25 EX-11.(A)(29) 3 EX. 11(A)(29) 1 1 IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE 2 IN AND FOR NEW CASTLE COUNTY 3 MENTOR GRAPHICS CORPORATION, : an Oregon corporation, MGS : 4 CORP., a Delaware corporation, : : 5 Plaintiffs, : : 6 vs. : Civil Action : No. 16584 7 QUICKTURN DESIGN SYSTEMS, INC., : a Delaware corporation, KEITH R.: 8 LOBO, GLEN M. ANTLE, RICHARD C. : ALBERDING, MICHAEL R. D'AMOUR, : 9 YEN-SON (PAUL) HUANG, DR. DAVID : K. LAM, WILLIAM A. HASLER, and : 10 CHARLES D. KISSNER, : : 11 Defendant. : 12 - - - 13 Chancery Courtroom No. 106 Herrmann Courthouse 14 Wilmington, Delaware Wednesday, October 7, 1998 15 10:19 a.m. 16 - - - 17 BEFORE: HON. JACK B. JACOBS, Vice Chancellor. 18 - - - 19 ARGUMENT ON VARIOUS MOTIONS 20 21 - - - 22 23 CHANCERY COURT REPORTERS 135 Herrmann Courthouse 24 Wilmington, Delaware 19801 (302) 577-2447 2 1 APPEARANCES: KEVIN G. ABRAMS, ESQ. 2 THOMAS A. BECK, ESQ. CATHERINE G. DEARLOVE, ESQ. 3 LISA A. SCHMIDT, ESQ. J. TRAVIS LASTER, ESQ. 4 THAD J. BRACEGIRDLE, ESQ. LEANNE REESE, ESQ. 5 DOMINICK GATTUSO, ESQ. Richards, Layton & Finger 6 -and- FREDRIC J. ZEPP, ESQ. 7 CHRISTOPHER L. KAUFMAN, ESQ. MARC W. RAPPEL, ESQ. 8 of the California Bar Latham & Watkins 9 for the Plaintiffs 10 KENNETH J. NACHBAR, ESQ. WILLIAM M. LAFFERTY, ESQ. 11 Morris, Nichols, Arsht & Tunnell -and- 12 DAVID J. BERGER, ESQ. JILL L. NISSEN, ESQ 13 of the California Bar Wilson Soncini Goodrich & Rosati 14 for the Defendants 15 - - - 16 17 18 19 20 21 22 23 24 3 1 THE COURT: Good morning. 2 MR. NACHBAR: Good morning, Your 3 Honor. There are, I think, three motions this 4 morning, a motion for summary judgment, a motion to 5 compel and a motion to strike. I guess I would seek 6 the Court's guidance on how to proceed. It struck me 7 that the motion to strike perhaps ought to be heard 8 first, because that, conceivably, could impact the 9 summary judgment motion. 10 The motion to compel probably should 11 be heard last, I would think, since if Your Honor 12 were to grant summary judgment, that motion would be 13 moot. 14 THE COURT: I agree with you. We had 15 scheduled -- I thought we scheduled the motion to 16 compel for this afternoon, depending on the outcome 17 of this motion. 18 MR. NACHBAR: I think there was some 19 confusion, but I think Your Honor has just clarified 20 it. We appreciate that. 21 THE COURT: But I would like to hear, 22 first, the motion to strike. 23 MR. NACHBAR: Yes, Your Honor. 24 THE COURT: Before we proceed, 4 1 however, are there any introductions? 2 MR. MONHAIT: Yes. 3 MR. ABRAMS: Good morning, Your 4 Honor. I would would like to introduce to the Court 5 three of my colleagues from Latham & Watkins. 6 Mr. Jack Zepp, Mr. Christopher Kaufman and Mr. Marc 7 Rappel are with me today. 8 THE COURT: Good morning, gentlemen. 9 MR. MONHAIT: Your Honor, I've 10 submitted a motion for the pro hac vice admission of 11 Stanley Bernstein, on behalf of plaintiff Howard 12 Shapiro. 13 THE COURT: Very well. 14 MR. MONHAIT: Thank you, Your Honor. 15 MR. NACHBAR: Your Honor, I would 16 like to introduce David Berger and Jill Nissen, of 17 the firm Wilson, Soncini Goodrich & Rosati. Mr. 18 Lafferty, you know. 19 The motion to strike relates to a 20 document entitled "Affidavit of Erich Barke," I guess 21 he pronounces it. In fact, that document is not an 22 affidavit. It's a statement. It's not under oath. 23 It's not under penalty of perjury. It's undated. We 24 don't know where it was signed. The signature wasn't 5 1 witnessed. In the eyes of the law, it's a piece of 2 paper, nothing more. 3 Moreover, it's not even clear that 4 Mr. Barke even knew that his quote/unquote statement, 5 which is what he calls it, was going to be used in 6 any court proceeding. 7 THE COURT: You are saying that the 8 document that was filed with the Court has no 9 signature? 10 MR. NACHBAR: It has a signature. 11 THE COURT: But no acknowledgement. 12 MR. NACHBAR: No acknowledgement. 13 Correct. And it's -- I don't know the exact number 14 of pages. What it consists of is a cover page that 15 bears a Richards, Layton & Finger tag line, word 16 processing tag line, that says "Affidavit." The 17 second -- it's unfaxed. It was printed here in 18 Wilmington, it appears. 19 The next several pages, two or three 20 pages, whatever it is, appear to have been faxed from 21 somewhere in Europe. And those are entitled 22 "Statement." No affidavit, nothing. No caption. 23 Nothing to indicate that it was being used in court. 24 And it's a three-page or four-page signed statement 6 1 with some cross-outs in it. There is a signature. 2 It's not under penalty of perjury. It's not under 3 oath. It's not signed before a notary. It's not 4 dated. 5 The final page is a certificate of 6 service, which again has a Richards, Layton & Finger 7 tag line and is a nonfaxed page. It appears that the 8 only thing that -- assuming Mr. Barke in fact signed 9 this, which -- we don't have much reason to trust 10 that, or believe it, but assuming he did, it appears 11 what happened is that somebody either sent him some 12 prepared statement or he prepared some statement. 13 Who knows under what circumstances? Who knows for 14 what purpose? Who knows what he was told? It 15 doesn't appear, at least from the face of the 16 document, that he knew that it was going to be used 17 in court. 18 THE COURT: Well, would it matter if 19 he knew? 20 MR. NACHBAR: I think it would. I 21 think if you know that something is being used -- 22 THE COURT: Would it matter if he 23 knew that the document did not have a formal 24 notarization or acknowledgement? 7 1 MR. NACHBAR: No. I think either 2 way, it's inadequate as a matter of law. At least if 3 he knew it was being used in court, there would be at 4 least some indicia of trustworthiness beyond what you 5 have got. You have now -- doesn't even -- he didn't 6 even know it was being used in court, apparently. 7 I agree with Your Honor. The rules 8 are clear. Rule 56 speaks of affidavits. We all 9 know how one does an affidavit. There is a Delaware 10 statute, I believe, that talks about being under 11 penalty of perjury or under oath. For one reason or 12 another, that wasn't followed here. 13 I would also point out that the 14 statement itself isn't very momentous. At most, it 15 says that one director, who's the only nonindependent 16 director on this eight-person board, took a position 17 saying that he didn't want to sell the company. We 18 don't know too much about the context of that, or 19 what he meant. 20 THE COURT: Obviously, it's momentous 21 enough to be the subject of a motion to strike. 22 MR. NACHBAR: Yes, it is. And my 23 only point is that there were seven other people on 24 that board who are independent outside directors. 8 1 THE COURT: Fine. But that goes to 2 the merits. 3 MR. NACHBAR: I agree. 4 THE COURT: That doesn't go to your 5 technical motion. 6 MR. NACHBAR: That is correct, Your 7 Honor. I simply wanted to point that out. The point 8 is that this is a piece of paper, totally unsworn. 9 It's just not acceptable. 10 The other thing that I will say for 11 the record is that I have been informed that 12 Mr. Barke intends to make some further submission, 13 that he is going to make simultaneously to both 14 sides, that I understand is going to withdraw the 15 statement that he has already made. And I guess 16 we'll see that further submission when he makes it. 17 THE COURT: Very well. Are you -- is 18 your motion also addressed to the Mentor Graphics 19 answering brief, or not? 20 MR. NACHBAR: It is. I will let our 21 papers speak to that. I think that's peculiarly for 22 the Court. I don't think I have anything to add to 23 what we have already said. 24 THE COURT: All right. 9 1 MR. NACHBAR: Thank you. 2 MR. LASTER: Good morning, Your 3 Honor. Travis Laster, on behalf of Mentor Graphics, 4 to address the issues raised by the motion to strike. 5 First -- 6 THE COURT: Have you filed a written 7 response to the motion to strike? 8 MR. LASTER: Yes, Your Honor. We 9 filed at the end of the day yesterday. 10 THE COURT: I never got it. 11 MR. LASTER: A courtesy copy was sent 12 to Your Honor this morning. I apologize if it didn't 13 arrive at your office prior to this proceeding, but 14 it was sent over. 15 THE COURT: Well, as I said, I never 16 received it. And it might be more orderly if I could 17 take some time to read it. 18 MR. LASTER: Certainly, Your Honor. 19 I could hand up a copy right now? 20 THE COURT: All right. All right. 21 At the risk of delaying this proceeding, but in order 22 to make it more orderly, I'm going to recess for ten 23 minutes. 24 MR. LASTER: That's fine, Your Honor. 10 1 Thank you. 2 (Recess at 10:29 a.m.) 3 MR. LASTER: Your Honor, once again, 4 Travis Laster, to address the motion to strike. I 5 would like to begin by apologizing to the Court. 6 Mentor's answering brief did exceed the page 7 limitation set forth in Section -- in Rule 171. A 8 motion to exceed page limitations should have been 9 filed. It was not. 10 THE COURT: Why not? 11 MR. LASTER: It was counsel's 12 oversight, Your Honor. Clearly should have been, and 13 we apologize to the Court for that oversight. I 14 would simply point out that we did believe that the 15 additional pages were necessary to address the issues 16 contained in the briefs. 17 The opening brief of Quickturn 18 contained repeated statements that there was no 19 record evidence on certain issues. As shown by the 20 more than five hundred cites in our answering brief, 21 there indeed was ample record evidence on those 22 issues. And by containing that information in the 23 answering brief, we avoided the need to submit 24 detailed factual affidavits in support of our brief. 11 1 THE COURT: Was this brief printed? 2 It looks like it was. 3 MR. LASTER: Yes, Your Honor. It was 4 printed. That's actually an ironic result. The 5 printing actually increased the length of the brief, 6 because rather than being printed in twelve point 7 type -- rather than in eleven point type, it was 8 printed in twelve point type. It wouldn't change the 9 final violation of 171. It would have weighed in at 10 about 70 pages. But yes, Your Honor, that is what 11 happened. 12 THE COURT: Well, it's impossible for 13 me to translate a single -- an 86-page single-spaced 14 brief into the length that would have resulted had 15 the brief been filed in conformity with the rules 16 requiring double space and whatever the typeset 17 normally is. But what I do not understand is why, 18 since your firm, which practices before the Court all 19 the time and is certainly cognizant of the rule, did 20 not take the trouble to inform the Court in advance 21 of what it was doing. 22 MR. LASTER: Yes, Your Honor. 23 THE COURT: I appreciate the apology, 24 but I would like some explanation. 12 1 MR. LASTER: Rule 171 does provide 2 for printed briefs. But Your Honor is exactly right, 3 that a motion to exceed page limitations should have 4 been filed. 5 All I can say is that in the pressure 6 of preparing the brief, it was overlooked. And 7 certainly, this will be something that I, personally, 8 having had the privilege to stand before Your Honor 9 right now, will certainly remember in the future and 10 make sure that it's -- that a motion to exceed page 11 limitations is filed if ever there is a risk that we 12 would be exceeding the requirements of the rule. 13 THE COURT: All right. Would you 14 address the affidavit? 15 MR. LASTER: Yes, Your Honor. The 16 second issue raised by Quickturn's motion is a 17 request that the Court strike the affidavit of Erich 18 Barke. As counsel mentioned in his presentation, 19 Quickturn believes that the affidavit -- contends 20 that the affidavit is not momentous. We suggest to 21 Your Honor that it is indeed momentous, that it goes 22 directly to Mr. -- 23 THE COURT: It isn't relevant whether 24 it's momentous or not. The question is: Does it 13 1 conform to the technical requirements? 2 MR. LASTER: That's correct, Your 3 Honor. That's correct. Passing over the substance 4 of the affidavit, we do believe that it conforms to 5 the technical requirements. There are two rules on 6 point. Those are Rules 43 and 56 of the Court of 7 Chancery rules. Rule 56(e) provides that supporting 8 affidavits "shall be made on personal knowledge, 9 shall set forth such facts as would be admissible in 10 evidence, and shall show affirmatively that the 11 affiant is competent to testify to the matters stated 12 therein." We meet -- I'm sorry. 13 The affidavit submitted, Your Honor, 14 meets each of these three requirements. First, the 15 affidavit makes clear that Professor Barke made his 16 statements based on personal knowledge. Indeed, 17 paragraph one of the affidavit, Professor Barke 18 states, "The following true statements are based on 19 my personal knowledge." 20 Doctor Barke also was a party to the 21 conversation about which his affidavit deals. And 22 under the Ayres v. Jacobs case, which we cited in our 23 papers, that is sufficient to meet that first 24 requirement. 14 1 The second issue is whether the 2 affiant is competent to testify to the matters stated 3 therein. Again, we don't believe there is any 4 dispute over Doctor Barke's competence. He has 5 firsthand knowledge of the statements. And indeed, 6 I'm informed that Quickturn was engaged in desperate 7 efforts over the weekend to get Doctor Barke to 8 submit additional statements. 9 Given that fact, I don't think that 10 his competence can be in dispute. Moreover, he is a 11 distinguished professor at a major research 12 institution. He gives scholarly presentations on EDA 13 issues all the time. He is knowledgeable about the 14 subject matter of his affidavit, and he is affiliated 15 with Quickturn. 16 THE COURT: Suppose Doctor Barke had 17 been called as witness, to testify as a witness in 18 court in this case, about the subject matter of his 19 affidavit or statement, whatever it may be, and he 20 was not put under oath but simply started talking 21 from the witness stand. Would that statement be 22 admissible in evidence? 23 MR. LASTER: Your Honor, that goes to 24 the second rule that governs this issue, which is 43 15 1 sub (d). I understand that for an actual witness 2 giving oral testimony it's sufficient if the witness 3 solemnly declares that his statement is true. And -- 4 THE COURT: Does he solemnly declare 5 that his statement is true in the affidavit? 6 MR. LASTER: Your Honor, we believe 7 he does within the requirements of 43(d), which set 8 forth what an affidavit should contain. Doctor 9 Barke, in paragraph one of his affidavit, says "The 10 following true statements are based on my personal 11 knowledge." Now the language of Rule 43(d) is 12 slightly more elaborate and includes adverbs such as 13 solemnly, but this Court has repeatedly eschewed any 14 requirement that magic words be included to validate 15 a legal act that is otherwise clear on its face. 16 We submit that Doctor Barke's 17 statement that "these statements, based on my 18 personal knowledge, are true" is sufficient within 19 the requirements of Rule 43(d). 20 Now Delaware does not have a statute 21 that requires that an affidavit be made under penalty 22 of perjury or under oath. We looked for a statute. 23 There is no such requirement. There is a federal 24 statute on point, but this is an issue of state law, 16 1 an issue of Delaware law. Under Delaware law, we 2 submit that Rule 43(d) sets the standard and that 3 Doctor Barke has met that standard. 4 THE COURT: How do I know that the 5 signature is Doctor Barke's? 6 MR. LASTER: Your Honor, there are 7 two points on that. First, we would submit that the 8 circumstantial guarantees of trustworthiness 9 evidenced by the affidavit are sufficient. It has a 10 fax stamp from Germany. It was submitted by 11 Richards, Layton & Finger. We spoke to Doctor Barke 12 personally. We sent it to Doctor Barke. We got his 13 signature. We then submitted it to the Court. 14 Also, I don't think that, really, the 15 issue of Doctor Barke's signature is in dispute; once 16 again, because Quickturn has made such diligent 17 efforts to get Doctor Barke to recant his testimony. 18 They have been contacting him desperately over the 19 weekend. 20 I don't think there is any doubt 21 between the parties that this is Doctor Barke's 22 statement. The only question is whether, as a 23 technical matter, the statement complies with the 24 rules. And we submit that because it meets each of 17 1 the requirements of Rule 56, as well as the 2 requirements of Rule 43, that indeed it does. 3 THE COURT: All right. 4 MR. LASTER: Thank you, Your Honor. 5 MR. NACHBAR: Your Honor, I think 6 this matter is pretty simple. Rule 56(e) provides 7 that supporting and opposing affidavits -- that's the 8 word it uses -- shall be made on personal knowledge. 9 While there is no statute, there are cases that we 10 have cited. There is common law in Delaware. There 11 is a federal statute. 12 Everybody knows that an affidavit is 13 a statement made under oath or under penalty of 14 perjury, signed before a notary. That wasn't done 15 here. The statement doesn't even purport to be an 16 affidavit. It is not an affidavit. And if it were 17 intended to be an affidavit, it would have been very 18 easy to contact Mr. Barke over the weekend and say, 19 "Gee, we forgot to tell you that you have to sign in 20 front of a notary. Would you please do so?" 21 Obviously, that didn't happen. 22 We don't know what this piece of 23 paper is, but under the eyes of the law, it's a piece 24 of paper, and nothing more. 18 1 THE COURT: Is there a dispute about 2 the signature? The argument that was advanced -- the 3 point was made that your side tacitly concedes that 4 Mr. Barke, Doctor Barke, signed the statement. 5 MR. NACHBAR: I have no idea if 6 Doctor Barke signed that statement or not. I have no 7 reason to believe that he did and no reason to 8 believe that he didn't. 9 THE COURT: All right. Well, having 10 read the Barke affidavit -- statement and the briefs 11 on this issue, I am inclined to agree with the moving 12 party, that this affidavit does not satisfy the 13 requirements of an affidavit under the rules of this 14 Court. It is not under oath or penalty of perjury. 15 It was not notarized. That is, there is no 16 notarization that attests to the genuineness of the 17 signature. 18 While all of that may be technical, 19 the rules of evidence themselves are technical, but 20 for good reason. Courts render judgments on behalf 21 of and against parties based on evidence. And the 22 sanctity and respect that judgments of this Court or 23 any court are entitled to necessarily depends on the 24 fundamental reliability of the evidence that's 19 1 considered by the Court. 2 For that reason, I feel that there is 3 no choice but to strike the affidavit of Doctor 4 Barke. It would also follow that the Court will not 5 consider whatever arguments are made that are 6 predicated on Doctor Barke's statement. 7 With respect to the plaintiffs' 8 brief, clearly it was filed in violation of our rule 9 that deals with space limitations, and there was no 10 effort made to obtain the expressed permission of the 11 Court to do that. I understand that there were 12 reasons for exceeding the page limit, and had the 13 Court been apprised of the problem and the reasons 14 that are now being argued, at least the Court would 15 have had time to consider what it would do. 16 But under these circumstances, and 17 because the Court is not in a position to sanction a 18 violation of rules without excuse, particularly rules 19 that are designed to ameliorate the burden imposed on 20 the Court by overly long briefs in the expedited 21 proceedings which we are involved in -- and we are 22 involved in many -- the Court feels that it is 23 likewise constrained to grant the relief requested. 24 However, it will do that without -- under certain 20 1 conditions. 2 First, any order striking the 3 plaintiffs' brief will not be entered until after the 4 oral argument. That is, for purposes of the oral 5 argument, the brief will be considered, because the 6 Court has read it. And therefore, the plaintiffs may 7 make whatever argument they see fit, based on the 8 contents of that brief. 9 Secondly, the Court will afford the 10 plaintiffs a reasonable time to withdraw the brief 11 and to substitute a brief that is in compliance with 12 the rule. And we can discuss later what the page 13 limitation should be. While the Court has expressed 14 its inclination -- that is, expressed its inclination 15 to grant the motion, the form of the relief that is 16 granted may be, simply, an order allowing the 17 withdrawal of this brief and the substitution of a 18 brief that is in conformity with the rules. But 19 that's a matter we will attend to later. 20 Anything further before we commence? 21 MR. NACHBAR: Nothing further, Your 22 Honor. 23 MR. ABRAMS: Your Honor, the 24 plaintiffs have pending before the Court a motion in 21 1 limine dealing with the references by the defendants 2 to the act of consulting with counsel. If 3 Mr. Nachbar were to agree now that there will be no 4 references in the argument to any consultation or act 5 of dealing with the attorneys at the Wilson, Soncini 6 firm, I'm prepared to proceed with the summary 7 judgment motion and defer that issue until this 8 afternoon. 9 THE COURT: Mr. Nachbar, I haven't 10 read the motion in limine, quite frankly. I thought 11 that it was an issue that was outside the scope of 12 the summary judgment proceedings. Am I correct on 13 that, or not? 14 MR. NACHBAR: I think it was served 15 late and that it was not on the agenda for today. I 16 can say that I -- it is not a central portion of our 17 defense that we relied on advice of counsel. I think 18 it is one of a number of factors that I may mention, 19 but I don't think it will have any prominence in any 20 argument that I make today. 21 THE COURT: If it was alluded to in 22 your briefs, I just don't recall it, but there are a 23 lot of things I don't recall. 24 MR. NACHBAR: Again, Your Honor, I 22 1 think it's one of a number of factors. I think it 2 probably was alluded to in our brief, and I'm not 3 surprised that Your Honor doesn't particularly recall 4 it, because it's not something that we featured 5 prominently. 6 THE COURT: All right. 7 MR. ABRAMS: The motion was filed on 8 Friday, and I believe we now have an understanding 9 that the fact of referring to counsel or consulting 10 with counsel is not going to be alluded to today, and 11 we are content to allow Your Honor to decide the 12 motion at such time as Your Honor deems appropriate 13 prior to the summary judgment ruling. 14 MR. NACHBAR: One other point, Your 15 Honor. I'm reminded that we did get a call from Your 16 Honor's secretary yesterday, saying that it would not 17 be heard today, the motion in limine. 18 THE COURT: That was my 19 understanding. But it was because I didn't think 20 that the parties had in mind presenting it today, not 21 because I was trying to dictate what would be heard. 22 I gather that is -- that's at least what Mr. Abrams' 23 side had in mind, and I gather you have no objection 24 to that. 23 1 MR. NACHBAR: We have no objection to 2 it being put off to a later time. 3 THE COURT: Very well. 4 MR. ABRAMS: Subject to the 5 conditions I've expressed, that is acceptable to the 6 plaintiffs, Your Honor. 7 MR. NACHBAR: Again, I mean, I may 8 mention the fact that counsel was involved, but I 9 don't really think that is disputed. I mean Your 10 Honor will do with that whatever Your Honor wishes. 11 THE COURT: All right. 12 MR. NACHBAR: Your Honor, the first 13 sentence of Mentor's brief states as follows: "This 14 case raises fundamental questions regarding the 15 ultimate allocation of power within a Delaware 16 corporation between stockholders and directors." 17 We agree with that. For over a 18 hundred years, Delaware courts have struck a balance 19 between the ability of corporate management to manage 20 companies and the ability of stockholders to take 21 action qua stockholders. 22 In the earlier years it came up 23 primarily in things like derivative suits. In the 24 past twenty years, in the context of the takeover 24 1 boom, there has been particular emphasis on 2 preserving this delicate balance. 3 The Court and commentators have 4 recognized that directors do have a role to play in 5 hostile offers. Moreover, allowing a board to 6 fulfill that role has been found by this Court and 7 the Delaware Supreme Court to benefit stockholders 8 and to enhance shareholder value. 9 This Court had occasion to comment on 10 that in the recent Toll Brothers case. There, the 11 Court struck down a dead-hand rights plan. In so 12 doing, the Court recognized that defensive 13 measures -- that delay measures have been upheld. 14 Those that preclude takeovers have generally been 15 not. Toll Brothers is surely a rational balancing 16 point. 17 Some commentators, some 18 practitioners, have said that Toll Brothers goes too 19 far and shifts the pendulum in favor of insurgents, 20 but I don't think that such criticism is warranted. 21 Indeed, permitting unlimited dead hands might make 22 companies takeoverproof, which clearly would not be 23 an appropriate balancing point. 24 But Mentor now seeks to swing the 25 1 pendulum completely in the other direction, 2 completely to the insurgent's side. It seeks a 3 regime under which at least once a year, for all 4 companies, and constantly for any company that, like 5 Quickturn, permits stockholders to call a special 6 meeting, a hostile offerer can elect its own nominees 7 and consummate its offer, and the incumbent board is 8 essentially defenseless. Moreover, it asks the Court 9 to dismantle defenses at a time when it indicates 10 that it's considering higher offers, or might 11 consider higher offers, and hasn't necessarily even 12 put its best offer forward. 13 The implications of this new regime 14 would be a radical departure from our Court's 15 takeover jurisprudence and would have staggering 16 consequences both in the world's perception of 17 Delaware law and in the underlying reality. 18 We know that in contested elections, 19 10 to 20 percent of the shares are typically not 20 voted. What Mentor seeks now is a regime in which an 21 offeror can plan its offer months in advance, as the 22 undisputed record shows that Mentor did here, and 23 then strike at any time with a hostile offer, a proxy 24 solicitation, litigation in two courts, all of which 26 1 Mentor did here within 24 hours, and according to 2 Mentor, its 45-day blitzkrieg can be successful. And 3 if the offeror happens to own 15 percent of the 4 company, for example, and 80 percent of the 5 stockholders show up, then they only need an 6 additional 25 percent to prevail. So under their 7 regime, an offer, blitzkrieg 45-day offer, will 8 succeed if as few as 25 percent of the public shares 9 favor it. 10 And in Mentor's world, the incumbent 11 board would be powerless even to slow down the 12 insurgents, unless perhaps, maybe, if it immediately 13 agreed to auction the company, they might concede 14 that you could slow things down for a month or two 15 months. That's not the balance that Delaware law has 16 followed to date, and it shouldn't be the balance 17 going forward. 18 Now we are here today on Quickturn's 19 motion for summary judgment. There has been an 20 extensive discovery record. It shows beyond any 21 factual dispute, first, that Quickturn's board fully 22 considered Mentor's offer over three lengthy 23 meetings, got advice from professional advisors, 24 selected with reasonable care, as contemplated by 27 1 Section 141 of the Delaware Code. 2 Second, the Quickturn board 3 determined that Mentor's offer was inadequate, and 4 was also contrary to the best interests of 5 Quickturn's stockholders, and posed a threat to 6 corporate policy and effectiveness; 7 Third, that the Quickturn board took 8 the two defensive actions that I think here are 9 undisputed, the bylaw amendment and the rights plan 10 amendment. The effect of these, either alone or 11 together, is neither preclusive, nor coercive. 