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iBASIS, INC., )
) ) ) )
) c.A. No. 4774-VCS
~ CONFIDENTIAL - FILED UNDER ) SEAL
) ) ) ) )
KONINKLIJKE KPN N.Y., KPN B.V., CELTIC ICS INC., EELCO BLOK, JOOST FARWERCK, AD SCHEEPBOUWER, STAN MILLER BAPTIEST COOPMANS, W.T.1. HAGEMAN, M.E. HOEKSTRA and M.N.A.1. YOGT,
KPN RV. and KONINKLIJKE KPN N.Y.,
iBASIS, INC., ROBERT H. BRUMLEY, CHARLES N. CORFIELD, OFER GNEEZY, W. FRANK KING and GORDON 1. V ANDERBRUG,
REDACTE]) PUBLIC VERSION 11/13/09
PLAINTIFF'S OPENING POST-HEARING BRIEF
Adam H. Offenhartz J. Ross Wallin David 1. Kerstein
Gibson, Dunn & Crutcher LLP 200 Park Avenue
New York, New York 10166-0193
Dated: November 6, 2009
Thomas A. Beck (#2086) Raymond J . DiCamillo (#3188) Margot F. Alicks (#5127) Richards, Layton & Finger, P .A. One Rodney Square
920 North King Street Wilmington, Delaware 19801 (302) 651-7700
Attorneys for Plaintiff and Counterc1aimDefendant iBasis, Inc. and CounterclaimDefendants Robert H. Brumley, Charles N. Corfield, Ofer Gneezy, W. Frank King and Gordon J. VanderBrug
TABLE OF CONTENTS
PRELIMINARY STATEl\1ENT 1
1. DEFENDANTS! MOTION FOR SUMMARY IDDGMENT ON THEIR
COUNTERCLAIMS MUST FAIL 6
A. The Bylaws Are Void to the Extent They Purport to Block the Rights Plan 6
1. The Relevant Provisions of the Bylaws Are Void Per Statute 6
2. The Bylaws Are Void on Equitable Grounds 8
B. The iBasis Board's Decision to Implement a Rights Plan Satisfies the
Standard Set Forth in Unocal 10
1. The Unocal Standard 10
2. The iBasis Board Reasonably Identified KPN's Tender Offer as a
a. The Special Committee Evaluated the Offer Using a
Reasonable Process 11
1. The Special Committee Thoroughly Evaluated the
Tender Offer 11
11. The iBasis Board Acted in Good Faith 18
b. The Tender Offer Poses a Threat.. 19
1. The Tender Offer Was Opportunistically Timed 20
11. KPN's Tender Offer Is Grossly Inadequate 21
(a) The Parent Projections Are Unduly Pessimistic and Do Not Represent KPN's True View of the Business
(b) The Work ofKPN's Financial Advisor Does Not
Support the Current Tender Offer Price 24
(c) Market Reaction Confirms the Special Committee's
Assessment That KPN's Offer Is Inadequate 27
Table of Contents (Continued)
m. KPN Has Misled the Investing Public Concerning
the Future Prospects ofiBasis 27
C. The Rights Plan Is Not a Disproportionate Response 28
II. AN INJUNCTION IS NECESSARY TO PREVENT IBASIS AND ITS
SHAREHOLDERS FROM BEING IRREPARABLY HARMED 33
A. iBasis Has Demonstrated That It Is Likely To Succeed On the Merits ofIts
1. Since Defendants Have Committed Numerous Disclosure Violations That Remain Uncured, iBasis Has Established a Likelihood of Success on the Merits of its Disclosure Violation
a. Morgan Stanley's Unexplained Adjustments to Its Valuation Analyses Prevent iBasis Shareholders From
Knowingly Determining Whether to Tender Their Shares 34
b. KPN's Failure to Disclose the Newly-Discovered Projections Is a Serious and Ongoing Violation ofIts
Disclosure Obligations 36
c. KPN's Disclosures Regarding the June 12th Favorable Projections Are Materially Misleading and Must Be
2. iBasis Has Established a Likelihood of Success on the Merits of Its Breach of Fiduciary Duty Claims against KPN and the
Overlapping Director Defendants 43
a. Defendants KPN, Blok and Farwerck Have Breached Their Fiduciary Duties to iBasis Shareholders by
Violating Their Duties of Disclosure 43
b. KPN Has Violated Its Duties as Majority Shareholder by
Squeezing iBasis' Margins 43
1. KPN's Oppressive Transit and Termination Fees 43
11. KPN Pressured iBasis to Squeeze Its Profit
Table of Contents (Continued)
c. The Overlapping Director Defendants Blok and Farwerck Breached Their Individual Duties by Failing to Inform
iBasis of Material Information 47
B. An Injunction Is Required to Prevent Irreparable Harm to iBasis 49
1. If the Tender Offer Is Allowed to Proceed, iBasis and its Minority
Shareholders Will Be Irreparably Harmed 49
2. Speculative Appraisal Rights Have No Bearing on Whether to
Issue an Injunction 50
III. THE TENDER OFFER CANNOT SATISFY ENTIRE FAIRNESS 51
A. The Tender Offer Should Be Subject To Entire Fairness Test, Which KPN
Cannot Meet 51
1. Entire Fairness Should Apply Because the Special Committee Has Recommended That iBasis Minority Shareholders Not
2. Entire Fairness Is Warranted Because the Tender Offer Is Rife
with Disclosure Violations 53
3. Entire Fairness Must Apply Because KPN and Overlapping Director Defendants Blok and Farwerck Have Breached Their
Fiduciary Duties to iBasis 55
4. Entire Fairness Review Is Appropriate Because KPN Has Placed
the Fairness of the Tender Offer at Issue in the Offer to Purchase 56
B. The Tender Offer Cannot Satisfy Entire Fairness Review 56
1. The Process Is Not Fair 56
2. The $2.25 Per Share Offer Price Is Not Fair 57
C. The Tender Offer Should Be Enjoined Because It Is Not Entirely Fair 59
TABLE OF AUTHORITIES
Blasius Indus., Inc. v. Atlas Corp.,
564 A.2d 651 (DeL Ch. 1988) 29,31
CA, Inc. v. AFSCME Employees Pension Plan,
953 A.2d227 (DeL 2008) 10
Carmody v. Toll Bros., Inc.,
723 A.2d 1180 (Del. Ch. 1998) 7,8,29,32
Chesapeake Corp. v. Shore,
771 A.2d 293 (Del. Ch. 2000) 11
City Capital Assoc. Ltd P'ship v. Interco Inc.,
551 A.2d 787 (Del. Ch. 1988) 11
Cooper v. Pabst Brewing Co.,
1993 WL 208763 (Del. Ch. June 8, 1993) 60
Eisenberg v. Chicago Milwaukee C01p.,
537 A.2d 1051 (Del. Ch. 1987) 44, 50, 52
Frantz Mfg. Co. v. EAC Indus.,
501 A.2d 401 (Del. 1985) 8, 10
Gantler v. Stephens,
965 A.2d 695 (Del. 2009) 19
Globis Partners, L.P. v. Plumtree Software, Inc.,
2007 WI, 4292024 (Del. Ch. Nov. 30, 2007) 43
Golden Cycle, LLC v. Allan,
1998 DeL Ch. LEXIS 80 (DeL Ch. May 20, 1998) 32
Gradient DC Master, Ltd v. NBC Universal, Inc.,
930 A.2d 104 (DeL Ch. 2007) 57
HMG/Courtland Props, Inc. v. Gray,
749 A.2d 94 (Del. Ch. 1998) 58
Hollinger Int'l, Inc. v. Black,
844 A.2d 1022 (Del. Ch. 2004) aff'd, 872 A.2d 559 (Del. 2005) 8,9,44,48,51,56
In re Cox Communications
879 A.2d 604, 607 (Del. Ch. 2005) passim
In re Cheyenne Software, Inc.,
1996 WL 652765 (Del. Ch. Nov. 7, 1996) 19
In re DIGEX Inc. S'holder Litig.,
789 A.2d 1176 (Del. Ch. 2000) 10
In re Digital Island Sec. Litig.,
357 F.3d 322 (3d Cir. 2004) 19
In re Gaylord Container Corp. S'holders Lit.,
753 A.2d 462 (Del. Ch. 2000) 11, 12,32
In re Intelligroup Sec. Litig.,
527 F. Supp. 2d 262 (D.N.J. 2007) 19
In re IXC Commc'ns, Inc. S'holders Litig.,
1999 WL 1009174 (Del. Ch. Oct. 27, 1999) 51
In re Netsmart Techs., Inc.,
924 A.2d 171 (Del. Ch. 2007) 41, 51
In re PNB Holding Co. S 'holders Litig.,
2006 WL 2403999 (DeL Ch. Aug. 18, 2006) 38
In re Siliconix S'holders Litig.,
2001 WL 716787 (Del. Ch. June 19, 2001) 38, 52
In re Staples, Inc. S'holders Litig.,
792 A.2d 934 (DeL Ch. 2001) passim
In re Topps Co. S'holders Litig.,
926 A.2d 58 (DeL Ch. 2007) 4, 36
In re Trans World Airlines, Inc. S'holders Litig.,
1988 WL 111271 (DeL Ch. Oct. 21, 1988) .37
In re Transkaryotic Therapies, Inc.,
954 A.2d 346 (DeL Ch. 2008) 19
Joseph v. Shell Oil,
482 A.2d 335 (DeL Ch. 1984) passim
Kahn v. lynch Commc 'n Sys., Inc.,
638 A.2d 1110 (Del. 1994) 37,53,54
La. Mun. Police Emp. Retirement Sys. v. Fertitta,
2009 DeL eh. LEXIS 144 (Del. eh. July 28, 2009) 9
Mentor Graphics Corp. v. Quickturn Design Systems, Inc.,
728 A.2d 25 (DeL eh. 1998) 22
MM Cos. v. Liquid Audio, Inc.,
813 A.2d 1118 (DeL 2003) 29
Moore Corp. ltd v. Wallace Computer Services, Inc.,
907 F. Supp. 1545 (D. DeL 1995) 21,32
ODS Tech., L.P. v. Marshall,
832 A.2d 1254 (DeL ci, 2003) 50, 51
Paramount Comm., Inc. v. Time Inc.,
571 A.2d 1140 (DeL 1990) 11,20,29
Payne v. Deluca,
433 F. Supp. 2d 547 (W.D. Pa. 2006) 19
Police & Fire Ret. Sys. of the City of Detroit v. Bernal,
2009 WL 1873144 (Del. eh. Jun. 26, 2009) 50, 51
Pure Resources, Inc. S'holders Litig.,
808 A.2d 421 (DeL eh. 2002) passim
Quickturn Design Sys. v. Shapiro,
721 A.2d 1281 (Del. 1998) 8
Raymond Revocable Trust v. MAT Five LlC,
2008 WL 2673341 (DeL eh. June 26, 2008) 38
Ryan v. Lyondell Chem. Co.,
2008 DeL eh. LEXIS 105 (Del. eh. July 29, 2008) 36
Sealy Mattress Co. v. Sealy, Inc.,
532 A.2d 1324 (Del. Ch. 1987) 40, 52
Solar Cells, Inc. v. True N Partners, LLC,
2002 Del. eh. LEXIS 38 (Del. Ch. Apr. 25, 2002) passim
Solomon v. Pathe Commc'ns C01p.,
672 A.2d 35 (Del. 1996) 43, 56
Thorpe by Castleman v. CERBCO,
676 A.2d 436 (DeL 1996) 1 0
Unitrin, Inc. v. Am. Gen. Corp.,
651 A.2d 1361 (DeL 1995) passim
Weinberger v. Rio Grande Indus., Inc.,
519 A.2d 116 (Del. Ch. 1986) 37,54,55,58
Williamson v. Cox Commc 'ns, Inc.,
2006 WL 1586375 (Del. Ch. June 5, 2006) 5, 45,56
8 DeL C. § 141 (a) 8
8 Del. C. § 141(b) 8
8 DeL C. §141(d) 6, 7, 8
Lucian Arye Bebchuk, et al., The Powerful Antitakeover Force of Staggered Boards:
Theory, Evidence, and Policy, 54 Stan. L. Rev. 887 (May 2002) 30
"Tr. _": Trial Transcript.
"[Name] Tr. _": Deposition Transcript.
"Op. Br.": Plaintiff's Opening Brief in Support of Motion for Preliminary Injunction, dated October 2,2009.
"Ans. Br.": Plaintiff's Answering Briefin Support of Motion for Preliminary Injunction, dated October 23, 2009.
"KPN Op. Br.": Koninklijke KPNN.V. and KPN B.V.'s Pretrial Brief, dated October 2,2009.
"KPN Ans. Br.": Koninklijke KPNN.V. and KPN B.V.'s Opposition to Plaintiff's Opening Brief in Support of Motion for Preliminary Injunction, dated October 23,2009.
"App. A": Refers to the Appendix attached hereto.
All other fact citations (cited as "Wallin Aff., Ex. _ at [bates range, section or page]") are to the Affidavit of Ross Wallin, dated November 6, 2009.
RLFI ·3502043· I
iBasis' CEO Ofer Gneezy was right when, following the launch ofKPN's Tender Offer for the remaining shares of iBasis at $1.55 per share, he declared that KPN, iBasis' majority shareholder, was "trying to steal the company. II The evidence adduced in discovery and at the hearing demonstrates that, even after KPN's last minute bump of its offer to $2.25 per share, KPN's Tender Offer is still grossly inadequate - which was not "a tough call" to make according to the iBasis Special Committee's financial advisor - and its Offer to Purchase is still rife with misleading disclosures. Chief among KPN's myriad disclosure violations is the fact that KPN purports to base its Tender Offer on a set of "Parent Projections" for iBasis that bears no relation to reality. Indeed, not only do the Parent Projections bear no relation to iBasis' actual value or the forecasts for iBasis generated by iBasis management, the Parent Projection cannot be reconciled with the numerous other more favorable projections that KPN prepared for iBasis both prior to and after the Parent Projections.
To protect iBasis' minority shareholders, the Special Committee responded the only way it could - by implementing a plain vanilla rights plan. KPN's assertion that iBasis' Bylaws prohibit implementation of a Rights Plan is wrong because the relevant provisions of the Bylaws are unenforceable. Simply put, the Bylaws purport to give the KPN-Nominated directors, and only the KPN-Nominated Directors, the power to veto implementation of a rights plan. But Section 141 of the Delaware General Corporation Law states that differential voting power among directors must be reflected in a company's certification of incorporation. And iBasis' certificate of incorporation contains no such reference. These facts are undisputed, and thus the Bylaws do not, and cannot, block implementation of the Rights Plan. Even if this were not the case, the relevant provisions of the Bylaws would be void as inequitable because, at least as applied in this case, they purport to
prevent the iBasis Board from exercising its fiduciary duty to protect iBasis' minority stockholders from KPN's coercive, grossly inadequate offer.
The iBasis Board's implementation of the Rights Plan satisfies the standard set forth in Unocal. The hearing testimony left little doubt that the Special Committee faithfully and diligently discharged its duty to evaluate the Tender Offer and the amended Offer. The Special Committee Chairman, Dr. Frank King, explained in detail how the Special Committee spent hours peppering management with questions concerning its projections for iBasis' business, and additional hours evaluating and testing Jefferies' valuation analysis. At the end of the day, the Special Committee concluded, as did Jefferies, that KPN's tender offer, at either $1.55 or $2.25 per share, did not approach the intrinsic value of the iBasis business.
In addition, the factual record amply supports the reasonableness of the Special Committee's conclusion that the Tender Offer is grossly inadequate. As iBasis has repeatedly explained, the Parent Projections on which the Tender Offer is based are hopelessly, unrealistically, and, no doubt intentionally, pessimistic. Among other things, the Parent Projections assume that iBasis will consummate exactly zero outsourcing transactions going forward, even though it has executed two outsourcing deals already, has an agreement in principle for a third, and has several more in the pipeline. Moreover, KPN's witnesses - in moments of rare candor - admitted during the hearing that iBasis is well-positioned to execute, and should seek to execute, outsourcing deals going forward.
