Legal Technology Journal

Interwoven’s executive officers and directors are in line for sizeable option payouts as well as windfall sums in the event that they are treated unfairly in the wake of the merger with Autonomy.

The $775m (£558m) merger was announced last Wednesday (21 January), under which US-headquartered content management group Interwoven agreed to be acquired by London Stock Exchange listed Autonomy Corporation for $16.20 (£11.31) in cash per share.

US law firm Morgan Lewis & Bockius represented Autonomy with Ashurst advising in the UK, and Interwoven was advised by Fenwick & West in the US and Allen & Overy in the UK.

Stock Options and Penalty Payments

In order to execute the merger agreement, each member of Interwoven’s nine-strong board of directors agreed to vote all stock – including any options – in favour of the merger. The board held a total of 104,255 shares of common stock, 432,081 restricted stock units and options to purchase 1,593,500 shares of common stock.

All vested stock options will be cashed out – Interwoven stock options have a normal four-year vesting schedule – and unvested options will be rolled over and become Autonomy options. In its annual report in 2007, Interwoven revealed it had spent $4.7m (£3.3m) in expenses incurred in connection with the company’s voluntary review of historical stock option grant procedures.

Under agreements reached well before the merger, all of the directors of the company will receive significant windfall payments in the event that they are unfairly treated post-acquisition.

Chief executive Joseph Cowan is in line for a severance pay out at current rates of $6,384,380 (£4,462,004) in the event that he is demoted and resigns or is unfairly sacked within 12 months of the merger. The payment includes a severance payment equal to 150% of his then-current annual base salary (currently $712,500/£497,900), 150% of his annual target incentive compensation ($637,500/£445,489), and accelerated equity to the value of $5,016,938 (£3,505,304). He will also be entitled to medical care for 18 months at a value of $17,442 (£12,186).

Company president Scipio Carnecchia and chief financial officer John Calonico, would be in line for a total payout of $934,661 (£653,060)  and $742,380 (£518,601) respectively. For all payouts see the box below.

Under the terms of the agreement, if the merger is terminated because Interwoven accepts a higher offer, the company would be obliged to pay a termination fee of $25m (£17.5m). If the company’s stockholders vote against adoption of the merger, Interwoven will be required to pay a fee of $7m (£4.9) to Autonomy.

The transaction is expected to close by the second quarter of this year and is subject to shareholder approval by both companies.

Valuation of The Competition

In order to assess whether the merger should go ahead, both Barclays Capital and Credit Suisse provided an opinion, which looked at, among a number of factors, the enterprise value of Open Text, Informatica, Vignette, Epiq Systems and CommVault Systems and acquisitions by a number of competitors. To see the full analysis and timetable of the merger, click here: http://www.sec.gov/Archives/edgar/data/1042431/000095013409001306/f51266prprem14a.htm

Market Reaction

The acquisition is inevitably causing a stir in the legal sector, in particular among Interwoven’s Universal Search customers.
Autonomy has revealed that Universal Search will be embedded with Autonomy’s Intelligent Data Operating Layer (IDOL), and the improved version will be available to all customers on maintenance contracts as an upgrade, at no further cost.

Plans going forward also include the introduction of a broader set of eDiscovery capabilities including end to end eDiscovery early case assessment and EDD, review and product processing capacity.

However Practical Law Company director Niels Montanana said: “They might underestimate the speed at which people are ready to adopt new technology.

“For those in the process of implementing new technology today, the question is whether they will have the appetite to put on hold all they have done for the last 18 months.”

One senior executive of a competitor added: “In the content framework this is not bad for Autonomy but they will have to be careful – their roots are in search and it’s very easy when you’re paying a premium to get distracted and lose focus.”