12 THE COURT: Well, doesn't that depend 13 on the factual circumstances? 14 MR. NACHBAR: Yes, it does, but the 15 facts are undisputed, as I'll explain in a moment. 16 There is no record evidence that this will coerce or 17 preclude anybody. Indeed, the record out of 18 Quickturn's own -- I'm sorry -- out of Mentor's own 19 mouths is that these things are not coercive or 20 preclusive. 21 THE COURT: Suppose there were 22 evidence that offers that are required to be held 23 open as long as nine months create financial burdens 24 and financial risks on bidders, with the result that 28 1 in most cases, bidders are forced to drop the offer? 2 MR. NACHBAR: Well -- 3 THE COURT: Suppose there is factual 4 evidence on that point. 5 MR. NACHBAR: I suppose -- I'm trying 6 to think of this, because you are asking a 7 hypothetical that isn't this case. Moreover, you are 8 asking a hypothetical about cases generally. 9 THE COURT: The other side says it is 10 this case. They say there is evidence. We'll find 11 out whether that's right. But if there is -- 12 assuming that there is, don't we have a factual issue 13 that would have to be tried? 14 MR. NACHBAR: If they had evidence 15 that in this case stockholders were going to be 16 coerced or there was going to be -- their offer were 17 going to be precluded and we had contrary evidence, 18 then I think you would have a factual dispute. 19 Again, I mean, you know, there has to 20 be at least evidence that rises to a Rule 56 21 threshold. They could have put in an affidavit of 22 their proxy solicitor. They chose not to do that. 23 They could have put in an affidavit of their banker. 24 They didn't do that, because their banker said that 29 1 the money will be available. They could have put in 2 an affidavit of their financial advisor. But again, 3 they didn't do it, because the fact of the matter is 4 that their offer will still be here in July. I'll 5 get to that and explain why that's the case and why 6 the record shows that. 7 So there isn't a factual dispute. I 8 mean the other side makes lawyers' arguments about 9 what might happen in some other case, but that's not 10 this case. Here, there is no factual dispute. We 11 are only dealing with one offer. We are dealing with 12 Mentor's offer. 13 THE COURT: All right. Just so the 14 record is clear, your contention that there is no 15 factual dispute essentially rests on what your side 16 contends is the absence of any evidence that the 17 nine-month delay that's built into the combined 18 poison pill and bylaw amendment -- that there is no 19 evidence that that delay would preclude the offer by 20 creating unacceptable risk to the bidder. 21 MR. NACHBAR: Correct. No evidence 22 sufficient to meet the Rule 56 standard. I mean 23 again -- 24 THE COURT: Does that mean no 30 1 evidence, or does that mean some evidence, but not 2 good enough? 3 MR. NACHBAR: Well, it means no 4 credible evidence within the parameters of Rule 56. 5 Let me give you an example. 6 If somebody speculates, "Well, under 7 certain circumstances I haven't thought about, it 8 could have some effect," that's not evidence to 9 overcome Rule 56. That's speculation. So in Your 10 Honor's question, is that some evidence, I don't 11 know, because I don't know what is in Your Honor's 12 head. I do know that that's not evidence sufficient 13 to create a factual dispute under Rule 56. That's 14 the distinction I'm drawing, because our motion is 15 under Rule 56. 16 One other thing that I note. That is 17 that the plaintiffs have not cross-moved for summary 18 judgment. There is, thus, substantial corroborating 19 evidence that Quickturn could have submitted, but did 20 not, as there are no factual disputes. In our 21 judgment, anyway, such submissions are not necessary 22 at this juncture. If the case goes forward, 23 obviously, there would be a lot more evidence. 24 THE COURT: I'm not sure what 31 1 inference you are asking me to draw from the fact 2 that there was no cross-motion for summary judgment. 3 MR. NACHBAR: I'm not asking for any 4 inference whatsoever. I'm simply pointing out that 5 if the motion were to be denied, I don't think the 6 Court is in a position to grant summary judgment to 7 the other side on any issues, because they haven't 8 moved for summary judgment, and we haven't submitted 9 affidavits that we no doubt would have submitted had 10 they so moved. 11 Turning now to the merits, Your 12 Honor, the board fully considered Mentor's offer. 13 That's undisputed. It had ten days under the federal 14 securities laws to file a 14D-9 setting forth its 15 response. 16 In that time period, there were three 17 lengthy meetings. The company hired advisors. There 18 is no real dispute that the advisors were chosen with 19 care. The record, again undisputed, reflects there 20 was extensive discussion about who to hire. And 21 there were certainly good grounds for retaining the 22 advisors who were retained. 23 THE COURT: Let me just focus on one 24 part of that record, although this may trail off into 32 1 the subject matter of the motion to compel. 2 Were minutes prepared for the three 3 meetings that you just referred to? 4 MR. NACHBAR: Yes, they were, Your 5 Honor. 6 THE COURT: Are they in the record? 7 MR. NACHBAR: Yes, they are. I can 8 get you the appendix cites, but they are in our 9 appendix and, no doubt, the other side's appendix, as 10 well. 11 THE COURT: All right. So the record 12 would include the minutes of those meetings, whatever 13 documents were shown to the board at those meetings? 14 MR. NACHBAR: Correct. 15 THE COURT: And the depositions of 16 whichever directors were taken -- 17 MR. NACHBAR: Correct. 18 THE COURT: -- in connection with 19 those meetings? 20 MR. NACHBAR: That is correct. 21 THE COURT: All right. 22 MR. NACHBAR: The record also 23 contains the 14D-9, which is the direct result of 24 that series of three meetings, that communicates to 33 1 the stockholders the actions that the board took. 2 There is also no dispute that eight 3 of the nine -- I'm sorry -- seven of the eight 4 members of Quickturn's board are independent, outside 5 directors. Their qualifications are listed at the 6 outset of our opening brief. And it is a strong 7 board. There are several CEOs. There are 8 distinguished people. 9 The other side doesn't contest the 10 facts. What they claim is that a legal conclusion is 11 that members who were recently added to the board are 12 somehow disqualified, and so they try to disqualify 13 two people that way. And they claim somehow that 14 former officers of the company, one of whom resigned 15 in 1995 and one of whom resigned in 1997, are also 16 not independent. 17 The case law doesn't support either 18 of those. On the former point, they cite no cases. 19 On the later point, they cite a case where in a 20 settlement, in dicta, the Court mentioned in passing 21 that the board was independent because ten of its 22 fourteen members were neither former nor present 23 officers of the company. Hardly a holding. 24 We, on the other hand, cite two cases 34 1 that expressly hold that former officers are 2 independent in the context of responding to a 3 takeover bid. Of course, that is the logic of what 4 constitutes an independent director. Somebody who 5 doesn't have a personal financial interest is 6 independent. And the fact that Mr. D'Amour, for 7 example, may have founded the company, and may have 8 been an officer of the company until 1995, hardly 9 gives him a financial interest in the company 10 remaining independent today. Indeed, the outside 11 directors are large stockholders. If they have any 12 interest, it's in maximizing the value of their 13 shares. 14 The board determined that the offer 15 was inadequate, contrary to the best interests of 16 stockholders, and posed a threat to corporate policy 17 and effectiveness. This is where I think Mentor 18 argues most vehemently. It argues that Quickturn did 19 not have a basis for believing that Mentor's offer 20 was inadequate. 21 It really makes two arguments: One, 22 that management's projections were unrealistic and 23 created simply to inflate the value of the company; 24 and two, that the financial advisor's, Hambrecht & 35 1 Quist's, inadequacy opinion was not adequately 2 supported. 3 Neither of these claims would stand 4 scrutiny or creates a factual dispute. We know that 5 management's projections assumed growth rates of 20 6 to 30 percent. These were not unreasonable, given 7 the undisputed facts. 8 Those facts are, first, 1998, the 9 company's performance was unquestionably depressed. 10 There is great uncertainty in the Asian markets. 11 That is not disputed. As Mr. Lobo pointed out, and 12 other directors have agreed, the Asian manufacturers 13 would have to make additional investments in the 14 future. It doesn't have to do with whether there is 15 an economic recovery in Asia or not. They have two 16 choices. One, they can either go out of the chip 17 manufacturing business -- 18 THE COURT: Let me just stop you here 19 for a minute, Mr. Nachbar. Is your argument that the 20 Court must find as a matter of law that the 21 management's projections were reasonable? Or is the 22 argument that the Court should find that the 23 directors were entitled to conclude that -- let me 24 rephrase the question. 36 1 Are you asking the Court to conclude 2 as a matter of law that the directors were entitled 3 to conclude that the projections were reasonable? 4 MR. NACHBAR: Close to the latter, 5 Your Honor. What I'm asking the Court to conclude is 6 that there is no factual dispute that the directors 7 had a reasonable basis to accept management 8 projections. 9 THE COURT: All right. That's what 10 you are arguing now? 11 MR. NACHBAR: That's what I'm arguing 12 now. 13 The other undisputed fact is that the 14 Mercury line of products was a new line of products 15 that was coming on stream. It was a next-generation 16 product. Between those two factors, there was a 17 reasonable basis to believe these projections. More 18 to the point, though, the projections were thoroughly 19 discussed by the board. The record cites are at page 20 nine of our opening brief. And there is no dispute, 21 and there can be no dispute, about that. 22 The directors specifically asked 23 about the 30 percent growth rate after discussion. 24 They were comfortable with those projections. Now 37 1 one can argue that's a bad business judgment and that 2 they shouldn't have -- other directors might have 3 come to a different conclusion. 4 THE COURT: Does the record show 5 whether projections of that magnitude had ever been 6 submitted before by management in a nonlitigation 7 context? 8 MR. NACHBAR: Yes, it does, Your 9 Honor. The company traditionally had had a one-year 10 plan, and it had in the past had growth rates in 11 excess of 30 percent. Now the other side points out 12 that those growth rates weren't always achieved in 13 the past. That is certainly true. Things like the 14 Asian markets problem intervened. But the projected 15 growth rate was actually lower than some prior growth 16 rates that had been presented in the past. 17 THE COURT: Does the record show 18 whether any of the management's growth rate 19 projections had ever been achieved? 20 MR. NACHBAR: I don't know the answer 21 to that. And I don't know that there has been full 22 discovery of all of management's projections going 23 back to the inception of the company. I just don't 24 know. 38 1 As to Hambrecht & Quist, it opined 2 unequivocally that Mentor's offer was inadequate. As 3 a matter of law, the board was entitled to rely on 4 that advice. But contrary to Mentor's belief, that 5 advice was not based, as they claim, solely on 6 uncritical acceptance of management's projections. 7 What their brief says -- I believe 8 this is page fourteen. I don't have it written down, 9 but I think it's my memory. When asked what steps 10 H&Q took to independently verify the projections, 11 which were the cornerstone for H&Q's base case, 12 Mr. Cleveland -- he is the Hambrecht representative, 13 could state only that "...we verified..." -- quote, 14 "...we verified that management..." -- their 15 underlining -- "...felt that their projections were 16 reasonable and made in good faith." That's what 17 their brief says. Mr. Cleveland could only say that 18 he verified that management thought the projections 19 were valid. 20 Here, what is Mr. Cleveland was asked 21 and what he answered, two pages later, in the same 22 deposition: 23 "Question: Aside from what you just 24 testified to, is there other due diligence H&Q 39 1 performed in order to satisfy itself as to the 2 reasonableness of management's projections? 3 "Answer: Yes. 4 "Question: Could you describe that, 5 please? 6 "Answer: We would look at 7 independent market estimates of the size of the 8 markets that were addressed by Quickturn and its 9 products. We looked at the historical performance of 10 Quickturn financially, and in particular the 11 performance of Quickturn at the time of significant 12 product introductions. 13 "We discussed with management and 14 critically appraised the economic conditions in 15 general, and in particular the economic conditions in 16 Asia which had had a depressing effect on the 17 company's results in the past twelve months. 18 "We reviewed the materials prepared 19 by our own industry analyst and other industry 20 analysts to understand their beliefs about the 21 industry and its potential and its size. 22 "We talked with management and 23 discussed among ourselves the intellectual property 24 position of the company and how much value that might 40 1 have. 2 "There were probably other things we 3 did in connection with due diligence." 4 Mischaracterization of the record is 5 not a basis to defeat summary judgment. Mentor also 6 contends that the Hambrecht & Quist inadequacy 7 opinion relied almost exclusively on management 8 projections. Again, that simply isn't true, as the 9 uncontradicted fact record makes clear. 10 Again, Mr. Cleveland -- I believe 11 this is page 24 through 25. "The question is how did 12 you determine it was inadequate, you mean H&Q? 13 "The Witness: We looked at the 14 company's circumstances, its assets, its intellectual 15 property, its customer base, its recognition in the 16 industry, its historical financial performance, its 17 projections, talked to management about prospects, 18 and then applied all of those inputs into a judgment 19 about the price that had been offered by Mentor and 20 determined that it was not adequate." 21 Mr. Cleveland list abouts eight 22 things that he considered. Mentor says he considered 23 one of the eight. 24 As Section 141 and cases such as Time 41 1 Warner make clear, directors are entitled as a matter 2 of law to rely on the inadequacy opinion of an 3 outside investment banker. That's what happened 4 here. And I suppose if there were a showing that 5 that reliance was completely unreasonable, one might 6 create a factual dispute. But there is no such 7 showing here, and there can be none. 8 Indeed, there is objective evidence 9 that the board was reasonable. For instance, the 10 state of Wisconsin recently -- they are the largest 11 stockholder of Quickturn and Mentor -- recently came 12 out and said that they opposed the offer because it's 13 inadequate. Other industry analysts have said the 14 same thing. Plainly, Hambrecht had a reasonable 15 basis to believe that the offer was inadequate. 16 THE COURT: Is the threat -- that is 17 within the meaning of Unocal and Unitrin -- 18 articulated in terms of the inadequacy of the offer 19 from a financial standpoint? 20 MR. NACHBAR: I'm about to get to 21 that. That is one of the threats. That's my point. 22 Inadequacy is one of many. And the other threats are 23 nowhere addressed in Mentor's 86-page brief. 24 For instance, it's undisputed that 42 1 this offer was timed to take advantage of a dip in 2 the market caused by the Asian crisis. While Mentor 3 makes much of the premium to the most recent market 4 price, the fact is, again undisputed, that this is a 5 25 percent discount to the February price of 6 Quickturn stock. 7 Now Quickturn's products, its 8 management, its prospects haven't changed. The 9 market has, we believe temporarily. And we believe 10 for good reason that it's temporary. And there is no 11 conflicting evidence about that. Mr. Lobo, the CEO 12 of the company, testified at length about how the 13 Asian manufacturers are going to have to make 14 investments, and they are going to have to come and 15 buy Quickturn's products. There is no dispute about 16 that. There is no contrary evidence. There is no 17 affidavit saying this is a permanent decrease. There 18 is no dispute about that. 19 THE COURT: Despite all of the 20 learned disputation on that subject that is taking 21 place in the financial press, and in the public 22 media, you would ask this Court to find as a matter 23 of law that the current drop in the stock market is a 24 temporary phenomena? 43 1 MR. NACHBAR: No, Your Honor. I'm 2 not asking that at all. What I am asking, though, 3 is, based on the facts before the Court, to 4 understand that this company sells products to the 5 Asian markets. Because of the turmoil in the Asian 6 markets, this company's sales have been adversely 7 affected. No factual dispute about that. The other 8 side isn't going to get up and contradict that, 9 because they can't. 10 The fact of the matter is that the 11 Asian manufacturers are going to have two choices. 12 They can either invest in new technology or they can 13 close their factories. They can either compete or 14 not compete. If they compete, they are going to have 15 to buy products from Quickturn or from somebody. 16 It's as simple as that. 17 Now also undisputed is that 18 Quickturn's corporate strategy for at least the last 19 three years has focused on product development to 20 enhance its position as a market leader, and 21 importantly, vigorous defense of its intellectual 22 property rights in defense of its market position and 23 in defense of its technology. 24 Undisputed is that it has been 44 1 involved in patent litigation against Mentor in three 2 different courts, as well as before the International 3 Trade Commission for two or three years. It's 4 undisputed that Quickturn obtained injunctive relief 5 preventing Mentor from infringing its patents and 6 preventing Mentor from selling certain products. 7 It's undisputed that Mentor appealed that preliminary 8 injunction, and it challenged the validity of 9 Quickturn's patents. 10 Quickturn, it's undisputed, is 11 seeking $225 million of damages in that patent 12 infringement action, which is approximately, I think, 13 the value of Mentor's offer. It's undisputed that 14 the federal circuit affirmed the grant of injunctive 15 relief and held that Mentor had no standing to 16 challenge Quickturn's patents on August 5th, 1998, 17 and that Mentor commenced this offer one week later. 18 THE COURT: Where is the damage 19 aspect of the patent litigation pending? 20 MR. NACHBAR: I believe it's pending 21 in District Court -- United States District Court in 22 Oregon, I believe. 23 THE COURT: Basically, that's the 24 damage phase of the ongoing patent litigation? 45 1 MR. NACHBAR: That's my 2 understanding, Your Honor. 3 THE COURT: Do you know what the 4 status of that litigation is procedurally? 5 MR. NACHBAR: I think we just 6 submitted our damage claims. I would have to defer 7 to my colleagues in terms of the actual trial date in 8 that action. I just don't know as I sit here. 9 December, I'm told, Your Honor. 10 THE COURT: On the damage issue. 11 MR. NACHBAR: On the damage issue. 12 THE COURT: All right. There is also 13 reference in the briefs to an argument that's 14 supposed to take place in the Delaware District Court 15 later this month. What is that concerning? 16 MR. NACHBAR: There are two motions 17 for preliminary injunction, Mentor's and Quickturn's. 18 Mentor's motion was argued yesterday. And there 19 hasn't been a ruling yet, although I imagine there 20 will be soon. We will present our motion for 21 preliminary injunction later this month. I don't 22 have the date as I sit here. 23 THE COURT: But what is the subject 24 matter of those motions, that disclosure is made in 46 1 connection with -- what is the subject matter? 2 MR. NACHBAR: Your Honor has it 3 correct. It's the disclosures made in connection 4 with the agent designation, solicitation, and the 5 subsequent proxy contest. 6 While we are on that subject, the 7 other side says that we really haven't set a date for 8 the meeting, or we are delaying them out until the 9 end of time, or something. That simply isn't true. 10 We have set a meeting date of January 8th. The 11 meeting will proceed on that date unless the federal 12 court rules that their agent designations were 13 misleading and an appropriate remedy is to vacate 14 that date. But the notion that we haven't set a 15 meeting date, it's repeated throughout their brief. 16 It's simply not true. 17 THE COURT: All right. I'm sure I 18 threw you off track with my questions, but where you 19 were, I gather, was in reciting the facts, all of 20 which bear on your point that the board was 21 reasonably entitled to rely on opinions that it 22 received that the Mentor offer was financially 23 inadequate. 24 MR. NACHBAR: It's beyond that. That 47 1 is certainly one thing that the board considered. 2 The other thing that the board considered is that 3 this offer doesn't take into account Mentor's -- or 4 Quickturn's intellectual property rights and, indeed, 5 poses a threat to corporate policy and effectiveness. 6 We have been -- 7 Quickturn has been vigorously 8 defending these rights for three years. It's now 9 achieved a significant victory. And what Mentor 10 wants to do, if it succeeds in this offer, is to 11 effect a 180-degree reversal of Quickturn's strategy. 12 There will be no market leadership for Quickturn, no 13 patent litigation, no defense of rights. Instead, 14 Mentor will acquire the company for cash and will 15 terminate the litigation. 16 There is no question that this is a 17 threat to corporate policy and effectiveness. This 18 entitles, and I think Delaware law says requires, 19 Quickturn to take defensive action under Delaware 20 law. It's interesting that the 86-page brief never 21 mentions the patent litigation, not even once. 22 Now I want to get back to a question 23 that Your Honor asked about earlier, whether there is 24 any real dispute as to whether the effect of these 48 1 defensive actions is preclusive or coercive. 2 There is no testimony that Mentor is 3 going to go away. Indeed, given the patent 4 litigation, it can't afford to go away. I mean it's 5 facing patent infringement damages. It can't sell 6 its products. It's got every incentive to stay 7 involved in this ball game. And it intends to 8 proceed. I don't think there is any dispute about 9 that. It will proceed whether these defensive 10 measures are upheld or not. 11 There is also no evidence of any 12 coercion. I point out at the beginning that coercion 13 in these circumstances is simply illogical. If 14 somebody wants a sale of the company, why would they 15 vote for Mentor's nominees on October 29 but not on 16 January 8? That makes no sense. Similarly, the 17 delayed redemption provision doesn't coerce anyone. 18 If people want the company to be sold, why would they 19 vote against the slate that is committed to the sale 20 of the company? 21 And this issue was addressed four 22 square in the NWA case. And Chancellor Allen said 23 that on the facts there, which were different, he 24 barely saw any threat of influencing the meeting. 49 1 There, there were two slates, both comitted to the 2 sale. One could sell the company immediately. One 3 could only sell the company in six months. The Court 4 said that he didn't really find that that would 5 coerce voters. 6 But here, the choice is clear. I 7 mean our slate isn't committed to the sale of the 8 company. Their slate is. As the Chancellor said in 9 NWA, that presents a clear question. If people want 10 the company to be sold, they will vote for the Mentor 11 slate, whether there is a delayed redemption 12 provision or not. 13 More importantly, though, there is no 14 affidavit of any proxy solicitor saying that the vote 15 is being chilled or people are being coerced. 16 Indeed, the testimony of Mr. Burch is that they are 17 getting more tenders than they thought they would. 18 Finally, Mr. Hinckley, who is the 19 chief operating officer of the company and the 20 architect of this takeover, was asked, "What has been 21 the effect of these defensive measures on your 22 offer?" 23 His answer, "They've increased our 24 expenses, they have slowed the process, and have 50 1 potentially jeopardized the business of Quickturn." 2 That is Hinckley dep at 255. 3 That is it. It doesn't say, "We 4 can't go forward." It doesn't say, "People aren't 5 going to tender." It doesn't say, "They have 6 jeopardized our ability to complete this." All it 7 says is they have increased expenses, which, if 8 anything, is a money damages claim. And they haven't 9 quantified it, so we don't know what it's talking 10 about. 11 Number two, "they have slowed the 12 process." Well, I mean we would concede that these 13 measures that we have taken will prevent them from 14 consummating their offer on October 29, like they 15 would like to. 16 And "they have potentially 17 jeopardized the business of Quickturn"? I don't know 18 what the latter means, other than something may 19 happen to Quickturn's business. But you know, some 20 good things might happen or some bad things might 21 happen. That's not coercive. That's not preclusive. 22 The real question, Your Honor, then 23 becomes, under Unocal and Unitrin, is what the board 24 did reasonable in relation to the threat posed? I 51 1 would say that the actions taken were quite mild. 2 The board, for instance, did not abrogate or abolish 3 the right of stockholders to call an annual meeting, 4 although it could have done so. It didn't sell 5 assets. It didn't do some financial restructuring 6 that would make it difficult or impossible for Mentor 7 to complete its acquisition. All it did is it said, 8 "We are going to give stockholders time to consider 9 this before they have to vote, and we are going to 10 make sure that the new board has at least some 11 reasonable period before it commits to the sale of 12 the company in a self-dealing transaction." 13 THE COURT: What does the record 14 show -- that is, what consideration does the record 15 show was given to the specific period of time called 16 for by the delayed redemption pill? That is, why six 17 months instead of three months or two months or nine 18 months? 19 MR. NACHBAR: I think -- I think what 20 the record shows is that the board thought that that 21 was an appropriate period for directors to get up to 22 speed and decide whether to sell the company or not. 23 THE COURT: What's the source of that 24 statement? 52 1 MR. NACHBAR: The source of the 2 statement or the underlying basis for the directors' 3 belief? 4 THE COURT: What was the underlying 5 basis for the directors' belief, and what is the 6 evidentiary source of that? 7 MR. NACHBAR: The evidentiary source 8 is on page thirteen and fourteen of our opening 9 brief. And I'll read what Dean Hasler, who is dean 10 of a college or law school -- I can't remember 11 which -- had to say about why this was done. 12 "I very much agreed or felt it was 13 very appropriate that if a new board were elected, 14 that they have time to get to know the company, the 15 industry, the market potential of the new products 16 that are just coming on stream, before trying to make 17 a decision as to the fair value of the company and to 18 shareholders. So I was very focused on finding a 19 reasonable period of time, a provision that would 20 permit a reasonable period of time for a new board to 21 make those assessments while still permitting a new 22 board to act. So the elimination of the dead hand, 23 but the addition of a provision requiring, in effect, 24 a waiting period seemed to me a very balanced and 53 1 fair approach." 