<PAGE>
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QUICKTURN DESIGN SYSTEMS, INC.
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MENTOR GRAPHICS CORPORATION
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<PAGE>
1
1 IN THE UNITED STATES DISTRICT COURT
2 IN AND FOR THE DISTRICT OF DELAWARE
3 - - -
4 MENTOR GRAPHICS CORPORATION : CIVIL ACTION
CORPORATION and MGZ CORPORATION,:
5 :
Plaintiffs :
6 :
v. :
7 :
QUICKTURN DESIGN SYSTEMS, INC., :
8 :
Defendant : NO. 98-473 (RRM)
9
- - -
10
Wilmington, Delaware
11 Tuesday, October 6, 1998
4:08 o'clock, p.m.
12
- - -
13
BEFORE: HONORABLE RODERICK R. McKELVIE, U.S.D.C.J.
14
- - -
15
APPEARANCES:
16
RICHARDS, LAYTON & FINGER
17 BY: KEVIN G. ABRAMS, ESQ.,
THOMAS A. BECK, ESQ. and
18 THAD J. BRACEGIRDLE, ESQ.
19 -and-
20
21
22
23 Valerie J. Gunning
Official Court Reporter
24
25
2
1 APPEARANCES (Continued):
2
LATHAM & WATKINS
3 BY: MARC W. RAPPEL, ESQ.
(Los Angeles, California)
4
5 -and-
6
LATHAM & WATKINS
7 BY: R. BRIAN TIMMONS, ESQ.
(Costa Mesa, California)
8
Counsel for Plaintiffs
9
<PAGE>
10 MORRIS, NICHOLS, ARSHT & TUNNELL
BY: WILLIAM M. LAFFERTY, ESQ.
11
12 -and-
13
WILSON, SONSINI, GOODRICH & ROSATI
14 BY: DAVID J. BERGER, ESQ. and
JILL NISSEN, ESQ.
15 (Palo Alto, California)
16 Counsel for Defendant
17 - - -
18
19
20
21
22
23
24
25
3
1
2 P R O C E E D I N G S
3
4 (Proceedings commenced at 4:08 p.m.)
5
6 THE COURT: All right.
7 MR. LAFFERTY: Good afternoon, your Honor.
8 I wanted to take a moment to introduce my co-counsel in
9 the matter, Mr. David Berger.
10 THE COURT: All right.
11 MR. LAFFERTY: And his associate, Ms. Jill
12 Nissen, both of whom have been admitted pro hac vice.
13 Mr. Berger will make the defendant's
14 presentation today, with your Honor's permission.
15 THE COURT: All right.
16 MR. ABRAMS: Good afternoon, your Honor.
17 THE COURT: Good afternoon.
18 MR. ABRAMS: I'd also like to introduce my
19 colleagues seated at counsel table.
20 Mr. Mark Rappel of Latham & Watkins, and Mr.
21 Brian Timmons.
22 In addition, seated in the first row of the
23 courtroom, we have Mr. Jack Zepp and Mr. Kaufman.
24 Mr. Rappel will make the plaintiffs'
25 application for support of preliminary injunction.
4
1 THE COURT: All right.
2 Actually, you can get both victims up at the
3 same time.
4 MR. BERGER: All right.
5 THE COURT: And we'll walk our way through,
6 issue by issue.
7 So pick a topic.
8 MR. RAPPEL: Your Honor, I want to thanks
<PAGE>
9 the Court for making the time available to us. I know
10 you're in trial. I also want to apologize for the length
11 of the papers. In a typical case, I can typically say I
12 said it better in my papers than I can say it in oral
13 argument and I will sit down, unless the Court has any
14 questions.
15 In this case, though, I would like to take
16 just a little bit of the Court's time and try to offer
17 more than that.
18 I think the situation before the Court is
19 remarkable. It's certainly remarkable in my experience
20 and all the practitioners that I've talked to about it.
21 And I would like to suggest it's a story with two
22 villains. Initially, I thought that Hambrecht & Quist
23 was the worst of the two.
24 And to substantiate that or to explain that,
25 I'd like to put up a chart from one of their
5
1 presentations.
2 THE COURT: Sure.
3 MR. RAPPEL: I know that's an issue with Mr.
4 Berger, because it does include issue that Quickturn has
5 designated as highly confidential. I think I place the
6 chart, though, so it's viewable to the Court, but not
7 the audience.
8 MR. BERGER: Your Honor, the point is the
9 chart is a page taken from one of the Hambrecht & Quist
10 presentations. It's my understanding that counsel has
11 copies to hand up to your Honor also of the same chart.
12 I'm happy with it to be shown to your Honor, or the chart
13 to be shown to your Honor. I just don't -- it's
14 confidential information to Quickturn and to Hambrecht &
15 Quist and don't wish to have it shown in open court.
16 MR. RAPPEL: Your Honor, for purposes of
17 argument, I would like to be able to refer to the chart.
18 I'm also happy to hand your Honor a copy of it.
19 THE COURT: Why don't you hand it to me first?
20 MR. RAPPEL: Okay.
21 THE COURT: Let's talk about whether it should
22 be protected.
23 MR. RAPPEL: May I approach, your Honor?
24 THE COURT: Yes.
25 (Mr. Rappel handed document to the Court.)
6
1 MR. RAPPEL: I've already given a copy to Mr.
2 Berger. And this is Page 38 of the August 21 presentation
3 by Agent Cue to the Quickturn Board, which is the full
4 text -- the full text of which is included as Exhibit C
5 to our motion for preliminary injunction.
6 THE COURT: All right. And --
7 MR. RAPPEL: And I have a blowup, your Honor.
8 If I may, I'd like to display it right here.
9 THE COURT: Why should this be protected from
10 disclosure?
11 MR. BERGER: Your Honor, that chart shows the
<PAGE>
12 confidential valuations of Quickturn under various
13 scenarios. It's one of the issues that plaintiff is
14 trying -- is arguing here in this motion that we're
15 required to disclose under the federal securities laws.
16 We've not disclosed that information. We don't think
17 it's required and it does include valuations of
18 Quickturn. It's clearly not public information and is
19 proprietary information.
