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DEFENDANTS KOHAVI, SHAMIR AND YARON’S REQUEST FOR JUDICIAL NOTICE
MASTER FILE NO.: 5:05-CV-3395 (JF) 384715.01
KEKER & VAN NEST, LLP JAN NIELSON LITTLE - #100029 ASIM M. BHANSALI - #194925 710 Sansome Street San Francisco, CA 94111-1704 Telephone: (415) 391-5400 Facsimile: (415) 397-7188 E-Mail: [email protected] [email protected] PAUL, WEISS, RIFKIND, WHARTON & GARRISON MARK F. POMERANTZ (admitted Pro Hac Vice) ERIC S. GOLDSTEIN (admitted Pro Hac Vice) ROBERTO FINZI (admitted Pro Hac Vice) 1285 Avenue of the Americas New York, NY 10019-6064 Telephone: (212) 373-3000 Facsimile: (212) 757-3990 E-Mail: [email protected] [email protected] [email protected] Attorneys for Defendants IGAL KOHAVI, YAIR SHAMIR and GIORA YARON
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF CALIFORNIA
SAN JOSE DIVISION
In re MERCURY INTERACTIVE CORP. SECURITIES LITIGATION
This Document Relates To:
ALL ACTIONS.
Master File No.: 5:05-CV-3395 (JL) (Consolidated with 3:05-CV-3664; 3:05-CV-4031; and 3:05-CV-4036)
DEFENDANTS IGAL KOHAVI, YAIR SHAMIR AND GIORA YARON’S REQUEST FOR JUDICIAL NOTICE
Date: March 30, 2007 Time: 9:00 a.m. Courtroom: 3 Judge: Hon. Jeremy Fogel
Case 5:05-cv-03395-JF Document 153 Filed 11/17/2006 Page 1 of 3
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1 DEFENDANTS KOHAVI, SHAMIR AND YARON’S REQUEST FOR JUDICIAL NOTICE
MASTER FILE NO.: 5:05-CV-3395 (JF) 384715.01
Defendants Igal Kohavi, Yair Shamir and Giora Yaron respectfully request that the Court
take judicial notice, pursuant to Rule 201 of the Federal Rules of Evidence, of certain documents
and information cited in support of their Motion to Dismiss the Consolidated Class Action
Complaint.
I. REQUEST FOR JUDICIAL NOTICE
Pursuant to Federal Rule of Evidence 201, Plaintiff requests that the Court take judicial
notice of the following:
(A) Mercury Interactive Corporation’s (“Mercury”) Press Release dated November 2,
2005, announcing the determinations of the Special Committee of the Board of Directors based
on their internal investigation relating to past stock option grants in response to an inquiry which
was initiated by the SEC;
(B) The Report of the Special Litigation Committee of the Board of Directors of Mercury
Interactive Corporation, dated June 7, 2006;
(C) A Mercury Press Release dated February 15, 2006 announcing the appointment of
Stanley Keller to Mercury’s Board of Directors;
(D) A Mercury Press Release dated February 22, 2006 announcing the appointment of
Joseph Costello to Mercury’s Board of Directors; and
(E) A Mercury Form 8-K, filed with the Securities and Exchange Commission (“S.E.C.”)
on June 6, 2006.
These documents are attached hereto as Exhibits A though E, respectively.
II. JUDICIAL NOTICE IS APPROPRIATE
The material set forth above is suitable for judicial notice pursuant to Federal Rule of
Evidence 201(b). Under that rule, the Court may take judicial notice of any matter that is “not
subject to reasonable dispute in that it is either (1) generally known within the territorial
jurisdiction of the trial court or (2) capable of accurate and ready determination by resort to
sources whose accuracy cannot reasonably be questioned.” Each of the documents cited above is
either: (1) cited in the Consolidated Class Action Complaint; (2) publicly-filed with the S.E.C.;
or (3) both, and therefore properly considered by the Court as part of this Motion to Dismiss.
Case 5:05-cv-03395-JF Document 153 Filed 11/17/2006 Page 2 of 3
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2 DEFENDANTS KOHAVI, SHAMIR AND YARON’S REQUEST FOR JUDICIAL NOTICE
MASTER FILE NO.: 5:05-CV-3395 (JF) 384715.01
Documents cited in a Complaint -- like the contents of “relevant public disclosure
documents required to be filed with the SEC” -- may clearly be considered by this Court in
ruling on a defendant’s motion to dismiss." In In re Silicon Graphics Sec. Litig., 970 F. Supp.
746, 758 (N.D. Cal. 1997) (citations omitted), the court held in this regard that:
‘[a] district court may take judicial notice of the contents of relevant public disclosure documents required to be filed with the SEC as facts capable of accurate and ready determination by resort to sources whose accuracy cannot reasonably be questioned'...Even if the Court cannot properly take judicial notice of defendants' SEC forms, given plaintiffs' reliance on the documents, the Court may consider them under the incorporation by reference doctrine. This doctrine provides that 'documents that a defendant attaches to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiff's complaint and are central to her claim.'
In re Silicon Graphics Sec. Litig., 970 F. Supp. 746, 758 (N.D. Cal. 1997). See also Silicon
Storage Technology, Inc. 2006 U.S. Dist. LEXIS 14790, *6-7 (N.D. Cal. March 10, 2006)
(“material that is properly presented to the court as part of the complaint may be considered as
part of a motion to dismiss. . . . If a plaintiff fails to attach to the complaint the documents on
which it is based, defendant may attach to a Rule 12(b)(6) motion the documents referred to in
the complaint to show that they do not support plaintiffs claim”) (citations omitted). Because
each of the documents cited above is either referenced in the Complaint (or otherwise fairly
considered part of the pleadings) and/or a document filed with the S.E.C. whose accuracy cannot
reasonably be questions, defendants Kohavi, Shamir and Yaron respectfully request that the
Court take judicial notice of each of these documents.
Dated: November 17, 2006 PAUL, WEISS, RIFKIND, WHARTON & GARRISON
KEKER & VAN NEST, LLP
By: /s/ Asim M. Bhansali _________________ASIM M. BHANSALI Attorneys for Defendants IGAL KOHAVI, YAIR SHAMIR, and GIORA YARON
Case 5:05-cv-03395-JF Document 153 Filed 11/17/2006 Page 3 of 3
MERCURY"Investor Refations Contort
Michelle Ahimann, 850 609.5200
Public Rotations Contact
Dave Paterson. 650.603 .520 0
• David Murphy Appointed Chief Financial Officer, Glora Yaron Elected Chairman• Board Accepts Resignations of Amnon t.andan, Douglas Smith and Susan Skaer• Resignations Follow PnseritalJon to Board of Special Committee's
Determinations of Previously Announced Investigatio n• The Company expects revenue to be $205 million to $210 million for the third
quarter ended September 30, 2005
mouwA S Viaw. CA, Mmuti n 2, 2008 - Mercury Interactive Corporation (NASDAQ: MERQE) today
announced that the Board of D irectors has named Anthony (Tony') Zingate as" t executive officer. Mr.
Zngate, who joined Mercu ry to December 2004 as the Company's president and chief operating oiic r. is
a highly regarded executive with more than twenty years of experience building profitable, high growth
Info►msnat technology companies . David Mwphy. who ioinad the Company in 2003 as senior vice
president. corporate development, has been named cItK financ ial officer. Dr . Olora Yaron. a member of
the Mercury Board since 1996 . has been elected Chairman of the Board .
The appointments of Mr . ZIngale, Mr. Murphy. end Dr. Yaron follow the presentation of
determinations by the Special Committee and its independent counsel , O'Melveny & Myers 4LP to the
Board of Directors regarding the previously announced investigatio n.
As previously announced . the Special Committee was formed to June 2000 to conduct an intern al
inwesiigatbn raising to past stock option grants iA response to an Inquiry which . was initiated by the
Securities and Exchange Commis sion in November. 2004. The Special Committee, its outside Legal
counsel and aCmunting experts reviewed millions of pages of documents , interviewed numerous
individuals. and engaged in a forensic audit of the issues under investigation . As a pa rt of ft continuing
hwestigation, the Special Committee has d.tenmined .the following:
From 1991 5 to the present. Utere have been kxty nine Instances In which the stated dare of a
Mercury stock option grant is different from the date on wtxdi the op tion appears to have actually been
granted . in akaost every such instance, the price on the actual date was higher than the price on the
stated grant date . These Instances represent the overwhelming majority of the grants between January
1996 and ApiR 2002. The misdating occurred with respect to grants to an levels of employees .
Page 2
Chief Executive Officer Amnon London . Chief Financial Officer Douglas Smith. and General
Counsel Susan Skeet rota each aware of and, to varying degrees, participated in to practices
discussed above. Each of them also benefited personally from the practices . While each of time
officers asserts that he or she did not focus on the fact that the practices and their ratated accounting
were knproper. the Special Committee has concluded that each of them knew or should have known that
the practices were contrary to the options plan and proper accounting . While the Special Committee is
appreciative of and sympathetic to the far-reaching demands of these executives' positions during this
critical period. missing or overcooking a practice as basic and important as the proper granting of options
is not acceptable .