2 THE COURT: Okay. My question, 3 though, goes to the length of the waiting period. 4 And you can only answer based on the record that we 5 presently have, but to the extent that it sheds light 6 on the subject, my question is why six months versus 7 some longer or shorter period of time? 8 MR. NACHBAR: I think because, as 9 Dean Hasler testified, in the directors' judgment, 10 that was a reasonable period of time for the board to 11 take to become up to speed on the company, its 12 products and its business, and to consummate the sale 13 process. 14 I mean, don't forget that at the end 15 of six months, if the pill is redeemed, the 16 transaction closes. It's not like you begin some 17 process at the end of six months. So there would be 18 some period to get up to speed, to learn the company, 19 to decide what transaction is appropriate to pursue, 20 and then there would presumably be some time 21 necessary to consummate that transaction. The end of 22 the six months, the transaction closes. 23 THE COURT: Does the record indicate 24 whether or not some longer or shorter period -- some 54 1 specific longer or shorter period was considered? 2 MR. NACHBAR: I don't know. I know 3 on the bylaw amendment there were longer periods 4 specifically considered. I'm not sure what the 5 record indicates on the delayed redemption provision. 6 THE COURT: Does the record show who 7 came up with the idea? 8 MR. NACHBAR: Again, Your Honor, I 9 think it arose out of a board discussion. I think it 10 was something that the board felt was fair and 11 appropriate. 12 THE COURT: I understand that. I 13 know you keep on coming back to it. But I'm 14 concerned about who broached the subject, who argued 15 for what position, and what information the board had 16 when it concluded that a six-month waiting period was 17 fair. 18 MR. NACHBAR: I'm not in a position 19 to answer that question. Maybe on reply, I'll know, 20 but I'm not sure that the record indicates who first 21 mentioned six months, as opposed to eight months or 22 five months, or something. 23 THE COURT: Or what the debate was on 24 that point, if any? 55 1 MR. NACHBAR: That's correct. The 2 important thing here is that there are no show 3 stoppers. Neither of these provisions is going to 4 stop a committed offeror like Mentor from proceeding. 5 There is no evidence that it would. 6 THE COURT: Was that issue discussed 7 at the board -- at that board meeting, whether or not 8 a six-month waiting period stacked on to a three- 9 month -- minimum three-month meeting -- special 10 meeting call period would have that effect? 11 MR. NACHBAR: I think it -- I don't 12 know that there was a specific question and answer, 13 but it is very clear from the overall context that 14 the board felt that Mentor was not going away. And 15 the board, you know -- I mean it's clear that the 16 board undertook this with the understanding and on 17 the expectation that this was not going to drive 18 Mentor away, which I think makes sense in light of 19 the patent situation. They can't go away. I mean 20 they can, I suppose, under some circumstances. 21 THE COURT: They could go away and 22 just litigate -- defend the patent damage case. I 23 mean they could go away. 24 MR. NACHBAR: Yes. It's unlikely 56 1 that they would go away. They are not the ordinary 2 bidder. They have an incentive to stay that most 3 bidders don't have. 4 THE COURT: All right. Is there a 5 record on that part of the discussion, whether or not 6 Mentor Graphics would likely go away if they were 7 delayed by nine months? 8 MR. NACHBAR: I don't believe that 9 there is a record specifically of that question and 10 that answer. I think it's clear from the overall 11 tenor of the board's approach that Mentor would be 12 around, and that nobody thought that this was 13 preclusive. 14 THE COURT: All right. 15 MR. NACHBAR: It is -- on Your 16 Honor's specific question, as to who first mentioned 17 six months and what was the debate, the issue was 18 raised. It was discussed with counsel. And the 19 minutes show that the board carefully considered 20 these issues. We have not waived privilege 21 concerning the discussions, but the record is clear 22 that it was discussed, and those citations are in the 23 opening brief. 24 THE COURT: You are asking the Court 57 1 to find that that judgment was reasonable as a matter 2 of law, but you are not willing to disclose the 3 underlying basis for that conclusion that the board 4 drew? 5 MR. NACHBAR: What I'm asking the 6 Court to conclude is that the board acted reasonably 7 in the circumstances. And I think that's 8 different -- 9 THE COURT: How can I conclude that 10 when I don't know what the board was told and what 11 the back and forth was? 12 MR. NACHBAR: You know, I think -- 13 THE COURT: You may be right, but 14 without knowing what the discussion was, how can I 15 conclude that as a matter of law? 16 MR. NACHBAR: I think at the end of 17 the day, the matter speaks for itself, and the fact 18 of the matter is, it's not preclusive and it's not 19 coercive. 20 Now whether, hypothetically, you can 21 sit there and say, "We had a debate and somebody said 22 nine months and somebody said six months and counsel 23 said this and somebody else said that," at the end of 24 the day, though, what counts is: Is it coercive? Is 58 1 it preclusive? And it's not. 2 THE COURT: Let's test that. Are you 3 saying -- let's assume for purposes of this 4 hypothetical discussion that there was no significant 5 discussion about the -- either the merits of six 6 months versus some shorter period or longer period, 7 and no significant discussion about the impact that 8 the delay would have on Mentor Graphics' offer. Is 9 it your position that if the board did not make an 10 informed judgment but ended up coming out with a 11 result that was neither preclusive nor coercive, that 12 that's enough to save the day? 13 MR. NACHBAR: Well, I -- number one, 14 I think it is. But number two, here there was a 15 discussion. I mean it's not that there was no 16 discussion. The discussion was privileged. I don't 17 understand that a board must waive attorney/client 18 privilege in order to overcome a Van Gorkom claim. I 19 mean I just don't understand that to be the law. 20 The point is that the board met at 21 length, discussed these matters at length, consulted 22 with counsel, consulted with advisors, got advice -- 23 THE COURT: My question is whether 24 even if you can argue that the result reached by the 59 1 board complies with Unocal, that that ends the 2 inquiry, or whether the degree of information that 3 the board had is also a relevant inquiry, that could 4 provide an independent ground to invalidate what the 5 board did? I'm reacting to your statement that all 6 that counts is whether or not the board's decision 7 was preclusive or coercive. 8 MR. NACHBAR: I think either is 9 sufficient. In other words, if you didn't get advice 10 and you chose something that was neither preclusive 11 nor coercive, it wouldn't become preclusive or 12 coercive because it had been chosen arbitrarily. Now 13 you might have difficulty on the question of whether 14 it was reasonable in relation to the threat posed if 15 it was arbitrary. But that also would be something 16 that the Court might be in a position to rule on. 17 On the other hand -- 18 THE COURT: You are saying that if 19 the -- if the board did not exercise due care in 20 arriving at the result that it reached, but the 21 result was neither preclusive nor coercive, then 22 there may be an absence of due care, but it would not 23 be actionable? 24 MR. NACHBAR: I believe that's 60 1 correct, Your Honor. Yes. 2 THE COURT: All right. Actionable in 3 the sense that the transaction could be enjoined, as 4 distinguished from whether the directors would be 5 personally liable. 6 MR. NACHBAR: Yes, Your Honor. I 7 believe if you do something -- I mean Unocal has two 8 prongs -- or Unitrin actually has two prongs, as I 9 understand it. First is: Is the action preclusive 10 or coercive; second, is it reasonable in the 11 circumstances? 12 Now certainly, I don't think that the 13 process that the board follows has any relevance to 14 whether the action is preclusive or coercive. Let's 15 say the board acted completely negligently. It gets 16 this piece of paper and it says, "We are not going to 17 meet, even. We are just going to do nothing. And 18 our recommendation is to tender, and we don't have 19 any basis for that. That's just what we are doing." 20 No one would say that was preclusive 21 or coercive, yet no one would say that was a very 22 good process. So I think the results are either 23 preclusive or coercive or they are not. I don't 24 think that the process is terribly relevant. 61 1 THE COURT: The reasonableness of the 2 process is not a factor? 3 MR. NACHBAR: In determining whether 4 the action taken is preclusive or coercive. 5 THE COURT: And in determining 6 whether or not for any other reason the actions 7 should be enjoined? 8 MR. NACHBAR: Well, that gets to the 9 next step, which is: Is it reasonable in relation to 10 the threat posed? I haven't quite gotten there yet, 11 but it's where I'm headed next. My point is it's not 12 preclusive. It's not coercive. And what the board 13 did doesn't make it -- what process the board 14 followed doesn't make their action any more 15 preclusive or less preclusive or any more coercive or 16 less coercive. 17 One other thing that I am reminded of 18 on this point is that Mr. Cleveland, from Hambrecht & 19 Quist, testified that he gave advice that six months 20 was reasonable, and that he recommended to the board 21 both the bylaw and the rights plan amendment. That's 22 in the Cleveland transcript. 23 Now turning to the bylaw amendment 24 first, the board perceived -- again, there is ample 62 1 record evidence -- that there was a threat of a 2 stampede or an ambush. Those are the words that the 3 directors used. The board members felt that 4 shareholders should be given a full and fair 5 opportunity to consider this matter. Indeed, it's 6 sort of ironic that Mentor, the undisputed record 7 shows, who is a big player in the industry, who has a 8 lot of expertise, who knows a lot about its 9 competitors, presumably, was considering the offer 10 since May. 11 So it took Mentor approximately three 12 months to decide to make an offer, yet they object to 13 stockholders having ninety days from the call of a 14 meeting to decide whether to accept the offer or not. 15 The bylaw amendment is designed to ensure adequate 16 time. It's similar to a notice bylaw. 17 THE COURT: I'm getting confused. We 18 are talking about the three months -- the three-month 19 delay for the holding of a special meeting. 20 MR. NACHBAR: That's correct, Your 21 Honor. 22 THE COURT: To elect directors. 23 MR. NACHBAR: That's correct. 24 THE COURT: To the extent there is a 63 1 decision on whether or not to accept the Mentor 2 offer, I gather that implicit in your argument is 3 that that decision would take the form of a different 4 decision, which is whether or not to replace the 5 board. 6 MR. NACHBAR: Right. I think as 7 Stahl, Time Warner and other cases recognize, when 8 you have the combined tender offer/proxy contest that 9 is being done here, the election of directors is, 10 really, a vote on whether stockholders want the offer 11 or not. I mean I don't think that anybody is here 12 contending that Mentor would have any chance of 13 succeeding in its proxy contest were it not making a 14 tender offer simultaneously. 15 THE COURT: So the special meeting is 16 really the plebiscite on the merits of the Mentor 17 offer, and then the sixth -- and then if the 18 plebiscite is successful from Mentor's standpoint, 19 then its nominees would have six months to decide 20 whether or not to go ahead and fulfill Mentor's 21 agenda or to do something else? 22 MR. NACHBAR: That's right. It will 23 elect five nominees, who are running on a platform of 24 selling the company to Mentor, paren, subject to 64 1 their fiduciary duties. We take that paren 2 seriously, which is why we have the delayed 3 redemption provision, because we think if they really 4 are going to exercise their fiduciary duties, they 5 are going to need some time, because the record is 6 clear, they know nothing about this company. They 7 don't have any background in the industry or with the 8 company. So we think some period to get up to speed, 9 and some period to effectuate the transaction is 10 appropriate, and we don't believe that there is any 11 record six months is inappropriate or inordinate in 12 any way. 13 THE COURT: How would that work in 14 the real world? If Mentor wins the election, the old 15 directors, the current directors, are gone. 16 MR. NACHBAR: Correct. 17 THE COURT: We have an entirely new 18 board. Who at the company -- that is, who at 19 Quickturn is going to educate the new directors about 20 the proper exercise of their fiduciary duties? 21 MR. NACHBAR: I don't know. I mean I 22 assume that they would hire counsel. I assume that 23 they would get independent counsel, although I don't 24 know what they will do. I have never spoken to any 65 1 of these five nominees. But that's what I presume 2 any newly-elected director would do. 3 In terms of people running the 4 company, some of the senior executives have 5 employment contracts. I assume that some of them 6 would be induced to stay, but I don't know that. And 7 that's something that the new board would have to be 8 in a position to deal with. 9 THE COURT: Is there any record 10 evidence on how this transition would work, if indeed 11 there was a transition? 12 MR. NACHBAR: I'm not aware of any, 13 Your Honor. 14 Going back to the bylaw, it's very 15 similar to a notice bylaw. It's very common for 16 companies to have bylaws that require ninety or even 17 120 days advanced notice of nominations and 18 shareholder proposals. In fact, Mentor has a ninety- 19 day advanced notice bylaw. 20 Now it's disputed if that bylaw would 21 be applicable here. It says that if a meeting is 22 called on less than ten days notice, then you have 23 ten days prior to the call of the meeting to meet the 24 requirements of the bylaw. And it's at least, I 66 1 think, unclear, and probably disputed, how that 2 applies in a stockholder-called meeting like this. 3 The point is that the bylaw amendment 4 is designed to accomplish the same result as the 5 company's preexisting advanced notice bylaw, to give 6 people time to consider all the material facts. 7 And that's all it's designed to do. 8 No one believes -- and there is no evidence that 9 having a meeting on January 8th, instead of October 10 29 is going to significantly impact this offer or 11 Mentor's ability to consummate the offer. 12 Now the delayed redemption provision 13 was enacted at a time when Mentor did not know who -- 14 I'm sorry. When Quickturn did not know who Mentor's 15 nominees were. I think the fear was that new 16 directors, with no knowledge of the company, would be 17 under intense pressure to sell to Mentor before they 18 took adequate steps to familiarize themselves with 19 the company. And that fear was realized, because the 20 five directors were subsequently identified, and it 21 turned out that they had no familiarity whatsoever 22 with the industry or with the company. 23 And you know, again, it's sort of 24 ironic that the procedure here for Mentor was to 67 1 start this process in May, leading to an October 29 2 meeting. When they were making the offer, five 3 months was okay for them to make the offer and have 4 it consummated. But yet they object to a new board, 5 with no knowledge of the company or the industry, 6 having six months to consummate an offer. 7 You know, we believe that the delayed 8 redemption provision is, on its face, a reasonable 9 provision, tailored to the threat that Mentor would 10 elect a neophyte board, that would be pressured into 11 selling to Mentor immediately. 12 We believe that -- 13 THE COURT: So the purpose of the 14 six-month delayed redemption provision is to assist 15 the Mentor nominees in resisting pressure from the 16 shareholder that nominated them? 17 MR. NACHBAR: To ensure that they are 18 not -- that they have an adequate time to become 19 familiar with the company, its products and its 20 business. 21 THE COURT: The answer to my question 22 is yes? 23 MR. NACHBAR: Well, I'm not sure I 24 would phrase it the way Your Honor phrased it. 68 1 THE COURT: I'm sure you wouldn't. 2 MR. NACHBAR: I think the way the 3 board phrased it and the way Mr. Hasler phrased it is 4 in the record. And I think that's what the record 5 shows. 6 THE COURT: Well, is there something 7 inaccurate about the way I phrased it? 8 MR. NACHBAR: Well, I think it's a 9 question of characterization. And I mean, I'm 10 sticking to what the board said. And Mr. Hasler's 11 statement is the one that I read that's in the 12 record. 13 THE COURT: But isn't the logical 14 implication of that statement that the six-month 15 delay provision is designed, in effect, to protect 16 the directors who would replace the incumbent board 17 from pressure exerted by the stockholder that 18 nominated them in the first place? 19 MR. NACHBAR: Yes, I think it is 20 designed to protect against pressure to do a 21 self-dealing transaction. 22 THE COURT: So what we have, then, is 23 the board, the incumbent board, somewhat 24 paternalistically enacting the delayed redemption 69 1 provision to help out the people who would be 2 replacing them against their will. 3 MR. NACHBAR: I think it's to help 4 out the stockholders of the company, who are faced 5 with a situation where there is enormous pressure on 6 them now, coming from both sides, and electing a 7 board that may not fully protect their interests. 8 Again, the delayed redemption 9 provision is not designed and will not have the 10 effect of precluding a sale to Mentor. It is 11 designed and will have the effect of precluding a 12 sale to Mentor before the board has had a six-month 13 period to consider it. That's what it's designed to 14 do. 15 THE COURT: So if after the six-month 16 period the new board, having considered it, decides 17 to redeem the pill and allow the Mentor offer to go 18 through, does that create some higher level of 19 presumption or inference that that board acted in 20 accordance with their fiduciary duties? 21 MR. NACHBAR: No. I think it merely 22 means that they had enough time to exercise their 23 fiduciary duty. What they did in that time, you 24 know, one hopes is the appropriate thing, but one -- 70 1 you know, we don't know too much about these 2 nominees. 3 We would think that any board who was 4 elected would use that time wisely. But if Your 5 Honor's point is that we won't control what they do, 6 that's correct. 7 THE COURT: All right. 8 MR. NACHBAR: We believe that the 9 defendants' actions here clearly pass the relevant 10 test. This is not a Blasius case, despite what the 11 other side says. 12 THE COURT: Your argument there -- 13 I'm going to put words in your mouth, but I'm 14 concerned about the time. Nobody is going to be 15 prevented from voting, and nobody is going to be told 16 how to vote. 17 MR. NACHBAR: That's correct. 18 THE COURT: Simply a three-month 19 delay, and will be able to exercise the right to 20 vote. 21 MR. NACHBAR: It's not even three 22 months. Their date is October 29. Our date is 23 January 8. By my count, that is a month-and-a-half, 24 or less. And you know, I think that the Stahl 71 1 against Apple Bancorp case is the one that is most 2 pertinent there, both for its holding and its 3 reasoning. There was a six-month delay, and the 4 Court made the very distinction that Your Honor drew. 5 The other point that the other side 6 raises is that somehow the delayed redemption 7 provision -- not the bylaw amendment, obviously, but 8 just the delayed redemption provision, is invalid per 9 se. 10 Unlike the provision at issue in Toll 11 Brothers, which Your Honor is obviously familiar 12 with, there is no discrimination among board members. 13 There is no prohibition on future board action. 14 There is a regulation of timing of when a future 15 board can take that action, but there is nothing 16 statutorily wrong with that. 17 Advanced notice provisions, for 18 example, say that a board can't call a meeting except 19 on some number of days notice. No one would say that 20 that impermissibly interferes with the right of a 21 future board under 141(a). Similarly, standstill 22 agreements, companies enter into them, and they 23 commit future boards not to undertake certain 24 transactions for a period of time. And those have 72 1 routinely been upheld. 2 Here, there is a narrow limitation. 3 It's akin to a short standstill. It regulates the 4 timing of when a future board could take certain 5 actions. And the case is wholly unlike Toll 6 Brothers. 7 Finally, Your Honor, an essential 8 element of the relief that the plaintiffs seek here 9 is irreparable harm. And there has been no showing 10 of irreparable harm. There is no evidence, as I've 11 said repeatedly, that this is coercive or preclusive 12 and the transaction wouldn't be consummated in the 13 form that it's been proposed. 14 There is some talk about it might be 15 a little bit more expensive. That's not irreparable 16 harm. That's money damages. 17 And the other side really miscites 18 the Unocal case. It says that the Unocal -- the 19 trial court case held as a matter of law that there 20 was irreparable harm there. That's simply not true. 21 There were affidavits from both sides in that case. 22 THE COURT: Let me make sure I have 23 this right. Is it correct that the case is, for your 24 argument, that the ninety-day delay will not be 73 1 preclusive of Mentor's offer or the -- is the 2 evidence that underlies that fact the same evidence 3 that negates any irreparable harm? 4 MR. NACHBAR: Yes, Your Honor. 5 THE COURT: Is there any difference? 6 MR. NACHBAR: I don't think so. I 7 mean the other side haven't articulated -- I think 8 it's their burden to show irreparable harm. I don't 9 think they have come forward and met that burden. I 10 don't know what their irreparable harm is. Maybe 11 they will tell me in answering, and we'll deal with 12 that. There are no affidavits. They have failed to 13 show an essential element. 14 Finally, Your Honor, one point about 15 the timing of a ruling and procedurally where we are. 16 Both sides have purported to notice stockholder 17 meetings, the other side for October 29, our side for 18 January 8. There are now two separate proxy 19 solicitations geared towards two different meeting 20 dates that are proceeding, essentially, side by side. 21 I suppose the other side, in the 22 absence of some ruling, would intend to convene their 23 meeting on October 29 and hold it as a rump meeting. 24 I think there is a lot of confusion in the 74 1 marketplace. I do believe that resolution of that 2 issue would be helpful to all stockholders. 3 Thank you, Your Honor. 4 THE COURT: Thank you. Just as a 5 housekeeping matter, Mr. Abrams, my intent was to go 6 on until 12:30 and then reconvene at 1:30. And I had 7 reserved the rest of the day, but unfortunately, I 8 must conclude no later than a quarter of four. I 9 hope we can do all of this in that time. 10 MR. ABRAMS: Rather than interrupt 11 the presentation and what I assume will be many 12 questions from Your Honor of me, would it be 13 preferable from the Court's perspective to take an 14 early lunch break now? If Your Honor would like, I'm 15 happy to start -- 16 THE COURT: I did not know whether 17 Mr. Monhait and his cocounsel intended to make a 18 presentation. 19 MR. BERNSTEIN: We do, Your Honor. I 20 would expect I would follow Mr. Abrams. I would be 21 certainly briefer than Mr. Nachbar. I don't know 22 about Mr. Abrams. 23 THE COURT: We don't have any time 24 for any duplicative arguments. 75 1 MR. BERNSTEIN: Won't be duplicative. 2 MR. ABRAMS: I suspect to have a fair 3 amount to say. I expect Mr. Bernstein will be brief 4 in his presentation. 5 THE COURT: Why don't we go on until 6 12:30, Mr. Abrams? Keep in mind that I don't need an 7 86-page argument. 8 MR. ABRAMS: May it please the Court: 9 Mr. Nachbar, to my knowledge, was not involved in any 10 of the depositions. Perhaps that is the source of 11 his continuing inability to respond directly to Your 12 Honor's questions for record citations. 13 This is an application for summary 14 judgment where the defendants bear the ultimate 15 burden of proof at trial, are required to demonstrate 16 conclusively that they are entitled to a judgment as 17 a matter of law. As I will discuss with Your Honor, 18 there are any number of statements in the record, all 19 of which support our position on the merits and 20 which, therefore, at a minimum create disputed 21 questions of fact. 22 THE COURT: On that point, it would 23 be helpful, Mr. Abrams, if you could identify the 24 disputed issues of fact in connection with what I 76 1 understand are the six master facts that the other 2 side contends are undisputed and that entitle them to 3 judgment as a matter of law. 4 Since they have structured the 5 framework for this dispute in that way, I'll find it 6 most easy to understand if you could respond in terms 7 of that framework; not meaning to preclude you from 8 arguing anything else, but I do need to have your 9 position on those points. 10 MR. ABRAMS: Ordinarily, I would of 11 course be responsive directly to Your Honor's 12 question. I had hoped to take a few minutes to 13 explain to the Court in chronological order exactly 14 what has happened here, to ensure that the Court has 15 the benefit of a clear understanding of our offer and 16 the reactions by the board. In the course of that 17 presentation, I do expect to address each of the six 18 points raised by the other side. 19 THE COURT: All right. 20 MR. ABRAMS: If I may, let me go back 21 to August 12 and start by referring to the fact that 22 on that day, Mentor Graphics commenced a noncoercive, 23 any-and-all, fully-financed offer to acquire the 24 Quickturn stock at a 51 percent premium over the 77 1 closing price on the preceding day. On that same 2 day, Mentor announced its intention to solicit agent 3 designations, to call a special meeting of the 4 Quickturn stockholders, for the expressed purpose of 5 removing the current directors and electing 6 independent nominees who, subject to their fiduciary 7 duties, would consider the Mentor Graphics proposal. 8 Mentor was proceeding under the preexisting Quickturn 9 bylaws which specifically confirmed the right of 10 10 percent of the company's stockholders to call a 11 special meeting, and that that meeting could occur on 12 ten to sixty-days notice. 13 The immediate, reflexive and 14 unconsidered reaction by the Quickturn directors was 15 best characterized by Mr. Antle, who conceded that 16 upon learning of the offer, the Quickturn directors 17 believed it was, quote, stupid. 18 The problem, however, that the 19 Quickturn board and its management faced in 20 confronting a 51 percent premium offer is that they 21 have a recent financial performance, and an ongoing 22 current fiscal year financial performance, which will 23 make it impossible for the Quickturn board to 24 demonstrate in a proxy contest to the satisfaction of 78 1 a majority of the stockholders that they should 2 reject Mentor Graphics' premium price. 