A Breach Of Fiduciary Duty And An Opportunity: Oplink Communications II

| About: Oplink Communications, (OPLK)
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Summary

There is a class action in which the Board is said not to be independent.

A group of activists is claiming that the transaction is "unfair and pursuant to a materially misleading Recommendation Statement".

Current shareholders should not tender their shares and new investors could buy to make Koch pay the fair value of the business.

The stock price should be above $24.25 since the fair value was said to be $27 the Board. There is a good opportunity for new shareholders.

Introduction

Do not buy bonds, buy Oplink Communications Inc. (NASDAQ:OPLK)! This was the title of my last review on the announced merger between Oplink and Koch. The transaction seemed to be one of these fast and simple mergers that Koch executes several times a year in which normally nothing exiting happens. However, this case is different. Plaintiff Brewerton -- which represents the interests of an independent group of activist investors (Engaged Capital, LLC and Voce Capital Management LLC) with a 7.5% stake in Oplink, the Oplink shareholders for change ("OSC") -- started a class action challenging the merger as a breach of fiduciary duty to shareholders. The merger is said to be done "by means of an unfair process, for an unfair price, and pursuant to a materially misleading Recommendation Statement". The company filled in response a new amendment on Dec. 3, 2014 in which more information is released about the process.

In my opinion, this process could have affected the stock price which closed last Friday at a price of $24.25, Koch's offer price. In this article we review the reasons behind the class action and evaluate the possible scenarios.

Class action review

Source: SEC

OSC started in July 2014 claiming that the current board of directors was not representing shareholder's interests and filed several proxy statements in order to nominate two directors to the board. In addition, when Oplink attempted to not organize an annual shareholder meeting OSC threatened them to start a lawsuit.

According to the class action released, OSC claims that its pressure was responsible for the Board entering into the transaction with Koch. In addition, the Board is accused of a "self-interested decision to sell the company" which is reflected in the terms of the merger. The main points of the class action are the following:

  1. The 14% premium is very low and it does not reflect the valuation of the company.
  2. The terms of the offer includes some "deal protection devices" that make impossible for other third parties to make another offer: "a no-solicitation provision" which does not allow the company to maintain any kind of discussion with another player; a four business days provision that enables Koch to react to any other competing offer; a $15.5 million termination fee (more that 3%) that the Company pays Koch.
  3. The Solicitation Statement, that attempted to convince shareholders to tender their shares, lacked of very important material information to evaluate the transaction and to make an informed decision.

The class action is very long as it describes the fight between the Board and OSC during more than two years. I would like only to remark the most important parts as it can be interesting for the investment motivation: on October 28, 2014 Oplink received two proposals to buy Oplink Connected and preferred to focus on the transaction with Koch. These proposals would have maximized value for the shareholders and in my opinion is a proof of the lack of independence. You can take a look at this part of the document:

Source: SEC

In addition, the Board of directors stated that the value of the company was $27 but harmfully to shareholders entered into an agreement with Koch for $24.25. You can take a look:

Source: SEC

Koch's offer price of $24.25 is in contrast with analysts at Yahoo! Finance who set a price target of $26.25 for the company. It is obvious that the Company is being sold undervalued because the negotiation was not properly done and because the Board is not independent.

Investment idea and conclusion

I recommend investors to buy Oplink Communications, not because of the spread but because the price is undervalued and there has been a breach of fiduciary duty. There are some chances that a judge orders to shop the company or that shareholders do not tender their shares. In this last case Koch -- which has already 7.1% of support - would increase its offer price and we can obtain a maximum 10% return in less than a three-week period. (the tender offer is until Dec. 22, 2014).

Also, I recommend investors who are already shareholders not to tender their shares since Koch does not pay enough.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.