Robyn Brooker, et al. v. Network Engines, Inc., et al. 12 ...securities.stanford.edu/.../201289_f01c_12CV11479.pdf · Robyn Brooker, et al. v. Network Engines, Inc., et al. 12-CV-11479-Shareholder

- 1 -

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

BOSTON DIVISION

ROBYN BROOKER, On Behalf Of Herself And All Others Similarly Situated,

Plaintiff,

v. NETWORK ENGINES, INC., GREGORY A. SHORTELL, JOHN A. BLAESER, FONTAINE K. RICHARDSON, GARY E. HAROIAN, CHARLES A. FOLEY, PATRICIA C. SUELTZ, UNICOM SYSTEMS, INC., and UNICOM SUB TWO, INC.,

Defendants.

) ) ) ) ) ) ) ) ) ) ) ) ) ) ) )

Civil Action No. 12-cv-11479 CLASS ACTION SHAREHOLDER CLASS ACTION COMPLAINT FOR BREACH OF FIDUCIARY DUTIES AND VIOLATIONS OF SECTIONS 14(a) AND 20(a) OF THE SECURITIES EXCHANGE ACT OF 1934 DEMAND FOR JURY TRIAL

Plaintiff Robyn Brooker, ("Plaintiff"), individually and on behalf of all others similarly

situated, brings this shareholder class action complaint for breach of fiduciary duties and

violations of sections 14(a) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange

Act") and U.S. Securities and Exchange Commission ("SEC") Rule 14a-9 promulgated

thereunder, and hereby alleges the following:

SUMMARY OF THE ACTION

1. This is a direct stockholder class action brought by Plaintiff on behalf of all the

holders of Network Engines, Inc. ("NEI" or the "Company") common stock (the "Class") against

the Company, NEI's Board of Directors (the "Board" or the "Individual Defendants"), and

UNICOM Systems, Inc. ("UNICOM"), and UNICOM Sub Two, Inc. ("Merger Sub").1 The

action is the result of Defendants' violations of state law and sections 14(a) and 20(a) of the

Exchange Act and SEC Rule 14a-9 promulgated thereunder. These violations arose in

connection with the proposed acquisition of NEI by UNICOM first announced on June 19, 2012 1 NEI, the Board, UNICOM, and Merger Sub are collectively referred to herein as "Defendants."

Case 1:12-cv-11479-RGS Document 1 Filed 08/09/12 Page 1 of 39

- 2 -

(the "Proposed Acquisition"). Following an inadequate sales process, defendants agreed to the

Proposed Acquisition pursuant to which NEI shareholders will be cashed out for only $1.45 per

share (the "Proposed Consideration"). As part of their efforts to seek shareholder approval of the

Proposed Acquisition, Defendants also filed a false and materially misleading Form 14A

Preliminary Proxy Statement (the "Proxy") with the SEC on July 27, 2012.

2. Founded in 1989, NEI is a leading provider of purpose-built, server-based

application platforms, appliances, and lifecycle support services for software developers and

original equipment manufacturers ("OEMs") worldwide. Headquartered in Massachusetts, the

Company provides its customers in the storage, security, and communications markets with

solution design, system integration, application management, global logistics, support, and

maintenance services. Given its recent financial successes and potential for growth, the Boston

Globe recently declared NEI the fourteenth best performing public company in the entire State of

Massachusetts.

3. Despite hearing recently that it would lose one of its largest customers, EMC

Corporation ("EMC"), the Company was poised to continue producing stellar financial results.

Indeed, defendant Gregory A. Shortell ("Shortell"), NEI's President and Chief Executive Officer

("CEO"), seemed undaunted by the EMC news stating that he was "confident that [NEI] can

overcome" the loss of EMC's business and "maintain [its] profitability" by continuing to

"aggressively pursue opportunities for growth and manage [its] expenses."

4. It is this aggressive pursuit of growth opportunities that has proved so successful

for the Company in the past. Over the past three fiscal years, NEI has seen its net revenues

increase, on average, by over 41% annually – from $148.7 million in 2009 to $272.5 million in

2011. Indeed, the most recently completed fiscal year ending on September 30, 2011, proved to

be "a year of great progress for NEI" as it achieved record setting revenue and profitability


- 3 -

figures. Notably, defendant Shortell attributed the success of NEI in 2011 to the fact that the

Company "diversified and strengthened [its] customer base, expanded internationally and set the

state for continued success."

5. The momentum gained by the Company during the 2011 fiscal year carried over

into fiscal year 2012 as well. On January 26, 2012, the Company released its "exceptional" first

quarter financial results, including revenues of $69.7 million and net income of $1.5 million –

both of which exceeded the original guidance issued by the Company. This success continued in

the second quarter of 2012 as well. Indeed, just two weeks after announcing the future loss of its

EMC business, the Company reported net revenues for the second quarter of $65.9 million (an

increase over the same quarter in fiscal year 2011) and net income of $1.2 million – again

exceeding its originally issued guidance.

6. There is no indication that this positive trend in the Company's financial

performance is likely to slow anytime soon. As noted by defendant Shortell in connection with

the release of the Company's second quarter of 2012 financial results, NEI is an extremely

resilient organization capable of meeting the demand of, and providing uninterrupted service to,

its customers even in light of such adverse scenarios such as the recent "industry-wide hard drive

and componentry shortage related to flooding in Thailand." It is the Company's established

position in the industry and ability to adapt during times of adversity that make NEI so valuable.

Unfortunately, however, the Individual Defendants are preventing Plaintiff and the Class from

realizing the benefits of the Company's future growth by inexplicably deciding to sell NEI now

in exchange for the grossly inadequate Proposed Consideration.

7. The inadequacy of the Proposed Consideration is most clearly evidenced by the

fact that NEI's stock traded above the $1.45 per share being offered in the Proposed Acquisition

as recently as April 12, 2012, and even closed at a higher price of $1.58 per share (nearly 9.0%


- 4 -

higher than the Proposed Consideration) on April 3, 2012. Accordingly, Defendants' claims that

the Proposed Consideration represents an 85.5% are misleading at best and are indicative of

UNICOM's attempt to capitalize on the temporary dip in NEI's stock price resulting from the

public's overreaction to the Company's loss of its EMC business.2

8. Equity analysts covering the Company have further emphasized the inadequacy of

the Proposed Consideration. When the Proposed Acquisition was announced on June 19, 2012,

at least one analyst had a price target of $2 per share for the Company (37.9% higher than the

Proposed Consideration) while no fewer than two others listed NEI stock as a "buy" or "strong

buy." Another analyst discussing the Proposed Acquisition noted how NEI's management

seemed to be "heading for the exits while not being too concerned for shareholders" given that

the Proposed Consideration only requires UNICOM to pay "65 cents for every dollar that [the

Company] has created in shareholder value" and the $1.45 being paid "[does not] cover [all of

NEI's current assets] let alone the relationships [the Company] has established or the money it

has poured into marketing."

9. Other media sources also critiqued the adequacy of the Proposed Consideration in

the aftermath of the Proposed Acquisition being announced, including one author who noted that

UNICOM "got themselves a sweet deal ... buying up the company for $1.45/share" especially

"given that the book value of the company" as of March 30, 2012 was around $2.23/share – or

53.8% above the Proposed Consideration. These sentiments, shared by many, further highlight

the failure of the Individual Defendants to obtain the maximum value available for the NEI

shareholders whose interest they are duty-bound to protect in connection with the sale of the

Company.

2 Notably, the press release announcing the loss of the EMC business was released on April 12, 2012 – the last day NEI's stock traded at or above the $1.45 offered in the Proposed Acquisition.


- 5 -

10. Even the analyses performed by NEI's financial advisor, Needham & Company,

LLC ("Needham"), in support of its opinion that the Proposed Acquisition was fair had to be

manipulated in order to make the inadequate Proposed Consideration appear fair to the

Company's shareholders. As detailed more fully below, Needham chose companies, and

transactions involving companies, that differed substantially from NEI for use in its Selected

Companies and Selected Transaction Analyses in order to calculate multiples which purported

the supposed fairness of the Proposed Consideration. Likewise, by choosing an artificially

inflated range of discount rates in its Discounted Cash Flow ("DCF") Analysis, Needham was

able to calculate implied per share values that created the false impression that the Proposed

Consideration was fair. The fact that Needham had to manipulate its analyses in order to render

its fairness opinion illustrates that the Proposed Consideration does not adequately compensate

NEI shareholders for their shares.