3 The 1997 results of Quickturn were 4 flat, and the company lost money. It had negative 5 earnings. The midterm 1998 financial results of the 6 company were drastically below expectations. They 7 started off, according to their own business plan, 8 with an expectation of having revenues of 150 million 9 this year. As recently as early August, they dropped 10 the revenue projection to only $100 million. Their 11 earnings are going to be below expectations, 12 THE COURT: That sounds like an 13 argument you should make to the stockholders, not to 14 me. 15 MR. ABRAMS: I would like it to make 16 it to the stockholders. I need Your Honor's help to 17 do so. 18 In the course of explaining what they 19 have done in order to gin up the inadequacy opinion, 20 that will shed important light on the directors' 21 motives here. Faced with the problem of a depressed 22 financial performance last year and this year, 23 Quickturn's management immediately understood on 24 August 12 that they needed some type of a long-term 79 1 plan, which they could reduce to a present value, to 2 give the current board a platform to go out on the 3 proxy contest and try to persuade the stockholders 4 they have a vision for Quickturn's future which will 5 generate a value in excess of the premium value 6 currently offered by Mentor. 7 The problem, as Mr. Nachbar admitted, 8 is that Quickturn only prepares a one-year business 9 plan. They recognized, however, that they have to 10 get a longer-term plan, because it would be 11 impossible for them to explain with any credibility 12 that this company's financial performance is going to 13 turn around so quickly, in one year, that the 14 stockholders should reject our offer. 15 Accordingly, on the day after we 16 announced our bid, Quickturn's management supplied 17 Hambrecht & Quist with entirely unsupported new 18 revenue earnings and profit margin projections. 19 Hambrecht & Quist was told that Quickturn is going to 20 earn 130 -- excuse me -- will have revenues of 130 21 million in 1998 and 170 million in 1999. 22 There was no backup for management to 23 substantiate the projections. The board had never 24 seen or approved these projections. Mr. Antle, the 80 1 chairman of the company, admitted that no director 2 asked at the August 17 meeting whether the company 3 could meet those projections. And in fact, those 4 projections were created on the back of an envelope 5 and are entirely dependent on at least two 6 significant facts: 7 First, there must be a huge 8 turnaround in the Asian market for Quickturn's 9 products. Revenues from Asia typically accounted for 10 up to 35 percent of revenues. I believe in the 11 current year they are now in the approximate range of 12 10 percent. It's absolutely clear that without a 13 dramatic uptick in sales to Asia, they could never 14 meet their revenue projections. 15 Mr. Antle testified that he -- excuse 16 me. Mr. Lobo, the current CEO of the company, 17 testified that he does not know whether there is 18 going to be a turnaround in Asia. In addition, the 19 new revenue projections assume, completely, that 20 there will be an immediate and widespread market 21 acceptance of the new Mercury product, which 22 Quickturn is completing testing on and which is, to 23 my knowledge, not even in widespread commercial 24 distribution. 81 1 Once again, the critical problem that 2 management had to overcome is that they have no 3 comparable revenue history in the company's 4 experience to justify a multiyear forecast of 30 5 percent compound earnings going out beyond one year. 6 It is clear that the new revenue 7 projections which are the basis for the Hambrecht & 8 Quist analysis were hastily concocted and they are 9 unjustifiably optimistic. Although the board was 10 given a preview of the Hambrecht & Quist analysis at 11 the August 17 meeting, the ultimate decision to 12 reject the Mentor offer as inadequate occurred at the 13 pivotal August 21 meeting of the Quickturn board. 14 I would like to hand up to to Your 15 Honor the chart that was included in the Hambrecht & 16 Quist materials, which contains the Hambrecht & Quist 17 analysis, which applies five different valuation 18 techniques to assess the adequacy of the Quickturn 19 offer -- the Mentor offer. 20 This document has been designated as 21 highly confidential, and therefore, I'm not free in 22 open court to refer to the specific dollar numbers, 23 but Your Honor will see there are five valuation 24 methodologies applied by Hambrecht & Quist to assess 82 1 the adequacy of an 12-and-an-eighth offering price, 2 which is depicted on the horizontal line. 3 Even Hambrecht & Quist, with the 4 benefit of the unduly optimistic management 5 projections, created value ranges for the Mentor 6 offer which show that our offering price is within or 7 above every single valuation range. 8 It's interesting, Your Honor, that 9 the chief executive officer of the company, Mr. Lobo, 10 testified in his deposition that he does not recall 11 seeing this valuation summary at the board meeting. 12 He does not recall any direct questions from 13 directors regarding the valuation summary. He 14 concedes that the board was not advised by Hambrecht 15 & Quist on August 21 that the DCF analysis in the 16 right-hand column is an unreliable methodology for 17 valuing Quickturn and for evaluating Mentor's offer. 18 And Mr. Lobo further concedes that 19 there were no questions by the directors regarding 20 the underlying assumptions in the DCF analysis, which 21 were used to create the single valuation range in 22 which the Mentor offer is at the low end of the 23 valuation. 24 Your Honor will see that in the first 83 1 four columns on the chart, Mentor's offering price of 2 12-and-an-eighth is well within or above all four 3 valuation ranges. Management concocted new revenue 4 forecasts, earnings forecasts and profit margins in 5 order to give Hambrecht & Quist a basis on which to 6 compute an extremely broad and, in our view, entirely 7 unjustified DCF analysis. Our brief explains in 8 considerable detail why even the single methodology 9 in which our offer falls within the low end of the 10 range -- that that methodology is an inappropriate 11 basis to evaluate the adequacy of the offer. 12 The deposition testimony is 13 unequivocal that in reaching the inadequacy 14 conclusion, the board never asked how the Mentor 15 offering price possibly could be deemed inadequate 16 when on the strength of Hambrecht & Quist's own 17 analysis, as depicted in this chart, the Mentor price 18 falls within or above every single valuation range. 19 Hambrecht & Quist also presented a 20 chart to the Quickturn directors which shows that no 21 hostile offer had been successfully completed if the 22 offer had been left open for five months. That chart 23 is on page 48 of Exhibit 7. I'll hand a copy of that 24 up to Your Honor as well. 84 1 The point of this chart is that even 2 though the directors were being asked on August 21 to 3 approve a bylaw amendment and the deferred redemption 4 provision, which would defer the completion of 5 Mentor's offer for at least nine months, the column 6 at the bottom of the page shows that all offers 7 depicted on that page were unsuccessful if they had 8 to be kept open for five months. 9 No director asked Hambrecht & Quist 10 if it was aware of any tender offer which had been 11 completed successfully if it had been kept open for 12 five months. No director asked Hambrecht & Quist 13 whether it was aware of any offer which had been 14 completed if the offer had been open for more than 15 nine months. 16 THE COURT: I'm sorry. You will have 17 to show me -- 18 MR. ABRAMS: The -- 19 THE COURT: -- where on the chart -- 20 which portions of the chart support what you just 21 said. 22 MR. ABRAMS: The second black box in 23 the left-hand column, I believe, refers to 24 unsuccessful. All of those tender offers failed when 85 1 they were required to be maintained for more than 2 five months. 3 THE COURT: All right. And where is 4 the data that relates to the more-than-five-months 5 statement? 6 MR. ABRAMS: We can confirm to Your 7 Honor's satisfaction that as a matter of public 8 record, all of those tender offers failed. I believe 9 Mr. Cleveland may have testified to that in his 10 deposition. 11 THE COURT: That's not apparent from 12 the chart. 13 MR. ABRAMS: Well, the ultimate point 14 is that in the context of a board meeting in which 15 the directors are being asked to consider two 16 defensive measures, which would defer the completion 17 of the Mentor offer for at least nine months, no 18 Quickturn director asked Hambrecht & Quist whether 19 any, even a single, tender offer had been completed 20 if it had been left open for more than nine months. 21 Leaving aside the chart -- 22 THE COURT: Going back to the chart, 23 I had the impression from what you said that the 24 chart, itself, suggested that none of these withdrawn 86 1 or failed offers -- well, that the withdrawn or 2 failed offers were not kept open for more than five 3 months. 4 MR. ABRAMS: In fact, I'm reminded 5 that the -- it's the negative, that the top portion 6 of the chart shows the successful offers were 7 completed within five months. The other offers, as I 8 understand it, failed. 9 The key point, Your Honor, is that 10 this chart is not focused upon by anybody. More 11 importantly, nobody asked Hambrecht & Quist, the 12 financial advisor which recommended the rights plan 13 amendment, whether it was possible to complete a 14 hostile tender offer if the offer could not be 15 concluded within nine months. 16 THE COURT: I understand that point. 17 There is nothing on the face of the chart that puts 18 the directors -- that shows, as I thought you had 19 told me, that all of the unsuccessful -- all of the 20 offers were unsuccessful if they had to be kept open 21 for more than five months. There is nothing that a 22 director could have concluded in looking at this 23 chart. Is that correct? 24 MR. ABRAMS: One would have thought a 87 1 director looking at the chart, tracing successful and 2 unsuccessful tender offers, would have asked the 3 question whether Mentor, or anybody else, would be 4 able to complete an unsolicited tender offer if the 5 offer had to be open for nine months. The deposition 6 testimony is clear that no director asked that 7 question. There was no discussion regarding that 8 fact. 9 Turning back to the valuation issue, 10 no director asked Hambrecht & Quist how it could give 11 an inadequacy opinion regarding a 12-and-an-eighth 12 offer when a Hambrecht & Quist analysis -- analyst 13 stated publicly only two months before the offer that 14 Quickturn shares were "fully valued" at $7.50. 15 A Quickturn director who repriced the 16 stock options for the employees to only $7.43 in June 17 1998 must have thought to himself that there has to 18 be at least a question as to why or how the board 19 could reject 12-and-an-eighth in August when they 20 lowered the employee option exercise prices to only 21 $7.43. That question was not apparent to this board 22 and was never asked. 23 Instead of asking the routine, 24 customary and relevant questions, this board of 88 1 directors instructed Hambrecht & Quist to refrain 2 from any communication with Mentor Graphics regarding 3 the possibility of increasing its bid. Furthermore, 4 this board of directors specifically instructed 5 Hambrecht & Quist not to analyze any strategic 6 alternatives for the company or to explore 7 third-party acquisition proposals. 8 THE COURT: One of the questions in 9 this case is whether a nine-month delay would 10 significantly increase the risks to Mentor, with the 11 result that it would either defeat or seriously 12 jeopardize the Mentor Graphics offer. Mr. Nachbar 13 insists that there is no evidence that that's the 14 case here. Whatever the effect may be on other 15 offerors or in other contexts, what does the record 16 show on that subject? 17 By the way, the subject that I'm 18 talking about goes to that fact both in terms of the 19 preclusive -- a preclusive defensive measure and in 20 terms of irreparable harm. 21 MR. ABRAMS: Well, the irreparable 22 harm need not be reached at this time, since we are 23 not before the Court on any pending application for 24 interim relief. As a court of equity, this Court, I 89 1 would suggest, deferentially, ought to retain all of 2 its remedies so that following a final determination 3 of the facts and liability, the Court can impose an 4 effective remedy. 5 With respect to the coercive and 6 preclusive effects of the defensive measures, if I 7 may, I'll start with the record testimony not cited 8 anywhere in the two briefs filed by Quickturn, and 9 surprisingly denied by my colleague, Mr. Nachbar. 10 First, with respect to the record 11 evidence that the defensive measures have a 12 preclusive and coercive effect on shareholder voting, 13 I would point to five statements by way of example. 14 Mr. Burch, the president of MacKenzie 15 Partners, an expert in the proxy solicitation field 16 who is representing Mentor Graphics, testified 17 testified at page 183, lines 20 to 22 as follows: 18 "...I'm aware of holders who didn't vote because..." 19 Quickturn "...enacted those actions." 20 Mr. Burch further testified on page 21 182 at lines 7 to 11, "...since the resolution of" 22 the dead-hand pill issue..." -- I apologize, Your 23 Honor. In the interests of speed, I'm inserting my 24 descriptions of the shorthand that was used in the 90 1 deposition. Mr. Burch testified since the resolution 2 of the deferred redemption provision "was not going 3 to be resolved for some period of time, people are 4 less likely to tender or less likely to vote because 5 of the futility of their act at the moment or 6 potential futility of their act at the moment." 7 Mr. Varelas of Salomon Smith Barney, 8 the investment banker representing Mentor Graphics, 9 also testified that the vote was coercive. He 10 testified, in particular, that the amendment to the 11 rights plan, "may prevent shareholders from voting in 12 favor of their offer, even though all else being 13 equal, they may see our offer as attractive and one 14 that is more attractive than the alternatives 15 available to them." 16 THE COURT: Whose testimony is this? 17 MR. ABRAMS: Mr. Varelas, the senior 18 representative from Salomon Smith Barney, the 19 financial advisor to Mentor Graphics. 20 We have three statements that have 21 been made by our proxy solicitor and our financial 22 advisor as to the preclusive effect of the vote and 23 the -- excuse me, the preclusive effects on the vote 24 of the defensive measures, and the coercive effect as 91 1 well. 2 That is sufficient to defeat summary 3 judgment, but the defendants, unbelievably, do not 4 even refer the Court to testimony by Mr. Cleveland, 5 of Hambrecht & Quist, their own financial advisor, 6 who also characterized the defensive measures as 7 coercing the vote and having a preclusive effect. 8 Mr. Cleveland testified "Because the existence of a 9 dead-hand provision makes it difficult for the 10 insurgent board to replace a pill, and therefore it 11 is less likely that a successful proxy contest could 12 be accomplished." That is Cleveland deposition 87, 13 at lines thirteen to twenty-four. 14 Mr. Cleveland -- once again, their 15 own financial advisor -- further testified that the 16 defensive measures precluded the effectiveness of the 17 stockholder vote by stating "That the existence of a 18 dead-hand provision decreases the likelihood that 19 someone would attempt a proxy contest...." That's 20 Cleveland deposition 86, lines one to twenty. 21 All of these statements are direct 22 record support from experts in their field that 23 support our argument that the defensive measures, in 24 tandem, have an improper effect on the vote at the 92 1 special meeting. 2 We argue -- these are arguments that 3 Your Honor is well aware of as a result of Toll 4 Brothers, that the defensive measures have two 5 coercive and preclusive effects with respect to the 6 stockholder vote. 7 First, they abrogate the 8 stockholders' voting right as a result of the fact 9 that the stockholders, in the face of these defensive 10 measures, will recognize their vote is unimportant, 11 and therefore, they have no incentive to vote, 12 because the new directors are powerless to implement 13 the stockholders' desires. 14 The impotency of the stockholder vote 15 was recognized in the Bank of New York decision. It 16 was recognized in the testimony I just read to Your 17 Honor from MacKenzie, Hambrecht & Quist and Salomon. 18 And of course Your Honor made the very same point in 19 Toll Brothers, in observing that a deferred 20 redemption provision "creates a structure in which 21 shareholder voting is either impotent or self- 22 defeating." 23 THE COURT: Was that in the context 24 of a deferred redemption provision or a dead-hand 93 1 pill? 2 MR. ABRAMS: It is a continuing- 3 director provision, which is technically different 4 from ours, but the same argument applies, Your Honor. 5 To the extent stockholders' wishes can not be 6 implemented by the new directors because of the 7 deferred redemption provision, their vote is 8 unimportant and meaningless, and therefore, they have 9 no incentive to vote. The abrogation of the vote is 10 preclusive within the meaning of Unitrin. 11 In addition, the defensive measures 12 operate in tandem to coerce the stockholder vote. As 13 we cite in our brief, numerous commentators, Salomon, 14 Hambrecht & Quist and MacKenzie Partners have all 15 recognized that the current stockholders necessarily 16 are coerced into voting for the current directors at 17 the special meeting because the deferred redemption 18 provision precludes the board from redeeming the 19 rights, exchanging the rights or amending the plan to 20 facilitate the Mentor offer. The stockholders would 21 be coerced into voting for the current directors 22 because under the deferred redemption provision, only 23 the current directors have the power under the rights 24 plan to approve a potential value-maximizing 94 1 transaction. 2 Finally, the testimony I just cited 3 to Your Honor is to the effect that Hambrecht & Quist 4 and Salomon are unaware of any tender offer which has 5 been successfully completed if required to be 6 maintained for nine months. Under those 7 circumstances, which are not even circumstances here, 8 because the operation of the defensive measures will 9 preclude Mentor from completing it's proposal for 10 eleven months -- but even focusing on a nine-month 11 time frame, the stockholders would understand that 12 Mentor can not proceed with its offer and, therefore, 13 any stockholder vote would be futile. 14 Turning, Your Honor, to the second 15 portion of the analysis under Unitrin with respect to 16 the preclusive effect of the defensive measures on 17 the offer, as distinguished from the preclusive and 18 coercive effects on the stockholder vote at the 19 special meeting, the record evidence also correctly 20 rebuts my friend's statement to the effect that the 21 undisputed facts demonstrate that the nine-month 22 period will not have a significant impact on Mentor's 23 offer. 24 The fact of the matter is that as 95 1 cited in our brief, and if my colleagues read the 2 deposition testimony, they would understand that 3 Mr. Varelas, of Salomon Smith Barney, testified that 4 "...the bylaws and the extension of the special 5 meeting...diminishes substantially the ability to 6 potentially effectuate and desire to effectuate the 7 transaction." Varelas deposition, 91, lines fourteen 8 to nineteen. 9 Mr. Varelas also explained on page 10 90, lines eleven to twenty, the rationale for a 11 hostile offeror being unwilling to maintain an 12 ununsolicited offer for nine months or more. He 13 testified "...we, as the acquirer, may not view the 14 opportunity as attractive given the fact that we will 15 not be able to take control of the company for an 16 extended period of time and, therefore, will not be 17 able to yield the business results which warrant the 18 share price that we're offering, particularly in 19 light of the fact this is a technology company, and 20 it's subject to an environment in changing dynamic, 21 which makes time more of an issue, not less of an 22 issue." 23 Mr. Varelas was asked specifically by 24 Quickturn's counsel whether he was aware of a hostile 96 1 transaction, whether he had been involved in a 2 hostile transaction that took longer than four months 3 to be successfully completed. His answer, on page 96 4 to 97, "I don't believe so," except for one special 5 situation. 6 Once again, we don't have to rely on 7 the testimony by our experts. We can turn to the 8 testimony supplied by Hambrecht & Quist, Quickturn's 9 financial advisor, to confirm the point. 10 Mr. Cleveland, of Hambrecht & Quist, was asked at 11 page 121 of his deposition, "In your experience as an 12 investment banker, are you aware of any tender offer 13 that has been successfully closed after having been 14 opened for nine months or longer? 15 "Answer: No." 16 Your Honor asked Mr. Nachbar 17 approximately two minutes into his presentation 18 whether there was any record evidence demonstrating 19 that the combination of the defensive measures would 20 have a preclusive or coercive effect. I believe 21 Mr. Nachbar confirmed that if there was such record 22 evidence, the summary judgment motion should be 23 denied and we should proceed to trial. That 24 testimony, by way of example, demonstrates the 97 1 effects of which we are complaining. 2 THE COURT: Well, does it? It may 3 demonstrate the effects in the abstract, but what 4 does it demonstrate as far as your client is 5 concerned? 6 MR. ABRAMS: It demonstrates, Your 7 Honor, that there are stockholders who have declined 8 to give us proxies and declined to tender in the face 9 of the defensive measure because they believe such 10 actions are meaningless as a result of Mentor's 11 inability to complete its transaction within nine 12 months. 13 Mr. Burch's testimony is crystal 14 clear on the point. In addition, both Hambrecht & 15 Quist and Salomon Brothers have provided expert 16 testimony to the effect that hostile tender offers, 17 if not completed in less than nine months, are not 18 going to be completed. That supports our argument 19 that these particular defensive measures, as applied 20 in this context, are preclusive. 21 THE COURT: Does that mean that if 22 your client is required to keep this offer open for 23 nine months, that it will not do that? 24 MR. ABRAMS: Our position, Your 98 1 Honor, as set forth in the tender offer materials, is 2 that we are here today. We have expressed rights 3 under the tender offer to terminate the tender offer 4 at any time. And we specify in the tender offer we 5 are going to continue to evaluate all outstanding 6 conditions. It should not be a requirement for a 7 tender offeror to say definitively that it's going to 8 terminate its offer in a particular set of 9 circumstances. 10 In this case, we have unlawful, 11 inequitable manipulations, which have been 12 implemented by target directors, which on the record 13 before the Court will coerce the stockholder vote, 14 will abrogate the stockholder vote, and which, given 15 historical experience, would preclude the completion 16 of the offer. We are entitled to come before Your 17 Honor now -- 18 THE COURT: It's that latter 19 statement that I'm focusing on. 20 MR. ABRAMS: We submit -- 21 THE COURT: How can I conclude that 22 in this case? 23 MR. ABRAMS: We submit, Your Honor, 24 we are not required to cross the rubicon of stating 99 1 definitively what we are going to do. We know they 2 have undertaken improper measures -- 3 THE COURT: You would have the Court 4 cross the rubicon and state definitively for you what 5 you would do. 6 MR. ABRAMS: In this case, we have 7 sufficient testimony on the record before Your Honor 8 to deny a summary judgment motion and to proceed to 9 trial, to allow our experts to explain to the Court 10 why a deferred redemption provision which in 11 combination with a bylaw amendment requires us to 12 keep our offer for eleven months will, as a practical 13 matter, given historical experience, preclude us from 14 completing our offer. 15 Unitrin requires the Court to assess 16 the reasonableness of the response, whether it is 17 preclusive or coercive. If, as Your Honor recognized 18 in your earlier question of Mr. Nachbar, the 19 testimony is that a substantial percentage of hostile 20 offers can not and are not completed within nine 21 months as a result of these types of defensive 22 measures, that, by definition, will be a preclusive 23 defensive measure and shall be stricken in this 24 context. 100 1 Your Honor, the directors' activities 2 in this case are such that -- 3 THE COURT: We are -- we have really 4 gone over our time, but before we conclude on this 5 point, Mr. Abrams, let's go back for a moment to the 6 beginning. On what date did the appellate court -- I 7 can't recall which one -- affirm the injunction in 8 the intellectual property case? 9 MR. ABRAMS: I believe August 5. 10 THE COURT: What was the date in 11 which your client announced its offer? 12 MR. ABRAMS: August 12th. 13 THE COURT: Are those two events 14 related? 15 MR. ABRAMS: I had no knowledge on 16 August 12th, at the time this offer started, that the 17 action had been taken on August 5th, if that is any 18 indication. We started the planning process, as is 19 evidenced by the record, in late May and early June. 20 The fact that litigation proceedings are occurring 21 between the companies should be irrelevant to the 22 assessment of the reasonableness of the defensive 23 actions. 24 No director testified that he valued 101 1 this company based on the prospect of any particular 2 damages that Quickturn asserts it's going to recover 3 from the patent litigation. The 220 million number 4 that is being bandied about is identified in an 5 expert report which is so strikingly at odds with the 6 underlying facts that Mentor Graphics is moving at 7 this time to strike the expert's report. 8 We have also asked Quickturn to make 9 public the expert's report, to allow all of the 10 stockholders to assess for themselves whether they 11 have really got a $220 million damages claim or, as 12 we suggest in the tender offer materials, the maximum 13 damages under any reasonable recognized theory are 14 only $10 million. 15 THE COURT: You are going to ask the 16 shareholders to decide for themselves what will be 17 before the Court in the the damage phase of the 18 patent proceedings? 19 MR. ABRAMS: They are now asserting 20 in public disclosures that they are going to recover 21 $220 million of damages from us, and they are using 22 that as part of their platform to defeat our proxy 23 contest. We think the $220 million number is a sham. 24 We are moving to strike the report. If they really 102 1 belief in the bona fides of that report, they can 2 make it public and allow everybody to evaluate its 3 terms. 4 THE COURT: Am I to conclude from 5 what you just said that the fact that your clients' 6 offer, unsolicited offer, took place within a week of 7 the affirming opinion of the appellate court in the 8 intellectual property case is a coincidence? 9 MR. ABRAMS: I have not spoken with 10 my clients about the timing. I can tell Your Honor, 11 having been heavily involved in this matter since 12 June, that I didn't know about the patent litigation. 13 And furthermore, the $220 million number didn't come 14 out until last week. And among other factors that we 15 considered in launching the bid was the existence of 16 the injunction in the patent litigation, which bars 17 us from selling our products in the United States. 18 But the testimony from my clients is 19 that there are legitimate strategic reasons for 20 combining the two product lines of the companies, and 21 thereby enabling a combined Mentor/Quickturn to sell 22 to its customers on a more efficient basis. 