In re Trados Inc. Shareholder Litigation

Facts

Trados Inc. developed translation software and by 2000 had secured venture capital funding from several firms, including Wachovia, Hg Capital, Sequoia, and Invision. These VC firms received preferred stock with liquidation preferences and placed representatives on Trados’s board of directors. By 2004, despite growing revenues, Trados had not met the VC firms’ return expectations. The VC directors began seeking an exit strategy.

In July 2004, the board hired Joseph Campbell as CEO with the mission to either grow the company or sell it. The board also adopted a Management Incentive Plan (MIP) that would compensate management for achieving a sale even if the transaction yielded nothing for common stockholders. Under Campbell’s leadership, Trados’s performance improved with record revenues and profits in late 2004 and early 2005.

In February 2005, SDL offered to acquire Trados for $60 million, consisting of $50 million in cash and $10 million in SDL stock. Under Trados’s certificate of incorporation, this merger constituted a liquidation event entitling preferred stockholders to a liquidation preference of $57.9 million. The MIP took the first $7.8 million of the merger consideration, the preferred stockholders received $52.2 million, and common stockholders received nothing. The board, composed of two management directors, three VC fund representatives, and two outside directors, unanimously approved the merger in June 2005.