On at least tree occasions , between 1998 and 2001 . exercise dates for options exercised by Mr.
t.andan appear to be incorrectly reported, which would have had the effect of reducing Mr. Gander'sintone and sxposing the Company to possible penal ties for failure to pay withh olding tames .
In addition, a $1 mlaon ban to W. Landan in 1999 (which has since been repaid) did not appear
to have been approved in advance by the Board of Directors and was referred to in some of tieCompany's publicfirings, but was not dearly disclosed .
Intentional selection of a favorable pine for option grants appears to have ended In or about
April 2002. at which time the Company began to blow a different daring practice for grants.
The Spedal Committee believes that questions should have been raised in the minds of the
Compensation Committee members from 1995 through 2002 (who In cluded present directors coat Kahavi .
Yair Shamir and Or. Yw ii) whether six giant that they approved by unanimous written Consent wereproperly dated. It appears that the Compensation Committee members reasonably, but mistakenly, raged
on management In draft the proper documentation for the option grants and to account for the optionsproperly. The Special Committee believes that changes in Board procedures made In recent years will
prevent stmiaroversights occurring in the future.
During the relevant period. Mercury's internal controls and accounting controls with re spect tooption grants and exerases were Inadequate. The weaknesses allowed dates of both grants andaxen~ses to be manipulated. They also Mowed grant dates to be changed to provide employees withmore favorably priced options . The Company began to Improve Its controls and procedures in April 2002
and has continued to improve them. The Special Committee believes that c hanges that Mercury hasmade with respect to its option practices will help prevent a recurrence of the problems.
Based on the evident, reviewed during Is Inve tigatlon, the Special Committee has concluded
that the actions of Mr. London, Mr. Smith and Ms . Skaer are not acceptable .
Page 3
Accordingly. the Board has accepted the resignations of Mr. Landan as chairman, chief executive
officer and director. Mr. Smith as executive vice president and clue( financial officer, and Ms . Skaer as
vice president. general counsel and secretary. Pursuant to his employment agreement . Mr. Landan is
entitled to 60 days prior notice for his resignation being effective . He is being refeved of all his duties
immediately.
The Company expects revenue to be $205 .0 million to $2t0.0 million for the third quarter ended
September 30.2003. As a result of these announcements and the findings of the Special Committee. the
Company is not to a position to provide its entire financial results for 03 2005 . The Company is working
diligently to determine the impact of the nisdatad stock grants identified by the Special Committee . and
an impact of M new issues related to mISdated option exercises and certain bans to officers in 1998.
1999. and 2001 on Its current and hlstoricat financial statements included in its current report on Form 10•
K and its report on Form 10.0 for the first quarter of 2005 . The Company does not believe that these
items wig have an impact on its historical revenues, cash position or non'siodc option related operating
expenses. Due to the pending restatement. the Company Is not able to give C~ fully diluted earnings
per share or non-GAAP fully diluted earnings per shore at this lkae. The Company believes that h
ability to ft amended reports by November 30. 2005 on Form 104< and Form 10.0 with the Securities
and Exchange Commission with respect to such periods is in serious jeopardy .
The Company anticipates that the fourth quarter will be challenging and at this time we will not
provide guidance for 04 2004.
As previously announced, the Company may be delisted by NASDAQ in the event k does not
complete such restaliments and submit the required Stings to the SEC by November 30, 2005 . The
Company anticipates providing the Panel with a revised plan of compliance by no later than November
15.2005. Thera 1s no assurance Out the Panel will provide the Company with any additional eidenslon s
beyond November 30.2005.
The Company's Board of Directors stated . 'Arnnon Leaden should be credited with establishing
the Company as a leader in its markets. However. the adverse findings of tt>! Special Co ittee'a
investigation make It appropriate for him . and the other trw indMdua s, to relinquish their positions.
Mercury Is well served having Tony Zingale assume the leadership of the Company . He is a highly
respected professional, with a proven (rack record . He is knowladgeabte about Mercury. its markets . and
customers. He is uniquely qualified to lead Mercury (or longterm success ."
'Mercury is committed to achieving consistently strong profitable growth over tM long term to Ore
benefit of its customers . people. and in so d oing. realizing enhanced value to shareholders . said Tony
Zingale. Mercuiys new chief executive officer. 'Our focus Is to ensue we capitadte on our significant
market opportunity, clear technology leadership . great people, and loyal customer base ."
Page 4
"Similarly. our constituencies can be fully assured that Mercury will be a model for best business
practices and toll compl2ancs with all regulatory and le gal requirements . This Is a responsibility that we
have to all our consittuenduu and is a core element of our business foundation going forward." concluded
Mr. Zingafe.
Anthony ("Tonyi Zingste Backgroun d
Prior to serving ss Mercui s President and Chief Operating ORkvr, Mr. Zingale was president
and chief executive officer of Clarify . a publicly traded enterprise technology company that was a leader in
the customer rslationship management market from 1997 until It was acquired by Nortel Networks . in
2000. Following the acquisition, he served as president of Nortrt's billon-dollar eBuslness Solutions
Group. Prior to that, Mr. Zingata spent mote than 10 years at Cadence Design Systems, Inc ., a leading
supplier of electronic design products and services, in a succession of executive management positions
leading to his note as senior vice president of worldwide marketing . Mr. Zingate holds a Bachelor of
Science degree in electrical and computer engineering and a Bachelor of Arts degree In business
administration from the University of Cincinnati .
David Murphy Background
David Murphy joined Mercury In January 2003 . Prevkwaly, he was CEO of Asera . when he led
the company's efforts as a pioneer in delivering real time collaborative business process solutions for the
extended enterprise. 6etore joining Assra . Mr. Murphy was president and general manager of Tivoli
Systems at IBM where he was responsible for day-today operations and drove aggressive expansion
into new markets. Previously he was head of the private equity Investments group at Perot Systems and
a partner at Mcldnsey & Company. Mr. Murphy holds master's degrees in business administration from
the Stanford Graduate School of Business Administration and in electrical engineering from Ftoride
Atlantic University. as well as a bachelors degree in computer science and applied mathematics from the
Universlly of La~svlM .
Dr . Glora Yaron Backgroun d
Dr. Glare Yaron has been a Director of Mercury shoe February 1998. Dr. Yaron Is a founder of
several startup companies and curren tl y serves as their active Chairmen . Prior to that, Dr. Yaron served
as the pr nl of Indigo NV. from August 1992 to November 1995. From April 1979 to July 1992, Dr .
Page 5
Yaron was with National Semiconductor Corporation where he served as general manager of its lsraefi
operations and corporate vice president of Microprocessor Products. Dr. Yaron also serves as chairman
of the board of Ylssum Research & Development Company of the Hebrew University and a member of
the Board of Governors and the Executive Committee of the Hebrew University.
Appendix: Summary of Special Committee Findings to Dale
From 1995 to the present. there have been forty-nine instances in which the'ststed date of a
Mercury Interactive Corporation ("Mercury" or'the Company') stock option grant is different from the date
on which the option appears to have actually been granted. In almost every such instance, the price on
the actual date was higher than the price on the stated grant date . These Instances represent the
overwhelming majority of the grants between January 1996 and April 2002 . The misdating occurred with
respect to grants to am levels of employees . On at least three occasions. the exercise dates foe options
exercised by Mercury executives appear to have been incorrectly recorded . In addition . a $1 million loan
to Mr. Landan in 1999 (which has since been repaid) was not dearly disclosed in the Company's public
filings.
The misdated stock option grants fa ll largely into three categories: (I) look back' grants, in which
the date of the grant was picked retroactively (e .g ., a decision In February to pick a January date):
(u)'wall and see grants. In which a grant date was selected, but the decision was finalized - and
somefwnes changed - at a later data (e.g . . a decision on January 1 to Issue a grant on January 15, but
then Is a period after January 15 In which the grantor waits to see If a more advantageous price occurs
and . if one does, uses that later date instead) ; and (III) grants where there was a failure to complete the
option grant process by the data of the grant (e.g. . where there is a decision to issue a grant as of a
certain date . but agar that date there we changes In the grantees or amounts to granteees, and although
the work is not complete on those grants as of the stated grant date, that date is nonetheless used) .
During the 1995 to April 2002 period . most grants fell Into the 'took back' and 'wait and see
categories . Since April 2002, two have been a small cumber of instances of the third category Identified
above, in which the Company appears to have been matting changes to the grantors or amounts of the
options after the stated data of the option grant. However, intentional selection of a favorable price for
option grants appears to have ended in or about April 2002, at which lime the Company began to follow a
different dating practice for new-ire. transfer and promotion grants . Pursuant to that practice . which is in
effect now . all such grants are to be made on a fixed date based an the employee's hire data .
Chief Executive Officer Amnon Landan . Chief Financial Officer Douglas Smith, and General
Counsel Susan Skier were each aware of and, to varying degrees, participated In the practices
Page S
discussed above . Each of them also benefited personally from The proms. While each of these
officers asserts that he at she did not focus on the fact that the practices and their related accounting
were improper, the Special Committee has concluded that each of them knew or should have known that
the practices were contrary to the options plan and proper accounting. While the Special Committee is
appreciative of and sympathetic to the far-reaching demands of these executives' positions during this
critical period, missing or overlooking a prate as basic and important as the proper granting of options
is not acceptable.