23 Ultimately, the issue is irrelevant, 24 because the stockholders need to decide for -- need 103 1 to be given an opportunity to decide for themselves, 2 without coercion and without the preclusive effects 3 of the defensive measures, whether our offer is 4 adequate. That is all we are asking Your Honor to 5 decide. 6 THE COURT: May be irrelevant. You 7 are saying it's irrelevant in this litigation, but it 8 is relevant to the stockholders in making whatever 9 decision they may be called upon to make. 10 MR. ABRAMS: I would have thought 11 that incumbent management faced with a proxy contest, 12 and purportedly believing it has a damages claim 13 which exceeds the current value of Quickturn, would 14 be willing to explain to the public what its theories 15 are and why it believes that $220 million is 16 legitimate. They have not done so. We asked them to 17 do so. 18 We do not believe the $220 million 19 has any credibility, and we are moving to strike the 20 expert's report in the patent litigation. 21 Ultimately, we ask Your Honor to decide what is 22 before this Court, which is the validity of the 23 defensive measures. 24 THE COURT: We are a little bit over 104 1 time. We'll he reconvene at twenty minutes of two. 2 MR. ABRAMS: Thank you, Your Honor. 3 (Recess at 12:38 p.m.) 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 105 1 AFTERNOON SESSION 2 1:45 p.m. 3 MR. ABRAMS: Thank you, Your Honor. 4 Too recapitulate, I have explained the board's 5 reliance at the August 21 meeting, the deficient 6 Hambrecht & Quist analysis. As of August 21st, the 7 board had made no careful financial consideration of 8 the offer. The board determined to reject a 51 9 percent premium offer as inadequate, notwithstanding 10 the analysis depicted on the chart I supplied to the 11 Court, which confirms by any reasonable standard that 12 the offer is in fact adequate, because it is within 13 or above all of the valuation methodologies employed 14 by Hambrecht & Quist. 15 The board determined on August 21st 16 to essentially pursue a just-say-no defense. They 17 have not undertaken any negotiations with Mentor to 18 get a higher price. They are not analyzing strategic 19 alternatives. There is no public indication that 20 they are pursuing alternative acquisition proposals. 21 So the board simply says on August 21 22 that the bid is inadequate, and they have a deficient 23 Hambrecht & Quist analysis. That is their position 24 going into a proxy contest with Mentor Graphics, 106 1 which presented a 51 percent premium offer. 2 The board understood on August 21 3 that fighting this out on the merits was not a very 4 desirable prospect for them. In order to defeat our 5 bid, they then proceeded to adopt two defensive 6 measures: First, the bylaw amendment to defer the 7 special meeting; and secondly, to amend the rights 8 plan to install the deferred redemption provision. 9 The defendants would like Your Honor 10 to analyze the validity of those provisions 11 separately. Unitrin teaches otherwise. And the 12 coercive and preclusive effects of both defensive 13 measures must be assessed by Your Honor, we suggest. 14 If I may start with the bylaw 15 amendment, I regret that there appears to be a 16 factual dispute over the actual language of the bylaw 17 amendment. The defendants misstated the actual 18 language of the bylaw amendment in their opening 19 brief. And in their SEC filings regarding the bylaw 20 amendment, they omitted the critical 21 validity-of-the-determination language from the 22 bylaw. 23 As Your Honor is aware, they are 24 employing the bylaws in order to defer the meeting, 107 1 in the event they determine that the agent 2 designations used to call the meeting are somehow 3 invalid. In addition, defendants repeatedly 4 misstated in their opening brief the effect of the 5 bylaw -- the effect of the bylaw, by suggesting that 6 at most the bylaw would defer the special meeting by 7 only a matter of a few weeks. 8 The actual bylaw, however, allows an 9 indefinite delay in the meeting, because the company 10 is not required to set the meeting date until ninety 11 to one hundred days after a determination of the 12 validity of the request for the meeting by the board. 13 THE COURT: That's theoretically how 14 it was worded, but in this case they have set the 15 meeting for, as I understand it -- for January 8th, 16 1999. 17 MR. ABRAMS: The confidential reply 18 brief suggested they will have the meeting on January 19 8th unless the federal court enjoins the 20 effectiveness of the agent designations. However, 21 the current SEC filings by Quickturn contain no 22 similar statement, and the Quickturn stockholders, 23 therefore, have no information from the company as to 24 their current position, as articulated to the Court. 108 1 Moreover they do not have the benefit of any 2 explanation as to the standards to be employed by the 3 Quickturn board in assessing the impact of the 4 federal court's ruling on whether the agent 5 designations were valid. 6 THE COURT: Let me stop you there for 7 a moment, because I was told, and I did not know 8 before, that your side is going ahead with the 9 meeting in October. 10 MR. ABRAMS: Yes, Your Honor. As a 11 result of the receipt -- 12 THE COURT: Based on your legal 13 position that the adoption of the bylaw amendment is 14 invalid? 15 MR. ABRAMS: In conjunction with the 16 solicitation of agent designations, which commenced 17 on August 12th, Mentor Graphics was successful, 18 September 11, in securing agent designations to call 19 a special meeting with just over 17 percent of the 20 Quickturn stockholders. 21 Upon the receipt of that number of 22 agent designations, Mentor, relying on the bylaws as 23 they existed prior to the amendment which is the 24 subject of this proceeding, proceeded to call the 109 1 meeting for October 29, to give notice of the 2 meeting. And because of the absence of prior action 3 by the board to set a record date, we contend that 4 the mailing of our proxy materials on September 11 5 has the effect under Section 213 of setting the 6 record date. We presently are planning, subject to 7 the rulings by this Court and the federal court, to 8 proceed with our meeting on August 29. 9 THE COURT: Okay. I'm not sure that 10 you answered my question. Is your plan to go ahead 11 with the meeting in October, predicated on the 12 assumption that the bylaw amendment is invalid, or 13 only that -- whether valid or not, it's not 14 applicable to your side? 15 MR. ABRAMS: Ultimately, Your Honor's 16 ruling on the validity of the bylaw amendment will 17 dictate the legality of the results of the meeting. 18 We are hopeful that Your Honor will be in a position 19 to give us a prompt ruling on the bylaw amendment so 20 that we can take that into account in determining 21 whether and how to proceed with the meeting on the 22 29th. They contend that the -- that our October 29th 23 date is invalid. 24 THE COURT: Let's assume the case 110 1 goes to trial. Are you saying that it would be 2 possible for the Court to have a trial and determine 3 all of that before October 29th? 4 MR. ABRAMS: It is hypothetically 5 possible, but we are mindful of Your Honor's 6 schedule. We have contingency plans to deal with 7 whatever rulings come from the Court, or the federal 8 court, or whatever rulings can not be issued because 9 of the press of time. 10 THE COURT: If the federal court 11 invalidates the agent designation solicitation, 12 presumably that moots whatever the effect might be of 13 your October meeting. Is that right? 14 MR. ABRAMS: I would have to assess 15 the specific ruling, but certainly, Quickturn will 16 assert that the agent designations were improperly 17 collected and invalid, and therefore, the special 18 meeting called for October 29 by Mentor Graphics is a 19 nullity. 20 THE COURT: That is certainly one 21 possible result of the federal -- pending federal 22 action. 23 MR. ABRAMS: A hypothetical result 24 which could occur, we submit, Your Honor. 111 1 THE COURT: Okay. Well, what I'm 2 really trying to ascertain is whether this meeting 3 that you have scheduled is really a prelude to some 4 later Section 225 action, assuming there are two 5 meetings with different results, and what impact, if 6 any, does it have on what this Court is doing at this 7 time. 8 MR. ABRAMS: Our present plan, Your 9 Honor, is to make a determination about whether to 10 proceed with the October 29 meeting as a result of 11 the events at trial and based upon whatever 12 indication Your Honor can give us as to a potential 13 schedule for the resolution of the issues to be 14 tried. We are terribly mindful of Your Honor's 15 schedule. We will certainly take it into account in 16 determining what to do with respect to a possible 17 adjournment of the October 29 meeting. 18 THE COURT: Mr. Abrams, I'm going to 19 have to conclude today's hearing no later than 20 quarter of four. So that really sets the outside 21 parameters for this argument, as well as the argument 22 on the motion to compel. So what I would -- 23 Without trying to dictate how you 24 make your presentation, somewhere in that 112 1 presentation it would be most helpful to me if you 2 would enumerate to me what you contend to be the 3 critical disputes of fact that would preclude summary 4 judgment. 5 MR. ABRAMS: Let me turn to that 6 precise issue, as to what the board knew and didn't 7 know or didn't ask about with respect to the adoption 8 of the bylaw amendment. The bylaw amendment was 9 adopted at the August 21st meeting. Our answering 10 brief, at pages 29 to 30, includes specific record 11 references to the following facts: 12 One, no director has any 13 understanding of the steps to be taken or the 14 standards to be employed to determine the validity 15 under the new bylaw of a stockholder's call of the 16 meeting; 17 Two, at the August 21 meeting the 18 directors never asked about the effect of the new 19 bylaw on Mentor's offer. 20 The board never asked about the 21 effect of the new bylaw on any potential insurgent's 22 proxy contest. The board never asked about the time 23 that would be required to conduct a proxy contest, 24 whether that was relevant to the period of time to be 113 1 set in the new bylaw for the calling of the meeting. 2 The board never asked about whether a 3 delay in the special meeting would influence the 4 outcome of any stockholder vote which might 5 ultimately occur. The board never asked whether a 6 delay in the holding of the meeting by ninety to a 7 hundred days, or any other period, would benefit 8 current management in a proxy contest. 9 The board never asked or understood 10 when or how the board would be required to set a new 11 meeting date in conjunction with the operation of the 12 new bylaw. 13 These are all fundamental, core 14 questions that any cognizant director could and 15 should have asked in order to assess the 16 reasonableness of the new bylaw and its impact on 17 Mentor's pending offer. 18 THE COURT: What does that go to, 19 that the board was not properly informed, or that the 20 board did not reasonably -- did not assess properly 21 the reasonableness of what it was doing, or both? 22 MR. ABRAMS: Both, Your Honor. We 23 have a Van Gorkom claim and a first prong of Unitrin 24 claim. 114 1 THE COURT: So your argument would be 2 that even if the Court were to find that the -- what 3 the board did passes muster under Unocal, it would 4 still be invalidated under Van Gorkom? 5 MR. ABRAMS: Certainly, Your Honor. 6 I suggest if Your Honor rules in our favor on the Van 7 Gorkom point, that derails the defendants' position 8 under Unitrin, which requires the board to carry its 9 burden of proof that it conducted a reasonable 10 investigation to identify a threat to corporate 11 policy and effectiveness. 12 THE COURT: Well, all of the facts 13 that you have enumerated go to the reasonableness of 14 the -- go to the effect of what the board was doing, 15 which I thought would bear in proportionality, as 16 opposed to threat. 17 MR. ABRAMS: It goes to the heart of 18 the initial question of whether this board had any 19 idea whatsoever of what it was doing when it adopted 20 the bylaw amendment. 21 Because the board did not address any 22 of the issues which I just enumerated, and which are 23 set forth with citations to record evidence in our 24 brief, this board was uninformed in adopting the 115 1 bylaw amendment. That is a failure under Van Gorkom. 2 It is a failure under the first prong of Unitrin. 3 In addition, I will get to the 4 effects of the bylaw, which constitute a separate 5 violation under Blasius and the second prong of 6 Unitrin. As Your Honor will see from my presentation 7 today, we are going to offer the Court numerous 8 opportunities to assess the validity of the conduct 9 of the defendants, under multiple branches of 10 Delaware law. We will have a Blasius argument, a Van 11 Gorkom argument, a Unitrin argument and a Schnell 12 argument, in addition to 141(a) with respect to the 13 rights plan. All of these constitute individual 14 bases to invalidate some or all of what the 15 defendants have done. 16 Let me turn now to the justification 17 proffered by the directors for adopting the bylaw 18 amendment. The uniform testimony, the mantra of the 19 directors, after coaching of the directors' lawyers, 20 was that they "wanted to afford an orderly process" 21 to allow the stockholders to determine how to vote. 22 That is the sole justification proffered by the 23 directors in their depositions for imposing a ninety- 24 to-one-hundred-day delay on the call of the meeting. 116 1 That justification is a sham. The 2 bylaw amendment only applies to stockholder-initiated 3 meetings and does not apply to management-initiated 4 meetings. One would have thought that out of a sense 5 of fairness, and if they really believe that the 6 stockholders needed an orderly process to obtain 7 information, the calling of the special meeting would 8 be on the same notice periods for both management and 9 the stockholders. The fact that it is not speaks 10 volumes about what is going on here. 11 In addition, there is no explanation 12 whatsoever from the defendants as to why the 13 stockholders somehow lack sufficient information, 78 14 days after Mentor's offer was commenced and 48 days 15 after Mentor's proxy materials were distributed, to 16 determine how to vote at the October 29 meeting. 17 Indeed, Mr. Lobo, the CEO of 18 Quickturn, admitted in his deposition the schedule 19 14D-9 of Quickturn contains all relevant information 20 for the stockholders to determine how to vote and 21 whether to tender. 22 Finally, this board of directors 23 never considered any special meeting deferral period 24 of less than ninety to one hundred days. They only 117 1 considered abolishing the special meeting procedure 2 altogether or requiring that any stockholder- 3 initiated special meeting occur on a longer period of 4 time. 5 There was no good-faith consideration 6 of the stockholders' interests. There is no reasoned 7 judgment here as to why the stockholders can't vote, 8 48 days after we distributed our proxy materials, on 9 the issues to be presented by Mentor. 10 Of course, the period of time between 11 the distribution of our proxy materials and the call 12 of our meeting and the actual date of the meeting is 13 48 days, well within the ten-to-sixty-day period 14 contemplated under the original bylaws for notice of 15 a meeting, and well within the requirements of 16 Delaware law. 17 Indeed, because of the requirements 18 of Delaware law, specifically Section 222(b), Your 19 Honor undoubtedly is aware that the substantial 20 majority of proxy contests are conducted in less than 21 sixty days. And therefore, the proffered 22 justification of the need for an orderly process is a 23 sham to delay the vote until such period of time as 24 the defendants can attempt to do whatever it is they 118 1 are going to do. But the bottom line is that the 2 stockholders have -- will have had, by October 29, 3 our proxy materials for 48 days. And we believe they 4 have -- as Mr. Lobo has admitted, they have more than 5 enough information to decide. 6 Let me turn to the adoption of the 7 rights plan. The deposition testimony is clear that 8 the defendants and their advisors misunderstood the 9 original terms of the Quickturn rights plan. Under 10 the original plan, the newly-elected directors could 11 have redeemed the rights at any time before a bidder 12 such as Mentor Graphics crossed the 15 percent 13 beneficial ownership threshold. 14 Nevertheless, the Quickturn directors 15 in their depositions, and their lawyers, and 16 Hambrecht & Quist, also, mischaracterized the 17 original plan as a pure dead-hand provision. It was 18 not. There was a redemption opportunity within the 19 original pill without the presence of continuing 20 directors. 21 Substantively, the new amendments are 22 two-fold. First, Quickturn redefined the definition 23 of an interested person to include any person who 24 directly or indirectly proposed, nominated or 119 1 financially supported a Quickturn director who was 2 elected at any regular or special meeting, an 3 interested person being the one with whom a 4 transaction should not occur if one is to avoid the 5 triggering of the rights. 6 So they specifically redefined an 7 interested person to encompass Mentor, the precise 8 party with the greatest motivation and the declared 9 intention of calling a meeting to replace the 10 incumbent directors. 11 Secondly, they amended the redemption 12 exchange and amendment provisions to prohibit any 13 such action for 180 days after the election of the 14 majority of the board if the purpose of such action 15 has the purpose -- if such action has the purpose or 16 effect of facilitating a transaction with an 17 interested person. 18 The net effect of the two amendments 19 is to eliminate the power of any board elected as a 20 result of the special meeting to redeem the rights 21 plan for six months if such action has the effect of 22 facilitating a transaction solely with the bidder who 23 proposes, nominates or financially supports the 24 replacement of the incumbent directors. 120 1 The new directors -- this is critical 2 to understand the manipulative nature of what they've 3 done. The new directors are free under the rights 4 plan to effect a transaction immediately with any 5 party other than the person who proposes the new 6 directors. Notwithstanding the fact that the new 7 directors can redeem the pill for any third-party 8 transaction, at any time, including day one after 9 they are elected, these directors are asserting to 10 Your Honor that the sole justification for the 11 deferred redemption provision is to allow the board 12 to get enough information to determine over a 13 six-month period as to whether to sell the company. 14 THE COURT: Let me make sure I 15 understand that. If a third party comes in, 16 unaffiliated with anyone, and offers a higher price 17 than Mentor, the new board could accept that and 18 redeem the pill. 19 MR. ABRAMS: On day one after their 20 election. Let's suppose the new board is given a $15 21 offer by a third party. They can redeem on October 22 30th if we proceed with the meeting. 23 Let's suppose Mentor counters after 24 the special meeting and offers $25 a share, $10 121 1 higher than what the third party bids. Under this 2 pill, these board of directors, even if we have the 3 highest and best bid at the end of the day, can not 4 redeem for six months. 5 Why do they say they need the 6 deferred redemption provision? Every director 7 testified that the new directors have to determine 8 enough information about the company to make a sale 9 decision. 10 The directors simply don't understand 11 the operation of their own rights plan. Why don't 12 they understand it? Because they received no advice 13 from anybody at the meetings which is admissible in 14 this proceeding. They received no written materials 15 at the August 21 meeting regarding the deferred 16 redemption provision. As set forth in our brief on 17 page 35, they asked no questions regarding the 18 individual or cumulative effect of the bylaw 19 amendment and the deferred redemption provision. 20 They did not ask whether any bidder had ever kept an 21 offer open for longer than six to nine months. They 22 did not ask whether the deferred redemption provision 23 would affect Mentor's tender offer or proxy contest. 24 They did not ask whether any other company had 122 1 adopted a deferred redemption provision. 2 THE COURT: Mr. Abrams, one of the 3 arguments that Mr. Nachbar made was that in a Unocal 4 analysis, the Court is not required nor should it 5 inquire as to the reasonableness of the decision- 6 making process that led to the adoption of the 7 defensive measure, but only the reasonableness of the 8 measure itself. What is your response to that? 9 MR. ABRAMS: The first prong of 10 Unitrin requires the board to carry its burden of 11 proof of demonstrating it conducted a reasonable 12 investigation to identify a threat to corporate 13 policy and effectiveness. That is Hornbook Delaware 14 law. If they fail to conduct a reasonable 15 investigation and to, in effect, conduct the 16 appropriate process in adopting the defensive 17 measure, then they have no informed basis on which to 18 enact the defensive measure. We submit these 19 directors, on the basis of the record that we already 20 established, will fail the first prong of Unitrin. 21 And at a minimum, we have raised, obviously, disputed 22 questions of fact as to what they knew. And 23 therefore, we are entitled to proceed to trial, we 24 submit. 123 1 THE COURT: You are saying that under 2 the first prong of Unitrin, the board has to conduct 3 a reasonable investigation to identify a threat, a 4 cognizable threat. Is it also the case that the 5 board has to conduct a reasonable investigation to 6 determine the proportionality, if any, of the 7 response? I mean is that required under Unitrin, or 8 is that just a hard core, bedrock fiduciary duty? 9 MR. ABRAMS: It's a bedrock fiduciary 10 duty, recognized in Van Gorkom, which is applicable 11 to any decision by the board. And in the context of 12 a defensive response, the board only is entitled to 13 enact reasonable measures. Certainly, it is a 14 requirement that the board act with due care on 15 behalf of their own stockholders before they enact 16 defensive measures, which, as in this case, could 17 preclude or coerce the outcome of the control 18 contest. 19 THE COURT: All right. 20 MR. ABRAMS: As Your Honor will hear 21 in the discussion this afternoon on the motion in 22 limine, we attempted to inquire of the directors -- 23 THE COURT: I thought it was a motion 24 to compel. 124 1 MR. ABRAMS: There are several issues 2 that we hope to discuss with Your Honor in the time 3 we have available today. I had suggested, I thought, 4 before we started the summary judgment argument that 5 we objected to any reference by the other side to the 6 fact of consultations with counsel. That is the 7 precise subject matter of the motion in limine. We 8 are asking the Court for a ruling that the defendants 9 are not entitled, in the summary judgment proceeding 10 or at trial, to refer to the fact that they consulted 11 with counsel. 12 THE COURT: Well, I don't know how to 13 deal with that, given that there has been no response 14 to the motion in limine and that the ground rules -- 15 I thought the ground rules had been set that we were 16 not going to consider that. 17 MR. ABRAMS: That's fine, Your Honor. 18 If Your Honor wishes to give them a time, additional 19 time, since the filing of our motion last Friday, to 20 submit a response, we are happy to take that up with 21 the Court at Your Honor's convenience. 22 The point, though, for purposes of 23 this proceeding, is we attempted to inquire as to the 24 board's discussions with their advisors regarding the 125 1 justification for the 180-day deferral period. 2 Steadfastly, consistently, and without hesitation or 3 exception, Quickturn's counsel invoked the 4 attorney/client privilege to block every single 5 question that we asked about the 180-day period. 6 We submit to Your Honor that the 7 board, with that record, can not carry its burden of 8 showing a reasonable investigation, because there is 9 no admissible evidence for Your Honor to consider 10 regarding the reasonableness or the propriety of the 11 board's process in evaluating the defensive measures. 12 Its their burden of proof, having invoked the 13 attorney/client privilege, to block the explanation. 14 They are in a difficult position, we submit, at trial 15 to carry their burden of proof. 16 In addition to not asking the 17 questions I just identified, we were able to elicit 18 in the discovery process two important facts 19 regarding questions which were not asked of H&Q, and 20 information which H&Q did not communicate to the 21 board in conjunction with its consideration of the 22 deferred redemption provision. 23 First, if the directors asked, H&Q 24 would have informed the board that the deferred 126 1 redemption provision would "make it less likely" that 2 a bidder could use a proxy contest to replace the 3 board, because the new directors would be powerless 4 to redeem the rights. That is the Cleveland 5 deposition, 87. 6 In addition, as I mentioned 7 previously by mention to Cleveland deposition 86, 8 lines one to twenty, H&Q would have told the board, 9 had anybody been awake to ask, that the deferred 10 redemption provision decreases the likelihood that a 11 bidder would even attempt a proxy -- attempt a proxy 12 contest. 13 Once again, Your Honor, having failed 14 to ask all of these questions; and indeed, having no 15 explanation on the record before you as to how they 16 came to the 180-day period, it is not surprising that 17 this board testified uniformly in the depositions 18 that the deferred redemption provision precludes any 19 sale of the company for six months. As I've just 20 explained to Your Honor, that is simply not true. 21 This board of directors did not 22 understand on August 21, and does not understand 23 today, the purpose or the effect of the deferred 24 redemption provision. Mr. Nachbar attempts to make 127 1 much of the fact that advice was solicited from 2 counsel. We hope to bar them from even referring to 3 that fact, but for present purposes, let me just 4 mention that we don't know what the advice was. We 5 don't know whether the board followed the advice. We 6 don't know whether the advice is reasonable. Under 7 those circumstances, the fact of referring to counsel 8 is irrelevant. 9 And furthermore, they refer to the 10 fact that Hambrecht & Quist, through Mr. Cleveland, 11 recommended the adoption of the bylaw amendment and 12 the deferred redemption provision. There is nothing 13 in the record that suggests that Mr. Cleveland, or 14 anybody at Hambrecht & Quist, had a basis for the 15 recommendation. It appears that we have a naked 16 recommendation, with no questions from the directors 17 and no explanation as to why this provision, as 18 opposed to some other provision, is reasonable. 19 Now, I believe I've touched upon 20 several of the reasons as to the basis for our 21 argument that the board's rationale for the deferred 22 redemption provision is simply a pretext. It says 23 the new directors need to learn about the company. 24 Under their theory, two of their own directors would 128 1 have been disqualified from voting on August 21 on 2 the sale of the company because they only joined the 3 board on June 5th, less than the six months that they 4 say is necessary in order to allow the directors to 5 figure out whether to sell the company. 6 Indeed, Mr. Hasler, the director they 7 rely upon for the reasonableness of their assessment 8 of the defensive measures, was in fact one of the two 9 people who joined the board on June 5th. Incredibly, 10 Mr. Hasler voted for defensive measures which will 11 have the effect of precluding the sale of the company 12 for eleven months, even though he made the decision 13 on the first day he joined the board to reprice the 14 options at approximately $7.50. 