11. In addition to failing to maximize value, the Individual Defendants have further

breached their fiduciary duties by conducting a flawed and unfair sales process. From the outset,

the Board ceded control of the sales process to the Company's self-interested management team,

led by defendant Shortell and Douglas G. Bryant ("Bryant"), NEI's Chief Financial Officer

("CFO"), Treasurer, and Secretary. As stated in the Proxy, Shortell and Bryant steered the

process to favor their preferred bidder, UNICOM, in order to secure for themselves and the other

Individual Defendants and key management various personal benefits not shared by NEI's public

shareholders. Even the purportedly independent committee formed by the Board (the

"Transaction Committee"), ostensibly to assist in the sales process, ceded to the desires of

Shortell and Bryant by failing to actively involve itself in the negotiations and allowing Shortell

and Bryant to attend, and lead, the few meetings they actually had.


- 6 -

12. Ultimately, in merely rubber-stamping the Proposed Acquisition as negotiated by

defendant Shortell, the Board ensured three things: (i) that UNICOM would acquire the

Company for a woefully inadequate price; (ii) that the Individual Defendants and various other

Company insiders received various personal benefits; and (iii) that NEI's common shareholders

would be deprived of their ability to benefit from the Company's potential by having their shares

acquired for less than fair value. Such conduct flies in the face of the Board's duty to maximize

shareholder value where, as here, the Company was for sale and the Board had a duty to secure

the best price possible.

13. To make matters worse, the Board further breached its fiduciary duties by

agreeing to various onerous and preclusive deal protection devices in connection with the

Agreement and Plan of Merger the Company entered into on June 18, 2012 (the "Merger

Agreement"). These provisions, which further undermine shareholder value, include: (i) voting

agreements which guarantee that 6,341,294 NEI shares (or approximately 14.9% of the total

Company shares outstanding) are voted in favor of the Proposed Acquisition (the "Voting

Agreements"); (ii) a no-solicitation provision prohibiting the Company from properly shopping

itself; (iii) a termination fee payable by the Company to UNICOM of up to $2.5 million should,

among other things, an unsolicited superior offer materialize and be accepted. Collectively,

these provisions precluded any competing offers from emerging during the limited go-shop

period and make it extremely unlikely that any superior offers will come forward prior to the

shareholder vote on the Proposed Acquisition.

14. While the Board is intent on cashing out the Company's shareholders at an unfair

price, the Individual Defendants and members of the Company's senior management team will

receive immediate benefits from the closing of the Proposed Acquisition. For example, on June

18, 2012 – the same day the Merger Agreement was executed – defendant Shortell and Bryant


- 7 -

entered into "Transaction Bonus Agreements" with the Company providing them with cash

payouts of $950,000 and $475,000, respectively, upon consummation of the Proposed

Acquisition – a total payout amounting to over 2% of NEI's total net revenues for the most

recently reported fiscal quarter. Additionally, all the stock options and restricted stock units held

by the Individual Defendants and NEI management will vest immediately and be converted into

additional cash payouts.3 As there exists an imbalance and disparity of economic power between

the Individual Defendants and NEI's public shareholders, it is inherently unfair for them to, as is

the case here, execute and pursue any acquisition agreement pursuant to which they will reap

disproportionate benefits to the exclusion of maximizing value for the shareholders they are duty

bound to serve.

15. On July 27, 2012, in an attempt to secure shareholder approval for the unfair and

self-serving Proposed Acquisition, Defendants filed the materially false and misleading Proxy

with the SEC. The Proxy, which recommends that NEI shareholders vote in favor of the

Proposed Acquisition, omits and/or misrepresents material information about the unfair sales

process for the Company, the inadequate consideration offered in the Proposed Acquisition, and

the actual intrinsic value of the Company, in contravention of sections 14(a) and 20(a) of the

Exchange Act. Specifically, the Proxy fails to disclose material information regarding: (i) the

sales process that led to the Proposed Acquisition; (ii) the key inputs and assumptions underlying

the analyses supporting the fairness opinion provided by Needham; and (iii) the Company's

financial projections. This omitted and/or misrepresented information is material to the NEI

shareholders' impending decision whether to vote in favor of the Proposed Acquisition. As such,

3 Notably, the Proxy also states that, as is customary in going-private transactions such as this, "each of [NEI's] officers will continue as the officers of the surviving corporation." This likely includes defendant Shortell as well, thus giving him further incentive to ensure the Proposed Acquisition was agreed to and, ultimately, is consummated.


- 8 -

Defendants' violations of sections 14(a) and 20(a) of the Exchange Act threaten shareholders

with irreparable harm for which money damages are not an adequate remedy.

16. In pursuing the unlawful plan to sell the Company via an unfair process and at an

unfair price, each of the Defendants has violated applicable law by directly breaching and/or

aiding and abetting the other Defendants' breaches of their fiduciary duties of loyalty and due

care, as well as federal securities laws. This action seeks to enjoin the Individual Defendants

from further breaching their fiduciary duties in their pursuit of a sale of the Company and from

seeking shareholder approval of the Proposed Acquisition without fully disclosing all material

information concerning the Proposed Acquisition to NEI shareholders in the Proxy.

17. Specifically, Plaintiff seeks, inter alia: (i) injunctive relief preventing

consummation of the Proposed Acquisition, unless and until the Individual Defendants adopt and

implement a procedure or process to obtain a transaction that provides the best possible terms for

Company shareholders, and until Defendants disclose all material information concerning the

Proposed Acquisition to NEI shareholders prior to voting on any potential change-in-control

transaction; (ii) a directive to the Individual Defendants to exercise their fiduciary duties to

obtain a transaction which is in the best interests of NEI shareholders; and (iii) rescission of, to

the extent already implemented, the Merger Agreement or any of the terms thereof.

JURISDICTION AND VENUE

18. This Court has jurisdiction over all claims asserted herein pursuant to section 27

of the Exchange Act for violations of sections 14(a) and 20(a) of the Exchange Act and SEC

Rule 14a-9 promulgated thereunder. The Court has supplemental jurisdiction pursuant to 28

U.S.C. §1367(a) over all other claims that are so related to the claims in the action with such

original jurisdiction that they form part of the same case or controversy under Article III of the


- 9 -

United States Constitution. Additionally, this Court has jurisdiction over the subject matter of

this action pursuant to 28 U.S.C. §1331.

19. Venue is proper in this District because NEI has its principle place of business in

this District. Plaintiff's claims arose in this District, where most of the actionable conduct took

place, where most of the documents are electronically stored, where most of the evidence exists,

and where virtually all of the witnesses are located and available to testify at the jury trial

permitted on these claims in this Court. Moreover, each of the Individual Defendants, as

Company officers and/or directors, has extensive contacts within this District.

PARTIES

20. Plaintiff Robyn Brooker is, and at all relevant times has been, a shareholder of

NEI.

21. Defendant NEI is a Delaware corporation with principal executive offices located

at 25 Dan Road, Canton, Massachusetts. NEI is a leading provider of server-based application

platforms and lifecycle support services for software developers and OEMs worldwide, including

solution design, system integration, application management, global logistics, support, and

maintenance services. NEI was founded in 1989 and in addition to its headquarters in Canton,

Massachusetts, has facilities in Plano, Texas, and Galway, Ireland. Upon the consummation of

the Proposed Acquisition, NEI will become a private company, wholly owned by UNICOM.

22. Defendant Shortell is NEI's President, CEO, and a director and has been since

January 2006. In connection with the Proposed Acquisition, Shortell entered into a Transaction

Bonus Agreement with NEI, pursuant to which he will receive $950,000 in a lump sum cash

payment in NEI's first payroll on or following the consummation of the Proposed Acquisition.

In addition, Shortell also entered into a Voting Agreement with UNICOM, pursuant to which he

agreed to vote his shares in favor of the Proposed Acquisition and against any alternative


- 10 -

proposal. Upon completion of the Proposed Acquisition, Shortell will continue as an officer of

the go-forward company.