In reviewing the evidence. the Spectral Committee believes that questions should have been
raised in the minds of the Compensation Committee members fro m 1995 through 2002 (who Included
present directors Mr. Kohavi. Mr . Shamir and Dr. Yaron) whether six grants that they approved by
unanimous written consent were properly dated . The evidence indicates that the Compensation
Committee members were focused on the substance of who received options and how many options they
received. as opposed to the effective dales of the unanimous v,itten consents . It appears that the
Compensation Committee members reasonably . but mistakenly, re li ed on management to draft the
proper documentation for the option grants and to account for the options properly. The Special
Committee believes that changes in Board procedures made in recent years will prevent similar
oversights occurring In the future.
On at bast three occasions, the exercise dates for the options exercised by Mercu ry executives
including Mr. Landon appear to have been Incorrectly reported. In each cane. the price of Mercury stock
was substantially lower on the reported date than on the date the option appears to have been actually
exercised. The repallng of an incorrect date would have had the effect of reducing the executives'
taxable income significantly and exposing Mercury to possible penalties for failing to pay withholding
taxes. In at leastone instance, Ms . Skeet was involved in Mr. Landan s exercise of options as of a prior
date.
Mr. Landan received three loans from Mercury. Two of the mans were for a total of approximately
$3.4 minion in connection with the exerdee of options by him and other executives. In September 1999.
Mr. Landan received a Si million loan from Mercury. The Special Committee has not been able to find
any record that the Si million ken was approved in advance by the Board of Directors . although the
board did approve an extension of the loan in December 2000 . The loan was referred to in some of the
Company's public lungs, but was not clearly disclosed . Not did Mr. Landon disclose it In his Directors
and Officers questionna ire in February 2000. the Special Committee has not yet been able to ascertain
the purpose or use of the loan. Each of the loans, together with applicable Interest, has subsequently
been repaid in U.
Page 7
Based on the evidence reviewed during its investigation, the Special CommiUce has concluded
that the actions of Mr. London . Mr. Smith and Me . Skoer set forth above are not acceptable. Ms. Skaer
and Mr. Smth have resigned from Mercury . and Mr. Landan has resigned from Mercury and from
Mercury's Board of Directors . The Special Comna'Ites has also expressly reserved all of the Company's
rights against Mr . Landon . Mr. Smith and Us . User.
Owing the relevant period . Me,* uy's internal controls and accounting controls with respect to
option grants and exerdses were inadequate. The weaknesses allowed dotes of both grants and
exercises to be manipulated. They also a llowed grant dates to be changed to provide employees with
more favorably priced options . The Company began to Improve its controls and procedures in April 2002
and has coniinuod to improve them. The Special Committee believes that changes that Mercury has
made with respect to Its option practices will help prevent a recurrence of the problems discussed herein .
end that additional remedial measures which it Is recommending wi ll further protect against a recurrence
of trio problems uncovered In Its investigation .
About Mercu ry
Mercury Interactive Corporation (NASDAQ, MERGE) . the global loader in business technology
optimization (STO) software . is committed to helping customers oplimfzze the business value of
information technology. Founded In 1989. Merauy conducts business worldwide end Is one of the largest
enterprise sottwafn companies today. Mercury provides softare and services for IT Governance .
Appticauon Delivery . and Application Management. Customers worldwide rely on Mercury offerings to
govern the priorities, processes and people of IT and test and manage the quality and performance of
business-ulUcet applications . Mercury 8TO offerings are complemented by technologies end services
from global business partners. For more fn(orrnation, please visity~can.
Forward Loosing Statements
The press release contains 'bward4aoking statements' under the Private Securiibs Litigation
Reform Act of 1995 that involve risks and uncertainties concerning Mercury 's expected financial
performance. as well as Mercur y's future business prospects and product and service offe rings. Mercury's
actual results may differ materially from the results predicted or from any Other forward-looking
statements made by. or on beha lf of. Mercury and reported results should not be considered ss an
indicpUon of future perfomwnce . Potential risks and uncertainties include. among other Things; 1) the
timing of completion of the Company's review, restatement and fitng of its historical Aneneiat statements
and the sling of its Form 10-0 (r the second and W id quarters of fiscal year 2005.2) the impact of th e
expensing of stock options and stock purchase, under Meiwys employee stock purchase program
pursuant to Financial Accounting Standards Board 's Statement 123 including, without Rmitatiom the
Pop 8
impact of the restatement. 3) the b tpact of the resignations of Amocn Landan, Douglas Smith and Susan
Skier. 4) the pos*Aty that the trustee for the Notes or the holders of at least 25% of the outstanding
prtndpat amount of the Notes may. if the Company does not Me Its historfcaf Rnanclal statements and
periodic reports by March 31, 2005 . cause acceleration of repayment of the emirs principal amount and
accrued Interest on the Notes, 5) the nature and scope of the ongoing SEC investigation . 6) the
substantial risk that the Company will not So its quarterly reports on Form 10.0 for Ina periods ended
June 30.2003 and September 30.2005 and all regtirsd restated and other financial statements for
previous periods by November 30.2005 and that the Nasdaq Uzi" Quallrications Panel may not grant
the Company's request fora further extension to regain compliance wlh Nasdaq listing quetiflcauone, in
which case the Company's common stock would be delisted from the Nasdaq National Market . 7) the
effect of any third party litiga tion arising out of the Special Committee investigation . 8) costs incurred by
Mercury in connection with the Special Committee investigation and the SEC Investigation . 9) the mix of
perpetual and term licenses and the effect of the liming of recognition of revenue Corn products s ol d
under the term licenses. 8) the impact of the transition In Europe. 10) the amount of rsshucttxirg charges
incurred by Mercury In the th ird quarter. 11) dependence of Mercury's growth on the continued success
and acceptance of Its existing and new software products and seMco$ and on the success of its STO
strategy. and 12) the additional risks and important factors described in Mercury's SEC repct1i indudtrg
the Quarterly Report on Form 10-Q for the fiscal quarter ended March 31 .2005. which is available at Use
SEC's websits at INto:Ilwww.sec acv. AN of the INoenation In this press release is made as of November
2. 2o05, and Mercury undertakes no duty to update Ills information.
Mercury . Mercury Interactive and the Mercury Moo are trademarks of Mercury. Interactive Corporation andmay be regislsred in certain jurhdlctfons. Other product and company names are used herein foridentification purposes only, and may be tradsrnarks of their respective companies .
Investor Relations ContactsMichelle AhlrnarwiMe cury{65p) 603.5200
Public Relation ContactsDave PetersonMercury(650) 6034200
REPORT OF THE SPECIAL LITIGATION COMMITTEE
OF THE BOARD OF DIRECTOR S
OF MERCURY INTERACTIVE CORPORATION
STANLEY KELLER, ChairBRAD BOSTON, MemberSpecial Li tigation Committee
MUNGER, TOLLES & OLSON LLPJOHN W. SPIEGELDAVID H. FR YSAMUEL N. WEINSTEINAJMEE A. FEINBERGCounsel to the Special Litigation Committee
June 7.2006
I . INTRQQL IQ-N
In November 2005, Mercury Interactive Corporation ("Mercury" or the
"Company") announced that a Special Committee of its Board of Directors had concluded . after
months of intensive investigation, that a large number of stock options granted to its employees
had been improperly dated . The improper dating of options has required the restatement of the
Company's financial statements for several years - a process that is not yet complete - and has
resulted in numerous securities fraud lawsuits filed against the Company, as well as shareholder
derivative suits fi led in the name of the Company. The financial costs to the Company of the
investigation . restatement, and litigation are substantial .
With this Report, the Company's Special Litigation Committee ("S LC-), created
by Mercury's Board of Directors to determine how the Company should respond to the
derivative actions . sets forth its conclusions. After an exhaustive investigation and careful
consideration, the SLC finds that it is in the best interest of Mercury that claims be pursued
against four of the Company's former officers named as defendants in the derivative actions .
Specifically, the Company should itself pursue claims against its former Chief Executive Officer,
Amnon Landan . using counsel retained and directed by the Company. The SLC further
recommends that the Special Committee void Mr. Landan's vested and unexercised options to
the extent they are found to have been dated improperly . The claims asserted against Douglas
Smith, Susan Skaer. and Kenneth Klein. the Company's former Chief Financial Officer . General
Counsel . and Chief Operating Officer . respectively, should go forward in the context of a
derivative action. They should not. however, be pursued in multiple different courts . Rather, the
SLC finds that these claims should be litigated in the Santa Clara County Superior Court, where
the first derivative action was filed .
While the SLC has concluded that there are claims that should go forward, there
are other claims that are not in the best interest of the Company . The SLC has concluded that the
claims asserted against three of the Company 's longstanding non-executive directors . Giora
Yaron, [gal Kohavi, and Yair Shamir, would fail in the face of the exculpato ry provision of the
Company's Certificate of Incorporation, which would permit damages claims against them only
for breach of the duty of loyalty or for actions taken in bad faith . It would not be in the
Company's interest to pursue these claims, which would also impose significant legal costs on
the Company and would distract it from its current business .