The Parent Projections are the most negative set of projections that KPN has ever generated for iBasis. This fact strongly suggests that KPN's M&A group engineered the Parent Projections to justify an unfairly low offer price. During discovery, iBasis uncovered over numerous additional sets of projections that KPN generated between October 2008 and the announcement of the Tender Offer ten months later; not a single one was more pessimistic than the Parent Projections.
Several of the more favorable KPN generated projections, including a set of scenarios that formed the basis of certain "Favorable Projections," were prepared by members of the iBasis Office, the group within KPN that was most familiar with iBasis and that worked with the Company on a day-to-day basis. These more favorable projections, which were finalized after the Parent Projections, expressly indicate that one of the more favorable scenarios therein is "most desirable," and "attainable," and that iBasis is "ready for 'back-on-track' growth initiatives. II In another scenario, KPN projected that iBasis would garner 2.5 billion minutes worth of outsourcing deals per year over the next several years - very similar to iBasis management's projections in its 5 Year Plan of 3 billion minutes per year in outsourcing deals. KPN did not provide any of these other more favorable financial projections to its financial advisor, Morgan Stanley, prior to Morgan Stanley's analysis of iBasis.
The evidence adduced at the hearing also demonstrated that, in stark contrast to Jefferies' analysis on behalf of the Special Committee, Morgan Stanley's work was unreliable at best. Among other deficiencies, KPN and Morgan Stanley continually, and without any credible explanation, tweaked the assumptions in its discounted cash flow analysis over a period of more than two months. Predictably, the constantly moving assumptions resulted in ever-lower implied share price ranges as the time to launch the Tender Offer approached. In addition, Morgan Stanley simply omitted a comparable companies analysis that appeared unlikely to support KPN' s lowball tender offer price.
This Court has preliminarily enjoined a tender offer in similar circumstances and should do so here. See In re Topps Co. S'holders Litig., 926 A.2d 58, 76 (Del. Ch. 2007).
Even worse, in its public filings, KPN has rnischaracterized or failed to disclose material information necessary to place the Parent Projections and the Morgan Stanley valuation analyses in context. In particular, KPN has failed to disclose or explain the Newly Discovered Projections, or correct its misstatements concerning the Favorable Projections. Indeed, the only constituency that seems willing to provide information concerning the KPN tender offer to iBasis shareholders is iBasis. Yesterday evening, iBasis disclosed the Newly Discovered Projections in the wake ofKPN's inexplicable failure to do so. But as the Court of Chancery has previously held, iBasis' disclosure of these projections "does not relieve the tender offeror from meeting its duty offu11 disclosure." Joseph v. Shell Oil, 482 A.2d 335, 342 (Del. Ch. 1984).
There is nothing coercive or preclusive about the iBasis Rights Plan. It cannot, and does not purport to, prevent KPN from nominating two additional directors at next year's annual meeting, thereby gaining control of the iBasis board. It likewise does not prevent KPN from taking immediate steps to enforce its rights under the By laws to remove iBasis' CEO, Ofer Gneezy. In short, there is no argument that this Rights Plan is an entrenchment device.
As iBasis explained in its pre-hearing briefing, and showed at the hearing, KPN's disclosure violations are serious and uncorrected. KPN has yet to disclose or explain the numerous sets of projections it generated that are more favorable than the Parent Projections.
KPN's serial disclosure violations require the Court to enjoin the Tender Offer, regardless of whether the Rights Plan remains in place. See id. at 343.
KPN's failures of disclosure also constitute a breach of the fiduciary duties that KPN and the KPN Nominated Directors, Eelco Blok and Joost Farwerck, owe to iBasis and its minority shareholders. And KPN's failure to provide anything but the Parent Projections to Morgan Stanley is itself a breach offiduciary duty. See id. at 341. Defendants' breaches of their fiduciary duties were not limited to disclosure violations, however. KPN started taking advantage of iBasis almost immediately after the KPN-iBasis transaction closed - first by refusing timely and fully to compensate iBasis for unanticipated transit fees and port charges, then by failing to provide iBasis with all of the traffic it had promised to provide, and finally by imposing unreasonable price demands on iBasis' mobile business that benefited other KPN subsidiaries at iBasis' expense. Lastly, Mr. Blok and Mr. Farwerck, in direct violation of their fiduciary duties to iBasis and its shareholders, deliberately withheld from iBasis any information concerning KPN's intention to launch a tender offer. The Tender Offer must be enjoined for all of these reasons as welL
Lastly, KPN's offer must be enj oined because it should be reviewed under an entire fairness analysis - and it cannot meet that test. As this Court observed in Cox Communications, the fact that the Special Committee has evaluated and rejected the Tender Offer should be enough to trigger entire fairness review. This will provide an incentive for acquirers to negotiate with the target's special committee prior to making their offers - unlike KPN's refusal to do so here. And even if such a rejection did not trigger a fairness review, KPN's numerous disclosure violations and breaches of fiduciary duties represent exactly the sort of failure to engage in fair dealing that would do so in any event. Finally, KPN's decision affirmatively to place the fairness of the offer to iBasis shareholders at issue in its Tender Offer materials is yet another factor that counsels in favor of an entire fairness
As the evidence adduced at the hearing shows - KPN's Tender Offer is not fair in price or
process. Like the defendants in Solar Cells, Inc. v. True N Partners, LLC, 2002 Del. Ch. LEXIS 38,
at * 19 (Del. Ch. Apr. 25,2002), KPN here has "manipulated the valuation" for iBasis by basing the
Tender Offer on Parent Projections that are "irreconcilable" with the myriad of other projections that
KPN has prepared for iBasis over the past year. On this basis alone, the Tender Offer is not entirely
fair and must be enjoined. See id. at *22.
I. DEFENDANTS' MOTION FOR SUMMARY JUDGMENT ON THEIR
COUNTERCLAIMS MUST FAIL
A. The Bylaws Are Void to the Extent They Purport to Block the Rights Plan
At no point during the prior briefing and two-day hearing did KPN come close to establishing
the legality of Section 3.17 of the Bylaws. On the contrary, 8 Del. C. §141(d) prohibits corporate
bylaws from granting greater voting powers to certain directors unless specifically allowed by the
certificate of incorporation. Moreover, the Bylaws are also void on equitable grounds to the extent
they limit the iBasis Board's ability to discharge its fiduciary responsibilities through adoption of the
1. The Relevant Provisions of the Bylaws Are Void Per Statute
Section 3.17 of the iBasis Bylaws gives only the KPN-Nominated directors veto power over
the Board's ability to enact a rights plan. This differential voting power is not authorized by iBasis'
certificate of incorporation. 8 Del. C. § 141 (d). The Bylaws are therefore void per se to the extent
they purport to block implementation of the Rights Plan. See id.; Carmody v. Toll Bros., Inc., 723
A.2d 1180, 1191 (Del. Ch. 1998).
In its pre-hearing answering brief, KPN attempted to distinguish Carmody on the grounds
that (1) Carmody concerned a rights plan, not corporate bylaws and (2) certain directors in Carmody 6
had no vote at all whereas the non-KPN-Nominated directors here may still cast a vote (albeit a
meaningless one if faced with opposition from any of the KPN-Nominated directors). KPN Ans. Br.
at 31. Both arguments ignore the reasoning of Carmody and the statutory language at issue. KPN's
first argument fails because Section 141(d) does not differentiate between voting inequality is set
forth in a rights plan or a bylaw or something else: the inequality is void unless it is established in the
certificate of incorporation. 8 Del. C. § 141(d); Carmody, 723 A.2d at 1191 ("Absent express
language in the certificate of incorporation, nothing in Delaware law suggests that some directors of
a public corporation may be created less equal than other directors[. r') (emphasis added). Likewise,
KPN's second argument fails because a bylaw need not completely disenfranchise a director in order
for it to violate Section 141 (d). So long as a class of directors receive "voting powers greater than or
less than those of other directors," and so long as the differential voting power is not reflected in the
certificate of incorporation, the bylaw is invalid. 8 Del. C. § 141(d); Carmody, 723 A.2d at 1191
("The plain, unambiguous meaning of [Section 141 (d)] is that if one category or group of directors is
given distinctive voting rights not shared by the other directors, those distinctive voting rights must
be set forth in the certificate of incorporation. ''),
KPN's other efforts to sidestep 8 Del. C. § 141 (d) are no more successful. KPN characterizes
the veto powers as "no ... more onerous than a [unanimity requirement)" (KPN Ans. Br. at 43), a
"super-majority voting process" (KPN Ans. Br. at 33) and as "merely set[ting] the minimum tally
necessary for the Board to take action[.]" !d. at 31.1 A unanimity or ordinary super-maj ority
1 In a related argument, KPN argues that super-majority provisions are allowed by 8 Del. C § 141(b). KPN Ans. Br. at 32-33 (citing Hollinger In!'l, Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004) and Frantz Mfg. Co. v. EAC Indus., 501 A.2d 401 (Del. 1985). As explained above, however, the veto powers are not ordinary super-majority provisions as contemplated by Section 141 (b); rather, the veto powers are held solely by the KPN-Nominated directors, and are therefore invalid per Section 141(d).
requirement would at least treat all directors equally, but the Bylaws as written give special veto
powers only to a certain class of directors. iBasis Ans. Br. at 42. The law could not be more clear:
Section 141 (d) mandates that all directors have an equal vote unless distinctions exist in the
certificate of incorporation; the Bylaws grant unequal votes to directors without a concomitant
provision in the certificate of incorporation; the Bylaws are therefore void.2
The Bylaws are also void under 8 Del. C. § 141(a) to the extent they remove from the full
Board the power to enact a rights plan in the face of a coercive tender offer, and grant that power to
only the KPN-Nominated directors. See Carmody, 723 A.2d at 1191 ("The business and affairs of
every corporation ... shall be managed by or under the direction of a board of directors, except as
may be otherwise provided in this chapter or in its certificate of incorporation. ") (quoting 8 Del. C. §
141(a)). KPN frames Section 3.17 as a "process-oriented" bylaw akin to "quorum requirements."
KPN Ans. Br. at 32. Of course, no quonun requirement or other purely procedural bylaw wrests
critical corporate management duties from the Board. See Quickturn Design Sys. v. Shapiro, 721
A.2d 1281, 1291 (Del. 1998) ("The [provisions at issue] would prevent a newly elected board of
directors from completely discharging its ftmdamental management duties to the corporation and its
stockholders ... restrict[ing] the board's power in an area of fundamental importance to the
shareholders - negotiating a possible sale of the corporation.") (emphasis added).
2. The Bylaws Are Void on Equitable Grounds
The relevant provisions of the Bylaws are void on equitable grounds, even ifthey are not
invalid pursuant to statute. As this Court has noted, "inequitable action does not become permissible
2 The reasons why KPN did not seek to change the certificate of incorporation to allow the veto power when the SPSA was negotiated, or why KPN did 110t demand a unanimity requirement instead of a special veto power, are irrelevant for the purposes of the evaluating the Bylaws' validity under controlling Delaware statutes.
simply because it is legally possible." Hollinger Int'l Inc. v. Black, 844 A.2d 1022, 1081 (Del. Ch. 2004), aff'd, 872 A.2d 559 (DeL 2005). Here, the iBasis Board had a fiduciary duty to oppose and protect the stockholders from KPNts coercive tender offer by attempting to oppose that offer. It determined in good faith after a reasonable investigation that the most effective way to fulfill that duty was to institute the Rights Plan. Had the Board not instituted the Rights Plan, it likely would have violated its fiduciary duty of loyalty. See, e.g., La. Mun. Police Emp. Retirement Sys. v.
Fertitta, 2009 DeL Ch. LEXIS 144, at *31 (Del. Ch. July 28, 2009) (holding that a board may violate its fiduciary duty if it "fail] s] to employ a poison pill to prevent [a stockholder] from obtaining control without paying a control premium"). Indeed, this Court has criticized a similarly situated special committee for failing to seek authority to implement a rights plan. See Pure Resources, Inc. S'holders Litig., 808 A.2d 421, 431 (DeL Ch. 2002) (questioning the basis for the special committee's failure to "insist on the power to deploy a poison pill- the by-now de rigeur tool of a board responding to a third-party tender offer").
In contravention of the Board's fiduciary responsibilities, the Bylaws purport to prevent the disinterested and independent directors from discharging their fundamental responsibilities to protect iBasis and its shareholders from an inadequate and misleading tender offer. The Bylaws do exactly what equity forbids: vest absolute power in the interested directors most likely to have a conflict of interest. See Thorpe v. CERBCO, 676 A.2d 436,442 (Del. 1986) (holding that conflicted directors "should have removed themselves from the negotiations and allowed the disinterested directors to act ... tt); In re DIGEX Inc. S'holder Litig., 789 A.2d 1176, 1211 (Del. Ch. 2000) (interested directors violate duty offairness when they exclude other directors from decision-making).
KPN cited two cases in its pre-hearing briefing for the proposition that the Bylaws are equitable: Frantz and Pure. The bylaws provisions at issue in Frantz, unlike the Bylaws provisions
at issue here, were purely procedural. This Court's decision in CA, Inc. distinguished Frantz on
precisely this ground and struck down a bylaw that limited the ability of a board to fulfill its fiduciary
duties, just as Section 3.17 does here. See CA, Inc. v. AFSCME Employees Pension Plan, 953 A.2d
227,235 (Del. 2008). Similarly, the observation in Pure that a board has no fiduciary duty to enact a
pill I'where a tender offer is not coercive and proper disclosures have been made" (KPN Ans. Br. at
36 (citing Pure, 808 A.2d at 446)) is irrelevant here because KPN's Tender Offer is coercive and
proper disclosures have not been made by KPN. Thus, the Bylaws are void as inequitable.
B. The iBasis Board's Decision to Implement a Rights Plan Satisfies the Standard Set Forth in Unocal
Absent a limitation in the Bylaws, the iBasis Board's decision to implement a rights plan in
response to KPN's unfairly low offer need only satisfy the standard set forth in Unocal.
1. The Unocal Standard
Under the standard set forth in Unocal, a target board may implement and maintain a rights
plan if (1) there are reasonable grounds to believe that a danger to corporate policy and effectiveness
existed; and (2) the adoption of the rights plan is reasonable in relation to the threat posed. Unitrin,
Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1373 (Del. 1995) (citing Unocal). lfthe target succeeds in
showing that its actions were reasonable and proportionate, the burden then shifts back to the
acquirer to demonstrate that the target board's actions are not entitled to the protection of the business
judgment rule. See Unitrtn, 651 A.2d at 1373. The iBasis Board's implementation of a rights plan in
this case easily meets the Unocal standard.
2. The iBasis Board Reasonably Identified KPN's Tender Offer as a Threat.
The first prong of the Unocal test is "essentially an inquiry into whether the board used a
reasonable process to identify a legitimate threat to the corporation." In re Gaylord Container Corp.
S'holders Lit., 753 A.2d 462,474 n.35 (DeL Ch. 2000). The hallmarks ofa reasonable process are
"good faith and reasonable investigation. II Paramount Commc 'ns., Inc. v. Time Inc., 571 A.2d 1140,
1152 (DeL 1990). As this Court has made clear, "a reasonable degree of deference to a properly
functioning board" is appropriate when the board "identifies a threat and adopts proportionate
defenses after a careful and good faith inquiry." Chesapeake Corp. v. Shore, 771 A.2d 293,329
(Del. Ch. 2000). In reviewing whether a board's determination was reasonable, a court should not
substitute its own judgment for that of the board and conduct a substantive evaluation as to whether a
tender offer gives a better deal than the corporation's alternatives for its shareholders. Time Inc., 571
A.2d at 1153 (rejecting the Court of Chancer is substantive evaluative analysis in City Capital Assoc.