23. Defendant John A. Blaeser ("Blaeser") is NEI's Chairman of the Board and has

been since September 2011 and a director and has been since October 1999. Blaeser also was

NEI's Lead Director from March 2008 to September 2011. Blaeser was a member of NEI's

Transaction Committee, which was formed in February 2012 to assist the Board with the process

of soliciting and analyzing acquisition proposals from third parties. In connection with the

Proposed Acquisition, Blaeser entered into a Voting Agreement with UNICOM, pursuant to

which he agreed to vote his shares in favor of the Proposed Acquisition and against any

alternative proposal.

24. Defendant Fontaine K. Richardson ("Richardson") is a director of NEI and has

been since October 2002. Richardson is also a member of NEI's Compensation Committee,

which considered, implemented, and recommended to the Board the transaction bonuses, which

are to be paid out to senior management, including defendant Shortell, in the event the Proposed

Acquisition is consummated. In connection with the Proposed Acquisition, Richardson entered

into a Voting Agreement with UNICOM, pursuant to which he agreed to vote his shares in favor

of the Proposed Acquisition and against any alternative proposal.

25. Defendant Gary E. Haroian ("Haroian") is a director of NEI and has been since

June 2003. Haroian was also a member of NEI's Transaction Committee, which was formed in

February 2012 to assist the Board with the process of soliciting and analyzing acquisition

proposals from third parties. In connection with the Proposed Acquisition, Haroian entered into

a Voting Agreement with UNICOM, pursuant to which he agreed to vote his shares in favor of

the Proposed Acquisition and against any alternative proposal.


- 11 -

26. Defendant Charles A. Foley ("Foley") is a director of NEI and has been since

September 2007. Foley is also Chairman of NEI's Compensation Committee, which considered,

implemented, and recommended to the Board the transaction bonuses, which are to be paid out

to senior management, including defendant Shortell, in the event the Proposed Acquisition is

consummated. In connection with the Proposed Acquisition, Foley entered into a Voting

Agreement with UNICOM, pursuant to which he agreed to vote his shares in favor of the

Proposed Acquisition and against any alternative proposal.

27. Defendant Patricia C. Sueltz ("Sueltz") is a director of NEI and has been since

September 2011. Sueltz is also a member of NEI's Compensation Committee, which considered,

implemented, and recommended to the Board the transaction bonuses, which are to be paid out

to senior management, including defendant Shortell, in the event the Proposed Acquisition is

consummated. In connection with the Proposed Acquisition, Sueltz entered into a Voting

Agreement with UNICOM, pursuant to which he agreed to vote his shares in favor of the

Proposed Acquisition and against any alternative proposal.

28. Defendant UNICOM is a California corporation with principal executive offices

located at 15535 San Fernando Mission Boulevard, Suite 310, Mission Hills, California.

UNICOM is a division of UNICOM Global, and operates as a global information technology

company delivering world-class solutions for the IBM mainframe and CICS marketplace.

29. Defendant Merger Sub is a Delaware corporation and wholly-owned subsidiary of

UNICOM. Following completion of the Proposed Acquisition, Merger Sub will be merged with

and into NEI and will cease its separate corporate existence.

30. The Individual Defendants named above in ¶¶22-27 comprise the Board.


- 12 -

INDIVIDUAL DEFENDANTS' FIDUCIARY DUTIES

31. Under Delaware law, in any situation where the directors of a publicly traded

corporation undertake a transaction that will result in a change in corporate control, the directors

have an affirmative fiduciary obligation to obtain the highest value reasonably available for the

corporation's shareholders, including a significant control premium. This duty arises in at least

the following three circumstances: (i) when a corporation initiates an active bidding process

seeking to sell itself or to effect a business reorganization involving a clear break-up of the

company; (ii) where, in response to a bidder's offer, a target abandons its long-term strategy and

seeks an alternative transaction involving the break-up of the company; or (iii) when approval of

a transaction results in a sale or change of control. To diligently comply with these duties,

neither the directors nor the officers may take any action that:

(a) adversely affects the value provided to the corporation's shareholders;

(b) will discourage, inhibit, or deter alternative offers to purchase control of

the corporation or its assets;

(c) contractually prohibits themselves from complying with their fiduciary

duties;

(d) will otherwise adversely affect their duty to secure the best value

reasonably available under the circumstances for the corporation's shareholders; and/or

(e) will provide the directors and/or officers with preferential treatment at the

expense of, or separate from, the public shareholders.

32. Additionally, in accordance with their duties of loyalty and good faith, the

Individual Defendants, as directors and/or officers of NEI, are further obligated under Delaware

law to refrain from:


- 13 -

(a) participating in any transaction where the directors or officers' loyalties

are divided;

(b) participating in any transaction where the directors or officers receive, or

are entitled to receive, a personal financial benefit not equally shared by the public shareholders

of the corporation; and/or

(c) unjustly enriching themselves at the expense or to the detriment of the

public shareholders.

33. Plaintiff alleges herein that Defendants, separately and together, in connection

with the Proposed Acquisition, knowingly or recklessly breached, or aided and abetted the other

Defendants' breaches of, their fiduciary duties – including, but not limited to, their duties of

loyalty, good faith, and independence as owed to Plaintiff and the other former public

shareholders of NEI. Additionally, certain of the Individual Defendants are obtaining for

themselves personal benefits, including personal financial benefits not shared equally by Plaintiff

or the Class. As a result of the Individual Defendants' self-dealing and divided loyalties, neither

plaintiff nor the Class will receive adequate or fair value for their NEI common stock in the

Proposed Acquisition.

34. Because the Individual Defendants knowingly or recklessly breached their

fiduciary duties of loyalty, good faith, and independence in connection with the Proposed

Acquisition, the burden of proving the inherent or entire fairness of the Proposed Acquisition,

including all aspects of its negotiation, structure, price, and terms, is placed upon them as a

matter of law.

BACKGROUND TO THE PROPOSED ACQUISITION

35. The process which ultimately resulted in the execution of the Merger Agreement

began in early August of 2011. It was during this ten-month stretch ending in June 2012, that


- 14 -

defendant Shortell held discussions with various potential strategic and financial acquirers

regarding a potential acquisition of NEI.

36. From August 3, 2011 through November 15, 2011, defendant Shortell engaged in

various discussions with UNICOM and the party identified in the Proxy as "Firm A" regarding a

potential acquisition of the Company and, with respect to UNICOM, the potential synergistic

value of such a transaction. While the Proxy indicates that UNICOM first reached out to

Shortell in early August, it fails to disclose whether Firm A first contacted NEI or vice-versa.

The Proxy further fails to disclose the type or value of the synergies that might result from an

acquisition of NEI that were discussed by UNICOM and Shortell during this time period and

later in the process.

37. Over the ensuing two months defendant Shortell and Bryant continued to discuss

with UNICOM a potential transaction. Additionally, they spoke with representatives of

Needham during this period about retaining Needham to serve as NEI's exclusive financial

advisor in connection with the sale of the Company. The Proxy fails to disclose what, if any,

communications between the Company and Firm A occurred from November of 2011 through

mid-January of 2012.

38. At a January 13, 2012 meeting of the Compensation Committee of the Company's

Board, the implementation of a retention and transaction success bonus program for NEI's key

executives was first discussed. Ultimately, these discussions resulted in the execution of the

Transaction Bonus Agreements pursuant to which defendant Shortell and Bryant will be paid a

cash bonus of $950,000 and $475,000, respectively, "in the event the transaction with UNICOM

is consummated."

39. With the possibility of this immediate cash windfall in their sights, defendant

Shortell and Bryant immediately ramped up their efforts to sell the Company to UNICOM.


- 15 -

Indeed, during the month following the January 13, 2012 meeting of the Board's Compensation

Committee, Shortell and Bryant engaged in no fewer than five meetings and/or calls with

UNICOM representatives. These efforts ultimately culminated in UNICOM submitting a

written, preliminary, non-binding indication of interest to acquire all the outstanding shares of

NEI common stock for $1.80 per share on February 9, 2012.