The SLC has also concluded that the claims against four other individuals shoul d
he dismissed : Tony Zingale, the current Chief Executive Officer and a former non-executive
member of the Board of Directors ; Bryan LeBlanc, formerly the Company's Principal
Accounting Officer, and ; Clyde Oster and Brad Boston . both non-executive members of the
Board of Directors . None of these four individuals was even affiliated with the Company at the
time of the principal events at issue . The claims against them would fail for lack of evidence of
wrongdoing, as well as due to the exculpatory charter provision to the extent the claims are based
on actions by Messrs . Zingale . Ostler, or Boston as members of the Board . The pursuit of claims
against any of these individuals would impose significant costs on the Company and would
distract the Company from its current business .
Finally, the SLC finds that the claims against the Company's independent auditor .
PricewaterhouseCoopers . should be stayed for at least an additional six months.
PticewaterhouseCoopers plays a central role in the Company's restatement process . It is in the
best interest of the Company that its relationship with PricewaterhouseCoopers not be interfered
with and that PricewaterhouseCoopers not be distracted from that task by an investigation
regarding past audits or by derivative litigation .
II . . BACKGROUND
In November 2004, Mercury was contacted by the Securities and Exchang e
Commission ('SEC") as pa rt of an informal inqui ry entitled In the Matter of Certain Option
Grants (SEC File No. MHO-9858) . At that time, it was the Comp any's understanding that the
SEC inquiry was limited to the issue of whether a small number of specifically identified stock
option grants had been made in advance of favorable public statements . The Company
voluntarily produced documents in response to an SEC request .
In April 2005 , the SEC expanded its informal inquiry . It requested additiona l
documents from the Company and asked to take the testimony of Company personnel . In
connection with the SEC's examination of Company personnel, the Company determined that
there were potential problems with the dating and pricing of stock option grants and with the
accounting for these option grants .
The Board of Directors determined on June 7. 2005 to form a Special Committee
of disinterested directors with broad authori ty to investigate and address these issues . The
Special Committee was composed of two disinterested members of Mercury 's Board of
Directors and Audit Committee . Clyde Ostler and Brad Boston . The Special Committee retained
the law firm of O'tvtelveny & Myers LLP as its independent outside counsel . O'Melveny &
Myers hired Ernst & Young as independent accounting experts to aid in its investigation .
On August 29 . 21005 . the Company announced that it would need to restate its
financial statemen ts for the fiscal years 2002.2003 . and 2000-4 . as well as those included in the
Form 10-Qs for those years and the first quarter of .1 005 . On October 14. 2005. a shareholder
derivative action entitled Conrardv v. Landon, et at., was filed in the Superior Cou rt of
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California in and for the County of Santa Clara, alleging that certain current and former officers
and directors had breached their fiduciary duties and caused the Company to the misleading
financial statements .
On November 2 . 2005, the Company announced the Special Committee's findin g
that there had been numerous instances where the date of a Mercury stock option grant was
different than the date on which the option appeared actually to have beert granted, including the
overwhelming majority of the grants made between January 1996 and April 2002 . The Special
Committee found that intentional selection of favorable prices for option grants appeared to have
ended in or about April 2002, at which time the Company began to follow a different dating
practice for grants. The Special Committee also found that the Company's internal controls and
accounting controls were inadequate during the relevant period, but were improved in April 2002
and continued to improve thereafter .
The Special Committee also determined that, on at least three occasions, optio n
exercises by the Company's Chief Executive Officer, Amnon Landan. had been misreported and
that a Si million loan to Mr. Landan was not approved in advance by the Board . The Company
announced that Mr. Landan had resigned. as had the Company's Chief Financial Officer ,
Douglas Smith, and the Company's General Counsel . Susan Skaer.
The day after the November 2, 2005 announcement, another shareholder
derivative suit was filed, this time in the Delaware Chancery Court . Schwartz v. Landon, etUl.,
Delaware Court of Chancery. New Castle County . Case No. Civ . A. 1755-N, filed November 3 .
2005. The day after that, a third suit was filed in Santa Clara County Superior Court .Nurilly v.
Landau, et al., Santa Clara County Superior Court Case No . 1-05-CV-51923, filed November 4,
2005 . On November 14-16, 2005, five shareholder derivative actions were filed in the Unite d
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States District Court for the Northern District of California. Korliely v. Boston. et id., N .D . Cal ..
Case No . C05-4642, fi led November 14 .2005 : Casey, Jr. v. London . et rel. . N.D. Cal ., Case No .
C05-04690, filed November 15, 2005 : Gupta v. Boston, et al. . N .D. Cal ., Case No . ODS-4685,
filed November 15. 2005 : City of New Orleans Employees' Retirement System v. Landau, et a l- ,
N .D . Cal .. Case No. C05-4704, filed November 16, 2005 : Selig v. Laudan, et al ., N.D. CA., Case
No. C05-4703, filed November 16, 2005 . An additional action was filed in Delaware Chancery
Court in February 2006, Cropper v Landan, Delaware Court of Chancery, New Castle County.
Case No . Civ. A. 1938-N, filed February 13, 2006 . The defendants in these actions vary, but
include a number of current and former officers and directors of the Company . as well as the
Company's independent auditor. PricewaterhouseCoopers LLP.
The claims asserted in these actions include the following :
A. Breach of Fiduciary Duty ;
B. Abuse of Control .
C. Gross Mismanagement;
D. Waste of Corporate Assets,
E. Unjust Enrichment;
F- California Corporations Code Section 25402 ;
G. Breach of Fiduciary Duties for Insider Selling and Misappropriation of
Information:
H. Contribution and Indemnification ;
1 . Violation of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule
10b-S{15 U.S .C. § 78k(b) ; 17 C.F.R. § 230.1Ob-5) :
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J . Violation ofSection 14(a) of the Securi ties Exchange Act of 1934 and SEC Rule
14a-9 (15 U.S .C. § 78n(a) ; 17 C.F .R. * 240 .14a-9(a)) ;
K. Disgorgement under Section 304 of the Sarbanes-Oxley Act of 2002 (15 U .S .C .
§ 7243) ;
L. Professional Negligence and Accounting Malpractice ; and
M. Aiding and Abetting B reaches of Fiduciary Duty . Abuse of Control, Unjus t
Enrichment . and Gross Mismanagement .
A consolidated amended complaint filed in the Northern District of California in May 2006
added a claim under Section 16 (b) of the Securities Exchange Act of 1934. 1
In December 2005, the Special Committee contacted Munger. Tolles & Olson
LLP with respect to the Company's re sponse to the shareholder derivative actions . On February
S . 2006, the Company ' s Board of Directors established a Special Litigation Committee of
disinterested directors charged with formulating the Company 's response to these suits . The
Board chose two disinterested Board members, Stanley Keller and Brad Boston , to serve on the
SLC_ The SL .C engaged Munger , Tolles & Olson as its counsel .
111 . INDEPENDENCE
By appointing two disinterested directors, the Board ensured that the S LC Is
independent .
'The claims asserted under Section 164b) of the Securities Exchange Act of 1934 are not true derivativeclaims and. therefore, present a different legal issue . Unlike true derivative claims, these claims do notbelong to the Company (although it is entitled to amounts recovered) . Accordingly, the SLC does notmake a recommendation regarding whether these claims should go forward or not . There is an additionalaction pending in the United States District Court for the Northern District of California that asserts solelySection 16(b) claims . Klein v. Landan, United States District Court, Northern District of California CaseN'o. C06 2971 . Because the Klein action asserts no true derivative claims, the SLC makes norecommendation Kith respect to the claims asserted therein .
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A. Stanley Keller
Mr. Keller is a partner in the law fum of Edwards Angell Palmer & Dodge LIP in
Boston, Massachusetts . Mr. Keller joined Palmer& Dodge. a predecessor of his current firm. in
1962 and become a partner in that firm in 1969. Mr. Keller's low practice has encompassed
most areas of corporate and securities law, but has focused on : corporate financings . including
both public and private securities offerings ; advising companies on compliance with Securities
and Exchange Commission rules, public disclosure requirements, and best practices ; Sarbanes-
Oxley Act compliance ; mergers and acquisitions; and corporate governance . W. Keller
formerly served as Chairman of the American Bar Association's ("ABA") Committee on the
Federal Regulation of Securities, as well as Chairman of the ABA's Ad Hoc Committee on Audit
Responses . He also acted as a special advisor to the ABA's Task Force on Corporate
Responsibility .
Mr. Keller has participated in a large number of educational panels addressing
issues of corporate governance and securities regulation . Mr. Keller has also published
extensively on the these and related subjects . His books include :
Co-Editor. The Practitioner's Guide to the Sarhanes-O.rlev Act (ABA 2004) .
Co-Author, Massachusetts limited Liability Company Forms and Practice Manual (Data
Trace Publishing Co . 1996).
Co-Editor, International Securities Law Handbooks (Graham & Trotman Limited 1995) .
Editor. Massachusetts Business Lawyering (Iv1CLE 1991). a t tee -volume treatise .
Mfr. Keller's most recent articles include :
Streamlined Form of Closing Opinion," co-author, 61 Business Lawyer 389,
November 2005 ;
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"Searching Google for Meaning: Equity Compensation Pitfalls and a Changed Climate
for Lawyer Responsibility," INSIGHTS, August 2005;
The Meaning of the Titan 21(a) Report. New Disclosure Practices for Contractual
Representations :' INSIGHTS, June 2005 . and .