20 THE COURT: I'm not trying to give you a
21 hard time. I'm trying to figure out under the standards
22 under Rule 26 why this shouldn't be disclosed in open
23 court as opposed to someplace else.
24 MR. BERGER: Well, your Honor, one of the
25 issues in the case -- as a matter of fact, the principal
7
1 issue in the case is the valuation of Quickturn, and we
2 don't want other parties to have a sense as to what
3 Quickturn should be valued at or what various valuations
4 Quickturn's various bankers value Quickturn at. And the
5 same dangers that has happened here. Somebody gets ahold
6 of it and says, Oh, I offered a price that's, quote
7 unquote, within the range of fairness. It takes away
8 negotiating leverage for the Quickturn Board in
9 connection with this offer. And potentially in
10 connection with other offers.
11 MR. RAPPEL: Your Honor, our point is really
12 that this chart is inconsistent with what Quickturn wants
13 the shareholders to hear. That is simply the word
14 inadequate with no explanation.
15 I can't understand how disclosure of this
16 chart could possibly reduce the bargaining leverage of
17 Quickturn vis-a-vis Mentor Graphics, because Mentor
18 Graphics' lawyers have that. And obviously, Mentor
19 Graphics' lawyers want to be involved in any
20 negotiations, even if we can't disclose that information
21 to our clients.
22 MR. BERGER: Your Honor, if I can respond to
23 that very briefly, the protective order in this case
24 prohibits clearly Mentor Graphics' attorneys from passing
25 on this information to their clients. To do so would be
8
1 a breach of the protective order. There's no question
2 about that.
3 And so if the argument is that Mentor
4 Graphics' attorneys are going to take this information
5 and pass it on to their clients as a way to tell their
6 clients how much they should bid or how much they
7 shouldn't, that would be --
8 THE COURT: All right. Let's just assume
9 we'll keep it confidential. And I will just work with
10 this small copy.
11 MR. RAPPEL: Okay.
12 Your Honor, the reason that I've given you
13 this chart is that I think it's the best, most visual
14 summary of the analyses that H&Q did in support of its
<PAGE>
15 valuation opinion. And this was presented to the
16 Quickturn Board on August 21.
17 Now, my clients and my opponent's clients
18 paid investment bankers a lot of money to prepare charts
19 like this. But I would submit to your Honor that it's
20 not rocket science. Your average investor, certainly
21 any institutional investor, is going to know what these
22 analyses are, what the typical analyses are that are used
23 by investment bankers in valuing a tender offer. They're
24 going to know that at least these bars are going to be on
25 the chart.
9
1 And they are also going to know where to
2 draw the line for the magic tender offer at 12-1/8. And
3 they're going to think, Well, if the bars are above the
4 line, then the offer is inadequate, and if the bars are
5 hitting the line squarely, then the offer is adequate.
6 And if the bars are over -- I'm sorry -- if the bars
7 are under the line, then that's a home run.
8 Now, if you look at this chart, the Mentor
9 offer is just slamming these bars. In fact, it's over
10 the analysis of comparable premiums paid. The only one
11 that's questionable is discounted cash flow analysis,
12 here on the far right.
13 But, as admitted in the briefs, Quickturn,
14 H&Q, didn't rely on that at all. And the H&Q -- I'm
15 sorry -- the Quickturn Board understood that it was
16 unreliable.
17 So if I were looking at this chart, I could
18 just draw a big red X through this chart on the far
19 right -- I'm sorry -- through the bar on the far right,
20 which is the only one that's even troubling in analyzing
21 our offer.
22 Now, there's another chart which reflects
23 the Board's or reflects H&Q's prior analysis on August
24 17. That appears at Page 30 of Exhibit B to our motion.
25 And if I can, I would just like to hold that one up for
10
1 the Court.
2 THE COURT: All right.
3 MR. RAPPEL: Now, this one (indicating), like
4 the other one, presents -- well, this one only presents
5 two analyses, but it has three cases. There's the base
6 case, an up-side case and a down-side case. Once again,
7 you can see the Mentor offer is just piercing the base-
8 case analysis. It is above the down-side analysis. And
9 it's just a bit below the up-side analysis, which is, as
10 we explain in our papers, based on a 40-percent assumed
11 growth rate.
12 So you consider these two charts. You
13 consider, in fact, all of the H&Q analyses, and it
14 looks -- it looked to me awfully mercenary for H&Q to be
15 giving an inadequacy opinion. It looks to me like they
16 sold out for $750,000.
17 Then, we found draft disclosure, and we
<PAGE>
18 provided that to the Court, it's Exhibit W-2 our motion.
19 That's a piece that we believe was prepared
20 by Skadden Arps, and it goes through each of the analyses.
21 It's, in essence, like giving these bar charts to the
22 shareholders, but doing so in words. In fact, maybe it's
23 a little bit better, because it explains a little bit
24 about the methodologies that are used to generate all
25 these bars. And that put H&Q's conduct in a different
11
1 light for me. It now appears that Hambrecht & Quist
2 thinks that it's okay to say that it is inadequate as
3 long as the shareholders know where the bars are and
4 where the red X's are if you draw the red X.
5 Exhibit W, this proposed disclosure, does
6 exactly that.
7 Now, that suggests that Hambrecht & Quist
8 doesn't think an adequacy opinion means much and, in
9 fact, that's what Mr. Cleveland testified in his
10 deposition. He said inadequacy simply means that in a
11 transaction, the offer on the table is not the best
12 price. And parenthetically, I would note that it's
13 impossible to exceed Mentor's offer where we've offered
14 to negotiate and to increase our offer if it's justified
15 by due diligence.
16 But here Quickturn instructed Hambrecht &
17 Quist not even to talk to us. So it's almost a
18 self-fulfilling prophecy that you don't have the best
19 offer on the table.
20 But that's maybe a little beside the point.
21 The fact is that the process here is to let the
22 shareholders make up their own mind. And here, Quickturn
23 shareholder body, it's largely institutional. If you
24 provide them with the facts, if you give them the bars
25 and the red X's, they can figure it out.
12
1 Now, remember I said earlier that there are
2 two villains and that's where Quickturn comes in. They
3 refuse to let their lawyers put Exhibit W, to put that
4 disclosure that was written in the 14D9. Instead, they
5 just used the naked opinion. All they wanted the
6 shareholders to hear was the word inadequate. And, so
7 far, that's all they've heard. They don't see the bars.