Ltd P'ship v. Interco Inc., 551 A.2d 787 (Del. Ch. 1988)).3
a. The Special Committee Evaluated the Offer Using a Reasonable Process
As set out in iBasis's pre-hearing briefs, and as reflected in the Hearing Record, the Special
Committee's evaluation of the Tender Offer unquestionably was thorough, diligent and in good
I. The Special Committee Thoroughly Evaluated the Tender Offer
On July 13,2009, KPN publicly announced its intention to commence a tender offer for all
outstanding iBasis shares that KPN did not already own at a price of$I.55 per share. Two days later,
on July 15, the iBasis Board formed a Special Committee of three independent directors to consider
3 Indeed, this Court explicitly noted in Chesapeake that its role was to examine "the legitimacy of the  board's identification of ' substantive coercion' or 'stockholder confusion' as a threat," not to substitute its view for that ofthe Board. Chesapeake, 771 A.2d at 327 (emphasis added).
4 Delaware COutts have not hesitated to uphold rights plans that were implemented following robust consideration by a board of a threat posed by an offer. See In re Gaylord,753 A.2d at 478.
KPN's $1.55 per share tender offer. Tr. 167:9-10. Dr. King, the Special Committee Chairman, testified at the hearing that the Special Committee's mandate was lito evaluate the tender offer, to fulfill our duties with respect to the regulatory filings, and to ensure that the shareholders, the minority shareholders, of the company get a fair deal." Id at 13-17.
From the outset, the Special Committee instituted a careful and diligent process for evaluating KPN's offer. As he testified at the hearing, Dr. King knew that he "needed to instruct [him] self and the committee on what that process was, hire the right advisors, get the work going, and be sure along the way that we deliberated thoughtfully and carefully about [the $1.55 offer]." Tr. 168:22-169:3. After considering several law firms to serve as "outside legal counsel to advise the Special Committee with respect to the proposed tender offer by KPN," the Special Committee retained Gibson, Dunn & Crutcher LLP on July 15. Tr. 169:10-12; JX 231, at iBASIS_0208138. The Special Committee also retained Richards, Layton & Finger, P.A., as Delaware counsel. Tr. 169:10-12; JX 231, at iBASIS_0208136. In addition, between July 17 and 19, the Special Committee interviewed three potential financial advisors and ultimately selected Jefferies & Company because of its knowledge of the telecommunications industry. Tr. 169:13-16, 176:20-21; JX 232, at iBASIS_0208139.
The Special Committee engaged Jefferies to evaluate the tender offer from a financial point of view. Tr.169:19-22. Specifically, Jefferies was to apply various valuation methodologies to determine whether $1.55 per share was adequate compensation for the outstanding shares ofiBasis not owned by KPN. Jd. The Special Committee thus requested that management prepare a set of
projected fmancials - the 5 Year Plan - for Jefferies to use in its valuation analysis.> Tr. 170:7-9; see
also IX 1197 at iBASIS _ 0208141. And as part of Jefferies' diligence of the 5 Year Plan, Jefferies
met with management to "understand the plan and ... to make sure that it made sense. tt Tr. 170: 13-
When management presented the 5 Year Plan to the Special Committee on July 27, the
Special Committee had a "very dynamic, interactive" discussion with management about the
assumptions underlying the 5 Year Plan - in particular, concerning the outsourcing assumptions,
which Mr. Gneezy specifically addressed. Tr. 174:15-17, 174:23- 175:4; see also IX 1198.7 As Dr.
King testified at the hearing, the Special Committee fulfilled its responsibility "to make sure we
agreed with [the 5 Year Plan], to scrub it, to test it, to examine it, not to rubber stamp it." Tr. 175:16-
18. The Special Committee ultimately concluded that management's 5 Year Plan "is a doable plan,"
and "the kind of plan the company ought to be able to execute." Tr.175:9-12.
Jefferies presented the preliminary financial analysis it had conducted to date regarding
iBasis at the July 27 Special Committee meeting. See IX 1198. Jefferies presented its final financial
5 Cj id. 251: 11-16 (testimony of John Huwiler that Jefferies "had ... multiple opportunities to talk to management, ask them questions, understand the assumptions, and satisfy [them]seIves that management had given this plan ... reasonable thought ... and was comfortable with it.").
6 KPN's insinuation that Jefferies' valuation and reliance on the 5 Year Plan are "suspicious" because a Jefferies research analyst dropped coverage of iBasis in early 2009 is meritless. As John Huwiler, leader of the Jefferies team advising the Special Committee regarding the Tender Offer, explained in his hearing testimony, Jefferies' analysts are completely separate from its M&A teams, there is an ethical screen between the two groups, and research reports from one covering analyst are never an element of a valuation analysis. Tr.294:6-20.
7 See also Tr. 183:] 8-] 84:] ("Q. How would you characterize the special committee's discussions with Jefferies and Gibson, Dunn before the committee reached its conclusions? A. We wanted to ... be sure that we had done a thorough job, that we had taken into account what Jefferies was telling us, and what we also brought to the table ... from our industry knowledge and our knowledge of the company. You know, it was a very complete conversation. As I said earlier, it was a long conversation. We were comfortable with it.").
analysis at the July 29 Special Committee meeting, after which it rendered its opinion that KPN's initial $1.55 per share offer "was inadequate from a financial point of view." JX 1202, at iBASIS_0208159. The Special Committee's discussion ofKPN's $1.55 per share offer- both with management and in executive session with its financial and legal advisors -lasted over three hours at the July 29 Special Committee meeting. See JX 1202. Based on Jefferies' analysis and its own knowledge of the company and the industry, the Special Committee recommended that iBasis' minority shareholders reject KPN's $1.55 per share offer. See generally ]X 1208.
In addition to recommending that shareholders reject KPN's $1.55 per share offer,
King Dep. Tr. 110:24-111:3. The Special Committee's legal advisor, Dennis Friedman of Gibson Dunn, explained the Committee's fiduciary duties "early on in the special committee deliberations." Tr. 185:23-24; see also JX 1197; JX 1202. Mr. Friedman also advised that, because KPN's misleading disclosures "needed to be sorted out so shareholders would really know what the appropriate information should be," Tr. 187:7-9, the Special Committee could likely adopt a rights plan, provided the Special Committee perceived a threat to the minority shareholders ofthe company, Tr, 186:22-23, and "develop a plan that was appropriate to that threat," Tr. 186:24-187:1. See generally]X 1290.
The Special Committee fully appreciated that KPN likely would assert that certain of the
By law provisions prohibited adoption of such a rights plan. Tr. 185 :2-5. The Special Committee and its legal advisors had an "ongoing conversation" about the interplay between the Special Committee's fiduciary duties to the minority shareholders (which they believed required adoption of a rights plan) with the Bylaw provision (which arguably required the consent of the KPN-Nominated
directors to adopt one) (see Tr. 188:8-12) and the Special Committee sought and received legal
advice concerning its ultimate recommendation to implement a rights plan. The Special Committee
II continued to discuss it throughout the process. II Tr, 188: 13-15; see also JX 1197 at
iBASIS_0208141; JX 1198 at iBASIS_0208144; JX 1202 at iBASIS_0208159. As Dr. King
testified at the hearing, the Special Committee "understood this was a very serious matter. II Tr.
The Special Committee ultimately recommended that the Board adopt a rights plan, which
would be "limited to one year II and subject to the Special Committee's determination of whether "the
rights plan needs to last that 10ng.11 Tr. 189:16-19; see also JX 282, at iBASIS_0213202. When the
:full Board met the next day, Mr. Friedman "repeated his legal advice" and further explained the
Board's fiduciary duties. Tr. 190:3-12. As Dr. King testified at the hearing, "we had a very complete
conversation at the board level about that issue." Tr, 190: 12-14. The full Board adopted the Rights
Plan on July 30.8 JX 282, iBASIS _0213204-08. Thereafter, the Special Committee continued to
meet regularly throughout August and September to discuss KPNls Tender Offer. Tr. 191 :24 - 192:3.
KPN revised its Tender Offer on October 5, raising its bid to $2.25 per share. The Special
Committee met that same day lito discuss the revised offer with management and its advisors. It JX
285, at iBASIS_0213558. As Dr. King testified at the hearing, the Special Committee "really went
into reset" in order lito go through an additional process from the beginning, looking at the $2.25
offer. We contacted Jefferies and asked them to prepare a new valuation analysis ... starting from
scratch. II Tr. 192: 14-20. Thereafter, Jefferies "held several conference calls with members of senior
management of the Company to diligence the fmancial condition, results of operations and prospects
8 KPN made no effort to negotiate with iBasis prior to launching the Tender Offer. The Rights Plan ensured that the Special Committee would have an opportunity to negotiate with KPN.
of the Company," and "also updated its prior diligence of the Company and updated its prior review
of the relevant markets." IX 1302, at 4.
Dr. King also notified management to be prepared, once again, to go through the assumptions
underlying the 5 Year Plan with the Special Committee "on a line item by line item basis," in order to
"revalidate the assumptions, to make sure that they were still consistent with what [Dr. King] and the
special committee believed were appropriate."? Tr. 194: 1-7. Accordingly, at the October 13 Special
Committee meeting, "we turned to the assumptions page in the five-year plan, "went through every
one of those again, to be sure that they were still appropriate," and "spent quite a long time going
over this again, to be sure that our process was thorough and that the assumptions were still
appropriate. It Tr. 194: 8-18; see also IX 289, at iBASIS_0213554; Tr. 221: 6-15 (Jefferies'
perspective regarding outsourcing assumptions). Indeed, this meeting of the Special Committee
lasted almost two and a half hours. See IX 289. The Special Committee also reviewed in detail
Jefferies' financial analysis ofKPN's $2.25 per share offer. The Special Committee even went so far
as to request that Jefferies perform an additional discounted cash flow analysis based on the
assumption "that the company missed its gross margin for each of the five years by 20 percent and
did not make any cost adjustments." Tr. 196: 21-24. The Special Committee requested this
"draconian" sensitivity analysis - which had the effect of reducing projected EBITDA for 2014 by
9 KPN's criticism of the Special Committee for its supposed "blind" reliance on iBasis' management's "5 Year Plan" for the business and Jefferies is meritless. As an initial matter, the Special Committee (and Jefferies) would have been remiss had they not taken management's view of the business into account. KPN does not cite a single case in which a Delaware court criticized a Special Committee for taking management's view of the business into account in evaluating a tender offer. Moreover, Dr. King's hearing testimony flatly contradicts the allegation that the Special Conunittee blindly relied on management's 5 Year Plan or Jefferies. See Tr. 175: 16-18 (noting with respectto the 5 Year Plan that the Special Committee's job was "to make sure we agreed with [the five year plan], to scrub it, to test it, to examine it, not to rubber stamp it."
approximately 40% ~ in order to ascertain whether the $2.25 per share offer would fall within the
implied share price range even assuming the company badly missed its plan. Tr. 196:15 - 197:1.
Jefferies presented the results of this analysis to the Special Committee on October 14,]X 291, at
iBASIS~0213559, which showed that the $2.25 per share offer was "still woefully low," even under
these draconian assumptions. Tr. 198: 3-4.10 Based on Jefferies' updated analysis and its own
knowledge of the company and the industry, the Special Committee recommended that iBasis'
shareholders reject the $2.25 per share offer. See generally ]X 1302.
The Special Committee also reconsidered the necessity of the Rights Plan, in light of the
revised offer and the current state of iBasis' and KPN's disclosures. Dr. King testified that, with
respect to whether to keep the Rights Plan,
[i]t was an open question. We discussed it thoroughly. Again, the three committee members all expressed the same view, from different viewpoints, that the reason for the rights plan initially was a woefully inadequate offer, in an environment where there were disclosure issues -- that was ongoing then, and I understand it's ongoing now -- there is a possibility of a better offer, either from KPN or a third party, or interactions there that would produce more for the shareholders; fourthly, that the special committee, using its tools and advisors that it has available to it, can do analyses and understand more fully than just the average shareholder. So we feel like we are -- we still have an important reason, and essentially the same reason, for keeping the rights plan in effect at this time, as we did when we initially adopted it.
Tr. 199 :20 - 200: 12. Accordingly, the Special Committee determined not to rescind the Rights Plan.
Tr. 200: 15.
In sum, there is no basis to conclude that the Special Committee failed to conduct a thorough
10 Huwiler testified that finding the revised offer of$2.25 per share inadequate "wasn't a tough a call." Tr, 269:5 - 270:4.
II. The iBasis Board Acted in Good Faith
KPN's repeated insinuations that the game was fixed and that the Special Committee process
was a sham also find no support in the evidentiary record. As set forth in detail above, the Special
Committee's evaluation of the Tender Offer undeniably was thorough. The Special Committee
members testified under oath that they reached their judgments independently and without pressure
from Mr. Gneezy, or any other members ofthe iBasis management team.U In any case, Delaware
courts repeatedly have held that the mere fact that a company's management opposes a tender offer is
not evidence that the company's board failed to exercise its fiduciary duties in considering a tender
Less compelling still is KPN's allegation that iBasis' management had a motive to exert
improper influence on the iBasis Special Committee because of their purported concerns about
protecting their compensation or positions within iBasis.13 This so-called "motive" could be
11 See Tr. 175: 16-18 (noting with respect to the 5 Year Plan thatthe Special Committee'sjob was "to make sure we agreed with [the five year plan], to scrub it, to test it, to examine it, notto rubber stamp it.";
12 See In re Cheyenne Software, Inc., 1996 WL 652765, at *2 (Del. Ch. Nov. 7,1996) ('"to overcome the presumption that the directors acted on an informed basis, plaintiffs must show that the Board acted with gross negligence"); Gantler v. Stephens, 965 A.2d 695, 707 (Del. 2009) ("to argue that directors have an entrenchment motive solely because they could lose their positions following an acquisition is, to an extent, tautological. ... [T]he plaintiffs must plead, in addition to a motive to retain corporate control, other facts sufficient to state a cognizable claim that the Director Defendants acted disloyally").
13 KPN's statement in its pre-hearing answering brief that Gneezy and VanderBrug "asked the Board to at least double their severance packages after the Tender Offer" is patently false. Mr. Gneezy testified that the Special Committee requested that management evaluate whether the company's existing severance and change-of-control agreements were competitive in the market. Tr. 104:21 - 105:1. Management hired a consultant to assist in this task, who concluded that the severance package for most of the iBasis
[Footnote continued on next page]
ascribed to virtually any management team that fails to support an unsolicited tender offer. It is for
exactly this reason that Delaware courts routinely refuse to credit allegations of undue influence
solely on the ground that management had a financial incentive not to support a tender offer. See,
e.g., In re Transkaryotic Therapies, Inc., 954 A2d 346, 370 (DeL Ch. 2008).
Lastly, KPN's assertion in its pre-hearing briefing that the Special Committee acted in bad
faith by allowing iBasis to pursue a yet-to-be adjudicated fraud claim against KPN is a non-starter.
Predictably, KPN does not cite a single case where a Delaware court found that a board acted in bad
faith by asserting a legal claim against an acquirer, much less a claim that had yet to be adjudicated.
Lacking any support in the case law, KPN attempted to support this dubious theory in discovery by
asking the Special Committee members whether they had been told prior to the Tender Offer than
KPN had committed "fraud" or breached "contractual obligations." The iBasis witnesses were aware
long before the Tender Offer of the disputes concerning pricing and provision of traffic at issue in
this Iitigation.l'l The fact that they were not necessarily discussing the claims using words that a
lawyer would use is unsurprising, and hardly evidence that the claims are "frivolous."
h. The Tender Offer Poses a Threat
As noted above, the iBasis Special Committee ultimately concluded that the KPN offer
represented a threat to iBasis and its shareholders. The opportunistic timing ofKPN's offer, the
[Footnote continued from previous page]
management team, including Mr. Gneezy, was below the 50th percentile in the market. Id at 105 :24 -
125 :2. To date, no change has been made to the iBasis management team's compensation packages. Id at 106: 7-12, 108:23 - 109:3.
14 See Tr, 162:1 - 163:1; JX 1081 at KPN00005987-88;
inadequacy of the offer price, and KPN's ongoing disclosure violations strongly support a finding
that the iBasis Board's conclusion was reasonable.Jf
i. The Tender Offer Was Opportunistically Timed
As an initial matter, there is little doubt that KPN's Tender Offer is highly opportunistic.