'The New Form 8-K Disclosure Requirements : Q&As." ABA The Securities Reporter,
Volume 10. Issue 1 . Spring 2005.
Mr . Keller joined the Mercury Board of Directors in February 2006, well after th e
events alleged in the derivative complaints. Before joining the Mercury Board, Mr. Keller had
no personal, professional, or familial relationship with any of the defendants named in the
derivative complaints . He continues to have no personal or familial ties to any of the individual
defendants. His sole professional connection to the individual defendants is his service on the
Board of Mercury at times when certain of the defendants were either officers or directors of the
Company . Mr. Keller 's law firm has never represented Mercury or any of the individual
defendants . He is not named as a defendant in any of the derivative actions .
B.Arad Boston
Mr. Boston is Senior Vice President and Chief Information Officer of Cisco
Systems, Inc ., a Fortune 100 company. Before joining Cisco in August 2001 . Mr. Boston was
Executive Vice President for product development and delivery at the Sabre Group . Prior to his
work at the Sabre Group. Mr. .Boston held senior executive positions at Visa International,
United AirlineslCovia, and American National Bank . In addition to Mercury, Mr. Boston serves
on the boards of directors of Active Power. Inc . . a publicly traded provider of back-up energy
iystems. and NetNumber. Inc.. a privately held provider of next-generation computer networking
technology . Mr. Boston is also a member of the Harvard Group Board of Advisors and the E-
business Advisory Board for Texas Christian University MMi . Neeley School of Business . Mr.
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Boston has been named by Business Week magazine as one of the 25 most influential people in
e-business and by Computer world magazine as one of the 100 leaders in information technology .
Mr. Boston joined the Board of Directors of Mercury in May 2004 . well after the
principal events underlying the claims asserted in the derivative actions . Prior to joining the
Mercury Board, Mr. Boston had no personal, professional, or familial ties to any of the
defendants. He continues to have no personal or familial ties to any of the individual defendants .
His sole professional connection to the individual defendants is his service on the Board of
Mercury at times when the other defendants (except Mr . Klein) were either officers or directors
of the Company .
Mr. Boston recused himself from the SLC's deliberations and decision-making
with regard to how to proceed with respect to the derivative claims brought against him, as well
as those brought against Mr. Ostler.
C . Munger. ToHys 8 Olson LLP
Munger. Tolles & Olson LLP. counsel to the SLC. is one of the nation's premier
law firms . The firm is frequently engaged to conduct internal corporate investigations, handle
governmental investigations, and conduct litigation in state and federal courts across the country .
The fern has served as counsel to numerous special litigation committees of boards of directors .
The firm's clients include many of the largest and most sophisticated companies in America .
including Berkshire Hathaway, Shell Petroleum. Boeing, General Electric, Merrill Lynch. Edison
International, and Phillip Morris . Munger. Tolles & Olson has never represented Mercury in any
matter, nor has it represented any of the individual defendants or the Members of the SLC in any
matter .
Lead counsel for the SLC. John W. Spiegel, received his J .D. degree from the
Yale Law School . where he was Editor-in-Chief of the Yale Law Journal . Mr. Spiegel served a s
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law clerk to Justice Byron White of the Supreme Court of the United States du ring the 1976-77
Term and as Special Assistant to Deputy Secretary of State Warren Christopher from 1977 to
1979 . From 1979 to 1982 , he was an Assistant United States Attorney in Los Angeles . Since
then , M r . Spiegel has been in private practice and has represented a wide variety of major
corporations in securities , corporate governance and other complex litigation . Mr . Spiegel's
recent clients in securities and corporate governance matters have included Northrop Grumman
Corporation, The Walt Disney Company, Edison International , Occidental Petroleum
Corporation, Mattel , Inc ., and Time Warner Inc . Mr. Spiegel has served as chair of the ABA
Litigation Section Coordinating Group on Civil Justice Reform, c o- chair of the ABA Litigation
Section Committee on Class Actions and Derivative Suits, and chair of the Los Angeles Coun ty
Bar Association Committee on Professionalism . Mr. Spiegel was named one of Califo rn ia's Top
30 Securities Litigators by the Dai1v Jountal .
The SLC has conducted its investigation independently and reached it s
conclusions free from any biases or extraneous Influence. Neither the Chairman. Mr_ Keller, nor
Mr. Boston has any ties to the defendants, personal, professional or familial, that would prevent
him from basing h is decision in this matter purely on his assessment of what is in the best
interests of the Company.
IV. SCOPE F INVESTIGATION
In its authorizing resolution, the Board delegated to the SLC the power t o
"conduct an independent review and investigation" of the merits of the derivative lawsuits
brought against the individual defendants and to determine "whether to commence, prosecute,
terminate, and/or compromise litigation against any person or entity" arising out of the derivative
lawsuits . The authorizing resolution also states :
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In connection with its investigation, the Special LitigationCommittee shall have the right to avail itself of any and allmaterial, work product, and other information prepared orcollected by management . employees or agents of Mercury, theBoard or any committee hereof;
The Special Litigation Committee is charged with reaching its ownindependent determinations and conclusions regarding theDerivative Matters and, accordingly . shall be not be bound by anydeterminations or conclusions that the Board or any Boardcommittee has reached or may in the future reach regarding suchmatters ; . . .
The Special Litigation Committee is authorized to take any otheraction . including the initiation and prosecution of litigation forequitable. declaratory and/or monetary awards . that the SpecialLitigation Committee deems appropriate in its sole discretion,against any person or entity arising out of or related to theDerivative Matters based upon the Special Litigation Committee'sdetermination that such action is in the interests of the Corporation.
The SLCs investigation of this matter has been exhaustive. involving an in-depth
review of a significant volume of documentary evidence, both hard-copy and electronic, as well
as memoranda of interviews of the relevant Mercury personnel. The SLC made its
determinations based on its review of this evidence in light of its mandate to choose the course
that would be in the best interest of the Company. In making its determinations, the SLC was
guided by a number of considerations, including : the merits of the derivative claims ; the
likelihood of recovery on those claims . the Company's obligations regarding indemnification
and advancement of defense costs; concerns regarding the multiplicity of derivative actions . the
Company's insurance coverage ; the Company's current and future business ; and the Company's
ocher litigation risks.
A. The Special Commit e's Inyestigation
The SLC began its investigation by collecting and reviewing evidence necessary
to understand the relevant facts and the roles of the individual defendants in the underlying
events . In so doing. the SLC's counsel was provided with extensive materials gathered by the
Special Committee during its own in-depth investigation of the underlying events in this matter .
These materials included both documentary evidence and memoranda of interviews that the
Special Committee's counsel conducted with approximately thirty witnesses .
The Special Committee's investigation included document-collection interviews
with more than forty individuals . including relevant officers, administrative assistants . and key
individuals from the Stock Administration. Legal, Finance . and Human Resources Departments
at Mercury. These witnesses were asked to identify documents and files they maintained that
could contain relevant information . They were also asked how they maintained electronic
information, and whether they stored relevant electronic documents anywhere other than on
Company servers or Company-issued computers . They were also asked whether they were
aware of any other potential sources of relevant information, including files or data that may be
maintained by others . At the conclusion of each interview, the Special Committee made
arrangements to collect any relevant files or documents in the interviewee's custody .
As a result of these efforts, the Special Committee collected 200,000 pages of
hard-copy documents. These documents included active files from the Company's Legal
Department and Stock Administration Department. as well as files removed from off-site
storage. The Special Committee also requested and reviewed certain additional categories of
documents In the course of its investigation, including :
1 . SEC Filings from 1993 to the present, including reports filed on Forms l0-Q and10-K . as well as Forms 3.3. and 5 for Section 16 filers .
? . Records of the Stock Administration Department . including correspondence withthe Legal and Human Resources Departments regarding certain grants .
3 . Human resources and personnel files .
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4. Corporate minute books for the Board . Audit Committee. CompensationCommittee, and Stock Option Committee . including meeting minutes and writtenconsents back to 1993 .
5. Audit work papers and Company records supporting the same .
In terms of electr onic documents , the Special Committee collected over 2 . 8
million email messages and the contents of the hard drives of 35 individual witnesses, In the
course of its investigation, the Special Committee restored available backup tapes containing
emails and other electronic documents from relevant custodians . Further. the Special Committee
collected electronic versions of specific categories of documents, including Unanimous Written
Consents ("U WCs"), Board of Director meeting minutes, Compensation Committee meeting
minutes, and SEC forms 3, 4, and 5 . The Special Committee analyzed the metadata attributes of
these documents to determine when they were created and to discover any history of
modifications . Finally. the Special Committee collected and analyzed data from the Company's
computer system used to track and manage the Company's stock option grants .
In addition to the extensive range of documentary evidence, counsel for th e
Special Committee conducted over 60 substantive interviews with individuals who were though t
to have potentially relevant knowledge of the Company' s stock option practices. including :
Sharlene Abrams Amnon Landan
Jeff Albrecht Jay Larso n
Jayaram Bhat Bryan LeBlanc
Annie Butte Mark McCaffrey
Nina Chellew Gil Pennington
Katy Cole Vicki Rya n
Shari Favia Yuval Scarlat
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Susie Fregoso Cheryl Schrady
Leilani Gayles Yair Shami r
Zohar Gilad Susan Skacr
Kathy Hawkes
Jeff Jackson
David Kempski
Doug Smith
Amy Starr
Michelle Valentine
Kenneth Klein Giora Yaron
(gal Kohavi Tony Zingale
These witnesses were questioned regarding the Company's stock option practices ,
loans to officers, and various other issues . The Special Committee also questioned the witnesses
about relevant emails and other documents .