8 They don't see the red X I drew. Instead, they just get
9 the opinion. In fact, they get a barrage of letters and
10 press releases, 14D9's, proxy statements, saying
11 Quickturn paid Hambrecht & Quist $750,000 and they said
12 Mentor's offer is inadequate.
13 The average shareholder, in fact, any
14 institutional shareholder, knows that you have these
15 bars. They know, or at least they think, that
16 inadequate means that the bars are above this red line
17 for the Mentor tender offer. They don't see this red X.
18 They don't know that Mentor is grazing the bottom of
19 this analysis on the right-hand side. All they hear
20 is inadequate. And I would submit that's misleading.
<PAGE>
21 The point, in fact, is capsulized pretty
22 nicely by Justice Souder's opinion in Virginia Bank
23 Shares, where he was dealing with a situation where there
24 was a claim that use of the word high in characterizing
25 an offer was misleading. And if I may, if I can find it,
13
1 I will read that.
2 Justice Souder stated it is no answer to argue,
3 as petitioners do, that the quoted statement on which
4 liability was predicated did not express a reason in
5 dollars and cents, but focused instead on the, quote,
6 indefinite and unverifiable, close quote, term, quote,
7 high, close quote, value, much like the similar claim
8 that the merger's terms were fair to shareholders. The
9 objection ignores the fact that such conclusory terms
10 in a commercial context are reasonably understood to
11 rest on a factual basis that justifies them as accurate,
12 the absence of which renders them misleading.
13 I would submit, your Honor, that inadequate
14 has a much more precise and well understood meaning among
15 shareholders than the term high. The question is,
16 without these bars, are the shareholders going to be
17 misled? I would say you bet they are. The institutions
18 are going to know what the bars are. They're going to
19 know that the investment bankers moved the bars around.
20 For example, I mean, this is explained in Mr.
21 Matthews' affidavit. You can cut this historical
22 trading range bar off at six months or 12 months and
23 just lop about half of the top off of it. And you can
24 make other adjustments to all these bars. These are
25 clearly not the best bars for us. They are the best bars
14
1 for Quickturn. But the point is that, even with the best
2 bars for Quickturn, the offer is not below the bars.
3 Now, to put this in legal context, there are
4 really three cases that have been cited and expanded
5 upon in the briefs. Quickturn's lead authorities are
6 Data Point and Abbey. But I would say that all those
7 cases say, even if you accept Quickturn's gloss on them,
8 is that it is a rare case in which the investment
9 bankers' underlying data -- that is all these bars -- is
10 material.
11 Well, your Honor, this is the rare case.
12 Now, our favorite case in the brief is the Gerber
13 Products case. And in that case, the baby food products
14 company defeated an offer by, in essence, arguing and
15 suing the bidder, because the bidder had paid bribes to
16 foreign dignitaries. I think the euphemism at the
17 time was sensitive payments.
18 After the bidder went away based on this
19 lawsuit, the class action lawyers sued. In the course
20 of that suit, they found out that Gerber had an
21 investment banker's opinion which said that the
22 consideration offered in that case was, quote,
23 substantial, close quote. I don't know what substantial
<PAGE>
24 means. I've never heard that term in an investment
25 banker's lexicon. I would submit that it probably
15
1 means something better than inadequate, but precisely
2 what it means, I'm not sure.
3 But the class action lawyers who had the
4 full report said, Well, it's misleading not to have told
5 the shareholders that you had this investment banker's
6 opinion saying that the bidder's tender offer was
7 substantial.
8 And the Court held that that opinion was
9 substantial, but it could have impacted shareholders'
10 opinions whether to tender their shares or to sell in
11 the open market. However, the Court concluded that it
12 was not misleading. The reason the Court said that was
13 that Gerber had never gone out to its shareholders and
14 said that, quote, This bid is inadequate.
15 That's exactly what Quickturn has done here.
16 They go out repeatedly and say this offer is inadequate
17 and they have a Hambrecht & Quist chart and analysis in
18 their pocket that is, I would submit, at least equivalent
19 to an opinion that an offer is substantial.
20 I would also like to talk about the
21 Chris-Craft opinion. I know it's an old one, but it's a
22 good one, in my opinion, and I think it has similar facts.
23 There, the Piper company owned their famous plane company
24 and Chris-Craft comes along and tries to swallow them up
25 and, for whatever reason, they don't want to be acquired
16
1 by that conglomerate. Right after the offer comes in,
2 the Piper family urged shareholders to reject it. And
3 in doing so, they said that the Board had, quote,
4 carefully studied this offer and become convinced that
5 it is inadequate and not in the best interests of Piper
6 shareholders.
7 Well, Chris-Craft sued for an injunction and
8 said you can't just disclose that, because you have an
9 investment banker's opinion. They had hired First Boston.
10 In fact, First Boston had given an opinion to Piper which
11 said that the consideration offered by Chris-Craft was
12 fair and adequate.
13 The District Court denied Chris-Craft's
14 injunction because it held that the term inadequate could
15 not be construed to refer to price. And the explanation
16 for that apparently involved a little bit of Monday-
17 morning quarterbacking, because by that time other
18 bidders -- by the time the thing came up for a hearing,
19 other bidders had appeared and the offer was
20 substantially increased.
21 The District Court opinion explains that
22 any Piper shareholder with a telephone or a newspaper in
23 hand could compare the current market for Piper's shares
24 with Chris-Craft's offer. Thus, if the Piper statement
25 of the inadequacy of the offer were intended to refer to
<PAGE>
17
1 price only, it would be more factual than misleading.
2 Well, the Court of Appeals looked at this
3 situation and they respectfully disagreed. They held
4 that any reasonable investor -- in fact, the quote is a
5 reasonable shareholder reading the letter most likely
6 would assume that the reference was to price. They held
7 that that was misleading. In fact, they held it was
8 particularly bad because the pronouncement that the offer
9 was inadequate had come from management. And the Court
10 stated by reason of the special relationship between
11 them, shareholders are likely to rely heavily on the
12 representations of corporate insiders when the
13 shareholders find themselves in the middle of a battle
14 for corporate control. Corporate insiders, therefore,
15 have a special responsibility to be meticulous and precise
16 in their representations to shareholders.