15 We submit, Your Honor, if these 16 directors knew on their first day enough information 17 about repricing options to 7.50, and if they knew in 18 two-and-a-half months to reject our bid as 19 inadequate, then these directors have no plausible 20 argument that it requires six months to sell the 21 company. 22 Your Honor is absolutely correct in 23 seeking to ascertain whether there is any record 24 evidence as to advice to the board regarding the 129 1 underlying justification for attempting to require 2 the new directors to wait six months before selling 3 the company. There is none. There is no basis in 4 fact or experience to preclude the new directors from 5 selling the company. If they breached their duties 6 in conjunction with such an activity, there are 7 remedies available at an appropriate time. 8 Finally, and most importantly, the 9 whole justification for the deferred redemption 10 provision is a sham, because it applies only to 11 Mentor. This board -- that is, the newly-elected 12 directors would be free to sell the company on day 13 one to a third party. They can't sell it to us. 14 They can't sell it to us even if we have the highest 15 bid. The six-month argument is a facade. 16 With that factual background, Your 17 Honor, let me touch upon the summary judgment 18 standard, which of course is familiar to Your Honor 19 as a general matter. Here, in the context of -- 20 THE COURT: I think I'm familiar with 21 that. 22 MR. ABRAMS: In the context of a 23 summary judgment application by a party who bears the 24 ultimate burden of proof, they are required to 130 1 introduce evidence to establish conclusively their 2 right to judgment after trial. It's their burden on 3 summary judgment in general. And in particular, that 4 burden is emphasized because they bear the ultimate 5 burden of proof at trial. 6 The defendants misunderstand their 7 evidentiary burden on their motion. They complain 8 that we have only advanced lawyers' arguments, with 9 no record citations. I would submit that even though 10 our brief may prove to be overlong, the 517 citations 11 to the record in our record are an interesting fact 12 in comparison to the paltry 27 record citations in 13 their reply brief. 14 We have presented an overwhelming 15 record that these people breached their duty of care. 16 They didn't know what they were doing. Their actions 17 are unreasonable under Unitrin. There are questions 18 based on the circumstantial evidence regarding their 19 motivations. Most importantly, there are critical 20 questions under Blasius regarding whether these 21 defendants can carry their burden of showing a 22 compelling justification for impeding the stockholder 23 franchise. 24 Your Honor is well aware of the 131 1 decisional law in this jurisdiction, enunciated 2 primarily by Chancellor Allen in Stahl I, and in 3 Wells Fargo, to the effect that the resolution of 4 fiduciary duty claims in general, and Unocal claims 5 in particular, requires a fine focus on the 6 particulars of the case, as well as highly contextual 7 determination of the reasonableness of the defensive 8 measures. 9 This is not the time, particularly on 10 this record, for the Court to make any ultimate 11 findings with respect to the validity of the 12 defendants' conduct. 13 As to the six questions that are 14 relied upon by the defendants in support of their 15 summary judgment application, let me review them with 16 the Court to make sure that we are clear on all six 17 of them. 18 As to independence of the directors, 19 we suggest that the directors are interested, as set 20 forth in Blasius and Aprahamian, because their 21 conduct is being undertaken in the context of a 22 control contest, where their removal from office is 23 the primary purpose of the proxy contest. 24 In addition, three of the directors 132 1 are quasi-insiders, who are former officers of the 2 company. We believe that raises a question of fact 3 as to whether they can truly be deemed disinterested 4 with respect to a hostile proposal to acquire the 5 company that they previously worked for. 6 Furthermore, two of their directors, 7 Mr. Hasler and Mr. Kissner, joined the board on June 8 5th. Under their explanation of how long it takes 9 directors to learn about the company, those directors 10 must have breached their duty of care by acting in 11 two months to reject our offer, instead of the six 12 months that they say that directors need to learn 13 enough information to determine whether to sell the 14 company. 15 So there are legitimate questions of 16 fact as to independence, as well as the evidence 17 regarding improper motivations and improper effects 18 of what the directors have done which justify a 19 trial. 20 There is a statement in the reply 21 brief to the effect that the Quickturn directors have 22 acted within the best traditions of Delaware law in 23 carefully analyzing and responding to Mentor's offer. 24 I look forward to seeing the directors at trial, so 133 1 they can respond directly to the many disputed 2 questions of fact which we have raised with respect 3 to their lack of understanding of what they've done, 4 and their failure to properly analyze the measures 5 that were before them. 6 Point Number 3 is that Quickturn, 7 quote, only took two defensive actions. I'm not sure 8 what the word "only" adds to the analysis when those 9 two actions have, for the reasons I identified, based 10 upon record citations, a preclusive and coercive 11 effect on the stockholder vote and on the outcome of 12 the Mentor tender offer. 13 Point Number 4 is that they've now 14 set the meeting date for January 8th. That, of 15 course, begs the question of whether it's proper to 16 use a bylaw and a rights plan amendment to defer a 17 meeting, to coerce the outcome of the vote and 18 effectively render the stockholders impotent to 19 replace the board. 20 The fifth point is the deferred 21 redemption provision only will delay the success of 22 Mentor's proposal by six months. That, of course, is 23 factually inaccurate. We are going to have to wait 24 until January 8th, and subsequently, until 134 1 approximately July 8th, in order to complete our 2 offer, absent the intervention of the Court to allow 3 us to proceed with the special meeting on an earlier 4 basis and, more importantly, to invalidate the 5 deferred redemption provision to allow the new board 6 to carry out its obligations under well-recognized 7 principles of Delaware law, to determine whether to 8 sell the company. 9 The net effect of the provisions 10 enacted by the defendants is to defer for eleven 11 months, nearly one year, our ability to complete the 12 offer. In addition, the eleven-month delay in 13 completing the offer begs the question of whether we 14 are going to be successful at any stockholder meeting 15 which might be held to obtain the requisite vote in 16 order to replace the directors. The success of our 17 offer, faced with their recalcitrance, depends upon 18 removing and replacing the directors. For the 19 reasons I've identified, the outcome of that proxy 20 contest is painfully in doubt, because of the effect 21 of the deferred redemption provision on stockholders' 22 willingness to vote at all, and the coercive effect 23 on any vote that they might make. 24 The sixth point is that Mentor can 135 1 keep its offer open for nine months. We don't know 2 that that's true. There is no evidence to that 3 effect. We have the right under the tender offer 4 materials to walk at any time. Ultimately, as I 5 explained to Your Honor this morning, we should not 6 be put to the test of declaring what we are going to 7 do or not do in response to illegal actions by the 8 defendants. 9 The six so-called undisputed facts 10 are all disputed or legally irrelevant at this stage 11 of the game. Most importantly, they ignore 12 completely the unjustifiable interference with the 13 stockholder franchise which results from the bylaw 14 amendment. They ignore the coercive and preclusive 15 effect of the defensive measures when considered 16 together. 17 For those reasons, we submit that the 18 summary judgment motion should be denied and we 19 should proceed to the trial that is scheduled to 20 start in less than two weeks. The plaintiffs thank 21 Your Honor for your cooperation in setting aside time 22 for the trial so promptly. We will be ready to 23 proceed. We continue to think that the three trial 24 days are more than enough to finish this proceeding 136 1 and will allow Your Honor time to render a decision 2 that will determine the outcome of our contentions 3 with respect to the unjustifiable delay in the 4 stockholder meeting. 5 THE COURT: Thank you. 6 MR. ABRAMS: Thank you, Your Honor. 7 MR. BERNSTEIN: Good afternoon, Your 8 Honor. Stanley Bernstein, for the shareholder 9 plaintiff. I was not going to be duplicative without 10 Your Honor's admonition. I will be brief and 11 nonduplicative, as well, given the time constraints. 12 I wholly adopt what Mr. Abrams 13 presented to Your Honor. From the shareholders' 14 perspective, let me emphasize several key points. 15 What the Quickturn defendants have 16 constructed is the ultimate in a prisoner's dilemma 17 shareholder game theory with respect to voting. The 18 analysis, really, from a shareholder's perspective 19 distills to the following: "I have a vote. I can 20 vote for the directors who can accept my offer, but 21 they won't. I can vote for the directors who won't 22 accept my offer, or can't accept my offer." I'm 23 sorry. "Those who won't approve the offer can. The 24 Quickturn designees won't approve the offer. They 137 1 won't accept the offer. But they are allowed to. If 2 I vote for the Mentor designees, who want the offer 3 to be accepted, they can't under the bylaw 4 designation and under the DRP." 5 What happens is I have to decide who 6 to vote for based on some type of gamesmanship as to 7 whether I vote for the incumbent, who could approve 8 the offer but they have indicated they won't, or vote 9 for the person who is new and indicated that they 10 might, but can't. 11 THE COURT: Doesn't that overlook one 12 thing? You're positing a choice between voting for 13 incumbents, who would defeat the expectations of the 14 shareholders who want the Mentor offer to be 15 accepted, and the nominees of Mentor, who would 16 fulfill those expectations, but who can't. But 17 that's only for six months. You didn't factor that 18 into your picture. So why don't we do that? 19 MR. BERNSTEIN: We do factor it in. 20 The six months, Your Honor, firstly, it's 21 disenfranchising, because only one slate has the 22 six-month handcuff. Immediately, it tilts the 23 playing field against the Mentor designees. The six 24 months is illusory, because as Mr. Abrams pointed 138 1 out, it's really eleven months when you add in the 2 ninety days from the bylaw amendment. And the most 3 important fact is I don't know if Mentor is going to 4 be here in July of '99. Your Honor has asked 5 repeatedly -- 6 THE COURT: Let's back up for a 7 minute. From the shareholders standpoint, which 8 presumably is what you are trying to portray, what 9 difference does it make what happened before the 10 meeting? We are now on the eve of the meeting and 11 trying to decide how to cast a vote. And from that 12 point on, we are only talking about a six-month delay 13 if you, for example, choose to vote for the Mentor 14 nominees, not nine months. It's not eleven months. 15 It's six months. 16 MR. BERNSTEIN: The six months -- I 17 don't know what is going to happen in those six 18 months. Mentor could walk. Someone else can walk 19 in, as we put forth in our brief, pages eight and 20 nine. There could be a bidding auction if Mentor 21 wins, and Mentor designees would be precluded from 22 accepting the highest bid, which might be theirs. 23 The issue -- 24 THE COURT: Would it? Would they? 139 1 MR. BERNSTEIN: Absolutely, Your 2 Honor. Mentor wins on October 29th -- 3 THE COURT: I thought if the Mentor 4 designees are elected, they could accept the bid of 5 an unaffiliated third party. 6 MR. BERNSTEIN: Yes. They could 7 accept the unaffiliated third party. What I said was 8 if Mentor enters the bidding war, which is likely, 9 and is the highest bidder on October -- on November 10 15th, two, three weeks later, which is a normal 11 bidding cycle, and Company X bids $14 a share, and 12 Mentor decides to bid $15 per share, the Mentor 13 designees will be sitting there saying, "We can take 14 14 today. We can not take the $15 that Mentor is 15 offering for six months." Six months is a lifetime. 16 It's a lifetime in the financial markets. It's more 17 than a lifetime in the technology industry. 18 The gamesmanship in the voting 19 shareholder dilemma gets further complicated because 20 the choice is not necessarily the Mentor board or the 21 Quickturn board. I thought what Your Honor was 22 alluding to was another choice, all of which are 23 inappropriate under Blasius, which is the whole DRP 24 only kicks in if a majority of the Mentor -- a 140 1 majority of the board becomes Mentor designees. 2 So maybe I have to decide to vote for 3 only two Mentor designees and leave three Quickturn 4 people on. The voting dilemma here has many 5 permutations. It's inappropriate, and it's 6 unnecessary. It serves no purpose. 7 As Mr. Abrams pointed out, if you 8 need six months to consider an offer, it's unheard 9 of. It's unthinkable. We are here on summary 10 judgment. We will have trial testimony on why you 11 don't need six months. But if you needed six months, 12 you don't need six months only to consider the Mentor 13 offer and not to consider Company X's offer. And 14 that's what the Quickturn defendants have done. 15 Their DRP proves that the stated 16 reason is false, a sham. I go so far as to say it's 17 simply a lie, because if you don't need six months to 18 consider General Motors' offer or Microsoft's offer, 19 you don't need six months to consider Mentor's offer. 20 You certainly don't need six months to consider 21 Mentor's offer when the Mentor designees have been 22 thinking about the Mentor offer for some time. 23 Dean Hasler was on the board for two 24 months. Before he got on the board, under 141 1 cross-examination he said he spent a day or two 2 considering Quickturn's business. He had no problem 3 repricing options the first day. He had no problem 4 rejecting a bid that was within a range of fairness. 5 Six months is a sham. 6 THE COURT: You are repeating 7 arguments that have already been made. The argument 8 that wasn't made is the one that you led off with. 9 That is how does a shareholder -- what distorting 10 effect, if any, does the six-month delay period have 11 on a shareholder's vote. 12 MR. BERNSTEIN: Right. 13 THE COURT: I just want to make sure 14 I understand that. One of the arguments that 15 Mr. Abrams advanced was that there is evidence that 16 the combined nine-month delay, or perhaps it was just 17 six months redemption delay, would induce some 18 shareholders not to vote at all. I gather, however, 19 that your point is that the shareholder may vote, but 20 they would have to engage in a painstaking analysis, 21 some probability chart, to determine what might 22 happen so they could decide which way to go. 23 MR. BERNSTEIN: That's precisely 24 correct, with the only proviso that that is in 142 1 addition to what the record evidence is, that some 2 shareholders might not vote at all. I'm trying not 3 to duplicate what Mr. Abrams said. Our brief and our 4 focus is the games theory, which we believe violates 5 Blasius. 6 THE COURT: How does it violate 7 Blasius? 8 MR. BERNSTEIN: It affects the voting 9 considerations by stockholders without any compelling 10 justification. And stockholder -- basically, Your 11 Honor, poison pills have been upheld by the Delaware 12 courts, as I understand it -- Your Honor understands 13 far better than I do, I am sure. The ultimate weapon 14 shareholders have -- that's how we started out today. 15 I agree with Mr. Nachbar on some things, as well. 16 This issue is here. Who is running 17 the show, the stockholders or directors? Poison 18 pills have been validated by the Delaware courts to 19 give target companies some leverage to negotiate, 20 subject to the ultimate check, the ultimate weapon 21 under Moran against Household. You can vote the 22 directors out if you are not happy with what they are 23 doing. 24 THE COURT: All right. You are 143 1 saying that forcing the shareholders to engage in 2 this what you call game theory, or sophisticated 3 probability analysis, is tantamount to the purposeful 4 interference with the shareholder franchise that was 5 condemned in Blasius? 6 MR. BERNSTEIN: Absolutely our 7 position, Your Honor. 8 THE COURT: There is a qualitative 9 difference. Isn't there? 10 MR. BERNSTEIN: There is a 11 difference, but the effect is you are -- you are 12 tilting the playing field with respect to voting. 13 You are making shareholders decide who to vote for in 14 order to -- whether you can accept a takeover or not. 15 The ultimate -- the ultimate ratification, the 16 ultimate purpose, the ultimate vindication of a 17 poison pill is that the shareholders also have the 18 right to vote out directors if they don't like the 19 way the pill is being used. 20 Here, if you vote out the directors 21 because you don't like the way the pill is being 22 used, you are stuck back in the dilemma that you are 23 with directors that don't have the right to get rid 24 of the pill with respect to what is now the only and 144 1 best alternative structure to the just say no. 2 THE COURT: What I'm really asking 3 you, is the evil of that situation that the 4 shareholders are forced to engage in this exercise, 5 or is it that once having engaged in the exercise, 6 they would more likely than not be tilted in favor of 7 voting for the incumbents; that is, against the 8 Mentor nominees, in which case, I gather, the effect 9 of the defensive measures is coercive. 10 MR. BERNSTEIN: It is closer to the 11 latter, Your Honor. I can't speak with personal 12 knowledge as to whether shareholders are going to 13 make the ultimate conclusion that they are better off 14 with the Quickturn board, who can redeem the DRP, 15 redeem the pill, but won't, than to buy into the 16 possibility that Mentor will still be there in six 17 months. My point is that they are going to have to 18 make this sophisticated analysis. 19 THE COURT: I'm trying to 20 determine -- I'm trying to make legal sense out of 21 that. If I understand you correctly, you are making 22 two separate arguments. If I don't understand you 23 correctly, I hope you will tell me. 24 One of the arguments is that the 145 1 mere -- merely being required or forced to engage in 2 this game theory analysis is, of itself, a purposeful 3 interference with the franchise under Blasius. 4 MR. BERNSTEIN: I believe that's 5 correct. 6 THE COURT: Is that what you are 7 arguing? 8 MR. BERNSTEIN: Yes, Your Honor. 9 THE COURT: You are also arguing, 10 aside from that, that the circumstances, the 11 objective circumstances, are such that once having 12 engaged in that exercise, a rational shareholder 13 would be tilted toward voting against the Mentor 14 nominees, which is a coercion argument under Unitrin. 15 MR. BERNSTEIN: It's coerces them to 16 vote for Quickturn or makes them gamble on a 17 six-month delay. 18 THE COURT: Those are your two legal 19 arguments. 20 MR. BERNSTEIN: Yes, with respect to 21 that. I might also point out with the DRP, just 22 quickly -- I don't want to take other counsel's time. 23 Quickturn makes a point that the DRP and six-month 24 restriction is akin to a standstill agreement and any 146 1 long-term contract in the ordinary course. That's 2 just plain wrong. It's a specious argument, Your 3 Honor. I don't know if that point has been made 4 adequately. 5 I have no particular problem with a 6 board in the ordinary course entering into a long- 7 term agreement or a standstill agreement. But the -- 8 this DRP only binds certain boards. It doesn't bind 9 all boards. And the fact that it only binds certain 10 boards again goes into this issue of, "Who do I vote 11 for? Do I vote for the board that is bound or do I 12 vote for a board that is not bound?" 13 You can't look at the six-month 14 restriction against accepting that Mentor bid as a 15 simple standstill agreement with Mentor, because it 16 only binds the Mentor designees. Therefore, I have 17 to decide am I better off with a bound Mentor group 18 or with a Quickturn group. 19 With respect to the delay, just -- I 20 would like to point out very quickly -- Mr. Abrams 21 covered virtually everything. The ninety-day delay 22 on the bylaw issue, H&Q, as Mr. Abrams pointed out, 23 valued this company at 7.50 a share, based on the 24 public information of its research analysts just a 147 1 couple months ago. Mentor has this public 2 information, too. They came in with a 3 $12-and-an-eighth bid. 4 Mentor made the bid in writing and 5 repeated thereafter -- they said, "Give us due 6 diligence. Maybe we'll come up with more money." 7 The Quickturn defendants won't give the due 8 diligence. They won't negotiate. They instructed 9 H&Q not to negotiate. They instructed H&Q not to 10 seek alternatives. 11 Our point is that the delay in this 12 case is completely unnecessary. It would have been 13 nice if the Quickturn defendants used this time to 14 get the due diligence, extract more money from 15 Mentor. If they are not doing the due diligence and 16 not seeking out alternatives, there is no purpose 17 seeking a delay. You won't get a higher price 18 without giving due diligence. 19 We are afraid that -- we are not 20 talking about a short-term 30 days or 90 days or six 21 months or eleven months, Your Honor. What we are 22 really talking about here is a gamble that Mentor is 23 going to walk. And Mr. Abrams doesn't say that he is 24 going to walk. He doesn't say he is going to stay. 148 1 And frankly, that's a risk that I don't think the 2 Quickturn defendants should put us in. Nine months, 3 eleven months, these are numbers, as the trial 4 testimony will show -- hostile tender offers don't, 5 in virtually any circumstance, survive that long. 6 Indeed, the Quickturn board, had it 7 paid attention to the H&Q analysis, was advised that 8 none of these offers lasted more than five months. 9 Any offer, hostile offer, that lasted more than five 10 months -- 11 THE COURT: Excuse me. Where do you 12 come up with that? 13 MR. BERNSTEIN: H&Q August 21 book 14 showed there was no successful hostile offer in this 15 industry that was open for more than five months. 16 THE COURT: Does it show that? 17 MR. BERNSTEIN: I believe it did. 18 THE COURT: Show me where it shows 19 that. 20 MR. BERNSTEIN: I misstated it, so I 21 withdraw it. That's how I understood it. I know 22 Mr. Cleveland testified that he wasn't aware of any 23 that lasted longer than that. 24 THE COURT: That may be, but the 149 1 question is what the board knew. 2 MR. BERNSTEIN: Your Honor, what we 3 are afraid of is not a ninety-day delay or six-month 4 delay. The odds are stacked against this offer 5 succeeding if it's delayed by eleven months. If it 6 doesn't succeed at all, Mentor walks, there is no 7 alternative. 8 It's not a question of whether you 9 get your money in ninety days or 120 days or in 10 eleven months. If there was a letter of credit 11 posted and no conditions that this offer could last 12 until July 9th, maybe there could be negotiations, 13 but that's not the situation here. There are no 14 guarantees other than there is a pending offer that 15 can be withdrawn at any time. 16 The markets are very volatile. 17 Mentor is very volatile. Quickturn is very volatile. 18 The technology industry is very volatile. There is 19 only so much time that Quickturn needs to analyze 20 this or negotiate. They decided they don't want to 21 negotiate. They analyzed it. They made the 22 determination. It's now up to the stockholders to 23 decide. 24 If we wait until July, there may be 150 1 nothing for the stockholders to decide, as a 2 practical matter. There may not be an offer there. 3 We don't know if there will be an offer there in 4 January. So cases that have allowed delay have 5 allowed delay for a purpose. At this point, there is 6 no purpose. 7 With that, Your Honor, if you have 8 any further questions, I could answer that, but I 9 think between the brief and Mr. Abrams' presentation, 10 I've covered what -- the key points we would like to 11 make. 12 THE COURT: Thank you, Mr. Bernstein. 13 MR. NACHBAR: Good afternoon, Your 14 Honor. Your Honor asked about the six undisputed 15 facts. And I didn't hear any disputed facts, really, 16 as to any of them, save one. 17 The one I heard, a factual dispute 18 from the other side on -- I'll explain why there 19 isn't a factual dispute -- is on the issue of 20 irreparable harm. Mr. Abrams said that there were 21 five relevant statements in the record, two from 22 Mr. Burch, one from Mr. Varelas, two from 23 Mr. Cleveland. 24 I'm going to go through those. None 151 1 of them provides any evidence of irreparable harm. 2 There are some statements that I'll go through that 3 contradict any evidence of irreparable harm. 4 THE COURT: Before you do that, 5 Mr. Abrams made the point that the use of the term 6 "irreparable harm" in this context is somewhat 7 curious, because we are not in an injunctive mode. 8 We are in a summary judgment mode. And I'm a little 9 curious about that, too. Are we really talking about 10 the harmful effect, if any, or the absence of a 11 harmful effect of the defensive measures? 12 MR. NACHBAR: I think we used it as a 13 shorthand to cover two things. First, is this 14 preclusive? I'll lump coercive into that same 15 category. I'll show that the testimony shows that 16 it's not. And second, there is a required element of 17 the relief they sought. They brought this action 18 seeking a permanent injunction. They've got to show 19 irreparable harm. If there is a damage remedy, they 20 don't get a permanent injunction. 21 But I'll leave the irreparable harm 22 aside and let's talk about preclusive and coercive. 23 I think they are the same thing. 24 Mr. Burch, who is the other side's 152 1 proxy solicitor, here is what his testimony was, Your 2 Honor. This is page 181. 3 "Question: If I described 4 MacKenzie's job as soliciting agent designations and 5 the mechanics of securing whatever percentage of 6 agent designations you sought to get or soliciting 7 tender shares, is there any Quickturn action that you 8 can point to that has made your job more difficult?" 9 Mr. Abrams then said, "Are you 10 purposely excluding the proxy solicitation with that 11 question? I believe you may have misspoken." 12 And Mr. Van Loben Sels, who took the 13 deposition, "No, I did not purposely omit it." 14 There is then colloquy and Mr. Burch 15 gives his answer. 16 "Answer: To some degree, some of the 17 actions have made our job easier and those same 18 actions can also make our job more difficult." 19 Then he gives an explanation. He 20 says that there is counterbalancing of the two 21 effects. That doesn't sound coercive to me, and it 22 doesn't sound preclusive to me. 23 He goes on a page-and-a-half later. 24 This is the second statement. He is asked, "Is there 153 1 anybody out there who didn't submit a proxy because 2 of these actions? 3 "Answer: We have not yet 4 solicited -- well, we've mailed, but we haven't yet 5 really commenced our solicitation of proxies for 6 meetings, so people haven't told us they weren't 7 going to vote for us because of the bylaw yet and its 8 potential to delay that meeting," etc. So he doesn't 9 have any evidence. 