B . Tiff S1sC'sInve tlsation
From among the massive amount of information gathered and analyzed by the
Special Committee. the SLC and its counsel were provided and examined extensive evidence
relevant to its task . The SLC's counsel was provided and examined documentation the Special
Committee had gathered relating to stock option grants over the more than ten years since the
Company's stock became publicly traded . In addition, the SLC's counsel examined voluminous
email and other documentation relevant to option grants, option exercises, loans to executives,
and the Board members' performance of their oversight responsibility . The SLC members
personally examined extensive documentary evidence, including both email communications and
grant documentation, relating to the individual defendants named in the derivative actions .
The SLC's counsel also reviewed the interview memoranda the Specia l
Committee compiled from the more than 60 substantive interviews the Special Committee' s
counsel had conducted . The SLC members personally reviewed selected interview memoranda .
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The SLC took numerous additional steps during its investigation, beyond its
review of the above evidence. Counsel for the SLC reviewed available emails from the relevant
time period involving the individual defendants as to whom the SLC is recommending the
Company move to terminate the derivative litigation . This review was not limited to emaiis on
any particular subject or containing any particular term or terms, but rather was intended to reach
all of the emails of these individuals . The review included over 60,000 emaiks and attachments-
In addition, counsel for the SLC met with counsel for three of the individua l
defendants . Mr. Landan , Mr. Smith. and Ms . Skaer, in an a ttempt to better understand these
defendants ' position on the facts of this matter and the claims against them . Counsel for the SLC
also interviewed Mr. Klein and spoke with his counsel in order to understand Mr . Klein 's
position on the events at issue.
Counsel to the SLC and the SLC members themselves reviewed testimony tha t
Messrs. Giora Yaron , Yair Shamir. and Igal Kohavi gave to the Securities and Exchange
Commission in connection with its investigation . The SLC and its counsel also personally
inte rviewed Messrs. Yaron . Shamir, and Kohavi to gain a more complete understanding of the
underlying events .
The SLC analyzed these materials and other information it gathered in order t o
determine how to proceed with regard to the individual defendants . In making these decisions .
the SLC met with its counsel numerous times to discuss the details of the investigation and the
formulation of its determinations - In-person or telephonic meetings of the SLC were held on the
following dates : March 3 . M arch 10, March 1.0, April 4, April W. April 24, May 10, fay 11,
and June 5, :006. Members of the SLC also had numerous other discussions with its counsel
regarding both the factual and legal aspects of its investigation.
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The SLC's ultimate determinations were in all cases based upon the SLC's
mandate to choose the course of action that is in the best interests of Mercury . In coming to its
decisions. the SLC reviewed the specific facts regarding each of the individual defendants and
his or her role in the underlying events against the backdrop of the law applicable to the claims
asserted against them as well as how any particular course of action would affect the Company .
In each case, the SLC reached the decision it understands to be in the best interests of the
Company.
V. CONCLUSIONS
The SLC has determined that it is not in the Company's best interest to set forth
detailed factual findings regarding the issues raised in the derivative actions . The Company is
subject to several federal secutlties fraud actions . Moreover, the SLC has concluded that
derivative claims against certain of the defendants should proceed and that the Company itself
should pursue certain claims . The Company's litigation interests with respect to both the cases
brought against the Company and the claims brought by or on behalf of the Company will not be
well served by providing the Company's litigation opponents with a substantial amount of work
product generated by the SLC's counsel- Accordingly, this report states the SLC's conclusions
and, with respect to defendants as to whom the SLC believes claims should be dismissed, an
explanation of those conclusions. It does not, however, set forth the specific factual findings that
led the SLC to these conclusions.
Based on its investigation and deliberations, the SLC has reached the following
conclusions' :
This report addresses only conclusions reached by the SLC with respect to defendants named inthe de rivative actions referenced above and the claims asserted therein .
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A. Amnon Landa u
Amnon Landan served as the Chief Executive Officer of Mercury from 1997 until
November 2005 . He also served as Chairman of the Board of Directors from July 1999 until
November 2005 . Mr, Landan was a member of the Company's Stock Option Committee from
the Committee's inception in July 1998 until he left the Company .
The SLC concludes that it is in the best interest of the Company that the Compan y
pursue claims against Amnon Landan . rn terms of the mechanism of pursuing those claims, the
SLC finds it to be in the Company's interest that claims against Mr . Landan be pursued by the
Company itself. using counsel selected by and acting at the direction of the Company . Unlike
other defendants, Mr . Landan has an employment agreement with the Company that complicates
litigation involving claims the Company may have against him . In addition, the Company and
Mr. Landan have entered into an additional agreement reserving certain disputed issues relating
to his terms of employment and subjecting those issues to arbitration in the event that the patties
are unable to resolve those disputes . Given these complications, among other reasons. the SLC
rinds that the Company's interest will be best served .by itself directing any litigation involving
claims it may have against Mr. Landan. The SLC therefore concludes that the Company should
engage counsel to prosecute its claims.
In addition, the SLC finds that, in light of Mr. Landan's conduct and other
considerations, it would be in the Company's best interest for Mr. Landan's vested and
unexercised stock options, to the extent they are found by the Special Committee to be dated
incorrectly, to be voided by the Special Committee . Accordingly. the SLC recommends that the
Special Committee take that action .
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B. Kenneth Klein, Douglas Smith, tmd Susan Skaer
Kenneth Klein. Douglas Smith . and Susan Skaer are former officers of the
Company. Mr_ Klein served as the Company's Chief Operating Officer from 2000 until 2003 .
He was also a member of the Board of Directors from July 2000 until December 21003 . Prior to
his appointment as Chief Operating Officer . Mr . Klein was Vice President for North American
Sales . Douglas Smith was initially hired in 2000 as Executive Vice President, Mergers &
Acquisitions . In November 2001 . he became the Company's Chief Financial Officer, a position
he held until November 2005. Susan Skaer served as the Company's General Counsel from
2000 until November 2005 .
The SLC concludes that it is not in the best interest of the Company for the claim s
against Mr. Klein . Xlr. Smith, and Ms. Skaer to be dismissed. Rather, the SLC finds that these
claims should be pursued in the context of derivative litigation . It is not, however, in the
Company's best interest for claims against these individuals to be pursued in multiple courts . A
multiplicity of actions will greatly increase the expense and distraction resulting from the
prosecution of these claims . Among other things, the Company might be required to advance
defense costs to the defendants, which would be substantially higher if they were defending
claims in multiple courts. Moreover. multiple proceedings will hinder the expeditious resolution
of the claims in a manner favorable to the Company.
The SLC further finds that it is in the Company's best interest for the derivativ e
claims to go forward in the Santa Clara County Superior Court, where the first action was filed .
The cases pending in that court encompass all of the defendants . Witnesses and relevant
evidence are more readily available in Santa Clara County. where the Company's headquarters
are located, than in the more distant forum of Delaware . In addition, personal jurisdiction over
the defendants is more clearly available in the California courts . All three of these defendants
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reside in the state or. if any have moved, would be subject to suit here by virtue of the nexus
between the state and the events underlying the claims ,
The Santa Clara County Superior Court litigation is also more favorable to the
Company than is the federal court action. Under the Private Securities Litigation Reform Act
(PSERA"), the federal action is subject to a stay of discovery until the defendants' motions to
dismiss have been resolved . 15 U .S .C. § 78u-4(b)(3)(B). In contrast, the state court action can
proceed immediately . The Company has a strong interest in having these matters resolved
expeditiously because, among other reasons, the Company will receive any amounts recovered
and . during the pendency of the action . it may need to advance defense costs to the defendants .
The federal action does not offer any benefit to the Company that would offset th e
detriment imposed by the PSLRA's mandatory stay of discovery . Most of the claims asserted
there mimic those brought in the state court action . The claims asserted solely in the District
Court do not provide any benefit for the Company over and above the state law claims asserted
in the Superior Court action . The claim for disgorgement under Section 304 of the Sarbanes-
Oxley Act of 2002 . for instance, will fail because there is no private right of action under that
provision . See, e.g. . Kogan v. Robinson . _ F. Supp . 2d - 2006 WL 1495065 at *6 (S .D.
Cal . May 24.2006); In re Bisys Group Inc. Deriv. Utig., 396 F. Supp. 2d 463, 464 (S .D.N.Y .
?005); Neer v. Pelino. 389 F. Supp . 2d 648 . 657 (E .D. Pa. 2005). see also In re Friedm an's. Inc.