During the period from October 1,2007 through the date of the Tender Offer, iBasis stock traded as
high as $10.78 per share. See JX 301. In the middle of 2008, iBasis initiated a share buyback
program at a price of more than $3.50 per share that had KPN's full support, including the support of
Mr. Blok and Mr. Farwerck. Serious work by KPN on the Tender Offer started in late April 2009,
just as iBasis was completing integration of the KPN acquisition, and at a time when five consecutive
recessionary quarters had battered the share price of nearly every publicly traded company. As set
forth in more detail in Section II. A. 2. below, KPN exacerbated the impact of this already difficult
economic environment by squeezing iBasis' margins, refusing timely and fully to compensate iBasis
for unexpected transit fees and port costs and failing to deliver all of the promised traffic to iBasis. In
short, KPN timed its offer to coincide with what it surely expected was a temporary trough in iBasis'
stock price - a trough that KPN helped to create.lv
15 In its pre-hearing briefmg, KPN attempted to pigeonhole the iBasis Board's assessment of the threat posed by the offer as relating solely to the inadequacy of the Tender Offer price. As set forth below, the threat posed by KPN's Tender Offer is by no means limited to the adequacy of the price. In any case, Delaware jurisprudence since the Delaware Supreme Court's decision in Time Inc. has made clear that a tender offer's inadequate value can give rise to a legitimate threat under Unocal. Unitrin, 651 A.2d at 1384 ("This Court has held that the 'inadequate value' of an all cash for all shares offer is a 'legally cognizable threat"') (citing Time Inc., 571 A.2d at 1153).
16 Other courts conducting Unocal analyses have expressed similar concerns about opportunistically timed offers. See, e.g., Moore Corp. Ltd v. Wallace Computer Services, Inc., 907 F. Supp. 1545, 1560 (D. Del. 1995) (holding that plaintiffs tender offer was a threat because "[tjhe favorable results from the board's past actions are now beginning to be translated into financial results ... only known to them" so "shareholders might tender their shares without appreciating the fact that ... [the board] is actually witnessing the beginning of the pay-off of its business strategy").
Moreover, the course of dealing between KPN and the iBasis Special Committee was highly
unusual for a minority buy-out transaction and speaks directly to KPN's strong-ann tactics. KPN
never informed iBasis that it was considering a tender offer until the day before it announced the
offer publicly. Tr. 48: 3-10. The persons at KPN responsible for arriving at the tender offer price-
specifically KPN's M&A group - never spoke with iBasis management concerning the future of the
iBasis business. Tr. 512: 5-13. In short, every step that KPN took reinforced the impression
(warranted, as it turned out) that KPN's goal was to force iBasis' minority stockholders to tender into
an unfairly low offer.
u. KPN's Tender Offer Is Grossly Inadequate
Delaware law is explicit in noting that inadequate value from an all cash offer is a "legally
cognizable threat" under Unocal. Unitrin, 651 A,2d at 1384. The opportunistic timing of the Tender
Offer, the pessimism and unrealistic assumptions reflected in the Parent Projections and the
deficiencies in the valuation analysis that KPN's fmancial advisor performed all support the
reasonableness of the Special Committee's conclusion that this is an inadequate offer) 7
(a) The Parent Projections Are Unduly Pessimistic and Do Not Represent KPN's True View ofthe Business
KPN derived the Tender Offer price from the Parent Projections set forth in its initial filing of
the Schedule TO. As Mr. Gneezy explained at the hearing, the assumptions underlying the Parent
Projections are patently unreasonable, particularly the assumption that iBasis will not consummate a
single outsourcing transaction going forward. Tr. 59:13 - 61:11. In fact:
17 TIle mere fact that a tender offer represents a premium to a company's share price does not dispose of the question of whether the offer represents a threat. See, e.g., Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 728 A,2d 25, 46 (Del. Ch. 1998) (finding that a 50% premium offer undervalued the target and was a threat).
• iBasis has completed two outsourcing transactions to date - KPN and TDC - and, recently learned that it has been awarded a new outsourcing deal from, and been selected as a preferred supplier to a large mobile operator in the Middle East. Tr. 15: 6-24;
• As KPN knows, because it has representatives on the iBasis board, iBasis has numerous outsourcing deals in the pipeline. Id. 15: 18-24;18
• Although the KPN integration took one and one-half years, the KPN outsourcing deal was an enormous one - approximately 10 billion minutes of traffic. iBasis was able to complete the smaller TDC integration in only six months, while simultaneously engaged in the KPN integration, indicating that it could complete multiple outsourcing deals per year for each of the next few years, Tr. 54: 22-24. Moreover, both the KPN and the TDC transactions included the acquisition of each carrier's international wholesale business in addition to the outsourcing of their own international traffic. The integration ofa "straight" outsourcing would be less complicated; 19
• KPN's own witnesses readily acknowledged at the hearing that iBasis was well-positioned and ready to pursue certain types of outsourcing deals. Tr. 337: 17-21.
Because outsourcing is a vital part of iBasis' business strategy going forward, and indeed
KPN agreed with this when it entered into the original Transaction with iBasis, JX 001 at
KPN0003272 I , any projection ofiBasis' future business must incorporate some quantity of
outsourcing deals, especially given that KPN was planning to engage in such deals itself after the
Tender Offer succeeded. Without that assumption, the Parent Projections are unreliableZ?
18 KPN makes much of the fact that, earlier this year, Telus told iBasis that it would not be awarded its outsourcing deal. See KPN Op. Br. at 19 and n.16.
19 Whether an outsourcing transaction requires significant capital to execute depends on whether iBasis is acquiring wholesale operations or taking assets in-house. Many outsourcing transactions require little, if any, capital to execute.
Even more disturbingly, the Parent Projections fail even to reflect KPN's actual views as to
the future fmancial performance of iBasis. As iBasis explained in its pre-hearing briefs and
demonstrated at the hearing, KPN generated at least fifteen additional sets of projections of iBasis'
financial performance (the "Newly Discovered Projections") subsequent to the formation of the
Working Group in October 2008.21 None of these projections were disclosed to iBasis shareholders,
and KPN sent only two of the projections to Morgan Stanley for its valuation analysis. Taken in their
totality, these projections, along with the Favorable Projections and the 5 Year Plan, support the view
that KPN deliberately engineered a lowball tender offer that did not reflect an honest assessment of
iBasis' future. The Newly Discovered Projections, most of which were prepared between April
2009, when KPN retained Morgan Stanley, and July 2009, are almost uniformly more positive than
the Parent Projections that KPN gave to Morgan Stanley. Compare JX 0103 with IX 0192-98. In
other words, the Newly Discovered Projections (along with the Favorable Projections and the 5 Year
Plan) demonstrate that the Parent Projections are an outlier.22 Moreover, all of these other
projections (even the earliest ones, prepared in October and November 2008) are significantly more
positive than the Parent Projections ~ despite the fact that KPN was already aware of the conditions
allegedly underlying the pessimistic Parent Projections, including iBasis' plummeting stock price and
the terrible state ofthe global economy. JX 1062 and JX 1280.23
21 See JX 51, JX 85, JX 93, JX 96, JX 103, JX 105, JX 113, JX 115, JX 124, JX 162, JX 192, JX 193, JX 195, JX 196, JX 197, JX 198, JX230, JX 240, JX 243, JX 246, JX247, JX261, JX 1278 and JX 1280.
22 Notably, the Parent Projections were prepared by the persons at KPN least knowledgeable about iBasis, whereas the Favorable Projections were prepared by the KPN employees most familiar with iBasis.
23 In addition, several of the Newly Discovered Projections appear to be predecessors to the Favorable Projections, including a presentation dated June 12,2009, that was prepared by Paul van der Schot and based on four scenarios created by Henk de Nijs. JX 1280 at KPN00042178-90. In the presentation, van der Schot notes that the scenario entitled "Outperform the Market" is the "most desirable and also seems
[Footnote continued on next page]
(b) The Work ofKPN's Financial Advisor Does Not Support the Current Tender Offer Price
The valuation analysis that Morgan Stanley performed also is highly suspect, for at least the
following four reasons. First andforemost, Morgan Stanley's analysis is irredeemably flawed
because it relies on the Parent Projections, which are themselves based on highly dubious
Second, Morgan Stanley repeatedly, and without credible explanation, tweaked the
assumptions underlying its DCF analysis. Not surprisingly, the changed assumptions resulted in ever
lower implied share price ranges for iBasis over time, ranging from a high of$2.62-$3.88 in Morgan
Stanley's first May 1, 2009 model (see JX 253) to a low of $0.82-$1. 8 8 in Morgan Stanley's final
luly 8,2009 presentation to the KPN Working Group. See JX 123 and JX 253. Most notably,
Morgan Stanley adjusted the discount rate from a range of 10-15% in its initial May 1, 2009 model to
a [mal discount rate of 14-16%. See id.; and JX 253 and 123. KPN and Morgan Stanley have been
unable credibly to explain this change. See Tr. 564: 17 - 571: 17. Indeed, when pressed at the
hearing, Mr. Terry conceded that the movement in the discount rate between May and luly 2009 was
largely the result of Morgan Stanley eliminating the low end of its range for two components of the
discount rate, the equity risk premium and the small cap premium, neither of which is iBasis specific.
Tr. 590:7 - 591 :3. He further conceded that he would not have been comfortable eliminating the low
end of the ranges if Morgan Stanley had been advising a target on the sell-side or rendering a fairness
opinion. Tr. 594: 5-9,595: 13-17.
[Footnote continued from previous page]
attainable," and that if that scenario also included iBasis outsourcing deals of "approx. 2.5 billion minutes per year," this would "improve iBasis performance significantly." Id. at KPN00042182.
In addition, Morgan Stanley adjusted its perpetual growth rate assumption downward to a
range of ~ 2% to 0% on the eve of its final presentation to the KPN working group, after using a more
favorable perpetual growth rate assumption of ~2% to 2% in every DCF analysis it generated
between May 6, 2009 and July 7, 2009.24 Tr. 572: 7-22.
Morgan Stanley's DCF analysis also is no longer valid in light ofiBasis' actual fmancial
results for the second and third quarters of2009. For example, Morgan Stanley calculated the
implied share price ranges in its July 8, 2009 DCF analysis based in part on iBasis' net cash position
at the end of the first quarter of2009. iBasis' net cash position at the end of the third quarter had
increased by more than $11 million, a fact that would result in a higher implied share price range for
At the hearing, Terry reversed course and stated that Morgan Stanley had revised the perpetual growth rate assumption downward because of a change in KPN's outlook for the business. Mr. Terry's explanation at the hearing of his previous deposition testimony - specifically, his assertion that his deposition testimony reflected only a lack of familiarity with the basis for the perpetual growth rate assumption in the July 7, 2009 model (as opposed to all the earlier versions of Morgan Stanley's discounted cash flow analysis) - is simply not credible. Tr. 575: 18 - 576:7. Indeed, Mr. Terry's suggestion that Morgan Stanley "modified the range" (see Tr. 574: 3~8) as KPN refined its long term view of the business downwards makes no sense in light of the fact KPN was at the same time using a higher range of assumed perpetual (or "terminal") growth rates of -1 % to 1 % in an internal presentation to its Board of Management, see IX I 288, and, iBasis' actual performance in 2009 was steadily improving as KPN and Morgan Stanley were supposedly "refining" downwards their long term view of the business. See IX 0297. Moreover, Mr. Terry's testimony that Morgan Stanley "didn't develop an independent point of view on the perpetual growth rate"
iBasis were Morgan Stanley to rerun its DCF analysis using iBasis' current net cash position. Tr.
Third, Morgan Stanley took the highly unusual step of excluding a comparable companies
analysis from its final valuation materials. When pressed at the hearing and deposition, Morgan
Stanley's lead investment banker, Ari Terry, conceded that Morgan Stanley jettisoned the
comparable companies analysis in part because most of the potential comparable companies that
Morgan Stanley identified were trading at significantly higher multiples than iBasis.26 Tr. 579: 18-
21. In other words, the decision not to include a comparable companies analysis appears to have
been largely driven by a desire to avoid generating the comparatively higher implied share price
ranges that were indicated by the potential comparable companies.
Fourth, Morgan Stanley conducted a historical trading multiples analysis based solely on
iBasis trading multiples during a recessionary period. Morgan Stanley made no effort to evaluate
whether iBasis (or the telecom sector generally) historically had traded at higher multiples in non-
recessionary periods. Tr. 584:21 - 585:9.
26 Even in the absence of "perfect" comparables to iBasis, Morgan Stanley could have included such a comparable companies analysis in its final presentation materials, with whatever caveats concerning the comparable companies it deemed necessary. Mr. Terry conceded at the hearing that there was nothing preventing Morgan Stanley from taking this approach other than a concern that KPN might be "misled" by the inclusion of such an analysis. Tr. 581: 2-11.
(c) Market Reaction Confirms the Special Committee's Assessment That KPN's Offer Is Inadequate
The market's reaction following KPN's July 13,2009 announcement ofthe $1.55 per share
tender offer and its announcement of the increased offer price of $2.25 per share is further evidence
of the reasonableness of the Special Committee's conclusion that the Tender Offer price was
inadequate. In the three days following the July 13 announcement, iBasis' stock price rose from
$1.30 per share to $1.86 per share. IX 301. By August 5, 2009, three ofthe largest non-KPN
shareholders had publicly announced their opposition to the Tender Offer in no uncertain terms,
calling the offer "grossly inadequate," "too low ... to merit serious consideration," and designed to
take "unfair advantage of the Company's currently depressed trading price." IX 150. iBasis stock
has closed above $2 per share every day since August 3, 2009, and has traded as high as $2.46 per
share. IX 301. In short, $1.55 per share was not a market clearing price. Indeed, it appears that
KPN's revised offer price of $2.25 per share also is not market clearing; iBasis stock closed at $2.3 3
per share on November 5, 2009. Shortly after KPN announced that it had increased its offer to $2.25
per share, iBasis' largest minority shareholders again publicly stated that they regarded the offer as
"grossly inadequate" and that they did not intend to tender their shares. Tr. 200: 16-201:1; JX 1297;
IX 1298; JX 1300.
iii. KPN Has Misled the Investing Public Concerning the Future Prospects of iBasis
The gross inadequacy of the offer price is by no means the only threat posed by the Tender
Offer. As set forth in more detail in Section II.A 1 below, KPN's misleading disclosures (including
its mischaracterization of the Favorable Projections and its failure to make any disclosure concerning
the Newly Discovered Projections) may confuse even the most sophisticated shareholders. iBasis
has done what it can to ensure that iBasis shareholders are well informed concerning the deficiencies
in the Tender Offer. To that end, iBasis yesterday evening disclosed on Schedule 14D-9 all of the
Newly Discovered Projections,
27 The disclosure of these projections does not cure KPN's disclosure
violations, however, because KPN's misstatements remain uncorrected. Moreover, iBasis fully
expects that KPN will respond to iBasis' disclosure of the Newly Discovered Projections with yet
another misleading disclosure disclaiming the relevance of the projections. Under the circumstances,
even sophisticated shareholders would fmd it difficult to evaluate accurately the adequacy of the
Tender Offer given KPN's repeated misleading disclosures. In short, KPN's actions have increased
"the risk that shareholders will mistakenly accept an under priced offer because they disbelieve
management's representations of intrinsic value."'28 Time Inc., 571 A.2d at 1153 n.17 (citation
omitted). Thus, the Special Committee was correct in identifying KPN's disclosure violations as a
threat to iBasis. Tr. 199:20-200: 12.
c. The Rights Plan Is Not a Disproportionate Response
Under the second prong of the Unocal test, a rights plan must be shown to be "proportionate II
to the threat posed. See Unocal, 493 A.2d at 954; Unitrin, 651 A.2d at 1373. "Under Unitrin, a
defensive measure is disproportionate (i.e., unreasonable) if it is either coercive or preclusive."