40. With UNICOM's indication of interest in hand, Bryant wasted no time finalizing

an engagement letter with Needham. Indeed, on February 16, 2012 – over six months after

discussions with UNICOM first commenced – the Board finally approved the retention of

Needham to serve as the Company's exclusive financial advisor in connection with the sale of the

Company. The Proxy fails to disclose the basis for selecting Needham to serve as the Company's

financial advisor and/or whether any other investment banking firms were considered.

41. At a February 20, 2012 meeting of the Company Board, Needham gave its initial

presentation and defendant Shortell discussed the state of NEI's business. The Board also

established the three-person Transaction Committee, comprised of defendants Blaeser and

Haroian and non-defendant Robert M. Wadsworth, to assist in the sales process.

42. In the days following the February 20, 2012 Board meeting, the Transaction

Committee, NEI management, and Needham finalized a list of twenty-one strategic and financial

parties to be contacted regarding their potential interest in acquiring the Company. Of these

twenty-one parties, which included both UNICOM and Firm A, only UNICOM submitted an

indication of interest in advance of the April 6, 2012 deadline set by Needham. The Proxy does

not indicate how the parties contacted were selected, how many of the contacted parties executed

non-disclosure agreements ("NDAs") and/or why the non-interested parties declined to

participate in the sales process at that time.


- 16 -

43. On or around February 24, 2012, management prepared a "top-side financial

forecast for fiscal years 2012 and 2013" (the "2012-13 Projections") which was provided to

Needham and each of those parties that executed a NDA during the sales process. The Proxy

fails to disclose the 2012-13 Projections.

44. During the ensuing weeks, defendant Shortell and Bryant met with representatives

of UNICOM and Firm A on multiple occasions regarding the status of their respective due

diligence efforts. The Board was updated on the strategic review process at a Board meeting

held on March 15, 2012. At that meeting, Shortell also purportedly apprised the Board of certain

issues facing NEI, including, among other things "the continuing limitations on [the Company's]

access to new customers and territories," although these so-called "limitations" are not described

in any detail.

45. On April 9, 2012, Firm A decided to withdraw from the process. The next day,

UNICOM revised its offer price down from $1.80 per share to $1.70 per share. The specific

basis upon which UNICOM decided to decrease its initial offer price are not disclosed in the

Proxy.

46. On April 12, 2012, the Company announced that it would lose one of its

customers, EMC. Following the announcement, NEI's stock dropped considerably, despite

assertions by Company management that the loss of EMC's business would have a minimal, if

any, impact on NEI's overall financial performance. On April 27, 2012, Company management

created revised financial forecasts (the "Revised Projections") which reflected the future loss of

EMC's business. The Revised Projections, which were provided to Needham and UNICOM, are

not disclosed in the Proxy.

47. On May 3, 2012, UNICOM reduced its offer from $1.70 to $1.45 per share,

purportedly based on the loss of the EMC business. Five days later, "Firm B" – who had


- 17 -

contacted Needham shortly after the release of the April 12, 2012 press release to discuss the

potential acquisition of the Company – also submitted a preliminary, non-binding indication of

interest to acquire all of the outstanding shares of NEI. Firm B, however, ultimately decided to

bow out of the sales process on May 30, 2012.

48. During the course of the ensuing two weeks, the terms of the Merger Agreement

were hashed out by the parties. Additionally, on June 15, 2012, certain adjustments were made

to the Company's 2013 financial projections based on the latest available market and customer

inputs (the "Final Projections"). The Proxy fails to disclose precisely what adjustments were

made to NEI's 2013 financial forecast model in preparing the Final Projections.

49. On June 19, 2012, NEI issued the following press release announcing that it had

entered into the Proposed Acquisition with UNICOM. The press release stated, in relevant part,

as follows:

CANTON, Mass., June 19, 2012 — NEI (Nasdaq: NEI), a leading provider of server-based application platforms, deployment solutions and lifecycle support services for software technology developers and OEMs worldwide, announced today that it has signed a definitive merger agreement with UNICOM Systems, Inc. ("UNICOM") and a new UNICOM subsidiary under which UNICOM, a global information technology company and part of the UNICOM group of companies, will acquire NEI for $1.45 per common share in cash. The transaction is valued at approximately $63.2 million. This price represents a premium of approximately 85.5% to NEI's closing price of $0.78 on June 18, 2012.

The transaction is subject to customary closing conditions and the approval of NEI shareholders. The Boards of Directors of both NEI and UNICOM have unanimously approved the transaction and the NEI Board of Directors has recommended that NEI shareholders vote in favor of the transaction. The transaction is currently expected to close within NEI's fiscal 2012 fourth quarter, the period ending September 30, 2012. Shareholders of NEI holding shares representing approximately 14.9% of the shares outstanding have entered into agreements with UNICOM under which they have agreed to vote their shares in favor of the proposed merger. Upon the consummation of the merger, NEI will become a private company, wholly owned by UNICOM.

Greg Shortell, President and Chief Executive Officer of NEI, commented, "This offer represents an attractive opportunity to deliver premium value and liquidity to NEI's shareholders. I am excited about the potential for future growth with a


- 18 -

strategic partner of UNICOM's stature and global reach. This is an excellent opportunity to realize short- and long-term benefits for our customers, employees and technology partners."

Under the terms of the definitive merger agreement, NEI is permitted to solicit alternative acquisition proposals from third parties through July 18, 2012 and intends to consider any such proposals. There can be no assurances that the solicitation of such proposals will result in an alternative acquisition transaction. It is not anticipated that any developments will be disclosed with regard to this process unless the Company's Board of Directors makes an affirmative decision to proceed with an alternative acquisition proposal. In addition, NEI may, at any time, subject to the terms of the definitive merger agreement, respond to unsolicited alternative acquisition proposals. The definitive merger agreement also contains certain break-up fees payable to each party in connection with the termination of the definitive merger agreement under certain circumstances.

NEI's exclusive financial advisor on the proposed transaction is Needham & Company, LLC, and its legal counsel is Latham & Watkins LLP.

50. Per the terms of the Merger Agreement, the Company was given a limited thirty-

day "go-shop" period within which to gauge the interests of other parties in pursuing a potential

transaction with NEI. During this time, Needham contacted forty-five parties – twenty-five of

whom had not been contacted at any other point during the sales process. However, due in large

part to the various deal protection provisions contained in the Merger Agreement (discussed

more fully below), the "go-shop" period ended without any of these parties submitting a proposal

to acquire the Company.

FAILURE TO MAXIMIZE SHAREHOLDER VALUE

51. The Individual Defendants' fiduciary duties require them to maximize shareholder

value when entering into a change-in-control transaction such as the Proposed Acquisition.

Here, however, the consideration to be paid by UNICOM in the merger does not reflect the true

inherent value of NEI as known only by the Individual Defendants, as directors and officers of

the Company, and UNICOM at the time the Proposed Acquisition was announced.

52. The Proposed Consideration of $1.45 per share is grossly inadequate given the

recent financial performance of the Company and its anticipated future success. While


- 19 -

Defendants tout the Proposed Acquisition as providing shareholders with a 85.5% premium, the

$1.45 per share proposed price is well below the Company's February 28, 2012 fifty-two week

high closing price of $1.58 per share and is even below the trading price of NEI stock on April

12, 2012 – the same day the Company announced that it was losing EMC as a customer.

53. Accordingly, the so-called 85.5% "premium" is no premium at all and merely

reflects the dip in the Company's stock price since April 12, 2012, which even EMC insiders

believed was only temporary. In fact, in the April 26, 2012 press release announcing the

Company's 2Q 2012 financial results, Shortell stated that he was "confident" the Company could

"plan and work to replace" EMC's lost revenues "and maintain [its] profitability." Thus, the

Proposed Consideration does not provide Company shareholders with any real premium, but

rather reflects UNICOM's ability to capitalize on a temporary depression in the market price of

NEI stock.

54. At the time the Proposed Acquisition was announced, all three Yahoo! Finance

analysts that were following the Company had its stock listed as either a "buy" or a "strong buy"

with one even setting a $2 price target for NEI shares. Other analysts also commented on how

the Proposed Consideration reflected a payment by UNICOM of only "65 cents for every dollar

NEI has created in shareholder value" which, in turn, fails to even "cover [all of NEI's current

assets] let alone the relationships NEI has established or the money it has poured into

marketing." These sentiments, shared by many industry and investment professionals, further

highlight the inadequacy of the Proposed Consideration.