Deriv. Litfg., 386 F. Supp . 2d 1355 . 1368 (N.D. Ga. 2005) (stating that court is doubtful of the
existence of a private right to sue under Section 304" (internal quotation marks omitted)) . There
is no benefit to the Company in litigating a claim that is doomed from the outset ; rather,
litigating that claim will impose unjustified costs on the Company-
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Similarly, the claim under Section 14(a) of the Securities Exchange Act of 1934
adds nothing of benefit to the Company . In this claim . the shareholder plaintiffs claim that the
Company's proxy statement issued in March 2005, in connection with the election of directors,
was false or misleading for failure to disclose a variety of asserted failings related to stock option
grants and that, if the omitted information had been disclosed, the shareholders would not have
elected the directors . To the extent the plaintiffs seek to set aside the 2005 election of directors,
the Section 14(a) claim is pointless because the next election of directors will occur long before
the case is resolved, which will moot the issue . General Elec. Co . v. Cathcart. 980 F.2d 927,
934 (3d Cir. 1992) (request to set aside election of directors rendered moot by subsequent
election) . To the extent damages are sought, the Section 14(a) claim will fail because (among
other reasons) there is no causal connection between the alleged violation and the financial harm
the Company has suffered .
In order to show causation on a Section 14(a) damages claim, the plaintiff mus t
show that an affirmative vote by the shareholders was -an essential link in the accomplishment
of the transaction" that caused the damages, Mills Y, Electric Auto-cite Cu., 396 U.S. 375, 385
(1970), If an affirmative vote of the shareholders is not required for the transaction, causation is
absent . Virginia Bankshares . Inc. v. Sandberg . 501 U.S . 1083, 1102 . 1108 (1991) (holding that .
where offaffirmative shareholder vote is not legally required, Section 14(a) claim lacks element of
causation). The improperly dated stock option grants did not require a shareholder vote and, in
any event, were not the subject of the proxy statement issued in March 2005 .
Although the Section 14(a) allegations made by the shareholder derivative
plaintiffs are decidedly vague, the plaintiffs do not appear to claim (nor could they) that
shareholders approved any transaction that resulted in damage . Rather, the allegations assert tha t
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the directors up for election in 1005 might not have been elected . They offer no explanation of
how electing different directors in 2005 would have avoided the damage caused by improperly
dated option grants that long pre-dated that election . Even assuming that the shareholder
plaintiffs could identify some action or inaction by the Board in 2005 that caused the Company
harm, they could not premise a Section 14(a) claim on it . Allegations that the election of certain
directors resulted in mismanagement of the company do no provide the "essential link," required
for causation under Mills. General Elec., 980 F.2d at 933 (holding that election of directors that
allegedly results in those directors' mismanagement of the company will not create a sufficient
nexus with the alleged monetary loss'); Gannon v. Continental Ins. Co., 920 F . Supp . 566, 58 4
t D.N.J. 1996) . In short, the Section 14(a) claim will fail as a damages claim and will be rendered
moot as an equitable claim, Accordingly. it is not in the interests of the Company to devote
resources to litigating the claim.
The remaining federal claim asserted derivatively by the shareholder plaintiffs i s
brought under Section 10(b) of the Securities Exchange Act of 1934 .3 The premise of this claim
is that the defendants against whom it is alleged (Mr . Landan, Mr . Smith, and Ms. Skaer)
engaged in a scheme to defraud the Company by improperly dating option grants, exercising
improperly dated options, exercising options in an improper fashion that exposed the Company
to tax liabilities, misreporting their option grants and exercises to the Company and the public .
and causing the Company to file false financial statements, All of this conduct, assuming it is
proved, would support a claim for breach of fiduciary duty under state law . Unlike a claim under
' As noted above. the claim asserted under Section 16(b) is not a true derivative claim in the sense that theclaim does not belong to the corporation . For a variety of reasons - including the fact that the Companyis not required to advance the defendants ' defense costs with respect to Section 16(b) claims -- the factthat those claims may go forward in the United States District Court does not weigh in favor or having thetrue derivative claims proceed in that court .
-21 -
Section 1 0 Ib). moreover, a breach of fiduciary duty claim generally would not require proof of
rcienter . Further, recovering on a Section 10(b) claim would not add to the recovery available
under a breach of fiduciary duty theory. See Harman v. Masoneilan Intl, Inc. . 442 A, 2d 487.
499-504 (Del . 1982) (contrasting limits on damages at law for false representation with "the
relief available in equity for tortious conduct by one standing in a fiduciary relation with another
]which] is necessarily broad and flexible") . In this particular circumstance, therefore, the Section
10(b) claim is essentially a breach of fiduciary duty claim that is harder to prove .
[n short. pursuing the Section 10(b) and 14(a) claims is affirmatively detrimenta l
to the Company's interest because the existence of those claims subjects the entire action in the
District Court - including the Company's state law claims - to the PSLRA's stay of discovery .
SG Cowen Sec. Corp. v. United $rates District Court jor the Northern District of Califnrnin, 189
F.3d 909, 913 n.1 (9th Cir. 1999). Because the federal claims do not offer any realisti c
expectation of recovery beyond what is available under the Company's state law claims, will
delay the resolution of the claims, and will increase the Company's litigation expenses . the SLC
finds that the continued litigation of the Company's claims in the United States District Court is
contrary to the Company's best interest .
C. Glora Yarog, Igal Koitavi. and YairShprni r
Giora Yaron . Igal Kohavi, and Yair Shamir are non-executive members o f
Mercury's Board of Directors . Messrs . Yaron . Kohavi . and Shamir constituted the
Compensation Committee from 1996 until July 2002 . when htr. Kohavi left the committee .
Messrs. Yaron and Shamir have continued to serve on the Compensation Committee to the
present .
Mr . Yaron joined Mercury's Board of Directors in February 1996. He has served
as the Chairman of the Board since November 2005 . In addition to Mercury, Mr. Yaron is
-22-
Chairman or Co-Chairman of the boards of directors of three other companies : [tamar Medical
(CM), where he also served as Chief Executive Officer from January 1997 until November 2000 ;
Comsys Communications and Signal Processing Ltd. ; and P-cube Inc. Previously. Mr. Yaron
served as the President of Indigo NV from August 1992 to November 1995, Prior to that, he
worked for National Semiconductor Corporation from 1979 to 1992 . serving as General Manager
of the company's Israeli operations and Corporate Vice President of Office Products . Mr. Yaron
also serves as a director of Yissum Research & Development Company of the Hebrew
University and as a member of the Board of Governors and the Executive Committee of the
Hebrew University.
Mr. Kohavi joined Mercury's Board of Directors in January 1994. In addition t o
Mercury . Mr. Kohavi serves on the boards of VCON Telecommunications . Ltd . and Neat Group,
Inc. Mr. Kohn-vi has previously served as Chairman of the Board of Neat Group. Inc . . DSP
Group. Inc ., and Polaris . a venture capital fund . From October 1994 to March 1996 . Mr . Kohavi
served as the President and Chief Executive Officer of Dovrat-Schrem & Co . . Ltd. . an Israeli
investment bank. Mr. Kohavi served as President of Clal Computers and Technology Ltd, from
April 1986 to May 1993 and as President of its parent corporation, CJal Electronics Industries
Ltd .. from May 1993 until September 1994 .
Mr. Shamir joined Mercury's Board of Directors in August 1994 . In addition to
Mercury . Mr. Shamir serves on the boards of directors of DSP Group . inc . . Orckit
Communications Ltd., Poalim Capital Markets-Investment Bank Ltd . and VCON
Telecommunications, Ltd . . where he is the Chairman and Chief Executive Officer. Prior to his
work at VCON . Mr. Shamir served as Executive Vice President of The Challenge Fund-Etgar
L .P . . a venture capital firm, from August 1995 to Match 1997. From January 1994 until Jul y
-33-
1995. he was Chief Executive Officer of Elite Industries Ltd . . a major Israeli food products
company. Prior to that, Mr. Shamir was Executive Vice President and General Manager, Israe l
of Scitex Corporation.
The SLC concludes that it is not in the best interest of the Company to pursue th e
claims made against Giora Yaron. Igal Kohavi . and Yair Shamir. Because Messrs . Yaron .
Kohavi, and Shamir are, and were at the time of the underlying events, non-executive directors
of the Company, they are entitled to the benefit of the exculpatory provision of the Company's
Certificate of Incorporation .4 That provision states : "To the fullest extent permitted by the
Delaware General Corporation Law as the same exists or as may hereafter be amended, a
director of the Corporation shall not be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary ditty as a director." Delaware law in turn provides
that a corporation's certificate of incorporation may "eliminat(e) or limit[] the personal liability
of a director to the corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that such provision shall not eliminate or limit the liability of a
director . . . [f]or any breach of the director's duty of loyalty to the corporation or its
stockholders ; . . . for acts or omissions not in good faith or which involve intentional misconduc t
or a knowing violation of law ; . . . under $ 174 of this title; or . . . for any transaction from whic h
the director derived an improper personal benefit ." Del. Gen . Corp. Law * 102(b)(7).
The Delaware Supreme Court has interpreted Section 102(b)(7) as ••bar(ringl the
recovery of monetary damages from directors for a successful shareholder claim that is base d
This distinguishes these individuals from Messrs . Landan . Klein, and Smith and Ms . Skaer.Although Messrs . Landan and Klein were . at certain times, members of Mercury's Board ofDirectors, they were also officers of the Company and, to the extent they are sued for actionstaken as officers, they are not entitled to the protections of the exculpatory provision . Mr. Smithand his . Skaer were never members of the Company's Board .