17 I would submit that this case is a lot like
18 that, your Honor. In fact, I would submit that it is
19 worse, for a couple of reasons.
20 The first is that we not only have the
21 credibility of Quickturn's management itself behind the
22 announcement that the offer is inadequate, we also have
23 the additional credibility that shareholders may assign
24 to a pronouncement from an investment banker.
25 Shareholders may not believe management. They may think
18
1 they may want to save their jobs. But they also see,
2 Gee, they paid three-quarters of a million dollars to
3 these experts. If they conclude it's inadequate, maybe
4 I can believe that. So I would say that's twice as bad
5 as Chris-Craft.
6 The second reason that it's worse is that
7 it's not one letter at the outset of the contest. In
8 this case, Agent Cue's opinion has been a centerpiece
9 of Quickturn's opposition to this bid. They describe it
10 in the 14D9. They describe it in the proxy statement.
11 They've sent it to the shareholders, not just once, but
12 twice. So I would say that's over twice as bad.
13 Now, you put all of that together, I think
14 you plainly have a material misrepresentation. You
15 cannot understand the fact that H&Q's opinion says
16 Mentor's offer is inadequate unless you know where the
17 bars are and you know where the red X's are.
18 The shareholders are entitled to see this
19 chart and to have it explained to them. There is a real
20 risk that Mentor will lose this company because
21 shareholders are assuming that the bars are above the
22 red line for Mentor's offer and there aren't any red X's
23 on this analysis.
24 THE COURT: Why don't you wait? Let's stop
25 now and give Mr. Berger a couple minutes.
19
1 MR. RAPPEL: Sure. Thank you, your Honor.
2 Listening to Mr. Rappel's discussion of H&Q's
<PAGE>
3 work and the analyses that are contained in there, it
4 contains so many errors, it's hard to know precisely
5 where to begin.
6 Mr. Rappel's argument is surely wrong on the
7 facts. The undisputed testimony and the complete analysis
8 of H&Q shows -- makes clear that H&Q found the offer
9 inadequate for a number of different reasons.
10 They're also wrong in the law. Mr. Rappel
11 says that it's the rare case in which the bars on the
12 chart or additional disclosure is required. And that's
13 correct. We have not found a case, nor have plaintiffs
14 cited any cases, where this type of disclosure that
15 they're seeking has been required. Indeed, the case --
16 the principal case that they rely on, the Berman versus
17 Gerber Production, does -- as Mr. Rappel says, does not
18 require additional disclosure.
19 I want to talk a little bit about the H&Q
20 analyses and what they mean, because that really is the
21 heart of their argument.
22 When I first got their papers, again, I could
23 not figure out how they continued to repeat this
24 conclusion that H&Q analyses say that the offer is fair
25 or adequate. It's not supported by the testimony. The
20
1 testimony is a hundred percent to the contrary. Mr.
2 Cleveland, in his deposition, says, again, that the offer
3 is inadequate. And he was actually asked specifically
4 what he meant by the offer is inadequate and what did
5 H&Q do to term that the offer was inadequate.
6 And he says -- and I'm reading from Pages 24
7 and 25 of the Cleveland transcript, and it says, quote,
8 We looked at the company's circumstances, its assets, its
9 intellectual property, its customer base, its recognition
10 in the industry, its projections. We talked to management
11 about prospects and then applied all of those inputs to a
12 judgment about the price that had been offered by Mentor
13 and determined that it was not adequate.
14 So it's clear from Mr. Cleveland's testimony
15 it's a wide range of factors that lead to an inadequacy
16 opinion.
17 It's equally true that the chart that Mr.
18 Rappel puts forward does not support his claims. Again,
19 the H&Q analyses that they cite, they certainly do not
20 stand for the proposition that Mentor's offer is fair
21 and adequate. At best, and it's just at best, according
22 to the figures summarized in their reply brief in the
23 chart that they handed your Honor, this graph shows that
24 Mentor's offer is at the low end of some of the summary
25 applied valuations for Quickturn. Merely because it's at
21
1 the low end of some of the summary valuations does not
2 mean anything.
3 And just a couple of examples of that. These
4 valuations are typical of most investment bankers: Very
5 wide. Their comparables M&A transaction spans a range,
<PAGE>
6 as your Honor can see, from a low end to just a few
7 dollars to a high end that's considerably higher.
8 The mere fact -- and this is one of the --
9 one of the charts, one of the blocks that Mr. Rappel and
10 his colleagues say is most important, these comparable
11 M&A transactions. It clearly does not mean that any
12 offer that's between these two valuations is fair and
13 adequate. And merely because their offer falls within
14 the low end of this valuation does not at all mean that
15 the offer -- that Mentor's offer is adequate.
16 They also did not get their view that H&Q
17 analyses show Mentor's offer to be fair and accurate from
18 the testimony of Quickturn's Directors. Again, they
19 deposed six of Quickturn's eight Directors. In each of
20 these depositions, each of Quickturn's Directors said,
21 based on their understanding and based on their careful
22 and detailed and lengthy analysis of Mentor's offer, it
23 was inadequate, for a wide range of reasons. And they
24 gave them in the depositions.
25 So then we're left back with the original
22
1 question: Where did Mentor get the view that the H&Q
2 analyses shows that the offer is adequate?
3 And, as you read through their briefs, it's
4 clear they got it from one group. They got it from their
5 attorneys. Mentor's attorneys have, in page and page
6 after page of their brief, both in their opening and
7 their reply, they argued their offer is adequate. There's
8 no citation to anything. There's no reference to any
9 analyses. It wasn't until this reply brief finally
10 regarding expert opinion -- we got an expert opinion from
11 a fellow by the name of Gil Matthews, which as your Honor
12 knows, we moved to strike, because it was not shown to us
13 at the time of their opening brief, which is when they
14 should have served it. And they didn't show it to us at
15 that time for a good reason, your Honor. Mr. Matthews'
16 opinion is fundamentally flawed. It contains gross
17 errors and if we had the opportunity to respond to it in
18 real time, if we had the opportunity to take Mr. Matthews'
19 deposition, it would be clear that his opinions, they may
20 be worth the paper they're written on or maybe not. It's
21 a close call.