55. Other media sources also critiqued the adequacy of the Proposed Consideration

by commenting on the quality of the Company's financial performance and the ability of the

business to grow into the future. Most notably, one author focused on the fact that NEI is a

"profitable company with no debt, significant cash holdings" and inventory "worth more than


- 20 -

[its] market valuation," in concluding that UNICOM "got themselves a sweet deal ... buying up

the company for $1.45/share" especially "given that the book value of the company" as of March

30, 2012 was around $2.23/share – or 53.8% above the Proposed Consideration.

56. NEI's financial performance in the period leading up to the announcement of the

Proposed Acquisition further reveals the inadequacy of the Proposed Consideration being offered

by UNICOM. As previously discussed, NEI has seen its annual net revenues increase by nearly

82% between 2009 ($148.7 million) and 2011 ($272.5 million). According to defendant

Shortell, this growth was the result of the Company's focus on "improving [its] lead generation",

thereby obtaining new customers, while simultaneously "develop[ing] … new service offerings"

which are beneficial to its existing customers. Shortell went on to state that, collectively, "these

efforts will build on the successful foundation [NEI] implemented in fiscal 2010 and should

position [it] for another successful year in fiscal 2011."

57. Defendant Shortell's prediction could not have proved more accurate, as fiscal

2011 proved to be a record setting year for the Company in terms of its revenue and overall

profitability. In addition to increasing its net revenues by 23% over fiscal 2010, the Company

reported Generally Accepted Accounting Practices ("GAAP") and non-GAAP net income of

$36.7 million (up 2346% over fiscal 2010) and $8.56 million (up 112% over fiscal 2010),

respectively. In commenting on these results, Shortell noted that "[f]iscal 2011 was a year of

great progress for NEI, as [it] diversified and strengthened [its] consumer base, expanded

internationally and set the stage for continued success."

58. As anticipated, the Company's financial success continued into the first half of

fiscal 2012 as well. On January 26, 2012, the Company released its "exceptional" first quarter of

2012 financial results, including revenues of $69.7 million and GAAP net income of $1.5 million

– both of which exceeded the original guidance issued by the Company. Similarly, on April 26,


- 21 -

2012 – just two weeks after announcing the future loss of EMC as a customer – the Company

reported its financial results for the second quarter of 2012 which included net revenues of $65.9

(an increase of nearly $1 million over the same quarter in fiscal year 2011) and GAAP and non-

GAAP net income figures of $1.2 million and $1.6 million, respectively.

59. Collectively, the Company's improving financial performance further supports

Plaintiff's claim that the Proposed Consideration is inadequate, especially when one considers

that the per share book value of the Company was $2.23 as of the close of the last full fiscal

quarter prior to the announcement of the Proposed Acquisition – nearly 53.8% higher than the

Proposed Consideration.

60. Even Needham, the Company's own financial advisor, had to manipulate its

analyses in order to create the false impression that the Proposed Consideration is fair. For

instance, Needham, whose $450,000 fee is entirely contingent on the consummation of the

Proposed Acquisition, used comparable companies in its Selected Companies Analysis which

have a median market capitalization of approximately $1.15 billion and last twelve month

("LTM") revenues of around $8.35 billion. NEI, however, has a market capitalization of

approximately $61 million and around $274 million in LTM revenue figures. Had Needham

chosen comparable companies more similar to NEI in size and revenue with a collective median

market capitalization of around $211.73 million and median LTM revenue figures near $294

million, the analysis would have produced implied value ranges of: (i) $2.15 per share for EV /

LTM Revenues; (ii) $3.51 per share for EV / FY2012 Revenues; (iii) $1.53 per share for EV /

FY2013 Revenues; (iv) $1.68 per share for EV / LTM EBITDA (earnings before interest, taxes,


- 22 -

depreciation, and amortization); (v) $3.36 for Price / LTM EPS (earnings per share); and (vi)

Price / $1.58 per share for FY2012 EPS.4

61. Similarly, Needham chose transactions valued at between $10 million and $300

million which occurred since January 1, 2011 and involved target companies in the vast "IT

services and electronics manufacturing services" for use in its Selected Transaction Analysis.

Given that the Proposed Acquisition has a transaction value of $63.2 million and is within the

packaged software business space, Needham's analysis incorporates numerous transactions with

much higher values. Had Needham limited its selected transactions to those with a transaction

value of $10 million to $100 million involving entities in the same type of business as the

Company (based on the Standard Industrial Classification ("SIC") code used on its SEC filings),

the resulting analysis would have yielded implied value ranges of: (i) $4.57 per share for EV /

LTM Revenues; and (ii) $1.64 per share for EV / LTM EBITDA.5

62. Finally, Needham chose overly conservative discount rates of 20% to 23% and

terminal exit multiple ranges of 2.5x to 5.0x FY2017 EBITDA. Had Needham utilized a more

appropriate discount rate of 16.4% as derived from review of NEI's publicly available

information, its DCF Analysis would have yielded an implied per share price range for the

Company of $1.59 to $1.88 – nearly 10% to 30% higher than the Proposed Consideration.

THE PRECLUSIVE DEAL PROTECTION PROVISIONS

63. On June 20, 2012, the Company filed a Form 8-K with the SEC wherein it

disclosed the Merger Agreement containing the numerous draconian deal protection devices

designed to preclude any competing bids for NEI from emerging in the period following the

4 These results are based on the publicly available figures/estimates for the ten comparable companies meeting the suggested market capitalization and LTM revenue guidelines.

5 These results are based on the publicly available information pertaining to the eight transactions meeting the suggested date range, transaction value, and business segment criteria identified.


- 23 -

announcement of the Proposed Acquisition. As the Individual Defendants were duty bound to

maximize shareholder value in connection with the Proposed Acquisition, the inclusion of these

provisions, discussed in more detail below, constitutes a further breach of their fiduciary duties.

64. Specifically, the Merger Agreement subjects NEI to a strict no-solicitation clause

that prohibits the Company from seeking a superior offer for its shareholders. Specifically,

section 5.6(b) states, in relevant part that, as of July 18, 2012:

[T]he Company shall not, and shall cause the Company Subsidiaries not to, and shall instruct the Company Representatives not to, on behalf of the Company: (i) knowingly initiate, solicit or encourage or facilitate the submission or making of any Acquisition Proposal involving the Company or engage in any discussions or negotiations, or furnish to any other party information, with respect thereto, (ii) recommend, or publicly propose to recommend, any Acquisition Proposal involving the Company, (iii) withdraw or materially change or qualify, in a manner adverse to Parent, the Company Board Recommendation, (iv) enter into any letter of intent, agreement in principle, merger agreement or other similar agreement relating to any Acquisition Proposal, or (v) resolve or agree to do any of the foregoing (any action set forth in the foregoing clauses (ii), (iii) or (v) (to the extent related to the foregoing clauses (ii) or (iii)), a "Change of Company Board Recommendation").

Section 5.6(b) further requires the Company to immediately cease discussions with each and

every party contacted during the limited "go-shop" period that did not submit a superior proposal

to acquire the Company prior to July 18, 2012.

65. The Merger Agreement ostensibly has a "fiduciary out" provision that allows the

Company to negotiate with other bidders; however, it may only do so in the rare event that the

potential acquirer makes an offer which the Board determines, in good faith and after

consultation with its financial and legal advisors, is "superior" to the Proposed Acquisition.

Collectively, the inability of the Company to provide any non-public information to, much less

communicate with, any third-party regarding a potential transaction – as well as the fact that

section 5.6(c) of the Merger Agreement requires NEI to notify UNICOM of any potentially


- 24 -

"superior" offer it receives – renders the likelihood of any rival bidder emerging, at best,

miniscule.

66. Additionally, section 7.2 of the Merger Agreement requires NEI to pay UNICOM

a $2.5 million termination fee should a superior proposal ultimately be accepted. This payment

represents nearly 4% of the total value of the Proposed Acquisition and increases the amount per

share that a competing bidder would have to offer to acquire the Company by at least $0.06

before it would even potentially qualify as a superior proposal under the Merger Agreement. To

make matters worse, this additional consideration would be paid directly to UNICOM rather than

NEI shareholders, thereby making it even more difficult for any competing bidder to acquire the

Company.

