Introduction
On January 9, 2024, Hewlett Packard Enterprise (NYSE: HPE) issued a press release announcing their agreement to acquire Juniper Networks, Inc. (NYSE: JNPR) in an all-cash transaction of $14 billion. The goal of the acquisition is to help establish HPE as a leader in the cloud-delivered networking industry. By bringing a diverse portfolio of customers and partners, this acquisition is expected to double HPE’s networking business. With Juniper’s competencies, HPE plans to leverage AI and cloud driven technology to provide consumers with secure, unified solutions from edge to cloud.
Effects on Shareholders
However, all the buzz about this exciting venture for both HPE and Juniper has been shadowed by the filing of a shareholder lawsuit against Juniper. The complaint, filed by shareholder plaintiff John Zaita, alleges two violations of the Securities Exchange Act. The basis of these claims stems from allegations that company executives misrepresented the financial terms of the Proposed Transaction in their Proxy Statement to the shareholders about the acquisition. A proxy statement is a document that a public company is required to give to its shareholders prior to a shareholder vote on a material transaction, which would be the acquisition in this case.
Further, the lawsuit names 10 board members of Juniper Networks as Defendants, along with the company, who collectively own large amounts of shares in Juniper. Zaita claims that these board members, along with select insiders of the company, will personally benefit from the Proposed Transaction at the expense of the shareholders.
Violation of Section 14(a) of the Securities Exchange Act
This section of the SEA, in relevant part, provides that:
“it shall be unlawful for any person, by the use of … any facility of a national securities exchange, in contravention of such rules and regulations as the [SEC] may prescribe as necessary… for the protection of investors, to solicit or permit the use of his name to solicit any proxy or consent or authorization in respect to any security registered pursuant to section 78l of this title”The purpose of this section is to prevent corporate directors and management from obtaining authorization for corporate actions through deceptive means or through inadequate disclosure in soliciting proxy statements.
Zaita claims that the Proxy Statement was prepared in violation of this section because Juniper included many misleading facts and additionally failed to include many material facts necessary to make an informed decision about the Proposed Transaction. Some of these include failure to disclose the amount of fully diluted outstanding shares, net debt, and the acquisition price per share. Zaita furthers that these material omissions deprived him of his ability to make an informed decision on whether to vote his shares in favor of the Proposed Transaction.
Violation of Section 20(a) of the Securities Exchange Act
Section 20(a) of the Securities Exchange Act provides for joint and several liability for people who control or abet violators of the Exchange Act. The section reads, in relevant part, as follows:
“Every person who, directly or indirectly, controls any person liable under any provision of this chapter…thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable…unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action”As a defense against liability, an individual may prove that the acts made were in good faith for the company. Ultimately, the purpose of Section 20(a) is to regulate secondary financial markets by prohibiting fraudulent activities, such as insider trading, and ensure transparent disclosures of important information to current and potential shareholders.
Zaita alleges that the defendants had knowledge about non-public information concerning the Company and should have known that the Proxy Statement was materially misleading to Zaita in his capacity as a company stockholder. The complaint further alleges that the defendants acted as controlling persons of Juniper by drafting, producing, reviewing and/or disseminating the materially false and misleading statements.
To avoid liability, Juniper must demonstrate that the controlling individuals did not directly or indirectly induce the fraud alleged in the complaint. At this time, Juniper has not commented on the lawsuit. However, the HPE President, Antonio Neri, stated that the acquisition would enhance the company's position "at the nexus" of accelerating macro-AI trends, and transform Juniper's networking hardware and services into a bridge between AI-native and cloud-native technology worlds to generate "significant value" for shareholders.
Conclusion
Although the $14 billion deal, at $40 per share, is expected to double the size of HPE's networking business, at least one shareholder is skeptical of the potential value. This challenge to HPE’s proposed acquisition of Juniper Networks is still in the early stages of litigation. As the shareholders are inquiring into a more in-depth examination of the potentially unfavorable deal, the Federal District Court must determine whether the Defendants prepared the allegedly misleading proxy statement to receive "unique" benefits at the conclusion of the acquisition. This decision may halt HPE's networking and AI technology goals in its merger with Juniper.
*The views expressed in this article do not represent the views of Santa Clara University.