22 But going back to the beginning, Mentor's
23 attorneys' views about Mentor's offer are not sufficient
24 to overcome the undisputed record that's developed
25 through H&Q's deposition, that's developed through the
23
1 documents, that's developed through the testimony of
2 all of Quickturn's Directors that Mentor's offer is
3 inadequate.
4 If you start from that premise, the argument
5 on the disclosure issue becomes easy. I'm not going to
6 go through the long disclosure. This Court knows it far
7 better than I. But, again, Mr. Rappel said at the very
8 beginning -- and Mentor concedes in its brief -- that,
<PAGE>
9 as a general manner, investment bankers' analyses do not
10 need to be disclosed where those analyses support the
11 opinion. That's at Page 13 of their reply brief.
12 Your Honor, as described above, H&Q
13 analyses -- and there are two of them and they are very
14 lengthy -- clearly, unequivocally, support the
15 determination that Mentor's offer is inadequate and
16 that's the end of the story. No disclosure is required,
17 according to Mr. Rappel.
18 Yet even if there was some discrepancy
19 between H&Q's opinion and its analyses, and we would say
20 there is none, there is no disclosure required, because
21 what really is at issue here is H&Q's opinion, not the
22 analyses that underlie it.
23 The Quickturn Board had the right under
24 Delaware law to rely on the opinion that was done by H&Q
25 and assume it was done correctly. The evidence
24
1 demonstrates that this is exactly what the Board did.
2 The Board received H&Q's analyses. It received its
3 opinion and then made its own determinations about the --
4 whether Mentor's offer was adequate or not.
5 This is not a case which is a professional
6 malpractice action against H&Q. The law is clear that
7 the Quickturn Board is allowed to rely on the opinion, it
8 did so, and then it disclosed fully and completely that
9 opinion. There's no question about that.
10 I want to respond very briefly to the point
11 about the draft disclosure issue that Mr. Rappel raised.
12 That document was done, as best as we can figure out, by
13 H&Q. Interestingly enough, when H&Q was deposed and
14 those documents were produced, there was never a question
15 to the H&Q witness about those documents. There's
16 absolutely no testimony that says that those documents
17 were ever provided to Quickturn. Indeed, there's no
18 testimony that those documents were ever provided to
19 H&Q's attorneys at Skadden Arps.
20 In fact, it's our understanding that that
21 information was not provided to Skadden Arps, nor was it
22 provided to Quickturn. It was just something done by
23 H&Q on its own as they've done several other analyses
24 in connection with their work that they did not share
25 with Quickturn. That's standard practice, and there's
25
1 no evidence to say that information was provided to
2 Quickturn or even H&Q's attorneys.
3 A couple of last points, your Honor. The
4 Berman case which, again, as Mr. Rappel cites, is the
5 key case that they intend to rely on, again, that case
6 states that 14-E is violated if the Board says an
7 offer is inadequate, but has an opinion that the offer
8 is fair and adequate. That's not this case.
9 The Berman case goes on to say that if the
10 investment banker -- if you have a formal opinion that --
11 if you say is offer is inadequate and you do not have
<PAGE>
12 any formal opinion whatsoever, you don't have to disclose
13 that. And if you -- if you say the offer is inadequate
14 and you have a formal opinion that the offer is
15 inadequate, you have to disclose that. That's exactly
16 what we've done. There's nothing in the Berman case
17 that leads to the conclusion that the underlying
18 analyses have to be disclosed.
19 One other key point that's important here.
20 Again, the crux of their argument is that -- and it's
21 all over their reply brief -- is that the only thing
22 the Board did is rely upon H&Q's opinion. Again,
23 there's no factual basis for that. The facts are all
24 to the contrary. As set forth in Quickturn's 14D9, and
25 it's at Pages 4 and 5 of the 14D9 that Quickturn filed
26
1 on or about August 24th. Quickturn lists -- I think I
2 counted 16 different reasons why it found the offer
3 inadequate. Some of them relate to H&Q's analysis,
4 that's for sure. Others of them do not. Others of
5 them relate to Quickturn's intellectual property
6 position, its patents, and a whole host of other
7 reasons.
8 What Quickturn says at the end of that,
9 however, is that, in view of the wide variety -- and
10 I'm reading from Page 5 of the 14D9 -- in view of the
11 wide variety of factors considered in connection with
12 its evaluation of the offer, the Board did not find it
13 practicable to, and did not quantify or otherwise
14 attempt to assign relative weights to the specific
15 factors considered in reaching its respective
16 determinations. And, your Honor, again, that disclosure
17 is fully consistent with the deposition testimony of the
18 Quickturn Directors. Mentor has deposed all but two of
19 the Quickturn Directors, six of eight. And under the
20 cross-examination of Mentor's attorneys, all of these
21 Directors testified that there were a whole host of
22 reasons why they felt the offer was inadequate. H&Q's
23 opinion was one of them, but just one of them. Not
24 greater, equal or less than any others.
25 So to summarize, Mr. Rappel is wrong on the
27
1 facts in terms of what H&Q's analyses show. He's wrong
2 on the facts in terms that H&Q's analyses support
3 clearly and unequivocally the fact that the offer is
4 inadequate and he's wrong on the law. There's no
5 disclosure requirement for these analyses, even under
6 the law that he cites.
7 For that reason, no additional disclosure
8 should be required.
9 There are other reasons. There are two
10 other reasons -- if your Honor wants to talk about them
11 now, I'm happy to do so -- why no further disclosure is
12 appropriate here.
13 THE COURT: Okay. That's fine. No. You
14 may continue.
<PAGE>
15 MR. BERGER: The first is the balance of the
16 hardships. It is clear that it would cause great harm
17 for Quickturn if this information is disclosed.
18 Again, as we started out this argument, this
19 is confidential information. Quickturn is, as a result
20 of Mentor's efforts, both in the proxy contest and
21 potentially in play, to show the world what Quickturn's
22 investment banker found. Even if it's summary of
23 implied valuations, even for just that limited portion,
24 is both misleading and could cause Quickturn substantial
25 harm, because what it means is that anybody could come
28
1 in, as Mentor has, and say, Oh, we're in the middle of
2 some of these ranges, so our offer is fair.