67. Finally, NEI directors and executive officers (including the Individual

Defendants) as well as a group of affiliated holders have signed the Voting Agreements which

require them to vote the 6,341,294 NEI shares they own (either directly or indirectly) collectively

in favor of the Proposed Acquisition. In other words, approximately 14.9% of the Company's

common stock is already "locked-up" in favor of the Proposed Acquisition, thereby making it

even more difficult for any competing acquirer to mount a successful bid for the Company.

68. These onerous and preclusive deal protection devices operate in conjunction to

ensure that no competing offers will emerge for the Company and that the patently inadequate

Proposed Acquisition is consummated, thereby guaranteeing that the Individual Defendants like

defendant Shortell and the other executive officers of NEI like Bryant will secure the personal

financial benefits for which they negotiated to receive in connection with the consummation of

the Proposed Acquisition. Accordingly, the Individual Defendants' efforts to put their own

personal interests before those of the Company's shareholders have resulted in the Proposed

Acquisition being presented to NEI shareholders at an untenable and inadequate offer price.


- 25 -

THE MATERIALLY MISLEADING PROXY

69. In order to secure shareholder approval of the unfair Proposed Acquisition,

Defendants filed the materially misleading Proxy with the SEC on July 27, 2012. The Proxy,

which recommends that NEI shareholders vote in favor of the Proposed Acquisition, omits

and/or misrepresents material information about the process that took place in selling the

Company, the actual intrinsic value of the Company as known to Defendants, the analyses

performed by Needham in connection with the rendering of its fairness opinion, and the basis for

the Individual Defendant's decision to accept the $1.45 per share consideration being offered in

the Proposed Acquisition. Specifically the Proxy omits and/or misrepresents the material

information set forth below in contravention of sections 14(a) and 20(a) of the Exchange Act

and/or Defendants' duty of candor and full disclosure under state law.

70. The Sales Process Leading to the Proposed Acquisition. The following

information is omitted from the "Background of the Merger" section on pages 20-27 of the

Proxy: (i) whether Firm A first contacted NEI concerning a potential acquisition in late 2011 or

vice versa; (ii) the basis for defendant Shortell's determination that, as of February 6, 2012, the

Board would not likely have accepted a proposal to acquire all the outstanding shares of the

Company for $1.70 per share; (iii) the type and/or nature of the barriers to the Company's ability

to access new markets as discussed by Shortell with the Board on February 20, 2012; (iv) how

the twenty-one parties contacted by Needham as part of the market check were selected; (v) how

many of the twenty-one contacted parties executed NDAs; (vi) the types of limitations which

prevented NEI from accessing new customers and territories as of March 15, 2012; (vii) how

many of the eleven parties that expressed an interest in acquiring the Company during the market

check were strategic (as opposed to financial) parties; (viii) the reason(s) behind Firm A's

decision to withdraw from the sales process on April 9, 2012; (ix) the reason those parties


- 26 -

contacted during the market check declined to participate in the sales process as discussed by

Needham with the Transaction Committee on April 11, 2012; (x) the reason(s) behind Firm B's

decision to withdraw from the sales process on May 30, 2012; (xi) why the twenty-five "new"

parties contacted during the "go-shop" period were not contacted during the initial market check

performed by Needham in February of 2012; and (xii) how many of the twenty-five new parties

contacted during the "go-shop" period were strategic (as opposed to financial) acquirers. These

omissions are material because they render the Background of the Merger section on pages 20-27

of the Proxy materially misleading. Specifically, the omission of this information precludes NEI

shareholders from determining whether the risks facing the Company warrant their acceptance of

$1.45 for each of their shares and whether the Board took all steps to maximize shareholder

value.

71. Needham's Selected Companies Analysis. The discussion on pages 32-34 of the

Proxy concerning Needham's Selected Companies Analysis is materially misleading because it

fails to disclose the market capitalizations and individually observed multiples for each of the

selected companies. This information is material as, without it, NEI's shareholders are unable to

independently assess whether the analysis used an appropriate set of companies/multiples and

whether it provides an adequate measure of the Company's inherent value. Additionally, this

information is necessary for NEI shareholders to determine the adequacy of the Proposed

Consideration and, in turn, what weight, if any, to place on Needham's fairness opinion. Here,

this information is even more material given that Plaintiff alleges Needham manipulated its

Selected Companies Analysis to create the false impression that the Proposed Consideration is

fair (see infra ¶60).

72. Needham's Selected Transaction Analysis. The discussion on pages 34-35 of the

Proxy concerning Needham's Selected Transaction Analysis is materially misleading because it


- 27 -

fails to disclose the dates, the sizes, and the individually observed multiples for each of the

selected transactions. As with the Selected Companies Analysis, this information is material to

NEI shareholders as it allows them to independently assess whether the transactions selected are

adequate benchmarks against which to compare the Proposed Acquisition. Again, this

information is of particular importance in instances such as this, where Plaintiff alleges Needham

has manipulated its Selected Transactions Analysis to create the false impression that the

Proposed Consideration is fair (see infra ¶61).

73. Needham's DCF Analysis. The discussion on pages 37-38 of the Proxy

concerning Needham's DCF Analysis is materially misleading because it fails to disclose: (i) the

definition of "free cash flow" as used by Needham in the analysis; (ii) whether stock-based

compensation was treated as a cash expense; (iii) the specific inputs and assumptions used to

determine the discount rate range of 20-23% used in the analysis; and (iv) the implied perpetuity

growth rates which were observed from the analysis. Because DCF analyses are very sensitive

to the inputs used, specifically the implied perpetuity growth rates and discount rates selected,

the basis for use of these inputs is material to NEI's shareholders' understanding of how the DCF

analysis was performed, whether that analysis was performed properly, whether the implied per

share value derived as a result of the analysis adequately measures the Company's true inherent

value and, in turn, what weight, if any, to place on Needham's DCF Analysis (and its fairness

opinion generally) when voting on the Proposed Acquisition.

74. The Company's Financial Projections. The following information is missing

from the discussion of the Company's financial projections as contained on page 73 of the Proxy

and renders that portion of the Proxy materially misleading: (i) the capital expenditures for the

years 2012-2017 as forecast by NEI management; (ii) the changes in net working capital for the

years 2012-2017 as forecast by management; (iii) the other, non-disclosed items used in the


- 28 -

calculation of free cash flow for the years 2012-2017 as forecast by management; (iv) the

projected unlevered free cash flow for the fourth quarter of the Company's 2012 fiscal year; (v)

why the stock-based compensation expense figures which are added back to calculate Non-

GAAP net income for the years 2012 and 2013 are different than the amounts subtracted as a

part of the operating expenses for each of those same years; and (vi) why the 2016 EBITDA

figure of $11,966 is not equal to the summation of the components listed as part of the

projections for that year. These financial projections, which were specifically relied upon by

Needham in connection with the rendering of its fairness opinion, are of great importance to NEI

shareholders because it is only through a thorough understanding of the projections that NEI

shareholders can independently determine how the $1.45 being offered compares with NEI

management's view of how the Company expects to perform going forward. Moreover,

shareholders have no other means of obtaining this information as they cannot replicate

management's internal view of NEI's future prospects. Accordingly, unless this information is

adequately disclosed, NEI shareholders will be unable to cast an informed vote on the Proposed

Acquisition.

75. Defendants' failure to provide NEI's former shareholders with the aforementioned

information in the Proxy constitutes a violation of sections 14(a) and 20(a) of the Exchange Act,

and SEC Rule 14a-9 promulgated thereunder. The false and/or misleading statements contained

in the Proxy were put there by Defendants. Likewise, it was Defendants who consciously chose

not to include certain other material information in the Proxy. Plaintiff and the other Class

members will rely on the Proxy containing these material omissions and/or false and misleading

statements when evaluating the adequacy of the Proposed Acquisition and the consideration

offered pursuant thereto. Consequently, as a direct result of Defendants' preparation, review, and


- 29 -

filing of the Proxy, Plaintiff and the Class will be wrongfully led to believe that the $1.45 per

share UNICOM has offered to pay for the Company is a fair value for their NEI shares.