Carmody, 723 A.2d at 1195.
A defensive measure such as a Rights Plan is more likely to be disproportionate if it
27 iBasis was unable to disclose publicly the Newly Discovered Projections prior to the hearing because they had been designated as Confidential or Highly Confidential under the Confidentiality Order entered in this action.
28 KPN's assertion that the threat posed by the Tender Offer is a result of iBasis reluctance to disclose its 5 Year Plan is baseless. Disclosure by iBasis of its 5 Year Plan in no way CUTes KPN's disclosure violations. In any event, KPN's point is now moot because iBasis publicly disclosed the 5 Year Plan on November 5, 2009.
somehow "disenfranchises shareholders by forcing them to vote for incumbent directors or their
designees if shareholders want to be represented by a board entitled to exercise its full statutory
prerogatives." Id at 1195; see also id. at 1187 ("The target board could not, however, erect defenses
that would either preclude a proxy contest altogether or improperly bend the rules to favor the board's
continued incumbency."), Thus, courts carefully scrutinize situations in which shareholders are
denied the opportunity to vote for new directors. See, e.g., MM Cos. v. Liquid Audio, Inc., 813 A.2d
1118, 1127 (Del. 2003) ("careful judicial scrutiny will be given a situation in which the right to vote
for the election of successor directors has been effectively frustrated and denied."); Blasius Indus.,
Inc. v. Atlas Corp., 564 A.2d 651,661 (Del. Ch. 1988) (where board takes action primarily for the
"purpose of impeding the exercise of stockholder voting power ... the board bears the heavy burden
of demonstrating a compelling justification for such action."). In other words, defensive measures
are much more likely to be disproportionate if they are intended to entrench existing management.
Delaware courts generally permit a target board to maintain a rights plan indefinitely if the
rights plan is neither coercive nor preclusive. See Gaylord, 753 A.2d at 481 ("While it is true that a
poison pill absolutely precludes a hostile acquisition so long as the pill remains in place, the mere
adoption of a garden-variety pill is not in itself preclusive under Delaware law. That is because in the
event of a concrete battle for corporate control, the board's decision to keep the pill in place in the
face of an actual acquisition offer will be scrutinized again under Unocal. In addition, in this case the
pill may be redeemed by a new board elected after a successful proxy fight by an acquirer at the 
annual meeting. All an acquirer needs is the necessary votes to elect a new board, which can redeem
the pill and allow the offer to go forward.") (internal citations omitted). As Professor Lucian
Bebchuk has noted,
In developing the jurisprudence that today allows a target board to maintain the pill indefinitely, the Delaware courts relied explicitly on there being a safety valve against
managerial abuse through the shareholder franchise. Because shareholders can replace the board, if the board were to sacrifice shareholder interests by maintaining the pill, the bidder or someone else (e.g., an arbitrageur) could run a proxy contest promising to elect a board that would redeem the pill and clear the way for the acquisition desired by shareholders. Indeed, the Delaware courts, at the same time that they seemed to be giving license to boards to maintain the pill indefmitely and otherwise block a bid, also indicated that they would protect against managerial moves to impede voting by shareholders to remove them.
Lucian Arye Bebchuk, et al., The Powerful Antuakeover Force of Staggered Boards: Theory,
Evidence, and Policy, 54 Stan. L. Rev. 887, 907 (May 2002).
The iBasis Rights Plan is neither coercive nor preclusive and therefore clearly meets the
second prong of the Unocal test.-? The iBasis Rights Plan is not coercive because it does not
"fundamentally restrictl]" the shareholders' ability to vote (see Moran v. Household Int 'I Inc. , 500
A.2d 1346, 1357 (Del. 1985)), nor was it enacted for the purpose of impeding stockholder voting
power (see Blasius Indus., 564 A.2d at 661). Furthermore, it was not intended to be, and has not
been used for, entrenchment purposes.
Indeed, the Rights Plan cannot be used for entrenchment or to interfere with shareholder
voting. First, the iBasis Rights Plan has a time limit of just one year. See Section 7(a) of Rights Plan
(July 30, 2010 is "Final Expiration Date"). Second, the Rights Plan does not in any way limit KPN's
ability to nominate additional directors to the iBasis Board of Directors. Under Section 3.2(a) of the
By-laws, KPN may nominate two additional KPN-Nominated Independent Directors, as defined in
Section 3.1, to the Board at the next annual meeting which will likely occur in Mayor June of 2010.
Once nominated, the Independent Directors would need to "be elected by a plurality of the votes of
the shares present in person or represented by proxy at the meeting and entitled to vote on the
29 The fact that KPN fails to allege anywhere in its pre-hearing briefs that the iBasis Rights Plan is either "coercive" or "preclusive" speaks volumes.
election of directors." Id. Again, nothing in the Rights Plan abridges KPN's or any other iBasis
stockholder's right to vote. Finally, under the existing By-laws, KPN can replace Mr. Gneezy in a
matter of weeks if it chooses to do so.30 See By-laws Section 3.3(b). In sum, the iBasis Rights Plan
is simply not the kind of rights plan that" disenfranchises shareholders," and it therefore cannot be
said to be either coercive or preclusive. See Carmody, 723 A.2d at 1195.
Because the iBasis Rights Plan is neither preclusive nor coercive, the Court should uphold it.
See Golden Cycle, LLCv. Allan, 1998 DeL Ch. LEXIS 80, *19-20 (DeL eh. May 20,1998)
("Moreover, there is every reason to conclude that the stockholders are fully empowered to remedy
anyone of those perceived problems as soon as they determine to accept [the] offer. They have the
immediately exercisable power (not shown to be materially impacted by any action taken by the
Board) to remove the directors and replace them with others committed to redeeming the Rights ....
No injunction is needed to accomplish these objectives once the stockholders decide it is in their best
interest so to act."). "[A] target board, facing a proxy contest j oined with a hostile tender offer, could,
in good faith, employ non-preclusive defensive measures to give the board time to explore
transactional alternatives." Carmody, 723 A.2d at 1186-87. The iBasis Board's decision to
implement a rights plan was reasonable and made in good faith, and it was therefore proper and
appropriate. See Moore, 907 F. Supp. at 1563 (where "the retention of the poison pill was not a
coercive or preclusive response," and the Board "reasonably believed that the shareholders were
entitled to protection from what they considered to be a 'low ball' offer," the Board's response "falls
within the range of reasonableness required under Unocal. ")
30 The factual record establishes that the Rights Plan was not implemented for entrenchment purposes. As Mr. Gneezy testified, he has no objection to selling the company at a fair price. Tr. 98:6-11. Indeed.Mr, Gneezy encouraged KPN back in 2006 to acquire all of iBasis rather than just a majority interest. Id
Moreover, the Rights Plan does not, as KPN suggested in its pre-hearing briefs, infringe on
any ofKPN's contractual rights. KPN currently holds a majority interest in iBasis, just as it claims it
is entitled to under the SPSA. iBasis has not (and cannot) force KPN to sell its shares. iBasis has not
attempted to offer new shares only to non-KPN stockholders. In short, KPN has the ability to retain
its majority interest in iBasis for as long as it chooses to do so, and that right is all that KPN
bargained for in the SPSA. KPN's real complaint is that the Rights Plan thwarts its efforts to buy the
remaining minority interest at a lowball price. But KPN has no affirmative contractual right to
purchase as many shares as it wishes, at whatever price it chooses) 1 Moreover, KPN's assertion in
its pretrial briefing that the Rights Plan is invalid because it is triggered ifKPN's acquisition of even
a single additional share is a red herring. Rights plans almost always are triggered by the acquisition
of any "even a single additional share" above some specified threshold. Here, KPN already owns
56% of iBasis. Thus, the structure of the Rights Plan makes perfect sense. Moreover, KPN has
never even considered buying a smaller additional stake in iBasis. KPN wants total control of
Indeed, under the circumstances, the Rights Plan is effectively the only arrow in the Special
Committee's quiver. Because ofKPN's controlling interest, iBasis cannot offer its shareholders any
alternatives which KPN does not support. The Rights Plan is a reasonable-if not the only-way to
31 The Rights Plan does not bar KPN from maintaining its majority interest KPN is free to purchase more shares, trigger the Rights Plan, and then exercise whatever contractual rights it has to maintain its majority interest.
32 KPN's assertion that the Rights Plan is "designed to ensure than minority shareholders will never get a chance to decide whether to accept a KPN offer at any price" also fails for two reasons. First, and most obviously, it is flatly contradicted by the evidentiary record. Simply put, this Rights Plan is no more a show stopper than any other rights plan. If and when KPN makes an adequate offer, backed by accurate disclosures, the Rights Plan almost certainly will be rescinded. Second, KPN's assertion that iBasis shareholders already have all allegedly material information about KPN's offer is wrong.
attempt to force KPN to raise its price. So far, the rights plan has worked, causing KPN to raise its
price from $1.55 per share to $2.25 per share. The Court should not interfere with this successful
maneuver. Rather, the Court should allow the Rights Plan to remain in place. If and when KPN
proposes a fair price, the purpose of the rights plan will have been achieved, and the Special
Committee will redeem the rights. The Special Committee, not the Court, should control the timing
of this decision.J''
AN INJUNCTION IS NECESSARY TO PREVENT IDASIS AND ITS SHAREHOLDERS FROM BEING IRREPARABLY HARMED
As previously briefed, and as discussed infra, the Tender Offer must be analyzed under an
entire fairness standard, which KPN cannot meet. Whether or not the Tender Offer is reviewed for
entire fairness, however, an order enjoining the Tender Offer is justified and required to prevent
iBasis and its minority shareholders from suffering irreparable harm. As discussed below, iBasis has
demonstrated that it is likely to succeed on the merits of its claims, including its claims that KPN has
committed numerous disclosure violations and breaches of fiduciary duties. Leaving those breaches
unchecked and allowing the Tender Offer to go forward will lead to irreparable harm for iBasis and
its shareholders. In addition, and as discussed in more detail below, injunctive relief is a vastly more
appropriate and effective remedy than a damages claim or appraisal.
33 The iBasis board's implementation of the Rights Plan easily meets the Unocal standard, and KPN cannot meet its burden of showing that the iBasis board's action was impermissible under the business judgment rule. See Unitrin, 651 A.2d at 1373.
A. iBasis Has Demonstrated That It Is Likely To Succeed On the Merits ofIts Claims
KPN's Tender Offer should be enjoined for three separate and distinct reasons. First, KPN's
disclosures to the iBasis stockholders in connection with the Tender Offer are materially incomplete
and misleading for a host of reasons discussed below in detail. Second, defendants have breached
their fiduciary duties owed to iBasis' minority shareholders through their improper conduct, including
(among other things) improperly "squeezing" iBasis' margins. See Solar Cells v. True North
Partners, LLC, 2002 Del. Ch. LEXIS 38, *2 (granting injunction because of defendant's breaches of
fiduciary duties to shareholders). Third, the Tender Offer is subject to the entire fairness standard,
and the record supports a finding that KPN's transparently low-ball offer cannot survive a fairness
review. Joseph v. Shell Oil, 482 A.2d 335,340 (DeL Ch. 1984) (enjoining tender offer after holding
that the plaintiffs "met their burden of showing that there is a reasonable probability that the
Defendants have not offered a fair price ... and that defendants have not made a full and complete
disclosure of all pertinent facts with complete candor.").
1. Since Defendants Have Committed Numerous Disclosure Violations That Remain Uncured, iBasis Has Established a Likelihood of Success on the Merits of its Disclosure Violation Claims
a. Morgan Stanley's Unexplained Adjustments to Its Valuation Analyses Prevent iBasis Shareholders From Knowingly Determining Whether to Tender Their Shares
The Tender Offer should be preliminarily enjoined because, as discussed in detail supra in
Section I, KPN has failed to explain or disclose why the subjective assumptions underlying its
financial advisor's DCF analysis were repeatedly adjusted to KPN's benefit, resulting in a
significantly lower range of value for iBasis in those analyses, and a low-ball offer to iBasis' minority
shareholders. See App. A at 30; see also Solar Cells, Inc. v. True N Partners, LLC, 2002 Del. Ch.
LEXIS 38, *22 (DeL Ch. Apr. 25, 2002) (granting injunction because the Court found the $32
million valuation was "irreconcilable with the earlier valuations only a few months before
[defendants J decided to go forward with the proposed merger. "). The rationale for why these
underlying assumptions, specifically the assumptions relating to perpetual growth rates, compound
annual growth rates and discount rates, shifted over the course of Morgan Stanley's engagement,
remains oblique. Not coincidentally, the implied share price range reflected in Morgan Stanley's
DCF analysis trended steadily downward, even as iBasis' actual fmancial performance improved.
See App. A at 31-36.
Under Delaware law, changes in a fmancial advisor's analytical approach that result in
valuations that are more favorable to its client, if unexplained, are deemed to be "materially
misleading" and support the grant of an injunction. See In re Topps Co. S'holders Litig., 926 A.2d
58, 76 (Del. Ch. 2007).34
Here, Morgan Stanley's black-box approach to valuation is squarely in line with the
questionable conduct of which the Court disapproved in Topps. Where, as here, a financial advisor
uses a different range of subjective inputs to "driv[ e J down the value range" without satisfactory
explanation, an injunction is warranted. Topps, 926 A.2d at 76,93.
Thus, like the defendants in Topps, defendants should have to furnish a credible explanation
for the repeated and puzzling shifts in Morgan Stanley's analytical approach. In failing to do so,
defendants have "materially misle[dJ" the shareholders ofiBasis and K..PN's tender offer must be
34 "The real informative value of the banker's work is not in its bottom-line conclusion, but in the valuation analysis that buttresses that result ... like a court would in making an after-the- fact fairness determination, a  minority stockholder engaging in the before-the-fact decision whether to tender would find it material to know the basic valuation exercises that [the financial advisor] undertook, the key assumptions that they used in performing them, and the range of values that were thereby generated." Pure, 808 A.2d at 449.
b. KPN's Failure to Disclose the Newly-Discovered Projections Is a Serious and Ongoing Violation ofIts Disclosure Obligations
As explained in iBasis' Opening and Answering Briefs, and as further brought to light at the
hearing, between October 2008 and June 11,2009, KPN created numerous sets of projections for
iBasis, all of which - save the "underperformance" scenario in the June 11 th projections (JX 1280a)
- are, like the belatedly disclosed Favorable Projections, more favorable than the Parent Projections
on which Morgan Stanley relied in performing its valuation ofiBasis in advance of the Tender
Offer.35 KPN has a duty to disclose these documents and the other Newly Discovered Projections
because they are material and necessary to put the Parent Projections in context. See In re Staples,
Inc. S'holders Litig., 792 A.2d 934, 953-54 (DeL Ch. 2001).
Disclosure by KPN is particularly critical here as even highly sophisticated shareholders
would be unable to evaluate accurately the adequacy of the Tender Offer, and place the Parent
Projections in proper context, without full disclosure by KPN in its offering material of the Newly
Discovered Projections and the circumstances surrounding their creation. See Weinberger v. Rio
Grande Indus., Inc., 519 A.2d 116, 126 (Del. Ch. 1986) ("[T]here may be instances where an
offeror's duty to disclose information in the offering materials will not be relieved by the public
availability ofthe same information, on the theory that investors may consider information contained
in the offering materials as more reliable than if contained in other documents"); In re Trans World
Airlines, Inc. S 'holders Litig., 1988 WL 111271, at * 10 (Del. Ch. Oct. 21, 1988) ("Nor can I agree
that if a fact is material, that a failure to disclose it is necessarily cured by reason that it could be
uncovered by an energetic shareholder by reading an SEC filing.") (abrogated on other grounds by
35 Compare JX 129 at iBASIS _0208988 and JX 103 at KPN00080084 (the "Parent Projections") with JX 051 at KPN00034411 ; IX t 62 at KPN00202545; JX 193a at KPN0007622 I; JX 240a; JX 247 at KPN00191518; JX 1278 at KPN00082515; andJX 1280a; see also App. A at 62.