3 First of all, that's preposterous but, second
4 of all, that's what happens, and that's clearly why we're
5 here today.
6 Another problem with the additional
7 disclosure here is the fact that these valuations are
8 all based upon Quickturn's projections.
9 Now, Quickturn does not publicly disclose
10 its internal projections. It does not give them to
11 analysts, for good reason. One, it's not required to.
12 Two, it's the target of lawsuits if it does. It's like
13 with any technology company, there's a host of
14 shareholder class actions waiting to hit if you put out
15 your projections and then you don't hit them.
16 So there's good sound corporate reasons as to
17 why you don't put out your projections. Sometimes
18 companies do put out limited projections in connection
19 with their securities filings, quarterly filings, but
20 those are protected by the private securities litigation.
21 You can put out the disclaimer language. In a tender
22 offer context, that disclaimer doesn't apply. In the
23 proxy offer context, that disclaimer doesn't apply.
24 If Quickturn was forced to put this stuff out,
25 if it didn't hit these projections, it would be liable in
29
1 any type of shareholder lawsuit. So there's tremendous
2 harm and risk of putting this information out in the
3 marketplace. It's not required.
4 And, finally, it's worth noting that Mentor
5 never even addresses the irreparable injury standpoint
6 necessary for an injunction. They basically pass right
7 over it, and there's just no basis.
8 We would be injured. The balance of
9 hardships tips in favor of Quickturn and Mentor has not
10 satisfied the basic element for an injunction, irreparable
11 injury. For those reasons, we don't think further
12 disclosure is required.
13 THE COURT: Why don't we find more cases
14 where courts have required targets to disclose the
15 underlying analysis of the investment bankers to give
16 the opinions?
17 MR. RAPPEL: Your Honor, I think the reason
<PAGE>
18 you don't is that it's extremely unfair for an investment
19 banker to issue an opinion in fairness or adequacy which
20 is so directly at odds with their underlying analysis.
21 Mr. Berger said that -- almost a direct
22 quote. At best, we're at the low end of some of these
23 ranges.
24 Well, you've got the picture in front of you.
25 The picture speaks a thousand words. We're going right
30
1 through the middle of those analyses. We're above the
2 premium analysis.
3 I think it is the unprecedented thing about
4 this case and, in fact, I think the reason the Court can
5 feel comfortable if it decides to issue an injunction is
6 that H&Q's opinion of inadequacy is sui generis. It is
7 remarkable that an investment banker could conclude that
8 this offer is inadequate, having crunched the numbers
9 and found out that even the best bars that H&Q can come
10 up with, the analyses which are most favorable to the
11 client, have the tender offer line just going right
12 through the bar or, in some cases, for example,
13 comparable public companies near the top, historical
14 trading range right through the middle premium or above
15 that.
16 So if the Court says where, for example, if
17 you want to draw a line, a majority of the investment
18 bankers' analyses do not support the investment bankers'
19 opinion that the offer is inadequate. And there is
20 some external -- something besides the bars that the
21 investment banker is considering to reach its
22 inadequacy opinion, then that needs to be disclosed to
23 shareholders, because that's an unusual situation.
24 THE COURT: Will I find any decisions where
25 courts require disclosure of the underlying analysis
31
1 beyond the conclusion, beyond a conclusion it's
2 inadequate?
3 MR. RAPPEL: Your Honor --
4 THE COURT: I haven't seen -- I just have
5 not seen cases where people have pushed for the
6 underlying analysis beyond the --
7 MR. RAPPEL: I think if your Honor broadens
8 the scope, clearly, Gerber Products, the Court was
9 prepared to order disclosure but for the fact that the
10 target had never said that the offer was inadequate.
11 In the Blasius case that Quickturn cited in
12 its opposition, pre-opposition brief, the target had
13 voluntarily disclosed the analysis.
14 In fact, one would think that an aggressive
15 target in most cases would love to disclose this
16 analysis, because it would support the conclusion that
17 the offer is inadequate.
18 This is the rare case, because the analysis
19 doesn't support the view that it's inadequate. I guess
20 I would offer one other opinion to the Court. I don't
<PAGE>
21 think we highlighted it sufficiently in our brief, but
22 it's the Humana decision. There, the Court said that
23 the offer was inadequate and there was a real question
24 whether the consideration that was offered by the bidder,
25 which was debentures, was worth, I think, $25 or
32
1 something materially less than $25.
2 And in that case, Humana had received an
3 investment banker's opinion that a proper valuation of
4 this debenture placed it above the current stock price
5 of the target company. And the Court in that case said
6 that the failure to disclose that analysis was materially
7 misleading and it issued an injunction, requiring
8 disclosure of the fact that the bidder's offer properly
9 valued, even though it was an odd piece of paper, was,
10 in fact, above the offer price.
11 THE COURT: All right. Do you have any
12 additional comments?
13 MR. BERGER: Your Honor, just one. Again,
14 the entire premise of their argument is that this one-
15 page document supports the notion that Mentor's offer
16 is fair and adequate. There's no testimony to support
17 that.
18 Mr. Cleveland, the author -- the lead banker
19 for H&Q, testified exactly to the contrary. All they've
20 got now to support this is their lawyers' arguments.
21 Lawyers and bankers are a different breed, I would submit.
22 Also, the last-minute affidavit of Mr. Matthews.
23 As you know, your Honor, we filed a motion to
24 strike that affidavit. It seems to us fundamentally
25 unfair that they should get to put that in at the last
33
1 minute with their reply papers. If you take away Mr.
2 Matthews' affidavit, they have no factual basis, no
3 factual predicate to support the notion that this piece
4 of paper says the offer is adequate. It does not. Mr.
5 Cleveland testified about that. So did Quickturn's Board
6 of Directors. I don't understand the basis for their
7 argument.
8 That's it, your Honor. Thank you.
9 THE COURT: Do you have anything else?
10 MR. RAPPEL: Your Honor, I would only make one
11 point and that is that Mr. Berger does not deny -- Mr.