76. As described above, Defendants are aware of, and/or have access to, information

showing that NEI's true value greatly exceeds the Proposed Consideration to be paid by

UNICOM in the Proposed Acquisition. Additionally, they know that Plaintiff and the other

Class members do not have access to such information, yet they chose not to include it in the

Proxy. As a result, Defendants have taken it upon themselves to deprive the Company's

shareholders of their right to make an intelligent, informed, and rational decision whether to

approve the Acquisition. Should the Proxy be amended to include the omitted and/or materially

misrepresented information discussed above, it would significantly alter the "total mix" of

information considered by NEI shareholders when deciding whether to approve the Proposed

Acquisition. Accordingly, Plaintiff and the other Class members will be irreparably harmed in

the event these disclosure deficiencies are not remedied.

INSIDER BENEFITS

77. Because the Individual Defendants dominate and control the business and

corporate affairs of NEI and have access to material, non-public information concerning the

Company's financial condition and business prospects, there exists an imbalance and disparity of

knowledge and economic power between them and the public shareholders of NEI like Plaintiff

and the Class. Therefore, it is inherently unfair for the Individual Defendants to execute and

pursue any merger or acquisition under which they will reap disproportionate benefits to the

exclusion of obtaining the best shareholder value reasonably available. Nonetheless, the

Proposed Acquisition represents an effort by the Individual Defendants to aggrandize their own

financial position and interests at the expense/to the detriment of the Class by denying them their

rights by selling the Company via an unfair process and at an inadequate price. Accordingly, the


- 30 -

Proposed Acquisition will benefit the Individual Defendants at the expense of NEI's public

shareholders.

78. Instead of attempting to negotiate an agreement reflecting the best consideration

reasonably available for the Company's shareholders who they are duty-bound to serve, the

Individual Defendants disloyally placed their own interests first, in breach of their fiduciary

duties. Specifically, the Individual Defendants tailored the terms and conditions of the Proposed

Acquisition to meet their own personal needs and objectives by, among other things, entering

into transaction bonus agreements pursuant to which, for example, defendant Shortell and Bryant

NEI's CFO, Treasurer, and Secretary will receive immediate cash payments of $950,000 and

$475,000, respectively, upon the closing of the Proposed Acquisition. Likewise, the Merger

Agreement provides for the accelerated vesting and cashing out of all the outstanding stock

options and/or restricted stock units owned by the Individual Defendants upon the close of the

Proposed Acquisition – thereby guaranteeing them an additional cash windfall not shared by the

public shareholders of the Company.

79. In light of the foregoing, the Individual Defendants must, as their fiduciary

obligations require:

• Withdraw their consent to the acquisition of NEI and allow the shares to trade freely - without impediments, including the termination fee and no solicitation provision;

• Act independently so that the interests of NEI's public stockholders will be protected;

• Adequately ensure that no conflicts of interest exist between defendants' own interests and their fiduciary obligation to maximize stockholder value or, if such conflicts exist, to ensure that all conflicts be resolved in the best interests of NEI's public stockholders; and

• Solicit competing bids to UNICOM's offer to ensure that the Company's shareholders are receiving the maximum value for their shares.


- 31 -

CLASS ACTION ALLEGATIONS

80. Plaintiff brings this action individually and on behalf of the Class comprised of all

holders of NEI stock who were harmed by Defendants' actions described above. Excluded from

the Class are Defendants and any individual or entity related to, or affiliated with, any

Defendant.

81. This action is properly maintainable as a class action pursuant to Rule 23 of the

Federal Rules of Civil Procedure for the following reasons.

82. The Class is so numerous that joinder of all members is impracticable. According

to the most recent Form 10-K filed with the SEC by the Company on May 10, 2012, there were

42,631,128 shares of NEI common stock outstanding as of May 8, 2012.

83. There are questions of law and fact that are common to the Class and which

predominate over questions affecting any individual Class member including, among others, the

following:

(a) whether the Proxy contains material misstatements or omissions in

violation of sections 14(a) and 20(a) of the Exchange Act;

(b) whether the Individual Defendants breached their fiduciary duties of

undivided loyalty, good faith, diligence, fair dealing, independence, and/or due care with respect

to Plaintiff and the other members of the Class in connection with the Proposed Acquisition;

(c) whether the Individual Defendants breached their fiduciary duty to secure

and obtain the best price reasonable under the circumstances for the benefit of Plaintiff and the

other members of the Class in connection with the Proposed Acquisition;

(d) whether the Individual Defendants breached their fiduciary duty of candor

to Plaintiff and the other members of the Class by soliciting shareholder votes in favor of the

Proposed Acquisition based upon inadequate disclosures;


- 32 -

(e) whether the Individual Defendants breached any of their other fiduciary

duties owed to Plaintiff and the other members of the Class in connection with the Proposed

Acquisition;

(f) whether the Individual Defendants are unjustly enriching themselves

and/or the other insiders/affiliates of NEI in connection with the Proposed Acquisition;

(g) whether the Individual Defendants, in bad faith and for improper motives,

impeded or erected barriers designed to discourage other potentially interested parties from

making an offer to acquire the Company or its assets;

(h) whether NEI, UNICOM, and/or Merger Sub aided and abetted any of the

Individual Defendants' breaches of fiduciary duty owed to Plaintiff and the other members of the

Class in connection with the Proposed Acquisition; and

(i) whether Plaintiff and the other members of the Class would suffer

irreparable injury were the Proposed Acquisition consummated.

84. The prosecution of separate actions by individual members of the Class would: (i)

create a risk of inconsistent or varying adjudications with respect to individual members of the

Class; (ii) establish incompatible standards of conduct for Defendants; and/or (iii) result in

adjudications with respect to individual members of the Class that would, as a practical matter,

be dispositive of the interests of the other members not party to those adjudications thereby

substantially impairing (or entirely impeding) their ability to protect their own personal interests.

85. Plaintiff, whose claims are typical of the other Class members', is committed to

prosecuting this action and has retained competent counsel who will draw on their extensive

experience litigating actions of this nature in order to fairly and adequately protect the interests

of Plaintiff and the Class.


- 33 -

86. Plaintiff does not have any interests adverse to the Class. Accordingly, there will

be no difficulty in the management of this litigation as a class action. Indeed, a class action is

superior to other available methods for the fair and efficient adjudication of this controversy.

87. Defendants have acted on grounds generally applicable to the Class with respect

to the matters complained of herein, thereby making appropriate the relief sought herein with

respect to the Class as a whole.

COUNT I

Against All Defendants for Violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 Promulgated Thereunder

88. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

89. During the relevant period, Defendants filed the false and misleading Proxy

specified above, which failed to disclose material facts necessary in order to make the statements

made, in light of the circumstances under which they were made, not misleading.

90. The Proxy was prepared, reviewed, and/or filed by Defendants. It misrepresented

and/or omitted material facts, including material information about the unfair sales process for

the Company, the unfair Proposed Consideration offered in the Proposed Acquisition, and the

actual intrinsic value of the Company's assets.

91. In so doing, Defendants made untrue statements of material facts and omitted to

state material facts necessary to make the statements that were made not misleading in violation

of section 14(a) of the Exchange Act and SEC Rule 14a-9 promulgated thereunder. By virtue of

their positions, Defendants were aware of this information and of their duty to disclose it in the

Proxy.

92. Defendants were at least negligent in filing the Proxy with these materially false

and misleading statements.


- 34 -

93. The omissions and false and misleading statements in the Proxy are material in

that a reasonable shareholder would consider them important in deciding how to vote on the

Proposed Acquisition. In addition, a reasonable investor would view a full and accurate

disclosure as significantly altering the "total mix" of information made available in the Proxy and

in other information reasonably available to former shareholders of the Company.

94. By reason of the foregoing, Defendants violated section 14(a) of the Exchange

Act and SEC Rule 14a-9(a) promulgated thereunder.

95. Because of the false and misleading statements in the Proxy, Plaintiff is

threatened with irreparable harm, rendering money damages inadequate. Therefore, injunctive

relief is appropriate to ensure Defendants' misconduct is corrected – not rewarded.