Kahn v. Lynch Commc 'n Sys., Inc., 638 A.2d 1110 (Del. 1994».36
Moreover, while it is true that not "every extant estimate of a company's future results,
however stale or however prepared, is material," if "the circumstances of their preparation support
the conclusion that they are reliable enough to aid the stockholders in making an informed
judgment," then projections such as those at issue must be disclosed. In re PNB Holding Co.
S'holders Litig., 2006 WL 2403999, at *16 (Del. Ch. Aug. 18,2006). As the Court stated in Shell
Oil, "it may be that each of the failures to disclose ... standing alone might not be of great
importance to a stockholder asked to decide whether to tender or hold his shares. When, however,
they are all considered together and are also considered against the factual background of this
transaction, it is clear that the tender offeror has not met its duty of disclosure under Delaware law."
482 A.2d at 343.
Here, the existence of these projections, and an explanation of the circumstances surrounding
their creation (nearly all of which are more favorable than the Parent Projections), is critical data that
the minority shareholders must have in order to make an informed decision as to whether to tender
their shares. See Raymond Revocable Trust v. MAT Five LLC, 2008 WL 2673341, *4 (Del. Ch. June
26, 2008) (holding information is material under Delaware law "if a reasonable stockholder would
consider it important in deciding whether to tender his shares or would find that the information had
altered the 'total mix' ofinfonnation available.") (citations omitted); In re Siliconix S'holders Litig.,
2001 WL 716787, at *9 (Del. Ch. June 19,2001).
36 Just this week KPN fmally permitted iBasis to disclose the Newly Discovered Projections to its shareholders. iBasis did so in a Schedule 14D-9 dated November 5, 2009. This disclosure, however, does not cure KPN's disclosure violations as expressly noted by the Court in Shell Oil: "The fact that Shell in its 14D-9 Schedule filed with the SEC did reveal certain data concerning the value of the probable reserves does not relieve the tender offeror from meeting its duty oj full disclosure." 482 A.2d at 342 (emphasis added).
The Newly Discovered Projections reveal that the Parent Projections reflect KPN's most
pessimistic view of iBasis' performance potential.I? KPN's failure to disclose either these
projections themselves, or the relative bleakness of the Parent Projections in comparison, renders its
disclosures regarding the Parent Projections misleading.P Any reasonable stockholder would want
to know that KPN created projections for iBasis in October and November 2008 - after iBasis' stock
price had already fallen significantly, and after the Lehman bankruptcy - that were much more
favorable than the Parent Projections. See JX OSla; JX 162. Any reasonable stockholder would
want to know that from approximately April 6, 2009, when KPN's M&A team first began to create
projections for iBasis for valuation purposes, until April 29, 2009, when KPN sent its first set of
projections to Morgan Stanley (see JX 096), the M&A team consistently and regularly revised its
projections downward, but never showed the earlier, more favorable, projections to Morgan Stanley.
See JX 193a; JX 247; JX 1278;
And any reasonable
stockholder would want to know that on June 11,2009, nine days after KPN sent its dismal Parent
Projections to Morgan Stanley, KPN created projections contemplating four scenarios for iBasis,
three of which are more favorable than the Parent Projections.i'' and all of which are even better than
37 Compare IX 129 at iBASIS _0208988 and IX 103 at KPN00080084 (the "Parent Projections") with JX 051 atKPN00034411; JX 162 at KPN00202545; IX 193a at KPN00076221; JX 240a; JX 247 at KPN00191518; IX 1278 at KPN00082515; and IX 1280a; see also App. A at 62.
38 At the hearing, Eelco Blok suggested that one reason the Parent Projections are so dismal compared to other projections generated by KPN is that KPN believes it "will be able to run the company better than in the current circumstances," Tr. 385: 18 - 386:2, and will be "better at executing the plan than Mr. Gneezy and his team." Id at 393: 1-12.
39 One of these four scenarios is a scenario that contemplates iBasis' performance if it obtains additional outsourcing deals. See IX 1280a at KPN00042189. The outsourcing scenario presents the most optimistic
[Footnote continued on next page}
the corresponding projections in the June 12 presentation (JX 114), which KPN disclosed (albeit
inadequately, see section ILA.1.c., infra) in Amendments No.2 and 5 to its Tender Offer. See JX
KPN removed the confidentiality designations from the more favorable sets of projections,
presumably on the theory that disclosure by iBasis would cure KPN's own disclosure violations. Tr.
201 :17~203:17. KPN's position is wrong. First, in this context, the acquiring party - not the target ~
owes a duty of disclosure to the shareholders ofthe target company. See, e.g., Sealy Mattress Co. v.
[Footnote continued from previous page)
view of iBasis' potential performance (see App. A at 54), and the document itself states that "Scenario 3 including outsourced deals every year with scope of approx. 2.5 billion minutes per year improves performance iBasis significantly." Id at KPN00042182. KPN acknowledged in its Offer to Purchase that the Parent Projections do not include outsourcing deals. See JX 129 at iBASIS _0208989. However, what KPN's disclosures fail to explain is that numerous documents produced in this case, as well as the testimony ofKPN's witnesses, demonstrate that KPN's actual opinion is that iBasis is fully capable of obtaining, and is now ready to implement, new outsourcing deals. See, e.g., JX 105 at KPN00183860 ("Several consolidations have taken place" and "Further consolidation is expected"); JX 252a at KPN00017566 ("iBasis ready to handle new 'back-on-track' growth initiatives (outsource deals)"; Tr. 337:22 ~ 338: 1 (Blok Direct) ("Q .... Do you believe that iBasis today is in a position to pursue outsourcing transactions? A. Yes, I believe the company is ready."); Blok Tr. 129: 9-16 ("Q. In light of the fact that the integration work is largely complete, it now makes sense that it's time for iBasis to start looking at either outsourcing or M&A opportunities, isn't it? ... A. Outsourcing opportunities, yes. M&A, no."). In fact, iBasis currently has a number of additional outsourcing deals in the pipeline. See, e.g., Tr. 15: 12-24, 56: 6-17; Tr. 338: 2-10. KPN's failure to explain its view that iBasis is capable of and ready for outsourcing constitutes a critical omission from its disclosures regarding the Parent Projections, rendering them both inadequate and materially misleading.
40 The June n" projections (JX 1280a) are significant. First, these projections were created after the Parent Projections and therefore, like the June 12th Favorable Projections, represent a more recent KPN view of iBasis' performance potential than do the Parent Projections. Additionally, the June 11th projections contain language suggesting that the "outperformance" scenario in these projections represents KPN's true view of what iBasis is capable of achieving. On slide 3 of this presentation, KPN states, "iBasis has the potential to outperform the market," and "Scenario 3 ('outperforming the market')" is the "most desirable and also seems attainable." JX 1280a at KPN00042182 (emphasis added). Only KPN can explain why it would include these statements in a presentation dated after the Parent Projections were sent to Morgan Stanley, yet maintain throughout this lawsuit that the Parent Projections reflect KPN's true view ofiBasis' performance potential. See, e.g., Tr. 386: 9-22; 487: 1-5. Additionally, the June l1iliprojections were created by representatives of the iBasis Office, who were, according to KPN, the "[f]irst point of contact with regard to financial matters" ofiBasis. JX 091 at KPN00056635. OnlyKPN can explain why projections created by the iBasis Office should be accorded tess weight than projections created admittedly "for valuation purposes," Tr. 370:7-23, by KPN's M&A group.
Sealy, Inc., 532 A.2d 1324, 1340 (Del. Ch. 1987) ("The duty of candor must be discharged by the
fiduciary directly to the beneficiary stockholder in the transaction itself .... "). Second, as the Court has previously held, the mere fact that a target company reveals in its Schedule 14 D-9 the existence
of material information the offeror failed to disclose in its Offer "does not relieve the tender offeror
from meeting its duty offull disclosure." See Shell Oil, 482 A.2d at 342. Where, as here, the
defendant's initial disclosures are inadequate or misleading, it is the defendant's obligation to remedy those deficiencies. Defendant cannot transfer this burden to the plaintiff, as KPN is hoping to do
here. See id (the "disclosure burden owed by the fiduciary [cannot] be thrust upon the beneficiary to
whom the duty is owed."). Furthermore, although iBasis has now disclosed to its shareholders the existence of these projections in its amended Schedule 14D-9 statement filed on November 5,2009, iBasis cannot provide the context for these projections that its shareholders undoubtedly need in
order to assess fully their significance. Only KPN can comment on the circumstances surrounding
the creation ofthese projections. Only KPN can explain to iBasis shareholders precisely why it
chose consistently to revise its projections for iBasis downward, despite iBasis' improving
performance.U And only KPN can explain why it failed to provide any of these earlier projections
to Morgan Stanley.f?
It is clear that the burden falls to KPN to cure the disclosure violations that result from KPN' s
failure to disclose the Newly-Discovered Projections to iBasis shareholders. Until it does so, the
Tender Offer must be enjoined. See Staples, 792 A.2d at 960.
41 See, e.g., JX297 (showing improvement in iBasis Adjusted EBITDA from Q4 2008 through Q3 2009). 42
c. KPN's Disclosures Regarding the June 12th Favorable Projections Are Materially Misleading and Must Be Remedied
While KPN has made certain disclosures about the June 12th proj ections that were shown to
iBasis executives by members of KPN' s iBasis Office, those disclosures are materially misleading
and must be corrected before this Tender Offer may proceed. See, e.g., In re Netsmart Techs., Inc.,
924 A.2d 171,203 (Del. Ch. 2007) ("Once a board broaches a topic in its disclosures, a duty attaches
to provide information that is 'materially complete and unbiased by the omission of material facts.''')
(citing Pure, 808 A.2d at 448).
In Amendment No.2 to its Offer to Purchase, KPN disclosed the June 12th Favorable
Projections, and a series of disclaimers relating thereto. See JX 202 at KPN00215948-54. KPN later
revised these statements in Amendment No.5, dated October 5, 2009. See JX 1296 at Item 11. The
result ofKPN's Amendment No.5 is that the entirety ofKPN's disclosures regarding the June 12th
projections has been changed, with the exception of the following language from the third bullet
point in Item 11 (2) of Amendment No.2, which remains intact:
The June 2009 Scenarios were not subject to the type of rigorous review that would be responsible and appropriate in the context of valuation and judgments as to fairness. Given their intended use, the June 2009 Scenarios were prepared in a short timeframe and in a cursory manner. Once produced, the June 2009 Scenarios were shown to members of senior management of Parent and the Company but were not approved by Parent's management and were not discussed with Parent's Board of Management.
JX 202 at KPN00215948 (emphasis added).
The irony here is that this statement is arguably the most significant and material
misrepresentation among all ofKPN's disclosures about the June 12th projections. As adduced at the
hearing, documents produced by KPN in this litigation reveal that KPN was considering multiple
"scenarios" for iBasis resembling the scenarios presented in the June 11th and June 12th presentations
as early as April 7, 2009. See JX 240a; JX 252a; compare JX 246a with JX 261. The very
individuals who ultimately created the Favorable Projections and presented them to iBasis in mid-
June had corresponded regarding these scenarios and exchanged various drafts of these projections
for over two months before they were presented to iBasis. See JX246a, JX261; JX1208a; JX115a;
Tr. 116:24-118:5; 148:8-18. These facts render KPN's statements regarding the "short time frame"
and "cursory" preparation ofthe June 12th projections not only misleading, but blatantly false.43
KPN's continued misrepresentations regarding the June 12th projections render its disclosures
inadequate, and an injunction of the Tender Offer at least until these disclosures are fully corrected is
warranted. See Globis Partners, L.P. v. Plumtree Software, Inc., 2007 WL 4292024, *10 (Del. Ch.
Nov. 30,2007) (''' [W]hile directors do not have to provide information that is simply "helpful," once
they take it upon themselves to disclose information, that information must not be misleading. ",)
(citations omitted); Staples, 792 A.2d at 960.44
43 KPN also continues to describe these projections as "inherently unreliable," see JX 1296 at Item 11(4), despite statements by KPN and its representatives, around the time they were presented to iBasis, that two of these scenarios ("outperfonnance" and "YEE 2009") represented "attainable" or "reasonable" outcomes for iBasis. JX 1280a at KPN00042182; REDACTED
44 KPN's public disclosures include further false and misleading material information regarding iBasis' four major shareholders. KPN states that on October 2,2009, Morgan Stanley met with these four major shareholders, at the shareholders' request, in order to discuss the shareholders' view of the Tender Offer and to indicate KPN's willingness to increase the offer price to $2.25 per share (the "October 2nd Meeting"). JX1296 at Item 5(7).
__ . In fact, all four shareholders stated that the $2.25 per share price offered at the meeting was insufficient and that they would not tender their shares at that price. Such information would clearly be relevant to the other minority shareholders regarding whether they would tender their shares. KPN, however, purposely misled the public on this point. Where there are "materially false or misleading disclosures made to shareholders in connection with a [tender] offer," thattender offer will be considered involuntary. Solomon v. Pathe Commc'ns Corp., 672 A.2d 35,39 (Del. 1996). As such, the Tender Offer should be enjoined.
2. iBasis Has Established a Likelihood of Success on the Merits of Its Breach of Fiduciary Duty Claims against KPN and the Overlapping Director Defendants
a. Defendants KPN, Blok and Farvverck Have Breached Their Fiduciary Duties to iBasis Shareholders by Violating Their Duties of Disclosure
As discussed supra at Section ILA.1, KPN, Blok and Farwerck have breached their fiduciary
duties of disclosure by making numerous misstatements and omissions of material fact regarding the
Tender Offer. Eisenberg v. Chicago Milwaukee Corp., 537 A2d 1051, 1059 (Del. Ch. 1987); see
also Staples, 792 A.2d at 953-54 (,,[T]he defendant directors have the duty to disclose in a non-
misleading manner all material facts bearing on the [proposed transaction.] The directors must also
avoid partial disclosures that create a materially misleading impression. ''), Defendants chose to
"cherry-pick" only the financial projections and metrics that benefited KPN and to conceal the
material Newly-Discovered Projections, as well as the true circumstances behind the creation of the
Favorable Projections. See supra at Section ILA.l. Defendants also breached their fiduciary duties
of disclosure by failing to disclose the ever-shifting assumptions underlying Morgan Stanley's
valuation exercises (see App. A at 30), or the cause of those shifts, making it impossible for the
minority shareholders to decide knowingly to tender their shares. As this Court stated in Shell Oil:
This conduct falls short of the fiduciary duty owed to the stockholders  by the maker of the tender offer. It shows a failure to make available to the appraiser hired by the offeror the essential information needed by the appraiser ifhis appraisal was to have any meaning. This would appear to be a breach of fiduciary duty aside from any issue of failure to make a full disclosure.
482 A.2d at 341. Such conduct by defendants is a breach of fiduciary duty.
b. KPN Has Violated Its Duties as Majority Shareholder by Squeezing iBasis' Margins
i. KPN's Oppressive Transit and Termination Fees
KPN's efforts to compress iBasis' profit margins began almost immediately following the
October 1, 2007 closing. Specifically, those efforts involved KPN's failure to compensate iBasis for
a sharp, unforeseen increase in iBasis' costs for terminating traffic in the Netherlands, and from the
KPN Mobile Affiliates' (with the help of the KPN Board of Management) constant pressures and
demands on iBasis to reduce significantly its prices. Hollinger, 844 A.2d at 1022 (granting
preliminary injunction due to allegations that majority shareholder breached his fiduciary duty in
connection with the proposed sale of company); Williamson v. Cox Commc Ins, Inc., 2006 WL
1586375, at *4 (Del. Ch. June 5,2006) (controlling shareholder owes fiduciary duty to company's
other shareholders); Solar Cells, 2002 Del. Ch. LEXIS 38, at *16 (preliminarily enjoining merger
where defendants violated fiduciary duties).