12 Berger doesn't deny -- nor do I think he can -- that
13 Quickturn has made this inadequacy opinion, naked
14 declaration of inadequacy, the centerpiece of
15 Quickturn's negotiations with shareholders, nor do I hear
16 him denying that your typical shareholder, particularly
17 an institution, institutional or other sophisticated
18 investors own something like 68 percent of Quickturn's
19 stock at last count. They're going to know what the bars
20 are and they are going to know what inadequacy means to
21 them. If you tell them this offer is inadequate, they're
22 going to make some assumptions about where the lines are
23 and where the bars are and that the bar is above the line.
<PAGE>
24 That is just not the case here. That's what makes this
25 the rare case. That's what requires disclosure.
34
1 THE COURT: Actually, that brings up again --
2 I'm back to the question about the protective order and
3 the extent to which information disclosed in litigation
4 is confidential or not confidential.
5 Your affidavit that you filed is under seal
6 or is it not under seal on valuation?
7 MR. RAPPEL: It is under seal, your Honor.
8 THE COURT: That's because it's based on
9 information you received from the other side?
10 MR. RAPPEL: Yes, your Honor. We're doing
11 our best to abide by the protective order.
12 MR. BERGER: Your Honor, one other point here
13 that's relevant.
14 Mentor would not give us, withheld on the
15 basis of a privilege, their similar information. So
16 although now they're pushing for public disclosure of our
17 investment bankers' analyses, it's worth noting that
18 Mentor has an investment banker, too, Solomon Smith
19 Barney, who presumably, if what counsel says is right, is
20 the case, they prepared their same valuation analyses.
21 They have not even given that to us in litigation, never
22 mind seek public disclosure of that. I don't see any
23 public disclosures, Solomon Smith Barney's valuations
24 for Quickturn, and I didn't even see them in connection
25 with the litigation.
35
1 There are two other points that are in their
2 motion. I don't know if your Honor wants to hear
3 argument on those. They didn't mention them much in
4 their reply papers. It concerns the additional
5 disclosures of the repricing of stock options for
6 Quickturn as well as for the analyst's report issued by
7 Hambrecht & Quist in July.
8 THE COURT: I'm happy to hear about them, if
9 you want to pursue them. If you don't, that's okay.
10 MR. RAPPEL: Your Honor, I'd be happy to make
11 a presentation on those. I think I would be derelict if
12 I didn't.
13 THE COURT: Okay.
14 MR. RAPPEL: I will try and be more brief.
15 What we're talking about here is, first of all, an
16 analyst's report that was prepared by the same company
17 that prepared that chart. That is an H&Q analysis or an
18 H&Q analyst prepared a report on July 15 of this year
19 which said that Quickturn stock was quote fully valued,
20 close quote, at 7.50 a share. At about the same time,
21 the Quickturn Board repriced a slew of options. They
22 repriced those at $7.43. And, as a matter of Delaware
23 law, that's not just a reference to the market, that's
24 a determination that the essential value of the company
25 is reflected by that $7.43 price.
<PAGE>
36
1 Quickturn's basic response to this is, Who
2 cares? We've already disclosed it.
3 I would submit that there is no reason to
4 suspect that your average shareholder received the
5 Hambrecht & Quist report. I think it's also fair for
6 the Court to conclude that it's unlikely that the
7 average shareholders waded through the 10Q that they
8 filed to get to one of the financial footnotes to read
9 this in little tiny print that they had repriced their
10 options.
11 The shareholders didn't have somebody, like
12 Hambrecht & Quist, to remind them that Hambrecht & Quist
13 had repriced its options. In fact, that's exactly what
14 Hambrecht & Quist did when they prepared their August 17
15 book for the Board. They explicitly referred to the fact
16 that Hambrecht & Quist had issued this opinion saying the
17 company was fully valued at $7.50 a share.
18 Now, the only -- sorry, your Honor. I lost
19 my place for a second.
20 All Quickturn had to do to bring this
21 attention to the attention of shareholders was put a cross-
22 reference in their 14D9 or their proxy statement to the
23 10Q in that footnote or to the Hambrecht & Quist opinion.
24 And, in fact, the Shell opinion, which they cite, held
25 that the disclosure was adequate because shell in that
37
1 case did precisely that. That's at Page 64 of the slip
2 opinion.
3 And you wouldn't know that from reading
4 their characterization of the case in their brief, but
5 that's okay. The key decision on this point is the Texas
6 International case, Bertoglio versus Texas International.
7 There, the Court -- I'm sorry -- there, the company had
8 bad earnings during the first quarter. And they put those
9 earnings in a 10Q and filed it with the SEC, and they also
10 put out a press release. They didn't, however, include it
11 in their supplemental proxy materials for a battle that
12 was going on at the time.
13 And the Court noted that and said that,
14 quote, the supplemental proxy material was sent to Texas
15 International shareholders on May 19. It made no
16 mention of the first-quarter loss, nor did it refer to
17 the form 10Q or the May 15 press release.
18 From that, the Court confronted exactly the
19 argument that Quickturn makes here and concluded, unlike
20 the Total Mix cases relied upon by TI, the press release
21 informed 10Q containing the first-quarter results were
22 not mailed directly to each TI shareholder, nor was this
23 the type of information of which those shareholders were
24 presumably aware. Rather, this was recent news, unknown
25 even to TI management before May 15, disseminated in a
38
1 fashion by TI, that by no means gave fair notice to
2 each shareholder. Accordingly, it is held that TI failed
<PAGE>
3 to disclose the fact of the first-quarter loss in this
4 proxy contest.
5 The real risk here is that a material
6 percentage of the shareholders, and perhaps a lot of
7 institutions, just don't know about this H&Q analysis
8 or the repricing of the options.
9 Now, the only other question before the Court
10 is whether those numbers are material. And here,
11 Quickturn argues that the 7.50 and 7.43 figures are
12 simply, in essence, spot quotes on the market. Well,
13 that's just plain wrong with respect to the Hambrecht &
14 Quist report. They said that this company is fully
15 valued at 7.50 a share. That's an assessment of the
16 investment value by the company. And it's also true
17 the option repricing.