COUNT II

Against the Individual Defendants and NEI for Violation of Section 20(a) of the Exchange Act



97. The Individual Defendants acted as controlling persons of NEI within the

meaning of section 20(a) of the Exchange Act as alleged herein. By virtue of their positions as

officers and/or directors of NEI, and participation in and/or awareness of the Company's

operations and/or intimate knowledge of the false statements contained in the Proxy filed with

the SEC, they had the power to influence and control and did influence and control, directly or

indirectly, the decision-making of the Company, including the content and dissemination of the

various statements which Plaintiff contends were false and misleading.

98. Each of the Individual Defendants and NEI was provided with, or had unlimited

access to copies of, the Proxy and other statements alleged by Plaintiff to be misleading prior to


- 35 -

and/or shortly after these statements were issued and had the ability to prevent the issuance of the

statements or cause the statements to be corrected.

99. In particular, each of the Individual Defendants has direct and supervisory

involvement in the day-to-day operations of the Company and, therefore, is presumed to have

(and exercise) the power to control or influence the particular transactions giving rise to the

securities violations as alleged herein. The Proxy at issue contains the unanimous

recommendation of each of the Individual Defendants to approve the Proposed Acquisition.

They were, thus, directly involved in the making of the Proxy.

100. NEI also had direct supervisory control over composition of the Proxy and the

information disclosed therein, as well as the information that was omitted and/or misrepresented

in the Proxy. In fact, NEI filed the Proxy and, is therefore, directly responsible for materially

misleading the Company's former shareholders.

101. In addition, as the Proxy sets forth at length, and as described herein, the

Individual Defendants and NEI were each involved in negotiating, reviewing, and approving the

Proposed Acquisition. The Proxy purports to describe the various issues and information that

they reviewed and considered, descriptions of which had input from both the directors and NEI.

102. By virtue of the foregoing, the Individual Defendants and NEI violated section

20(a) of the Exchange Act.

103. As set forth above, the Individual Defendants and NEI had the ability to exercise

control over, and did control, the person(s) and/or entity(ies) that have violated section 14(a) and

SEC Rule 14a-9, by their acts and omissions as alleged herein. By virtue of their positions as

controlling persons, the Individual Defendants and NEI are liable pursuant to section 20(a) of the

Exchange Act. As a direct and proximate result of the Individual Defendants and NEI's conduct,

Plaintiff and the Class will be irreparably harmed.


- 36 -

COUNT III

Against the Individual Defendants for Breach of Fiduciary Duties



105. The Individual Defendants knowingly, recklessly, and in bad faith have violated

their fiduciary duties of care, loyalty, good faith, candor, and independence owed to the public

shareholders of NEI by, among other things:

(a) failing to take steps to maximize the value of NEI to its public

shareholders;

(b) failing to properly value NEI and its various assets and operations;

(c) putting their personal interests and the interests of UNICOM and Merger

Sub ahead of the interests of NEI shareholders; and

(d) failing to provide all material information concerning the Proposed

Acquisition to the Company shareholders.

106. As a result of the Individual Defendants' unlawful actions, Plaintiff and the other

members of the Class will be irreparably harmed in that they will not receive their fair portion of

the value of NEI's assets and operations.

107. Plaintiff and the members of the Class have no adequate remedy at law. Only

through the exercise of this Court's equitable powers can Plaintiff and the Proposed Class be

fully protected from the immediate and irreparable injury which the Individual Defendants'

actions threaten to inflict.

108. Indeed, unless the Proposed Acquisition is enjoined, the Individual Defendants

will continue to breach their fiduciary duties owed to Plaintiff and the other members of the

Class, will not engage in arm's-length negotiations on the Proposed Acquisition terms, and may


- 37 -

hold the shareholder vote on the Proposed Acquisition without first disclosing all the material

information necessary for NEI shareholders to make a fully informed decision whether to

approve the Merger Agreement in the first place.

COUNT IV

Against NEI, UNICOM, and Merger Sub for Aiding and Abetting the Individual Defendants Breaches of Fiduciary Duties



110. NEI, UNICOM, and Merger Sub are each sued herein as aiders and abettors.

Specifically, NEI, UNICOM, and Merger Sub colluded in or aided and abetted the Individual

Defendants' breaches of fiduciary duties as outlined herein by actively and knowingly

participating therein.

111. Indeed, the Individual Defendants' breaches of fiduciary duties could not, and

would not, have occurred but for the conduct of NEI, UNICOM, and Merger Sub in negotiating

the terms of, and ultimately entering into, the Merger Agreement and pursuing the

consummation of the Proposed Acquisition.

112. Moreover, NEI, UNICOM, and Merger Sub each had knowledge of the fact that

the Individual Defendants were breaching their fiduciary duties to NEI shareholders. Still, they

participated in such breaches for purposes of advancing their own interests. Specifically, should

the Proposed Acquisition be consummated, UNICOM and Merger Sub will benefit both directly

and indirectly by acquiring the Company for well below its true value as known to Defendants at

the time the Merger Agreement was executed.

113. Plaintiff and the members of the Class shall be irreparably injured as a direct and

proximate result of the aforementioned acts by NEI, UNICOM, and Merger Sub.


- 38 -

PRAYER FOR RELIEF

WHEREFORE, Plaintiff demands injunctive relief, in her favor and in favor of the Class

and against Defendants as follows:

A. Declaring that this action is properly maintainable as a class action;

B. Declaring and decreeing that the Merger Agreement was agreed to in breach of

the fiduciary duties of the Individual Defendants and is therefore unlawful and unenforceable;

C. Rescinding, to the extent already implemented, the Merger Agreement;

D. Enjoining Defendants, their agents, counsel, employees, and all persons acting in

concert with them from consummating the Proposed Acquisition, unless and until the Company:

(i) adopts and implements a procedure or process reasonably designed to provide the best

possible value for shareholders; and (ii) amends the Proxy so as to provide NEI shareholders

with all material information concerning the Proposed Acquisition as required by the Exchange

Act;

E. Directing the Individual Defendants to exercise their fiduciary duties to

commence a sale process that is reasonably designed to secure the best possible consideration for

NEI and obtain a transaction which is in the best interests of NEI's shareholders;

F. Imposition of a constructive trust, in favor of Plaintiff and members of the Class,

upon any benefits improperly received by Defendants as a result of their wrongful conduct;

G. Awarding Plaintiff the costs and disbursements of this action, including

reasonable attorneys' and experts' fees; and

H. Granting such other and further equitable relief as this Court may deem just and

proper.


- 39 -

JURY TRIAL DEMAND

Plaintiff hereby demands trial by jury on all issues so triable.

Dated: August 9, 2012 HUTCHINGS, BARSAMIAN, MANDELCORN & ZEYTOONIAN, LLP /s/Theodore M. Hess-Mahan

THEODORE M. HESS-MAHAN

BBO #557109 110 Cedar Street Wellesley Hills, MA 02481 Telephone: (781) 431-2231 Facsimile: (781) 431-8726 [email protected]

ROBBINS UMEDA LLP BRIAN J. ROBBINS STEPHEN J. ODDO ARSHAN AMIRI EDWARD B. GERARD JUSTIN D. RIEGER 600 B Street, Suite 1900 San Diego, CA 92101 Telephone: (619) 525-3990 Facsimile: (619) 525-3991 [email protected] [email protected] [email protected] [email protected] [email protected]

THE BRISCOE LAW FIRM, PLLC WILLIE BRISCOE 8117 Preston Road, Suite 300 Dallas, TX 75225 Telephone: (214) 706-9314 Facsimile: (214) 706-9315 [email protected]

POWERS TAYLOR LLP ZACHARY M. GROOVER 8150 N. Central Expressway Suite 1575 Dallas, TX 75206 Telephone: (214) 239-4565 Facsimile: (214) 550-2635 [email protected] Attorneys for Plaintiff

756526


mailto:[email protected]






Documents

Robyn Brooker, et al. v. Network Engines, Inc., et al. 12 ...securities.stanford.edu/.../201289_f01c_12CV11479.pdf · Robyn Brooker, et al. v. Network Engines, Inc., et al. 12-CV-11479-Shareholder