Pursuant to Dutch regulations, fees for terminating traffic in the Netherlands can vary
depending on the corporate relationship between the provider and carrier. Tr. 416:6-419:5. Here, the
practical effect of those regulations was that the October 1, 2007 transaction, a component of which
was the transfer ofKOCS from KPN to iBasis, triggered a steep increase in KOCS's annual fees for
terminating traffic in the Netherlands. Tr. 144:8-9; 409:8-411 :16.
However, in the KOCS pro-forma projections that KPN provided to iBasis prior to the
closing, KPN failed to include as a cost component any of these increased fees, which totaled
approximately €11 million annually, and explicitly assumed that the fees would be "stable" going
forward.45 Tr. 144: 11-16; JX0028. Indeed, evidence shows that KPN either believed incorrectly
that the termination fees would not increase post-closing (as a result of KPN retaining a majority
share ofiBasis) or willfully failed to take them into account when presenting KOCS's pro-forma
45 Although the termination costs were assumed to be stable "due to unknown regulatory price development," JX0028 at iBASIS _0059169, the increase in termination costs that resulted from the transaction had nothing at all to do with regulatory price developments, and instead was tied solely to a modified application of those fees in light of the post-transaction ownership structure ofKGCS.
projections to iBasis pre-closing.
Tr. 462:21-464:6; JX0028.46
Regardless of its motivation, KPN now characterizes those costs as "unforeseen" and
maintains that, in order to help effectuate the closing, it promised iBasis that it would compensate it
for any "unforeseen" costs not included in the KGCS pro-forma projections. Tr. 414:12-20.
However, after the deal closed, executives at KPN opposed compensating iBasis beyond the last
quarter of2007 for a portion of these costs, and beyond 2008 for the remainder. Tr.467:7-468:22;
JXOOI2. Moreover, it was not until six months later, in April 2008, that KPN began compensating
iBasis. Of course, by then, iBasis had already lost "40-50 percent" of its mobile traffic terminating in
the Netherlands and took a hit on its margins for fixed traffic+? Tr. 33:3-10,139:11-17.
ii. KPN Pressured iBasis to Squeeze Its Profit Margins
In the midst of this €11 million termination fee issue, in early 2008 the KPN Mobile
Affiliates began to apply additional pricing pressures on iBasis. For example, within weeks of the
October 1, 2007 closing, KPN Mobile demanded a one-quarter reduction in margin from 15% to
11 % on the prices iBasis was charging it. Tr. 33: 11-20. A former KPN employee who had
transitioned to iBasis agreed to KPN Mobile's demand without Mr. Gneezy's knowledge, thereby
immediately reducing iBasis' margin on its sales to KPN Mobile by 25%and impacting iBasis by an
additional $2 million annually. Id.; JX0212; Tr. 38:20-39:8. Soon thereafter, in the third quarter of
2008, E-Plus threatened to reroute 25%ofits traffic away from iBasis, and E-Plus and Base
And in any event, iBasis was not aware of the termination and transit fee issue prior to the deal closing. Tr. 136:14-23.
47 KPN has also yet to make any assurances that it will continue to compensate iBasis after this year, which is only the second year of their ten-year outsourcing agreement. Tr. 139:23-140: 13.
demanded a one-third reduction in iBasis' margin on its sales to them from 12% to 8%. Jr. 33:21-
34:7; 34:15-35; JX0038; JX0186.48
Moreover, top KPN management became involved in the margin squeeze dispute by
initiating an "investigation" and laying the groundwork for the issuance of a "ruling." Tr. 40:6-42:20;
JXO 188. In an effort to retain all ofE-PIus's business, and under pressure from its majority
shareholder and the parent ofE-Plus, iBasis "offered" under duress to reduce its margin from 12% to
8% on the condition that Base begin routing all of its traffic to iBasis, as it was required (but failed)
to do under the express terms of the FSA. Tr. 75:7-23. The KPN Board of Management
subsequently ruled that E-Plus accept iBasis' "offer" of 8% effective as of October 1,2008, but that
iBasis cut its margin further to 7% as of January 1,2009, a level at which iBasis would earn negative
profit. JX0188; Tr. 40:14-22. Although the ruling was not fully implemented, the KPN Board of
Management also required that iBasis provide E-Plus with a most favored nation status, requiring
iBasis to provide E-Plus the best price iBasis gave to any third-party entity that was using a similar
volume of traffic, see Tr. 40:14-41 :2. The KPN Board of Management also refused to require Base
to route all of its traffic to iBasis, even though Base was required to do so under the express
48 iBasis recognizes that pursuant to the terms of the Framework Service Agreement, the Mobile Affiliates have the right to seek bids from iBasis competitors provided that the Mobile Affiliates give iBasis the opportunity to match any such bids. JX0002 § 3.2. At the same time, the language of the Service Agreement makes clear that, absent iBasis losing traffic through this express last bid process
, of the Mobile Affiliate's traffic and that if the last bid procedure did not result in iBasis receiving 99% of the traffic another formula that would deliver 99% to iBasis would be applicable. Regarding the margins that iBasis expected upon entering into this transaction, Mr. Gneezy has testified that he received pre-closing assurances from KPN that the margins on the business would not decrease. Mr. Gneezy has testified, and iBasis recognizes, that such assurances are not reflected in the language of the Service Agreement. However, Mr. Gneezy's understanding reflects the tacit expectation of the parties' business dealings going forward. Thus, KPN's campaign of squeezing iBasis' margins following the closing of the transaction illustrates the bad faith conduct ofKPN in a fiduciary context. In any event, iBasis is not relying on its fraud in the inducement claim for purposes of its motion for preliminary injunction.
provisions of the FSA, and even though the KPN Board granted Base the same margin reduction that
it granted to E-Plus. See id: at 41:23-42:9.49
Finally, not long after, in the first quarter of2009, KPN Mobile threatened to take part of its
percent of its business away from iBasis, also in contravention of its express obligations under the
FSA to provide iBasis all of its existing traffic. JX0076.
c. The Overlapping Director Defendants Blok and Farwerck Breached Their Individual Duties by Failing to Inform iBasis of Material Information
In addition, defendants have failed to disclose various other material facts, including, inter
alia, information concerning KPN's plans for iBasis, including the formation ofthe Working Group,
its retention of Morgan Stanley to assist in evaluating iBasis' corporate control options, and its plans
to privatize iBasis. By failing to disclose this information, KPN, Mr. Blok and Mr. Farwerck have
violated their fiduciary duties of disclosure. See Hollinger Int'l Inc., 844 A.2d at 1061.
Mr. Blok and Mr. Farwerck took great pains to prevent the detection ofKPNs scheme in
violation of their fiduciary duties.
49 Mr. Gneezy successfully fought back against the imposition of the 7% margin reduction, but still had to reduce to 8% on the traffic. Still, as Mr. Gneezy stated, "The result of the whole process was a disastrous reduction in profitability. And the fact that some of the items were not eventually implemented is not a concession to me." Tr. 78:12-15. Mr. Greezy likened this so-called "concession" to being asked to "cut my arm off, and the board just decided to cut my hand off. This is not favorable. This is just less disastrous." Tr.76:15-20.
REDACTED Tr. at 47:9-24. Under Delaware law, such an omission by fiduciaries is a breach oftheir
fiduciary duty. See, e.g., Solar Cells, 2002 Del. Ch. LEXIS 38 (enjoining proposed merger because
fiduciary defendants failed to inform the plaintiff company's board of its transaction). As Chancellor
Chandler wrote in Solar Cells,
No effort was made to inform [target's management] that [the proposed merger] was contemplated, or imminent, when those facts were surely known at the time of the March 6 meeting ... These actions do not appear to be those of fiduciaries acting in good faith. As the Supreme Court and this Court have made clear, it is not an unassailable defense to say that what was done was in technical compliance with the law. The facts before me make it likely, in my opinion, that the defendants would be required to show the entire fairness of the proposed merger.
Id at *15-16.
It is not contested that Mr. Blok knew ofKPN's long-term consideration of a tender offer for
the remainder ofiBasis' shares and indeed, he met regularly with members of the Working Group to
provide input in the work.
REDACTED Tr. 322:19-325:1; 328:12-330:19. And, contrary to
Mr. Farwerck's protestations at the hearing that he had not been aware that "the consideration of a
tender offer was on-going," (Tr. 453:3-5), the record reveals that, in fact, the opposite is true.>!
, ,_ see also JXl93a (an April 9, 2009 "Project Celtic" presentation in
which a comment that "the market is currently undervaluing Celtic" was "[tlo be validated with
~ ~ _ . An e-mail from as early as
April 2009 from the Working Group to Mr. Blok and Mr. Farwerck contained a draft Celtic Presentation that expressly laid out the "buy" option wherein KPN would purchase the remaining shares of iBasis. See JX0230.
B. An Injunction Is Required to Prevent Irreparable Harm to iBasis
1. If the Tender Offer Is Allowed to Proceed, iBasis and its Minority Shareholders Will Be Irreparably Harmed
There can be no question that iBasis and its minority shareholders will suffer irreparable
harm if this Court declines to enjoin the Tender Offer. "Irreparable injury is threatened when a
stockholder might make a tender or voting decision on the basis of materially misleading or
inadequate information." Pure, 808 A.2d at 452; see also ODS Tech., L.P. v. Marshall, 832 A.2d
1254, 1262 (DeL Ch. 2003) (liThe threat of an uninformed stockholder vote constitutes irreparable
harm."). Moreover, "injunctive relief may be the only relief reasonably available to shareholders for
certain breaches of fiduciary duty .... " Police & Fire Ret. Sys. of the City of Detroit v. Bernal, 2009
WL 1873144, at * 3 (Del. Ch. June 26, 2009)
Defendants' disclosure violations and other breaches of fiduciary duty are depriving iBasis'
shareholders of the opportunity to make a voluntary, fully-informed decision as to whether to tender
their shares. See Eisenberg, 537 A.2d at 1062 (granting preliminary injunction preventing coercive
tender offer and fmding that a shareholder's right to make an informed, uri-coerced tender offer
decision is "specific" and "requires a specific, not a substitutional, remedy"); Shell Oil, 482 A.2d at
344 ("To permit the minority stockholders ... to decide to tender their shares without the omissions
of the defendants being cured ... would constitute such harm as could not easily be unscrambled and
is therefore irreparable. ").
Injunctive relief is thus the most appropriate remedy where, as here, the offeror fails to
disclose material information in its Tender Offer. As discussed above, supra at Section II.A.I,
defendants' Tender Offer is incomplete and misleading, as it contains numerous material
misstatements and omissions. Permitting the Tender Offer to go forward in light of defendants'
disclosures "might forever deny their right to be treated fairly," and "such harm" would be
"irreparable." Shell Oil, 482 A.2d at 344 (enjoining tender offer in light of defendants' numerous
disclosure violations); see also Netsmart, 924 A.2d at 207 C'By issuing an injunction requiring
additional disclosure, the court gives stockholders the choice to think for themselves on full
information, thereby vindicating their rights as stockholders to make important voting and remedial
decisions based on their own economic self-interest. ")52
Furthermore, once the Tender Offer is consummated, it cannot be undone. Because iBasis'
minority shareholders will be unable to make an informed decision as to whether to tender, they will
be effectively disenfranchised. Monetary damages will be unable to rectify that loss. As a result,
iBasis and its shareholders will suffer irreparable harm if the Tender Offer is not enjoined.53
2. Speculative Appraisal Rights Have No Bearing on Whether to Issue an Injunction
Even though a small percentage of iBasis minority shareholders who are cashed out in a
second-step merger may eventually have the opportunity to pursue an appraisal proceeding, that
possibility should not affect the Court's decision to enjoin the Tender Offer.
The Court repeatedly has expressed a preference for injunctive relief over appraisal in cases
like this one, where an acquirer's disclosure violations would force shareholders to decide whether to
tender their shares without complete and accurate information. See, e.g., Staples, 792 A.2d at 960
("An injunctive remedy of that nature specifically vindicates the stockholder right at issue - the right
52 KPNs reliance on In re!XC Commc'ns, Inc. S'holders Litig., 1999 WL 1009174 (Del. Ch. Oct. 27,1999), in which the shareholders' vote was "fully informed," is thus misplaced. KPN Ans. Br. at 30 n. 33.
53 See Bernal, 2009 WL 1873144 at *2 ("[I]t would be impossible to 'unscramble the eggs' by attempting to unwind the merger once it has been completed."); see also Hollinger, 844 A.2d at 1090 (injunctive relief appropriate to address irreparable harm that would result from director and principal shareholder's breach of the duty ofloyalty in connection with the sale of a company); ODS Techs., 832 A.2d at 1263 ("The harm to shareholders in the form of a misinformed vote is alone sufficient to justify the imposition of an injunction. '').
to receive fair disclosure of the material facts necessary to cast a fully informed vote - in a manner
that later monetary damages cannot and is therefore the preferred remedy, where practicable."); see
also Eisenberg, 537 A.2d at 1062 ("An injunction is the remedy most likely to achieve disclosure of
the information necessary to achieve an informed decision and to eliminate the Offer's coercive
aspects. "); Sealy, 532 A.2d 1324, 1342 (Del. Ch. 1987) (granting preliminary injunction and noting
that, "[t]he appraisal remedy ... may not be adequate in certain cases, particularly where fraud,
misrepresentation, self-dealing, deliberate waste of corporate assets, or gross and palpable
overreaching are involved.").54
Accordingly, absent injunctive relief, iBasis and its minority shareholders will suffer
irreparable harm from the materially false and misleading statements and omissions in the Tender
THE TENDER OFFER CANNOT SATISFY ENTIRE FAIRNESS
A. The Tender Offer Should Be Subject To Entire Fairness Test, Which KPN Cannot Meet
As iBasis explained in its pre-hearing briefs, the Tender Offer should be evaluated under the
entire fairness standard for a number of reasons. First, as this Court suggested in Cox
Communications, entire fairness should be applied because the Special Committee has evaluated and
rejected the Tender Offer. 879 A.2d 604, 607 (Del. Ch. 2005). Second, as even defendants concede
in their pre-hearing briefs, when a controlling shareholder makes a tender offer without disclosing to
54 Furthermore, as this Court noted in Cox Commc'ns, Inc. S'holders Luig., one cannot "ignore the realities that make appraisal an inefficient remedy for small holders, or the risk that appraisal petitioners must take (of getting less than the deal price). 879 A.2d 604,645 n.88 (Del. Ch. 2005). Although the benefit to shareholders seeking appraisal may be substantial, small shareholders may be disinclined to undertake the risk and significant expense of an appraisal action.
the minority shareholders "all material facts surrounding the tender," the offer must be reviewed for
entire fairness. Siliconix, 2001 WL 716787, at *9. Third, entire fairness must be applied because
KPN and Overlapping Director Defendants Blok and Farwerck have breached their fiduciary duties
to iBasis and its shareholders. Fourth, the Tender Offer should be reviewed for entire fairness
because KPN expressly placed the fairness of the offer process and price at issue in the Offer.
1. Entire Fairness Should Apply Because the Special Committee Has Recommended That iBasis Minority Shareholders Not Tender
The Tender Offer should be reviewed for entire fairness because the Special Committee, after
due diligence and advice from its independent advisors, has evaluated and rejected the Tender Offer
not once, but twice - first rejecting the initial offer of$I.55 per share, then the amended offer of
$2.25 per share. Tr. 180:15 - 181:21; 198:3-15. Notably, prior to making its first offer, KPN did not
so much as speak to iBasis about its coming low-ball offer, let alone attempt to negotiate with the
Company. That is, of course, because KPN thought it did not need to do so.
As this Court noted, a majority shareholder who commences a tender offer owes a fiduciary
duty "to permit the independent directors on the target board both free rein and adequate time to react
to the tender offer, by ... providing the minority with a recommendation as to the advisability ofthe
offer, and disclosing adequate information for the minority to make an informed judgment." Pure,
808 A.2d at 445. In Cox, this Court went on to suggest that Delaware law would enjoy greater clarity
and coherence if lithe protections of Pure Resources [would] be supplemented by subj ecting the
controlling stockholder to the entire fairness standard if a special committee recommended that the
minority not tender." 879 A.2d at 607.
