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In re AOL, Inc. Repurchase Offer Litigation

United States District Court, S.D. New York

August 19, 2013

IN RE AOL, INC. REPURCHASE OFFER LITIGATION

Page 308

For Barbara Keeling, Lead Plaintiff: Daniel W. Krasner, Peter C. Harrar, Beth A. Landes, Wolf Haldenstein Adler Freeman & Herz LLP, New York, NY.

For AOL, Inc., Tim Armstrong, and Arthur T. Minson, Defendants: Jonathan M. Moses, Adam M. Gogolak, Michael J. McDuffie, Wachtell, Lipton, Rosen & Katz, New York, NY.

OPINION

Page 309

OPINION & ORDER

DENISE COTE, United States District Judge.

This case concerns the sale on April 9, 2012, by defendant AOL, Inc. (" AOL" ) of a portfolio of patents to Microsoft Corporation for $1.056 billion in cash. At its heart, the Amended Complaint alleges that AOL, along with defendants Tim Armstrong, AOL's CEO, and Arthur T. Minson, its CFO, knew the details of the sale long before it was publicly announced, allowing the company to carry out a stock repurchase program under which it bought approximately 14.8 million shares of its own stock. When the billion dollar sale was announced, AOL's stock went up 43% in a single day. The plaintiff alleges that she and others who sold AOL stock during a class period running from August 11, 2011 to April 9, 2012, suffered a significant loss in that they sold at a price that was artificially deflated by defendants' failure to disclose information about the patent sale and misleading statements that implied that no such sale was imminent.

Before the Court is defendants' motion to dismiss. For the reasons stated below, the motion to dismiss is granted.

BACKGROUND

The following facts are as alleged in plaintiff's Second Amended Securities Class Action Complaint (the " Complaint" ). AOL, a pioneering internet services provider, was founded in 1985, became a publicly traded company in 1992, and merged with Time Warner in 2001. In 2009, Time Warner spun off AOL, which again became an independent publicly traded company. During the spinoff, Armstrong and others at AOL negotiated with Time Warner to allow AOL to retain a valuable portfolio of patents covering a wide range of internet-based activities, many of them dating back to AOL's early years as an internet pioneer. After the spinoff, AOL carried this portfolio of patents on its books at $4 million.

In 2011, the market for internet technology patents like AOL's began heating up. On June 30, 2011, after conducting an auction, Nortel sold its patent portfolio to a consortium of other technology companies for $4.5 billion. An article in Bloomberg noted the broader implications, observing that the deal had " woken up the world to what IP means and how companies think about ways of monetizing intellectual property." Around the same time, Google acquired Motorola Mobility for $12.5 billion, a purchase that the Complaint says was driven in substantial part by Google's desire to access Motorola's " trove" of patents. This trend of high valuations of technology patents was well-known and widely reported. The Complaint quotes an April 9, 2012 New York Times article that later referred to the period's " patent frenzy" as an " arms race among the industry's giants."

Meanwhile, in the summer of 2011, AOL saw its stock price slump after announcing " dismal" second-quarter earnings. Believing AOL was undervalued, on August 11, 2011, management and the board announced a stock repurchase program, under which AOL was authorized to purchase up to $250 million worth of its own stock. The Complaint alleges that by the time the stock repurchase program was announced, defendants " had already committed to a plan to sell AOL's valuable Patent Portfolio" and that " Microsoft was the . . . inevitable purchaser."

In the fall of 2011, AOL's board authorized the sale of the patents, and Armstrong contacted Steve Ballmer, the CEO

Page 310

of Microsoft, " to spur Microsoft's long-held interest in acquiring the Patent Portfolio and to close the deal." In various public statements made during the fall, however, including a third quarter earnings call and various SEC filings, AOL did not disclose any impending patent sale, mentioning only in its 10-Qs that it would " consider divesting of additional assets or product lines." Meanwhile, the company continued to tout its repurchase program, arguing publicly that its stock was undervalued.

AOL attracted the attention of an activist investor, Starboard Value LP (" Starboard" ), which owned 5.2% of the outstanding stock. In December 2011, Starboard began sending letters to AOL's board indicating that the company's stock was underpriced and making suggestions about steps that could be taken to increase its value. On February 24, 2012, Starboard sent a letter to AOL's board highlighting the value of the company's " foundational" patent portfolio and suggesting that steps be taken to monetize it. Starboard speculated that the portfolio could fetch " in excess of $1 billion of licensing income if appropriately harvested and monetized." This letter, ...


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