18 As a matter of Delaware law, the Quickturn
19 Board would have committed waste if it simply looked to
20 the market and said, Well, gee, the market is down a
21 little bit, let's reprice some options at 7.43. To
22 avoid waste, the Board was required to conclude that
23 that price reflected a fair assessment of the value of
24 the stock on the day the options were repriced. And if
25 7.50 or 7.43 is the real value, even without a control
39
1 premium, then it strongly suggests that Mentor Graphics'
2 offer is fair, because, remember, the fourth bar on the
3 chart is the comparable premium bar. That bar is below
4 Mentor Graphics' offer.
5 Well, if you recalculate that bar based on a
6 7.50 price instead of an $8 price, which was the basis
7 for this bar, the bar is going to be even farther below
8 the Mentor Graphics' line.
9 So I would submit that the shareholders also
10 need to know about the Hambrecht & Quist report and the
11 option repricing, and that the Court ought to order that
12 as well.
13 MR. BERGER: Your Honor, very briefly, because
14 it is late in the day, again, there are so many flaws in
15 the argument, it's hard to know where to begin.
16 To start with, both the option repricing and
17 the analyst's report were fully disclosed. There's no
18 question about that. They were publicly disclosed. The
19 analyst's report came out a few weeks before the offer.
20 It's done by an H&Q research analyst, a lone person who
21 follows the industry. I'm sure your Honor is familiar
22 with analysts' reports. They come out all the time. It
23 is a public document. Anybody these days who has a
24 computer can pick up the analyst's report very, very
25 easily.
40
1 The same is true with disclosure concerning
2 the option repricing. On the one hand, again, Mr. Rappel
3 says that we've got sophisticated institutional investors
4 who own a fair amount of Quickturn. On the other hand, he
5 says they're probably not aware of what's going on.
<PAGE>
6 The option repricing was in Quickturn's 10Q.
7 It was filed the day after Mentor mentioned its tender
8 offer. It's disseminated to shareholders through, again,
9 easily picked up through the Internet.
10 We're arguing your Honor, could anyone on a
11 computer easily go into Edgar and pick it up? And
12 that's what shareholders do. The issue of option
13 repricing in particular is always a very important issue
14 for institutions. They are well aware of it. Indeed,
15 in this instance, the Quickturn disclosure on the option
16 repricing made clear we're not going to reprice options,
17 again absent shareholder approval, precisely because the
18 institutions care so much about this issue.
19 And, again, we look for factual arguments as
20 to how either the analyst's report or the option
21 repricing value of the company are some indication of
22 the value of Quickturn as a whole in a sale. There is
23 none. It's completely -- it's totally again lawyers'
24 rhetoric. It's completely apart from the undisputed
25 record.
41
1 That record, whether it's testimony of Mr.
2 Cleveland, the H&Q representative, who talked at length
3 about the H&Q report, made clear why his -- his differ.
4 Made clear there's an ethical wall between the analyst's
5 team on the one hand and the banking team on the other.
6 Made clear that the banking team has access to non-public
7 material financial information that the analyst obviously
8 does not have and explained in very clear and lucid terms
9 why there's a difference in valuations, to the extent
10 there is a difference. Analysts look at very short-term
11 stock price. An investment banker valuing their company
12 as a whole looks at very different factors. The same
13 with option repricing. The notion that option repricing
14 represents anything more than a repricing to the value of
15 the stock on a particular day is ludicrous.
16 I hear Mr. Rappel saying that there is some
17 claim out there for corporate waste, if it doesn't do
18 something. Again, I don't see any stockholder suing us
19 for corporate waste. I don't see Mr. Rappel -- this is
20 not a corporate waste case. This is a disclosure claim.
21 And the disclosure claim here is that we didn't disclose
22 the repricing of options.
23 But that claim is just false because we did,
24 in fact -- and it's a matter of public record --
25 disclose the day after the tender offer was made in our
42
1 filing with the SEC, which is distributed on the Internet,
2 the full facts about the option repricing.
3 I guess in summary, your Honor, when you look
4 at Mentor's arguments, all of Mentor's arguments are
5 based upon the factual speculation of its attorneys.
6 There is no factual record to support either the theory
7 that H&Q's analyses are improper or the argument that the
8 analyst's report somehow shows the value of the company,
<PAGE>
9 or that the repricing of options somehow shows something
10 other than the price of the stock on that day. There is
11 no factual support anywhere for any of those arguments,
12 and yet that's the linchpin of all of their claims for
13 additional disclosure.
14 Until they get some facts to support that and
15 the undisputed facts are clear. I mean, it's not even a
16 situation where we have differing facts, which I suggest
17 to your Honor is not a basis for an injunction, because
18 they have not shown a likelihood of success on the merits.
19 Here, the undisputed facts are all to the contrary. And
20 all they've got against it is the rhetoric of their
21 counsel. That is not a basis for an injunction. That's
22 it, your Honor.
23 THE COURT: Do you want to take a minute and
24 just tell me where we are in the dispute between the
25 parties? What's going on? Chancery Court --
43
1 MR. BERGER: Our motion for summary judgment
2 is to be heard tomorrow, your Honor. We're looking
3 forward to that hearing. There are a couple of other
4 motions to be heard on that and then we're back before
5 this Court again on the 21st in connection with our
6 motion for preliminary injunction. We've scheduled a
7 shareholder meeting for January 8th, 1999. We
8 pre-released our earnings and revenues for the quarter.
9 It is a public release. They beat market expectations.
10 And one of the largest and most sophisticated
11 institutional investors, the state of Wisconsin
12 Investment Board, has come out too and said they believe
13 the offer is inadequate and that they are not tendering
14 their shares to the offer. They are our second-largest
15 shareholder and I believe they're Mentor's second-
16 largest shareholder. They are not tendering.
17 THE COURT: Do you have any additional
18 information?
19 MR. RAPPEL: The largest shareholder is
20 urging Mentor Graphics to negotiate. I believe the State
21 of Wisconsin Investment Board does not know about these
22 charts. And my concern is that, if they don't see these
23 charts, we may not be able to change their mind. I
24 think there's an extremely high likelihood that if we
25 can show them these charts, if we can show them the H&Q
44
1 performed analyses that skewed these bars as best we
2 could and we still come up hitting right through the
3 middle of them, that they would think twice about
4 characterizing our offer as inadequate and think twice
5 about not tendering their shares.
6 THE COURT: I appreciate your presentation.
7 I will let you know. I will turn this off. I will see
8 people when I see you.
9 MR. BERGER: Thank you, your Honor.
10 (Hearing concluded at 5:15 p.m.)
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