Although Defendants are correct that, in Cox, this Court discussed the advisability of
reforming the standard for negotiated merger transactions in Kahn v. Lynch Communication
Systems, Inc., 638 A.2d 1110 (Del. 1994), the Court also squarely addressed the idea that entire 52
fairness review should be applied to tender offers that have been rejected by special committees
stating that: "an alteration on the Lynch line could be accompanied by a strengthening of equitable
review of the Siliconix line." Id at 646. Although the Court did not ultimately apply an entire
fairness standard in Pure, it reaffirmed its desire to reform Lynch in Cox, declaring that, "the
additional step of triggering fairness review when a controller proceeded against the views of the
special committee would bring together both lines of our going-private jurisprudence in a sensible
manner, providing stockholders with substantial procedural guarantees of fairness that work in
tandem." Cox, 879 A.2d at 607.
Moreover, contrary to defendants' policy argument, by creating a bright-line rule that
provides for a fairness review if a special committee rejects an offer, the courts would encourage
offerors to negotiate with special committees a fair price for minority shareholders. Here, as
discussed above, that did not happen. Instead, KPN made a very low offer without so much as
speaking to iBasis about the offer prior to making it (see supra at Section I.B.2.b.i.), misrepresented
and failed to disclose material information that would have allowed minority shareholders to
recognize that the offer was inadequate, and stated that Siliconix imposed upon KPN "no duty to
offer a fair price at all," (KPN Op. Br. at 26) all the while proclaiming to shareholders in its Offer that
the Tender Offer was in fact "fair" (in price and process) IX 129 at iBASIS _0208976-79.
2. Entire Fairness Is Warranted Because the Tender Offer Is Rife with Disclosure Violations
Defendants do not dispute that, when material information regarding a transaction is not
disclosed to minority shareholders, that transaction must be reviewed for entire fairness. See, e.g.,
Weinberger v. UOP, Inc., 457 A.2d 701, 710 (DeL 1983) (reviewing cash-out merger for entire
fairness); Pure, 808 A.2d at 445-46 (setting forth test for tender offers issued by controlling
stockholders). And, indeed, where, as here, material information has been withheld or
misrepresented, and the evidence adduced shows that there is a reasonable probability that the
defendants have not offered a fair price, the offer may be enjoined on those bases. See Shell Oil, 482
A.2d at 340.55 As discussed below, the Tender Offer must be reviewed for entire fairness because
defendants have failed to cure any of their myriad disclosure violations.
Defendants' attempts to distinguish Weinberger and Shell Oil in their pre-hearing briefs are
unavailing. Although defendants attempt to dismiss Weinberger as a cash-out merger case, the
disclosure violations described there are remarkably similar to some of the violations at issue here.56
Defendants' assertion that Shell Oil is "entirely distinguishable" (KPN Ans. Br. at 20) from
the present case also rings hollow. KPN argues that Shell Oil is distinguishable, in part, because in
Shell Oil, the majority shareholder and tender offeror, Royal Dutch, "did not supply [Morgan
Stanley] with non-public information about the value of Shell's actual oil reserves - information that
the court described as potentially 'the single most valuable asset of Shell.'" Id (citing Shell, 482 A.2d
at 341). However, here, KPN did not supply Morgan Stanley with crucial non-public information of
perhaps even greater relative value when KPN failed to disclose its own, and iBasis management's,
projections indicating iBasis' potential to secure lucrative outsourcing deals. Moreover, the
projections for outsourcing revenue from both the Favorable Projections and the 5 year plan (that
55 Although the Shell Oil court did not refer to "entire fairness" explicitly, it analyzed both aspects of the entire faimess test - fair dealing and fair price.
56 In Weinberger, the majority shareholder of UOP negotiated a cash-out merger with UOP's independent directors to take the company private. 457 A.2d at 703. Two UOP directors who had been nominated by the majority shareholder failed to disclose to the independent board members, the minority shareholders, or the majority shareholder's fmancial advisor that they had prepared a feasibility study indicating that the actual per share valuation was significantly higher than the price they represented was fair. Id at 705-08. Here, KPN similarly failed to disclose many more favorable projections both its M&A team and the iBasis Office (the group that works most closely with iBasis on a day-to-day basis) prepared for iBasis, as well as critical information concerning the assumptions underlying Morgan Stanley'S DCF analysis. App. A at 30, 62.
existed at the time) were most likely a greater relative percentage of iBasis' total value than the oil
reserves were of Shell's.J?
Notably, the Shell Oil court also held - contrary to KPN's assertions - that disclosure by just
anyone is not sufficient: "the fact that [the target company] in its 14-D-9 Schedule filed with the SEC
did reveal certain data concerning the value of the probable reserves [did] not relieve the tender
offeror from meeting its duty of full disclosure." Id at 342. The key is not that a disclosure is made
by someone, but that the majority shareholder and offeror, here KPN, "ha[ s] not made a full and
complete disclosure of all pertinent facts with complete candor." Id at 340.
3. Entire Fairness Must Apply Because KPN and Overlapping Director Defendants Blok and Farwerck Have Breached Their Fiduciary Duties to iBasis
In addition, the Tender Offer should be reviewed under an entire fairness standard because,
as discussed supra at Section ILB.1.3., KPN and Overlapping Director Defendants Blok and
Farwerck have breached the fiduciary duties they owe to iBasis and its minority shareholders. See
Solar Cells, 2002 Del. Ch. LEXIS 38, at *2; Solomon v. Armstrong, 747 A.2d 1098, 1112-1113 (Del.
Ch. 1999); Williamson v. Cox, 2006 WL 1586375, *4 (Del. Ch. June 5,2006) (Answering Compo
Ex. 1); Hollinger Int'l Inc. v. Black, 844 A.2d 1022 (Del. Ch. 2004), affd 872 A.2d 559 (Del. 2005»;
57 KPN's partial cite is particularly misleading since the Shell court was clear that "it is possible-although not probable-that the probable reserves may be the single most valuable asset of Shell," Shell, 482 A.2d at 341 (emphasis added), and that "Goldman-Sachs found that the value of these reserves, when examined in depth, would only add-at a maximum-an additional $4 per share to the value of Shell's shares" -less than 8% of even the $53 per share offered by Royal Dutch. Id at 344 (emphasis added).
KPN also misstates the Shell Oil court's holding that "once Royal Dutch provided its financial advisors with sufficient information to produce a new fairness opinion for minority shareholders to review, [ ] the shareholders each needed to decide for themselves whether they believed the offer was fair or not." KPN Ans. Br. at 20 (citing Shell Oil, 482 A.2d at 344-45). Instead the Shell Oil court held that the defendant was to require Morgan Stanley "to review in good faith the data developed by the independent committee and to again express their opinion as to value after such review and to disclose by supplemental notices the information which should have been disclosed." Shell Oil, 482 A.2d at 345 (emphasis added).
Gradient OC Master, Ltd v. NBC Universal, Inc., 930 A2d 104, 130 (Del. Ch. 2007); see also Op.
Br. at 34-39; Ans. Br. at 20-24.
KPN cites no authority to support its argument that a breach of fiduciary duty does not trigger
the entire fairness analysis, and its prior attempt to distinguish Solar Celis, 2002 DeL Ch. LEXIS 38,
is unavailing. 58
4. Entire Fairness Review Is Appropriate Because KPN Has Placed the Fairness ofthe Tender Offer at Issue in the Offer to Purchase
As discussed in iBasis' Opening Brief, the Tender Offer should be reviewed for entire
fairness because KPN expressly placed the fairness of the offer process and price at issue in the Offer
to Purchase. Op. Br. at 40-41.59
B. The Tender Offer Cannot Satisfy Entire Fairness Review
Because the evidence adduced in discovery and presented at the hearing before this Court
shows that defendants cannot meet either aspect of the entire faimess test - fair dealing or fair price -
the Tender Offer must be enjoined.
1. The Process Is Not Fair
Defendants will be unable to establish the fair dealing requirement because they have
repeatedly violated their fiduciary duties to iBasis. Supra at Section ILA2. "Part offair dealing is
the obvious duty of candor ... Moreover, one possessing superior knowledge may not mislead any
stockholder by use of corporate information to which the latter is not privy." Weinberger, 457 A2d
58 Solar Cells involved a transaction, like the Tender Offer at issue here, initiated by a group owing a fiduciary duties to the target corporation. See id at 2. Therefore, the Solar Cells court's conclusion that "the defendants would be required to show the entire fairness ofthe proposed merger," because their actions "d[id] not appear to be those of fiduciaries acting in good faith," applies with equal force to KPN's actions. Id. at *15-16. Nowhere does the Court suggest that its holding would not apply to tender offers.
59 Defendants argue in support of the alleged "fairness" of the Tender Offer. See, e.g., KPN Op. Br. at 26 n.18. Having raised the issue, they should not be permitted to argue against entire fairness analysis.
at 711 (citations omitted). Because defendants have withheld material information, including numerous projections and information concerning Morgan Stanley's valuation analyses, and because they have made false and misleading statements concerning the Parent Projections and the Favorable Projections (see Supra at Section II.A.1.), the Tender Offer will not satisfy the element of fair dealing. Id
Defendants' contention that they have satisfied the element of fair dealing by complying with the standards set forth in Siliconix and In re Pure Resources is unavailing. KPN Ans. Br. at 28-29. As discussed below, defendants have not complied with those standards. Instead, they have withheld material information concerning various aspects of the Tender Offer; without that information, presented in the appropriate context, iBasis' minority shareholders will not be able to make an informed decision as to whether to tender their shares. See id.
2. The $2.25 Per Share Offer Price Is Not Fair
"Fair price" concerns "the economic and financial considerations of the proposed, including all relevant factors: assets, market value, earnings, future prospects, and any other elements that affect the intrinsic or inherent value of a company's stock." Weinberger, 457 A.2d at 711. When a majority shareholder fails to disclose all relevant financial information to its appraiser - and where "the disclosures made to the stockholders fail[ ] to clearly and unequivocally disclose that essential and necessary information [has] been withheld by the appraiser" - the offer price will not meet the "fair price" standard. Shell Oil, 482 A.2d at 341; see also HMG/Courtland Props, Inc. v. Gray, 749 A.2d 94, 116-17 (Del. Ch. 1998).
In addition to Jefferies well-considered analysis which demonstrates that the Tender Offer price is unfair, KPNrs own statements in the Tender Offer, that the offer price reflected "the analyses contained in the presentation provided by Morgan Stanley, II see IX 1296, also demonstrate that the
offer price is unfair. Morgan Stanley had no opportunity to incorporate the Newly-Discovered
Projections or the Favorable Projections - including the "outperformance" and "YEE 2009"
scenarios that represented "attainable" or "reasonable" outcomes for iBasis into its analysis. See JX
1280a at KPN00042182;
Moreover, the assumptions underlying
Morgan Stanley's DCF sensitivity analysis have been called into question, by both this Court and the
hearing testimony of its representative, Mr. Ari Terry. See Tr. 564:17 - 571:17; App. A. In fact,
although KPN claims that the Parent Projections were the basis for Morgan Stanley's DCF analysis,
the assumptions underlying the DCF analysis are even more negative than the assumptions
underlying the Parent Projections and the results for iBasis in 2009 to date - resulting in a lower
hypothetical valuation for iBasis. JX 123 at KPN _00078738.
KPN's contention that the offer price is fair rests entirely on the notion that the offer price
represents an alleged "premium" over the market price for iBasis shares. See KPN Ans. Br. at 26-28.
As the lead banker for iBasis' fmancial advisor testified at the hearing, however, an analysis of the
premium can be a misleading tool to evaluate the fairness of an offer where a company's stock is
trading at an unreasonably low value. See Tr, 195:20-196:05.60
Between KPN's prolonged concealment of numerous projections that are more favorable and
realistic than the Parent Projections, Supra Sections ILA.I.b and c., and defendants' calculated efforts
to reduce iBasis' discounted cash flows, Supra Sections LB.2.d, ILA.l.a., it is clear that KPN did
everything it could to create the lowest hypothetical valuation for iBasis. As a result, the revised
offer price is unfair.
60 Defendants' reliance on Cooperv. Pabst Brewing Co., 1993 WL 208763, at *8 (Del. Ch. June 8,1993) is also misleading. In that case, the Chancery Court clearly stated that "[ w]here there is an established market for a corporation's stock, market value must be considered in appraising the value of the corporation's shares." Id
C. The Tender Offer Should Be Enjoined Because It Is Not Entirely Fair
Although it has been suggested that the question of which standard of review should apply to
the Tender Offer may not impact the appropriate remedy to be applied in this matter, iBasis
respectfully submits that is not the case. As demonstrated above, from the evidence adduced at the
hearing, iBasis has established that KPN's Tender Offer is not entirely fair (in terms of either fair
price or fair dealingj.v! As a result, and based upon both the unfair price and process, pursuant to
Solar Cells, the Tender Offer should be enjoined. See Solar Cells, 2002 Del. Ch. LEXIS 38 at *22,
28 (granting preliminary injunction against proposed merger where there was neither fair dealing, nor
a fair merger price because the valuation on which the price was based was "irreconcilable" with
In the alternative, and pursuant to Shell Oil, this Court may: (a) preliminarily enjoin the
Tender Offer; (b) require that Morgan Stanley review the Newly-Discovered Projections, Favorable
Projections and iBasis 5 Year Plan, recalculate its valuation analysis, and disclose that supplemental
analysis to iBasis shareholders, and ( c) order that shareholders who have already tendered be given
the opportunity to withdraw their shares. See Shell Oil, 482 A.2d at 345 (holding that a court of
equity has broad powers to fashion a fair remedy, granting preliminary injunction as described above
and holding that absent an injunction the minority shareholders would be irreparably harmed).
In the alternative, and pursuant to Shell Oil, this Court may: (a) preliminarily enjoin the
Tender Offer, (b) require that Morgan Stanley review the Newly-Discovered Projections, Favorable
61 The Tender Offer price and process are not fair, in large part, because the price is based upon the Parent Projections and Morgan Stanley's least favorable valuation analysis, The Parent Projections are "irreconcilable" with and less favorable than numerous other KPN-prepared (and iBasis prepared) projections; likewise the Morgan Stanley analysis is "irreconcilable" with and less favorable than earlierprepared valuation analyses. In addition, the myriad of disclosure failures on the part of KPN only heightens its failure to engage in fair dealing.
Projections and iBasis 5 Year Plan, recalculate its valuation analysis, and disclose that supplemental
analysis to iBasis shareholders, and (c) order that shareholders who have already tendered be given
the opportunity to withdraw their shares. See Shell Oil, 482 A.2d at 345 (holding that a court of
equity has broad powers to fashion a fair remedy, and granting preliminary injunction as described
If the Court is of the view that based upon the current record, it cannot yet make a judgment
as to whether the $2.25 price now offered by KPN is "fair," iBasis respectfully requests a two-day
entire fairness hearing prior to the Court's ruling.62
For the reasons set forth above, iBasis respectfully requests that the Court (1) enter an order
denying Defendants' counterclaims; (2) enter an order enjoining consummation of the Tender Offer;
and (3) grant such other and further relief as the Court deems just and proper.
lsi Raymond J. DiCamillo
Adam H. Offenhartz David J. Kerstein
J. Ross Wallin
GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue, 47th Floor
New York, New York 1 0 166~0 193
Thomas A. Beck (# 2086) Raymond J. DiCamillo (# 3188) Margot F. Alicks (# 5127) Richards, Layton & Finger, P.A. no North King Street Wilmington, Delaware 19801 (302) 651 ~ 7700
Attorneys for Plaintiff and CounterclaimDefendant iBasis, Inc. and Counterc1aimDefendants Robert H. Brumley, Charles N. Corfield, Ofer Gneezy, W. Frank King and Gordon J. VanderBrug
Dated: November 6, 2009
62 If, however, the Court decides to bypass an entire fairness analysis, iBasis respectfully requests a preliminary injunction preventing the Tender Offer from going forward until all disclosure violations have been cured and a cooling-off period allows iBasis' minority shareholders to absorb the data.
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