10 Next we are told, well, we have to 11 look at what Mr. Varelas said. Let's do that, page 12 ninety and ninety-one. Mr. Varelas was asked how the 13 dead hand impacts this. And he said two things: 14 First, he said, "Well, it may prevent shareholders 15 from voting..." -- not it will. Not it has. Not 16 it's preclusive. Not it's going to coerce people. 17 "It may prevent shareholders from voting for our 18 offer." 19 Then he goes on to say, "Secondly, 20 we, as the acquirer, may not view the opportunity as 21 attractive given the fact that we will not be able to 22 take control of the company for an extended period of 23 time and, therefore, will not be able to yield the 24 business results which warrant the share price that 154 1 we're offering," etc. He goes on. 2 He is not an officer of Mentor. But 3 leaving that aside, the fact of the matter is, Your 4 Honor, January 8th, if they win their proxy contest, 5 they are going to take control. They can put in 6 their own board members. They can fire the CEO. 7 They can put in their own people. They can do 8 whatever they want to do. I mean this ceases to be a 9 hostile offer after January 8th. 10 So all the stuff we have heard about 11 hostile offers for nine months and eleven months, the 12 question here is: Will the stockholder meeting be on 13 October 29 or will it be on January 8th? 14 Now if they get enough proxies -- and 15 there is no evidence that they are not getting 16 proxies because of anything we have done. They may 17 not be getting proxies because their offer isn't 18 adequate, like the state board of Wisconsin said. 19 But if they do get the proxies, they are going to 20 control the board. And it ceases to be a hostile 21 offer at that point. The board is then controlled by 22 people who are receptive to their offer. 23 So what we are talking about is a 24 little more than two months, between October 29th and 155 1 January 8th. That's all we are talking about. 2 Finally, Mr. Cleveland, our 3 investment banker, is quoted, twice mentioned. 4 Extremely misleadingly, Your Honor. Page 86. 5 "Question: Do you personally have a 6 view on whether a dead-hand provision in a rights 7 agreement has an effect on the ability to replace a 8 target board of directors by proxy contest? 9 "Mr. Berger: A never-expiring dead- 10 hand provision? 11 "Mr. Beck: Yeah, the dead-hand 12 provision that was in existence on August 17, I'm 13 talking about." 14 That's the one before the amendment 15 here, Your Honor. That's the one that you could 16 never redeem. 17 He goes on, "Well, that could 18 decrease the likelihood of someone making an offer." 19 That is not the six-month delayed 20 redemption provision we are talking about. You know, 21 maybe the other side just made a mistake, or maybe 22 they know that. I don't know. But either way, their 23 citation is incorrect. 24 Now what we do know is that when 156 1 Mr. Hinckley, who is the architect of this, set out 2 to get a bank commitment, he got a three-year bank 3 commitment on his financing. That's Hinckley pages 4 226, 227. 5 Why did he do that if he needed to 6 complete this offer in forty-five days, one might 7 ask. Mr. McMahon, of the bank, confirmed that the 8 financing will be available. I think he was asked 9 about June. It will be available in July, too. He 10 said it's available until the offer is consummated. 11 He was specifically asked if it would be available in 12 June of 1999. He said yes. 13 Mr. Hinckley was then asked, "Well, 14 you know, how have you been harmed by this?" 15 His answer was, "They've increased 16 our expense. They have slowed the process. They 17 have potentially jeopardized the business of 18 Quickturn." 19 That's it. Nothing about preclusion. 20 Nothing about coercion. 21 In fact, we know from the press 22 release that they put out today that they now have 23 tenders for over 40 percent of the stock. Mr. Burch 24 testified that tenders don't come in until the last 157 1 minute and a lot of people wait. They have also 2 testified -- Mr. Richardson testified that he was 3 told at the mid-September board meeting that their 4 tenders are ahead of where they were projected. 5 This business about this being 6 preclusive and coercive, it's a figment of some 7 lawyer's imagination. There is absolutely no record 8 support for that. 9 And I would submit that the lawyers' 10 arguments are not cognizable on this motion. But if 11 they are going to make arguments like Mr. Bernstein 12 did about prisoner's dilemmas, and things like that, 13 let's look at what the Court has said about that. 14 NWA case. Identical delayed 15 redemption provision. The Court says that because 16 there are two slates, both of which are committed to 17 selling the company, there will be a slight effect on 18 voting, although the Court says, "I'm rather 19 unimpressed that that will have an effect." 20 The Court then goes on to say, "Had 21 the NWA board not recently announced itself willing 22 to consider a value-enhancing transaction I would 23 feel more confident that the real issue facing the 24 shareholders is whether they want the company sold 158 1 now or not. In that context, the issue would have 2 been clearly joined and the delayed redemption 3 provision would have seemed a relatively 4 insignificant cloud." 5 That's where we are, Your Honor. The 6 issue has been joined. Relatively insignificant 7 cloud. That's not coercive. That is not preclusive. 8 We also heard there have been no 9 tender offers that have been kept open for nine 10 months. We haven't done an exhaustive study over 11 lunch, but I thought of two of them that I knew were. 12 One is the Holly Farms case, litigated in this Court, 13 where a hostile offer was opened and successfully 14 concluded after, I think it was, ten months. The 15 other is the Bally Alliance Gaming case, that was 16 also litigated. 17 The lawyers' arguments aren't 18 sufficient to resist summary judgment. You have got 19 to come forward with facts. The other side had the 20 opportunity to do so. They have failed. 21 We heard about the -- whether the 22 180-day period was a reasonable period and whether 23 the board made any investigation. There were 24 discussions about that at the board meeting, and the 159 1 other side got testimony about that. It's in our 2 briefs. Hasler deposition 33 is certainly one place 3 where that was discussed. 4 And there were discussions on 5 counsel -- with counsel about these issues. And this 6 is undisputed. It meets the Van Gorkom obligations. 7 And I don't believe that Van Gorkom requires you to 8 disclose substantive advice of counsel in order to 9 say to the board, "Operate it appropriately." I'm 10 not aware of any case that says that. 11 There was a statement made in reply 12 that Mr. Cleveland wasn't asked any questions about 13 the bylaw amendment. That's false. Mr. Cleveland's 14 testimony, page 88 and page 89, he couldn't recall 15 specific questions, but he said there was extensive 16 discussion and extensive questions about that. 17 In terms of the January 8 day, I 18 think that's not disputed now. But in all events, 19 for the record we put out a press release on October 20 1. I believe it is appended to a securities law 21 filing. But it's certainly publicly announced. 22 There is no mystery about it. 23 You know, for the reasons that we 24 have previously said, we believe and the board 160 1 believed that the ninety-to-a-hundred-day period was 2 akin to an advanced notice provision and was 3 reasonable. I would only point out that at the time 4 that the board enacted that, they didn't know -- the 5 board, I think, expected that the agent designations 6 might be delivered immediately. You only need 10 7 percent. Mentor already had 3-and-a-half percent. 8 There were several large stockholders. It was 9 possible that the request for a meeting would be 10 delivered the next day. The board set forth a 11 reasonable period, ninety to a hundred days. It 12 keyed that to indicate a determination was made that 13 the meeting had properly been requested. 14 Finally, there was this question 15 about reasonable investigation and the first prong, 16 as opposed to the second prong, of Unitrin. There is 17 no dispute here that there was a threat to corporate 18 policy and effectiveness. The first prong was 19 satisfied. 20 Mr. Abrams says that you have got to 21 act in accordance with Van Gorkom and reasonable 22 investigation in the first prong. I think as a 23 matter of law he is correct about that. But here 24 there is no dispute. I mean one of the reasons that 161 1 specifically is in the minutes of the board meeting 2 and in the 14D-9 is the situation vis-a-vis the 3 intellectual property rights. 4 It was not a coincidence that this 5 offer was made seven days after a critical federal 6 circuit court ruling affirming the validity of our 7 patents. We asked about that. We asked Mentor's 8 directors about that. They refused to answer on the 9 basis of attorney/client privilege. But we do know 10 what they said in the letter that they handed us on 11 the night of the 11th, the night before they 12 commenced their offer. 13 At the same time they were calling 14 the Wall Street Journal to place the ad for the 15 tender offer, they handed our chairman a letter. 16 They said right in the letter, "In addition, in 17 separate patent infringement lawsuits over the past 18 two-and-a-half years, Mentor Graphics has sued 19 Quickturn and Quickturn has sued Mentor Graphics. 20 The acquisition will resolve these disputes between 21 our companies, which otherwise will continue to 22 require substantial time and expense and represent a 23 significant distraction for both companies well into 24 the future." 162 1 Director Richardson, Mentor director 2 Richardson, also said one of the attractive reasons 3 for going forward with the offer was that it would 4 allow Mentor to sell its otherwise infringing 5 products. There is no question that that was one of 6 the factors that Mentor took into account. There is 7 no factor that that's a 180-degree reversal of where 8 the company otherwise would be in its strategy. That 9 is a threat. That is a threat to corporate policy 10 and effectiveness. Action was taken in response to 11 that threat. 12 For the reasons previously stated, I 13 think those actions, in the circumstances, are 14 reasonable and they pass the Unocal test. But it's 15 certainly a Unocal test, not a Blasius test. I won't 16 repeat that argument. 17 Finally, I would note in passing that 18 we also asked for summary judgment on Section 203, 19 the issue there being that the failure to approve the 20 offer pursuant to 203 is a question of business 21 judgment, rather than a Unocal or Blasius question. 22 The other side makes some legal argument that we 23 think is erroneous. We haven't heard anything about 24 it here today. And we believe we are entitled to 163 1 summary judgment on that as well. 2 Thank you, Your Honor. 3 THE COURT: It's now five minutes of 4 three. Let me just inquire, do counsel wish to go 5 forward with the motion to compel or to argue that at 6 a different time, with the motion in limine. 7 MR. BERGER: Your Honor, David 8 Berger. We are prepared to move forward with the 9 motion to compel, if it's convenient for the Court. 10 I don't think it touches upon the motion in limine. 11 On the other hand if Your Honor 12 wishes to defer it to another day, we are willing to 13 do that, if the summary judgment -- 14 MS. SCHMIDT: We are prepared to 15 argue that today, Your Honor, in the time remaining. 16 THE COURT: I will impose an 17 arbitrary 30-minute deadline to complete argument on 18 that. I'm also going to take a five-minute recess. 19 We will reconvene at 3:00 o'clock. 20 (Recess at 2:55.) 21 THE COURT: Mr. Berger, before you 22 begin, before the recess, I neglected to do the most 23 important thing, I guess, from your standpoint. That 24 is to announce what it is that I'm going to do. 164 1 It is probably no surprise that I'm 2 going to take the motion under advisement. I'm not 3 in a position to decide the summary judgment motion 4 from the bench, and I will get back to counsel as 5 soon as I can with respect to that. So let's now 6 proceed on the motion to compel. 7 MR. BERGER: Thank you, Your Honor. 8 David Berger, from Wilson, Soncini, Goodrick & 9 Rosati. It's again a pleasure to appear in this 10 Court. 11 Your Honor, our motion is very brief, 12 and I think rather straightforward, and summarized 13 amply in our papers. Just a couple of very quick 14 issues. 15 One, we are seeking the depositions 16 of two individuals, Mr. Jon Shirley, who is the 17 chairman of Mentor's board of directors, and Bernd 18 Braune, who is the head of the Mentor business unit, 19 which competes directly with Quickturn, and we 20 understand recently is also the one who has been 21 having some discussions that are directly relevant to 22 this action. Those are the two depositions we are 23 seeking. 24 The second portion of our motion 165 1 deals with a request to overrule Mentor's objections 2 on the basis of the business-strategies privilege. 3 Mentor has asserted that privilege to block 4 testimony, to withhold documents, based upon -- 5 solely upon their current offer. 6 The only discovery we are seeking 7 that is at issue with the business-strategies 8 privilege has to do with the analyses of their 9 current offer. We are not seeking to inquire into 10 what Mentor may do in the future, how they may value 11 Quickturn six months from now, or what decisions they 12 may make in the future. 13 THE COURT: All right. What I would 14 like to do, Mr. Berger is bifurcate the argument. 15 MR. BERGER: Sure. 16 THE COURT: They are very different 17 questions. 18 MR. BERGER: Yes. 19 THE COURT: Let's take the deposition 20 issue first. Is it correct that your argument is, 21 basically, that when counsel appeared before Vice 22 Chancellor Steele, Vice Chancellor -- Vice Chancellor 23 Steele ruled that would you be entitled to take those 24 depositions? 166 1 MR. BERGER: That's with 2 Mr. Shirley's deposition. That's clear. I don't 3 want to repeat that. I don't think I need to. It 4 shouldn't be reargued. 5 Mr. Braune -- we sought the 6 deposition of Mr. Braune very early on. It was not 7 argued before Vice Chancellor Steele. We originally 8 understood that Mentor was going to produce 9 Mr. Braune for depositions. At the last minute, he 10 was not produced for deposition. 11 There is this claim -- the only 12 issue, as I understand it, in Mr. Braune's deposition 13 is that it's after the discovery cutoff date in this 14 action. We have not agreed to any discovery cutoff 15 date in this action. Indeed, we are not even going 16 to finish identifying witnesses for trial until 17 October 10th. We have -- the parties have agreed 18 after October 10th, any witnesses who have been so 19 identified who have not yet been deposed can be 20 deposed -- there is a slight disagreement on this 21 issue, but can be deposed subsequent to October 10th 22 is for sure. 23 THE COURT: All right. Thank you. 24 MR. BERGER: That's it with the 167 1 depositions. 2 THE COURT: I think you clarified the 3 issue. 4 MS. SCHMIDT: Good afternoon, Your 5 Honor. With respect to the depositions, Mr. Berger 6 is relying on Vice Chancellor Steele's ruling but has 7 not explained the circumstances and the entire 8 ruling. 9 At the time that Vice Chancellor 10 Steele was asked to rule on whether they could have 11 two outside directors, they had agreed to produce to 12 us all of the outside directors on Quickturn's board, 13 unable to make a determination as to which particular 14 directors would be relied upon at trial. 15 At the time they made that decision, 16 we had asked specifically for Director Antle, D'Amour 17 and Huang. We found out during the course of 18 depositions that Mr. Huang was unavailable. 19 Apparently, his unavailability was being pigeon-holed 20 under a prong of the second of Vice Chancellor 21 Steele's rulings, which was we had to respect the 22 business commitments of these directors. Therefore, 23 we were only entitled to take half-day depositions, 24 at best, because these were busy people. 168 1 We explained to Mr. Berger at the 2 time that we were having similar problems with 3 Mr. Shirley; if that's the rule that was going to be 4 applied, we would live with that. He refused to do 5 so, and so we offered a compromise. We would produce 6 Mr. Shirley, Mr. Braune, and help facilitate Arthur 7 Andersen, for their production of the remaining 8 witnesses, which have been unavailable to us, 9 Mr. Huang, Mr. Alberding, and the remainder of 10 Mr. Kissner, who was pulled after three hours because 11 of his business commitments. Mr. Berger refused that 12 offer, and that is why he doesn't have Mr. Shirley. 13 With respect to Mr. Braune, they 14 identified in a 30(b)(6) notice the topics they now 15 seek from Mr. Braune. Mr. Hinckley was produced for 16 two days to address those topics. If they chose not 17 to address them with Mr. Hinckley, that is not an 18 excuse to obtain further discovery after the cutoff. 19 As to the lack of agreement, 20 Mr. Berger explained to Vice Chancellor Steele at 21 page twenty of the transcript, "Depositions are from 22 the 15th through the 23rd in this action. That's all 23 the time we have. They want to depose each of the 24 directors. They want to depose third parties. We 169 1 don't have the time to have full-day depositions for 2 each." 3 We took eight depositions. They took 4 fourteen. It begs the question who the defendants 5 are in this action. 6 THE COURT: Well, you don't have any 7 counterapplication to take the depositions of the 8 directors on their side that you want. Is that 9 correct? 10 MS. SCHMIDT: If Your Honor is 11 inclined to extend discovery, we certainly will have 12 a counterapplication. But we feel that for the 13 positions taken by the parties previously, discovery 14 has been concluded. 15 THE COURT: Well, I'm confused. 16 Mr. Berger says that there has been no agreement to a 17 cutoff. You are saying there has been an agreement. 18 MS. SCHMIDT: Absolutely. Mr. Berger 19 used the fact that discovery was only going to take 20 place between the 15th and 23rd to obtain the ruling 21 that we could only take the defendants in this action 22 for half days. So to now turn around and say there 23 is no agreement I believe is a bit disingenuous. 24 THE COURT: All right. 170 1 MS. SCHMIDT: Thank you. 2 MR. BERGER: Your Honor, very brief 3 reply to this issue. Again, all argument before Vice 4 Chancellor Steele -- 5 THE COURT: Not all. Just Shirley. 6 MR. BERGER: Just Shirley. But the 7 issue of the discovery cutoff, which is now being 8 raised by my colleague on the other side -- we came 9 in, we believed, under the original schedule. We 10 thought it made sense to do very expedited discovery. 11 In the argument before Vice 12 Chancellor Steele, Mr. Laster argued in opposition to 13 me, and did a splendid job and convinced Vice 14 Chancellor Steele that we had to identify trial 15 witnesses by October 10th, and that afterwards, if 16 there were witnesses that had been so identified that 17 had not been deposed, you would depose them 18 afterwards, after October 10th. That was -- 19 So the notion there is a discovery 20 cutoff when they are going to identify their 21 witnesses by October 10th, and we still have to 22 identify ours -- indeed, just this past week there 23 was correspondence between Mr. Abrams and my partner, 24 Mr. DiBoise, concerning additional depositions. 171 1 These are expert depositions. 2 THE COURT: What is the significance 3 of the October 23rd date? 4 MR. BERGER: September 23rd date. 5 THE COURT: September 23rd. 6 MR. BERGER: Originally, it was 7 limiting fact discovery to September 23rd. We talked 8 about limiting the number of depositions. Neither of 9 those positions were accepted by the plaintiffs. The 10 issue now, that there is a quid pro quo from 11 Mr. Shirley's deposition, again wasn't raised by 12 before Vice Chancellor Steele. 13 I could go into the offer that was 14 given to me. It's not worth it. Vice Chancellor 15 Steele spoke loud and clear on Mr. Shirley's 16 deposition. We are happy to do Mr. Braune's 17 deposition in a half day, as well. 18 If there are no further questions -- 19 THE COURT: No, there are no further 20 questions as to that. Obviously, any ruling on these 21 issues may be viewed by some as a signal as to how 22 the Court is going to rule on the summary judgment 23 motion. After all, what difference does any of this 24 make if your side is entitled to summary judgment. 172 1 So what I'm going to do is rule in the context of 2 this case going to trial, which is yet to be decided. 3 MR. BERGER: That's fine, Your Honor. 4 If you were to rule in favor of us on summary 5 judgment, we will withdraw the motion. 6 THE COURT: You can go ahead and take 7 Mr. Shirley's deposition. You can take Mr. Braune's 8 deposition. If, however, there is a need on the 9 other side to take additional discovery and you can't 10 agree to that -- obviously, both sides are going to 11 have to be reasonable -- then the other side, Ms. 12 Schmidt, may apply for relief from the Court. That 13 is, I'm going to open up -- this will be a two-way 14 street if the case is going to trial, not one way. 15 MS. SCHMIDT: Your Honor, we would 16 make that application today, orally, only because of 17 the pressures of time. If the case is going forward, 18 we are approaching trial and we want time to conduct 19 the additional depositions. We asked for, in our 20 letter on September 23rd, specifically Mr. Huang, 21 Mr. Alberding, and the continuation of Mr. Kissner. 22 MR. BERGER: Your Honor, I would ask 23 the papers be submitted on that issue. The problem 24 with that is they have deposed six of our eight 173 1 directors. It's not like they have -- 2 The difference between the two sides 3 is this: We have had one outside director from 4 Mentor deposed. They have had six of our eight 5 members of our board. The only two members of our 6 board who have not been deposed are Mr. Alberding, 7 who lives in upstate New York and had some personal 8 issues, and Mr. Huang, who had business issues that 9 took him away. 10 There is no question -- I will make 11 that representation right now. We are not going to 12 offer Mr. Alberding's testimony or Mr. Huang's 13 testimony at trial. I don't see the need for their 14 depositions. I'm happy to present Kissner. 15 THE COURT: I'm not in a position to 16 rule on that. All I'm saying is that as far as I'm 17 concerned, this is a two-way street. If there are 18 valid reasons, apart from that, for the other side 19 not being permitted to take discovery of those 20 witnesses, I'll consider it. But I'm going to have 21 to consider it based on some exchange of letters. I 22 can't do it right now. 23 MR. BERGER: Okay. Second issue, 24 very briefly, the business-strategies privilege. Our 174 1 assertion is they have used the business-strategies 2 objection to block inquiry at depositions of their 3 financial advisor, as well as Mr. Hinckley, and I 4 believe one other representative. They have actually 5 used the business-strategies assertion to withhold 6 from production the few key documents they have 7 remaining concerning their analysis of the tender 8 offer. As you know, at the beginning -- 9 THE COURT: Let me stop you for a 10 minute. 11 MR. BERGER: Sure. 12 THE COURT: I have trouble with what 13 it is you are trying to find out, and why this is 14 important to your case, where the issue is the 15 conduct of your clients. 16 MR. BERGER: The issue is the conduct 17 of our client. The real issue is the value of 18 Quickturn. And just as Mr. Abrams, in his argument, 19 handed you up that chart, the bar chart from 20 Hambrecht & Quist, we believe that the analysis that 21 is being withheld here shows unequivocally that 22 Mentor valued Quickturn, at the time it made its 23 offer, at considerably more than 12-and -- 24 12-and-an-eighth; indeed, considerably more than the 175 1 values that are in the H&Q presentation. 2 What this evidence will do is it 3 will -- it will buttress the board's argument that 4 the offer is inadequate. It surely is impermissible 5 for Mr. Abrams on the one hand to argue that the 6 Quickturn board acted irresponsibly in determining 7 that the offer was inadequate and on the other hand 8 to withhold from production his analyses, the 9 analyses of their financial advisers, that show 10 conclusively, we believe, that the offer was far 11 below the value of Quickturn. 12 And if we are going to face here at 13 trial the Salomon Brothers representative or a 14 representative from Mentor that is going to say the 15 price is at this great premium and this spectacular 16 offer and the Quickturn board breached its fiduciary 17 duties in accepting this offer -- I'm sorry -- in 18 rejecting this offer as inadequate, then we ought to 19 be able to inquire into what the analyses from Mentor 20 showed. 21 THE COURT: Are you aware of any 22 authority, any cases, in which the target board was 23 allowed to take that kind of discovery from the 24 hostile acquiror? 176 1 MR. BERGER: Well, Your Honor, the 2 issue has usually come up, again, in the business- 3 strategies privilege. And the business-strategies 4 assertion is very, very limited. It covers, solely, 5 issues going into future plans and future prospects. 6 That's what all the commentaries say. That's what 7 the cases say. So the typical issue where it comes 8 up is the bidder with the target withholding 9 information about its plans. 10 THE COURT: Right. That's why I'm 11 asking whether there is any authority for what you 12 are trying to do. 13 MR. BERGER: Your Honor, the only 14 time I'm aware that this issue has been raised is in 15 the Circon/U.S. Surgical case, where Chancellor 16 Chandler addressed the issue and was -- I think he 17 denied the request for additional discovery. 18 THE COURT: All right. 19 MR. BERGER: Thank you. 20 MS. SCHMIDT: Your Honor addressed 21 this issue in the Atlantic Research Corporation case. 22 And Your Honor concluded -- 23 THE COURT: That was a lifetime ago. 24 Wasn't it? 177 1 MS. SCHMIDT: It's still good law, as 2 far as I know. 3 THE COURT: Was that discovery being 4 sought of the bidder? 5 MS. SCHMIDT: Yes, it was. 6 THE COURT: What kind of discovery? 7 MS. SCHMIDT: Business-strategy type 8 information. And -- 9 THE COURT: You mean how they valued 10 the target? 11 MS. SCHMIDT: Yes. I believe so. 12 It's a transcript ruling, so it's limited. But Your 13 Honor stated in that opinion, "..the decision of the 14 Atlantic directors as to whether and the extent to 15 which Clabir constituted a threat, and the need to 16 adopt the pill in response, is a decision the 17 validity of which has to rise or fall on what the 18 directors knew and considered at the time that they 19 adopted the pill, and should not be considered on the 20 basis of what they did not know and what they did not 21 consider." 22 They did not know anything regarding 23 the Mentor strategies. They could not have known 24 that. They did not consider that. In addition, just 178 1 as we are not entitled to know what price Quickturn 2 would accept, they are not entitled to know the 3 highest price Mentor might be willing to offer. If 4 they wanted to know that information, instead of 5 trying to pierce the business-strategy privilege, 6 they should enter into negotiations. Mentor has 7 continuously expressed a willingness to do so, and 8 they have continuously refused. But the fact that 9 they rejected the first offer doesn't mean that the 10 strategy is dead. Therefore, it would always be in 11 the bidder's control. Reject the first offer, find 12 out the range and hold out for more. The strategy is 13 meant to be a two-way street. 14 Also, Your Honor, it's not true that 15 they have provided us with all of their analyses. 16 They have not. They have not let us investigate what 17 the direct -- what analyses the directors themselves 18 might have performed in connection with considering 19 this offer. And they have asked for, and we have 20 returned, documents prepared by H&Q which outlined 21 what other potential bidders could pay. 22 There is no testimony that there are 23 continuing negotiations with any of these bidders. 24 In fact, Mr. Cleveland testified that these were done 179 1 just to show if someone else could pay more, maybe 2 Mentor's offer wasn't where it should be. Well, 3 under their theory, if Mentor's offer has been 4 rejected, those types of documents would not be 5 protected under the business-strategy privilege, 6 because they went to the rejection of Mentor's offer. 7 So we are not seeing the same 8 application of this privilege, and I would submit 9 that for the same reasons Your Honor held in Atlantic 10 Research Corporation, they are not entitled to 11 Mentor's business strategies. 12 MR. BERGER: Again, Your Honor, I'll 13 be very, very brief. When I argue cases and try 14 cases, it's beyond my belief that the one side can 15 put at issue an issue -- here, the valuation of 16 Quickturn. They are allowed to look at our documents 17 and allowed to take evidence as to what our 18 investment banker and -- thought was the value of the 19 company, and we can't get the same information from 20 them, to impeach their arguments; that by looking at 21 the chart that was handed up, the chart is right and 22 the offer is invalid. 23 THE COURT: Well, Mr. Berger, that's 24 one of the problems with privilege. That is, 180 1 privileged information, by its nature, is almost 2 always relevant. It can be used for impeachment 3 purposes in many different ways to harm the case of 4 the other side. But for public policy reasons, that 5 information is made unavailable to serve other ends 6 that are deemed to be more important from a social 7 point of view. I think that's the case here. 8 I'm not persuaded, assuming there is 9 a compelling-need standard -- I don't know that to be 10 the case -- that you have shown any compelling need 11 to have this information. All your clients have to 12 do is to defend on the basis of what they reasonably 13 perceived and knew at the time. There is a -- the 14 problem is that in allowing your side to have that 15 information, there is a real risk concerning the 16 kinds of strategic information going to what they are 17 willing to pay, and how much would be discoverable, 18 and that is precisely the area that is protected 19 under the business-strategy privilege. 20 MR. BERGER: Your Honor, if I might 21 just for one moment follow up, isn't that precisely 22 the same issue that we faced when we handed over 23 documents like the chart that we handed over to the 24 other side? That is, what I'm having difficulty 181 1 understanding is the distinction and why that 2 privilege doesn't attach to documents going to our 3 analysis of the prior offer, versus their analysis of 4 the prior offer. 5 I would certainly agree with Your 6 Honor that we are not entitled to understand their 7 bidding strategies, or what information -- they may 8 do in the future. We are not seeking that. I'm just 9 looking for information regarding the current offer, 10 which by definition isn't part of any future 11 strategy. 12 THE COURT: I've heard you say that, 13 but I'm not sure what it is you are asking for that 14 wouldn't encroach on the area that is precluded by 15 the privilege. 16 MR. BERGER: Okay, Your Honor. Thank 17 you. 18 THE COURT: All right. The Court 19 stands in recess. I'll get back to counsel as soon 20 as I can. 21 (Recess at 3:25 p.m.) 22 - - - 23 24 182 1 CERTIFICATE 2 I, WILLIAM J. DAWSON, Official Court 3 Reporter of the Chancery Court, State of Delaware, do 4 hereby certify that the foregoing pages numbered 3 5 through 181 contain a true and correct transcription 6 of the proceedings as stenographically reported by me 7 at the hearing in the above cause before the 8 Chancellor of the State of Delaware, on the date 9 therein indicated. 10 IN WITNESS WHEREOF I have hereunto 11 set my hand at Wilmington, this 9th day of October, 12 1998. 13 14 15 Official Court Reporter 16 of the Chancery Court State of Delaware 17 18 19 20 21 22 23 24 EX-11.(A)(30) 4 EX. 11(A)(30) IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE IN AND FOR NEW CASTLE COUNTY MENTOR GRAPHICS CORPORATION, : an Oregon corporation, and MGZ CORP., a : Delaware corporation, : : Plaintiffs, : : v. : Civil Action No. 16584 : QUICKTURN DESIGN SYSTEMS, : INC., a Delaware corporation, : KEITH R. LOBO, GLEN M. ANTLE, : RICHARD C. ALBERDING, MICHAEL : R. D'AMOUR, YEN-SON (PAUL) : HUANG, DR. DAVID K. LAM, : WILLIAM A. HASLER and CHARLES : D. KISSNER, : : Defendants. : : HOWARD SHAPIRO, : : Plaintiff, : : v. : Civil Action No. 16588 : GLEN M. ANTLE, KEITH R. LOBO, : RICHARD C. ALBERDING, MICHAEL : R. D'AMOUR, YEN-SON HUANG, : DAVID K. LAM, WILLIAM A. : HASLER, CHARLES D. KISSNER, : and QUICKTURN DESIGN SYSTEMS, : INC., : Defendants. MEMORANDUM OPINION ------------------ Date Submitted: October 7, 1998 Date Decided: October 9, 1998 --------------- --------------- Kevin G. Abrams, Thomas A. Beck, Catherine G. Dearlove, J. Travis Laster, Thad J. Bracegirdle and Dominick Gattuso, Esquires, of RICHARDS, LAYTON & FINGER, Wilmington, Delaware; and Fredric J. Zepp and Heidi E. Klein, Esquires, of LATHAM & WATKINS, San Francisco, California; and Marc. W. Rappel, LATHAM & WATKINS, Costa Mesa, California; and Christopher L. Kaufman and David A. York, Esquires, of LATHAM & WATKINS, Menlo Park, California; and H. Steven Wilson, Esquire, of LATHAM & WATKINS, San Diego, California, Attorneys for Plaintiffs Mentor Graphics Corporation and MGZ Corporation. Norman M. Monhait, Esquire, of ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A., Wilmington, Delaware; and Stanley D. Bernstein and Abraham I. Katsman, Esquires, of BERNSTEIN LIEBHARD & LIFSHITZ, New York, New York, Attorneys for Plaintiff Howard Shapiro. Kenneth J. Nachbar, William M. Lafferty and Donna L. Culver, Esquires, of MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; and James A. DiBoise and David J. Berger, Esquires, of WILSON, SONSINI, GOODRICH & ROSATI, P.C., Palo Alto, California, Attorneys for Defendants. JACOBS, VICE CHANCELLOR Pending is a motion for summary judgment dismissing this action. At issue is the validity of two defensive measures adopted by the board of directors of the target company, Quickturn Design Systems, Inc. ("Quickturn"), in response to a hostile bid by plaintiff Mentor Graphics corporation ("Mentor") to acquire Quickturn. Because of the press of time,(1) no extended treatment of the facts or law is possible, and this Opinion must necessarily be abbreviated. For the reasons discussed below, I conclude that a trial is need to adjudicate the breach of fiduciary duty and other claims asserted by Mentor in this action. Accordingly, the motion for summary judgment will be denied. I. BACKGROUND On August 12, 1998, the plaintiffs, Mentor and MGZ Corporation, a Mentor subsidiary, (referred to collectively as "Mentor") announced an unsolicited cash tender offer for a majority of the outstanding common stock of Quickturn.(2) That offer, once consummated, would be followed by a second step merger wherein Quickturn's remaining stockholders would receive, in cash, the $12.125 per share tender offer price. In reliance upon Quickturn's original by-law provision governing the call of special stockholders meetings, Mentor began soliciting agent designations from Quickturn stockholders to satisfy the by-law requirements for calling a special meeting.(3) - ------------------ (1) The case has been scheduled to be tried beginning October 19, 1998, subject to the Court's ruling on this motion. Given the short period remaining in which to complete preparation for trial in the event summary judgment is denied, a prompt decision was required. (2) The offer was for $12.125 per share, representing an approximate 50% premium over Quickturn's immediate pre-offer price, but also an approximately 20% discount from Quickturn's stock price in February, 1998. (3) The original by-law required a call by shareholders who hold at least 10% of Quickturn's shares. In their agent solicitation, Mentor informed Quickturn stockholders of its intention to call the special meeting approximately 45 days after it received sufficient agent designations to satisfy the 10% requirement under the 3 At issue are two defensive measures adopted by the Quickturn board of directors in response to Mentor's hostile takeover bid. First, the board amended the Quickturn special meeting by-law which allowed stockholders holding 10% or more of Quickturn's stock to call a special stockholders meeting. The board amended that by-law to provide that if a special meeting is called by stockholders, the corporation (Quickturn) would determine the time and place of that special meeting, and that the meeting must not take place less than 90 days nor more than 100 days after the receipt and determination of the validity of such a request (the "By-Law Amendment"). The corporation would also fix the record date determining the stockholders entitled to vote at the meeting.(4) Second, the board amended Quickturn's Shareholder Rights Plan ("Rights Plan") by eliminating its so-called "dead hand" provision, and replacing it with a "Delayed - ------------------- original by-law. The solicitation also disclosed Mentor's intent to set the date and give notice of the special meeting, and also to set the record date for that meeting. (4) Section 2.3 of Quickturn's by-laws, as amended, states (amended portion in italics): A special meeting of the stockholders may be called at any time by the (i) board of directors, (ii) the chairman of the board, (iii) the president, (iv) the chief executive officer or (v) subject to the procedures set forth in this Section 2.3, one or more stockholders holding shares in the aggregate entitled to cast not less than ten percent (10%) of the votes at that meeting. Upon request in writing sent by registered mail to the president or chief executive officer by any stockholder or stockholders entitled to call a special meeting of stockholders pursuant to this Section 2.3, the board of directors shall determine a place and time for such meeting, which time shall be not less than ninety (90) nor more than one hundred (100) days after the receipt and determination of the validity of such request, and a record date for the determination of stockholders entitled to vote at such meeting in the manner set forth in Section 2.12 hereof. Following such receipt and determination, it shall be the duty of the secretary to cause notice to be given to the stockholders entitled to vote at such meeting, in the manner set forth in Section 2.4 hereof, that a meeting will be held at the place and time so determined. 4 Redemption" provision under which no newly elected board could redeem the Rights Plan for six months after taking office to facilitate a transaction with a person who proposed, nominated or financially supported the election of the new directors to the board.(5) In this case, that "person" would be Mentor. The by-law amendment would impose a minimum 3 month delay in holding a special stockholders meeting called by shareholders, and the Delayed Redemption provision would delay the ability of certain newly-elected boards to redeem the poison pill for 6 months. In this case, the combined practical effect of the two defensive measures would be to delay for at least nine months any acquisition of Quickturn by Mentor. II. THE PARTIES' CONTENTIONS In this lawsuit Mentor challenges the validity of these two defensive measures on several grounds. First, Mentor claims that by enacting the defensive measure the Quickturn directors breached their duty of care.(6) Second, the plaintiffs claim that (i) the Quickturn board did not have reasonable grounds to conclude that a threat to corporate policy existed and, (ii) if a threat did exist, the board's defensive response was disproportionate to the threat posed, and - ---------------------- (5) The amended Rights Plan pertinently provides that: "[I]n the event that a majority of the Board of Directors of the Company is elected by stockholder action at an annual or special meeting of stockholders, then until the 180th day following the effectiveness of such election (including any postponement or adjournment thereof), the Rights shall not be redeemed if such redemption is reasonably likely to have the purpose or effect of facilitating a Transaction with an Interested Person." An "Interested Person" is defined under the amended Rights Plan as "any Person who (i) is or will become an Acquiring Person if such Transaction were to be consummated or an Affiliate or Associate of such a Person, and (ii) is, or directly or indirectly proposed, nominated or financially supported, a director of [Quickturn] in office at the time of consideration of such Transaction who was elected at an annual or special meeting of stockholders." (6) Cede & Co. v. Technicolor, Inc., Del. Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 872-75 (1985). 5 hence, violated the board's duties prescribed by Unitrin, Inc. v. American Gen. Corp. ("Unitrin")(7) and Unocal Corp. v. Mesa Petroleum Co. ("Unocal").(8) Third, the plaintiffs claim that Quickturn's board, without any compelling justification, adopted the defensive measures purposefully to disenfranchise its shareholders, in violation of the principles set forth in Blasius Indus., Inc. v. Atlas Corp. ("Blasius").(9) Fourth, the plaintiffs claim that by adopting the defensive measures, the Quickturn board inequitably manipulated the corporate machinery to perpetuate itself in office, which is proscribed by Schnell v. Chris-Craft Indus., Inc. ("Schnell").(10) Fifth, the plaintiffs claim that the Delayed Redemption provision is invalid as a matter of Delaware law.(11) Lastly, Mentor contends that the Quickturn board's decision not to exempt Mentor's offer from 8 Del. C. Section 203 constitutes a breach of the board's fiduciary duties, and is invalid under Unocal and Unitrin. The defendants argue that they are entitled to summary judgment on all these claims. They base their claim of entitlement to judgment upon the following six facts, which, defendants say, are undisputed: (i) a majority of Quickturn's board is independent; (ii) the - -------------------- (7) Del. Supr., 651 A.2d 1361 (1995). (8) Del. Supr., 493 A.2d 946 (1985). (9) Del. Ch., 54 A.2d 651, 661 (1988) (10) Del. Supr., 285 A.2d 437, 439 (1971). (11) Plaintiffs base this claim upon this Court's recent decision in Carmody v. Toll Bros., Inc., Del. Ch., C.A. No. 15983, Jacobs, V.C. (July 24, 1998, revised July 27, 28 and August 4, 1998). 6 Quickturn board carefully analyzed Mentor's offer, and only after length deliberation did it determine that the offer was inadequate and contrary to stockholder's interests; (iii) the only two defensive actions taken by Quickturn's board were the By-Law and Rights Plan Amendments; (iv) the By-Law Amendment imposes no improper delay, because Quickturn has noticed the special meeting requested by Mentor for January 8, 1999;(12) (v) the Rights Plan Amendment would delay an acquisition of Quickturn by Mentor for no more than six months; and (vi) Mentor has the ability to keep its offer "on the table" for the nine month period mandated by the (combined) By-Law Amendment and the Rights Plan Amendment. Mentor disputes all six of these "facts" arguing that underlying all of plaintiffs' claims are factual material disputes sufficient to warrant a trial.(13) III. ANALYSIS Summary judgment is appropriate only where the moving party demonstrates that there are no genuine issues of material fact and that the moving party is entitled to judgment as a - ------------------------ (12) Mentor points out, however, that Quickturn has made the January 8 date and meeting contingent upon a ruling in a pending action brought by Quickturn in the United States District Court for the District of Delaware attacking the propriety of Mentor's agent solicitations. Should that Court uphold the agent solicitations, then the meeting would go forward. Mentor responds that the Federal Court is not likely to issue even a preliminary ruling on Quickturn's challenges to Mentor's agency solicitations until after a hearing scheduled for October 21, 1998, a ruling that Quickturn could then appeal to the Third Circuit. Moreover, (Mentor points out) a trial in Quickturn's federal action is not scheduled until November 1, 1999. For these reasons, Mentor urges, the delay of a special meeting resulting from the By-Law Amendment is, for all practical purposes, open-ended, and the fact that a special meeting is called for January 8, 1998 is illusory and purely cosmetic. These arguments need not be addressed in this Opinion. (13) The class plaintiffs join in Mentor's summary judgment arguments. 7 matter of law.(14) On any application for summary judgment, the Court must view the evidence in the light most favorable to the non-moving party.(15) Summary judgment must be denied "if there is any reasonable hypothesis by which the opposing party may recover, or if there is a dispute as to a material fact or interferences to be drawn therefrom."(16) Moreover, this Court may, in its discretion, deny summary judgment if it decides upon a preliminary examination of the presented facts that it is desirable to inquire into or develop more thoroughly the facts at trial in order to clarify the law or its application.(17) This has occurred even in cases where the Court has found that there are no material factual disputes.(18) As Chancellor (then Superior Court Judge) Chandler aptly observed in McCabe v. Wilson: Before a court can apply the law, it must have an adequate factual basis for doing so. And in some situations a fuller development of the facts may serve to clarify the law or help the Court determine its application to the case . . . . In other words, summary judgment, with ever-lurking issues of fact, is a treacherous shortcut. Such relief is always discretionary and in cases posing a complex mosaic of factual issues and questions of law, sound judicial - ------------------------------- (14) Ch. Ct. R. 56(c); Gilbert v. El Paso Co., Del. Supr. 575 A.2d 1131, 1142 (1990); Brown v. Ocean Drilling & Exploration Co., Del. Supr., 403 A.2d 1114, 1115 (1979). (15) Brown, 403 A.2d at 1115. (16) Seagraves v. Urstadt Property Co., Inc., Del. Ch., C.A. No. 10307, Jacobs, V.C. (April 1, 1996), mem. op. at 7(citations omitted). (17) Alexander Industries, Inc. v. Hill, Del. Supr., 211 A.2d 917, 918-19 (1965); Ebersole v. Lowengrub, Del. Supr., 180 A.2d 467 (1962); Frazer v. Worldwide Energy Corporation, Del. Ch., C.A. No. 8822, Jacobs, V.C. (May 3, 1990), mem. op. at 5; McCabe v. Wilson, Del. Super., C.A. No. 38, 1977, Chandler, J. (June 26, 1986), mem. op. at 5; see also Robert Johnson Grain Co. v. Chemical Interchange Co., 541 F.2d 207 (8th Cir. 1976); 10A Wright and Miller, Federal Practice and Procedure, Section 2725 (1983). (18) Frazer, mem. op. at 5. 8 administration may dictate withholding judgment until the whole factual structure stands upon a solid foundation following a plenary trial where proof can be fully developed, questions answered and issues clearly focused. . . .(19) In this case, I conclude that several of the plaintiff's claims involve disputed questions of material fact that under Chancery Court Rule 56(c) can be resolved only after a trial. I further conclude that to the extent there are claims that do not involve disputed issues of material fact, the "complex mosaic of law and facts" presented by the unique circumstances of this case "cry out for further development of background and context, so that the nature of and subtlety of those claims can be more clearly grasped."(20) A. Claims Involving Disputed Issues of Fact The Court concludes, first, that several claims rest on material facts that are disputed. First, whether the Quickturn board was properly informed when it decided to adopt the defensive measures is factually disputed. There is evidence that raises triable fact questions bearing upon whether the board adequately performed an independent inquiry and conducted a reasonable investigation into (i) whether Mentor's offer posed a threat to Quickturn, and (ii) whether adopting the defensive measures would have a coercive or preclusive effect upon the Mentor offer and/or upon any shareholder vote at any meeting specially called to replace Quickturn's board of directors. These factual issues are pivotal to both Mentor's duty of care and Unocal/Unitrin claims. - --------------------- (19) Mem. op. at 5 (citations omitted). (20) Frazer, mem. op. at 5. 9 There are also disputed fact issues that relate to Mentor's Unocal/Unitrin claims. Under Unocal/Unitrin's first prong, the target board must show that it had reasonable grounds for believing that a danger to corporate policy and effectiveness existed.(21) Quickturn's stated reason for deeming the Mentor offer a threat is sharply contested, and cannot be resolved on a paper record. Also disputed is whether the Quickturn board acted in good faith. There are also fact disputes relating to Mentor's claim under the second prong of Unocal/Unitrin, which requires the board to prove that a defensive measure was "proportional" in the sense that it is (i) not preclusive or coercive and (ii) that it falls within a range of reasonableness.(22) In this case there are factual disputes as to what effect the defensive mechanisms would have upon any election contest and the Mentor offer, and as to whether the target board understood those likely effects when it adopted the defensive measures. A related issue, which a trial is needed to explore, concerns why the Quickturn board decided to adopt a six month delay period in the Rights Plan amendment as opposed to a shorter (or longer) time period, particularly given the current volatile market environment. 2. Claims Requiring Further Factual Development and Clarification of the Application of Law to the Facts. Given the complex legal arguments, the voluminous briefs and lengthy oral arguments advanced on the several issues, and the extremely short time period remaining between the oral argument on summary judgment and the scheduled trial dates, I am satisfied - ----------------------- (21) Unitrin, 651 A.2d at 1373. (22) Unitrin, 651 A.2d at 1386-88. 10 that even as to claims that do not involve material fact disputes, it is necessary to further develop the record at trial in order to clarify the law and its proper application to the facts.(23) For example, whether Blasius concerns are even implicated in this case depends upon factual issues that are not easily resolved on this record. A trial is needed to clarify whether Quickturn's board's defensive measures would in fact impede the exercise of the stockholder's voting rights, and if so, whether the board specifically intended this and why. A similar problem exists with respect to Mentor's Schnell claim that the Quickturn board manipulated the corporate machinery for the inequitable purpose of "perpetuating itself in office." Further development of the facts is needed for the court to determine precisely what the board's purpose was. Indeed, the record evidence of the board's purpose gives rise to conflicting inferences. Perhaps the most important reasons a trial is needed is that a determination of one or more of the issues presented could have far-reaching effects in the development of the law governing mergers and acquisitions. The legal validity of the Delayed Redemption provision is a prime example. To determine that issue, the Court must be certain of the precise effect of those provisions in this specific context, which is unclear on this record. Thus, clarification of how and to what extent the defensive mechanisms would operate (separately and in combination) and how (if at all) they would adversely affect Mentor's offer and the shareholders' voting rights is needed. The same is true for Mentor's claim that the Quickturn board violated its fiduciary duty by not exempting Mentor's offer under 8 Del. C. Section 203. In short, further development of the facts - --------------------------- (23) These are also the reasons why this Court has not provided the parties with greater detail in this opinion. Due to the time limitations presented by the procedural posture of this motion, the Court has purposefully treated the factual issues in a cursory manner, with the thought in mind that all disputed factual issues will be better explored at trial, rather than in this Opinion. 11 is needed to clarify what the legal issues truly are. To decide on this record "issues" that may turn out to be different or nonexistent on a fully developed record, would be imprudent. IV. CONCLUSION For the foregoing reasons, the motion for summary judgment is denied. IT IS SO ORDERED 12 EX-11.(A)(31) 5 EX. 11(A)(31) MENTOR GRAPHICS SAYS INSTITUTIONAL SHAREHOLDER SERVICES RECOMMENDS VOTE FOR MENTOR'S DIRECTOR NOMINEES AND PROPOSALS AT QUICKTURN STOCKHOLDER MEETING WILSONVILLE, OR, OCTOBER 15, 1998 - Mentor Graphics Corporation (Nasdaq: MENT) today said that Institutional Shareholder Services Inc. (ISS), one of the nation's leading institutional shareholder advisory firms, has recommended to its clients that they vote in favor of Mentor Graphics' director nominees and related proposals at the Special Meeting of stockholders of Quickturn Design Systems, Inc. (Nasdaq: QKTN). The principal purpose of the Special Meeting is to vote on replacing the Quickturn Board of Directors with a slate of independent directors nominated by Mentor Graphics. If the nominees are elected, Mentor Graphics expects that, subject to their fiduciary duties to all Quickturn stockholders, the nominees will take the steps necessary to facilitate the stockholders' ability to accept Mentor Graphics' $12.125 per share all-cash offer. In its report, ISS states: "At best, ISS views the [Quickturn] board's actions as an overzealous execution of its perceived fiduciary duty to shareholders. At worst, we must give weight to the self-preservation effects that the takeover defenses produce on behalf of the board and management at the potential expense of shareholders. Fiduciary duty does not include eliminating or obstructing the rights of shareholders to determine to accept any offer for their ownership in the company." The ISS report concludes: "The board's duty would have been more properly executed by placing its argument squarely in opposition to the offer of [Mentor] and allowing shareholders to exercise their right to vote democratically and expeditiously on the matter." Dr. Walden C. Rhines, President and CEO of Mentor Graphics, said, "We are very pleased to have received the recommendation of ISS for our nominees and all our proposals, and agree with this independent firm's criticism of the entrenchment actions of Quickturn's Board and management. It is time for Quickturn's Board of Directors to listen to the wishes of its stockholders and allow them to decide for themselves the merits of Mentor Graphics' offer." Mentor Graphics has called the Special Meeting of Quickturn stockholders for October 29, 1998. A trial on Mentor Graphics' challenge to Quickturn's anti-takeover actions and Mentor Graphics' scheduling of the Special Meeting will take place later this month in Delaware state court. Institutional Shareholder Services, based in Bethesda, Md., is a leading independent advisor to several hundred institutional investors and provides voting recommendations for proxy contests, corporate governance proposals and other shareholder related issues. The Dealer Manager for Mentor Graphics' tender offer is Salomon Smith Barney. The Information Agent for the Offer is MacKenzie Partners, Inc., which can be reached toll-free at 800-322-2885 or by collect call at 212-929-5500. Contacts: Anne M. Wagner Roy Winnick/Todd Fogarty Vice President, Marketing Kekst and Company 503/685-1462 212/521-4800 # # # -----END PRIVACY-ENHANCED MESSAGE-----