24
exclusively upon establishing a violation of the duty of ca re ." Emerald Partners v. B erlin . 787
A.2d 85. 91 (Del. 2001). Thus . Section 102(b)(7) precludes damages claims that charge
directors with gloss negligence in the performance of their duties . J'falpiede v. Townson. 780
A.2d 1075 . 1094-95 ( Del . 2001 ). Directors sheltered by a Section 102(b)(7) charter provision
can be held liable for damages only for b reaches of their duty of loyalty and for acts taken in bad
faith.
A director breaches his duty of loyalty when he subordinates the corporation's
interests to his own . "Essentially, the duty of loyalty mandates that the best interest of the
corporation and its shareholders takes precedence over any interest possessed by the director . . .
and not shared by the stockholders generally." Cede & Co. v. Technicolor. Inc. . 634 A .2d 345 .
361 (Del. 1994) .
Under Delaware law, a director acts in bad faith if his conduct constitutes a n
"intentional dereliction of duty [or] a conscious disregard for Ihis] responsibilities ." In re The
Watt Disney Ca Derivative Litigation, No. Civ . A. 15452.2005 W[. ?056651 . at *36 (Del. Ch .
Aug . 9, 2005) (appeal pending). When a director acts "for some purpose other than a genuine
attempt to advance corporate welfare or when the transaction is known to constitute a violation
of applicable positive law." he fails to perform his duties in good faith . Id. at *35 (emphases and
alterations omitted). When a claim against a corporation's director "is predicated upo n
ignorance of liability creating activities . . . only a sustained or systematic failure of the board to
exercise oversight" will establish a lack of good faith . Guttman v. Huang . 823 A.2d 492.506
tDel . Ch. 2003). Such a complete failure of oversight arises, for example, when the Board
-utterilyj fail[s] to attempt to assure a reasonable information and reporting system ." Id at 506-
07 (stating that a plaintiff could plead facts demonstrating an actionable failure of oversight by
-25-
contending "that the company lacked an audit committee, that the company had an audit
committee that met only sporadically and devoted patently inadequate time to its work, or that
the audit committee had clear notice of serious accounting irregularities and simply close to
ignore them or, even worse, to encourage their continuation") .
Most of the claims asserted in the derivative actions are breach of fiduciary dut y
claims . although they bear various labels, including breach of fiduciary duty, abuse of control .
gross mismanagement . waste of corporate assets. unjust enrichment, breach of fiduciary duties
for insider selling and misappropriation of information, and contribution and indemnification.
These claims are subject to the Company's exculpatory provision . The SLC finds that Messrs.
Yaron, Kohavi . and Shamir did not act in a manner that would subject them to any of the
exceptions to the exculpatory provision . Messrs. Kohavi and Shamir received no improperly
dated options . Mr. Yaron received one improperly dated grant, but it was the grant he received
upon first being appointed to the Board and he had no role in the grant process or knowledge that
the grant was improperly dated. When advised that these options were improperly dated . Mr.
Yttron volunteered to repay . and did repay, the difference between the stated exercise price and
the correct exercise price . With respect to grants to others, these directors have stated that they
relied upon management of the Company . including its legal counsel, to correctly document
stock option grants and executive loans made by the Company and that they were not aware of
any instances where management failed to do so . The SLC did not identify any evidence
showing that Messrs. Yaron, Kohavi. and Shamir were conscious of any failure by Company
management to properly document grants . Moreover, there is substantial evidence that is
inconsistent with the conclusion that these directors would have consciously acquiesced in any
impropriety with respect to option grants or loans . The Special Committee has made findings
=6
regarding the conduct of Messrs . Yaron, Kohavi, and Shamir as directors , and in light of the
SLC's need to focus only on conduct that could fall outside the Company 's exculpation
provision, there is no need for the SLC to revisit these findings .
For the same reason that the exceptions to the exculpato ry provisions do not
apply. the state securities claims against these defendants would fail because they lacked the
requisite state of mind . For the reasons outlined above, among others, the SLC concludes that
the claims asserted under Section 14(a) of the Securities Exchange Act of 1934 would not
succeed and . in any event , would not give rise to any legally cognizable damages . The claims
under Section 10(b ) of the Securities Exchange Act of 1934 and under Section 304 of the
Sarhanes -Oxley Act of 2002 are not asserted against these defendants .
In addition to its conclusion that the derivative claims asserted against Messrs .
Yaron. Kohavi, and Shamir would fail on their merits (as outlined above), the SLC finds that
pursuit of these claims would produce negative consequences for the Company . Pursuit of the
claims would entail significant costs to the Company and would likely interfere with the ongoing
conduct of the Company's business . Accordingly, the SLC concludes that it is in the Company's
best interest that these claims be terminated .
D. Clyde Ostler. Braid Boston . Tony ZinQalgLM ttd Bryan LeBlanc
Clyde Ostler joined Mercury's Board of Directors on May 31, X002 as a non-
executive director . He has never served an the Compensation Committee . He has served on the
Audit Committee since July 2002 . He was appointed Lead Director in December 2004 . Mr.
Ostler has been employed by Wells Fargo & Company or its affiliates since 1971 . He has served
as the Group Executive Vice President and head of Private Client Services at Wells Fargo since
January 2003 . Prior to his current position, Mr. Ostler held a variety of other positions with
Wells Fargo . including : General Auditor. Chief Financial Officer. Branch Banking Group Head-
-27-
Vice Chair of the Business & Investment Group : Group Executive Vice President. Investment
Group . Online Financial Services, and Group Executive Vice President, Internet Services Group .
Anthony Zingale joined Mercury's Board of Directors on July 31, 2002 as a non-
executive director. He served on the Board and as a member of the Compensation Committee
from that time until December 1 . 2004 . when he became Chief Operating Officer of the
Company. Mr. Zingale was named Chief Executive Officer of Mercury in November 2005, at
which time he also rejoined the Board. Earlier in his career, Mr. Zingale spent more than ten
years at Cadence Design Systems, Inc . . in a series of executive management positions, including
Senior Vice President of Worldwide Marketing . Mr. Zingale then served as President and Chief
Executive Officer of Clarify, a publicly traded enterprise technology company . from 1997 until it
was acquired by Nortel Networks, Inc . in 2000. Following that acquisition, he served as
president of Nortel's eBusiness Solutions Group before joining Mercury .
Bryan LeBlanc joined Mercury in May 2002 as the Vice President of Finance . He
was also the Company's Principal Accounting Officer . As Vice President of Finance, Mr.
LeBlanc reported to Douglas Smith . In April 2005, Mr. LeBlanc transitioned into a new position
running the company's M28 ("MercuryS2 Billion") process, which involves evaluating the
company's systems. Mr. LeBlanc left the Company for other employment in March 2006_
Brad Boston's background is outlined above . He joined Mercury's Board of
Directors in May 2004 and became a member of the Compensation Committee at that time .
The SLC concludes that it is not in the best interest of the Company to pursue the
claims made against Messrs . Ostler, Boston . Zingale, and LeBlanc. Each of these individuals
became associated with the Company after April 2002, when the process by which stock option
grants. were made at Mercury changed and the practice of intentionally choosing advantageous
-28-
grant dates appears to have ceased . Very few instances of improperly dated option grants
occurred while these four individuals were affiliated with the Company. Moreover, the evidence
does not indicate that any of these individuals was aware that any option grants had been dated
improperly . In short . there is no evidence of wrongdoing by any of these individuals-
in addition, Messrs . Ostler and Boston are entitled to the protection of th e
Company's exculpatory provision, as is Mr . Zingaie for the period that he was a non-executive
director. The evidence does not indicate that any of these directors acted in a way that would
subject him to any of the exceptions to the exculpatory provision . None of these individuals
received any improperly dated options . As noted above, the SLC finds that the Section 14(a)
claims would be unlikely to succeed, would not give rise to any legally cognizable damages . and
that the requested equitable relief would be mooted by a new election of directors . The claims
under Section 10(b) of the Securities Exchange Act of l 34 and under Section 304 of the
Sarbanes-Oxley Act of M0O2 are not asserted against these defendants.
The S LC further finds that pursuit of claims against these four individuals would
entail significant costs to the Company . Given their current roles at the Company (other than
dir . LeBlanc) . pursuing such claims would also interfere with the ongoing conduct of the
Company's business . In the absence of evidence of wrongdoing, such interference would not be
in the Company's interest . Accordingly . the SLC concludes that It is in the Company's best
interest that these claims be terminated .
E . rrieewaterhouseCoooers LL P
PricewaterhouseCoopers LLP is, and during the relevant period was, the
Company's independent auditor. The SLC concludes that it is in the best interest of the
Company for the claims asserted against PricewaterhouseCoopers to be stayed for an additional
period of time . The Company is still engaged in the process of restating its financials for several
years . Until that process is complete, the Company will not be able to be rehsted on a national
securities exchange and will suffer other ongoing harm to its business . As the Company's
independent auditor, PricewatethouseCoopers plays a central rote in the restatement process . It
is in the best interest of the Company that its relationship with PricewaterhouseCoopers not be
interfered with and that PricewaterhouseCoopers not be distracted from that task by an
investigation regarding past audits or by derivative litigation . The SLC therefore finds that the
Company should request a further stay of proceedings against PricewaterhouseCoopers for at
least an additional six months .
V1. CONCLUS ON
For the foregoing reasons, the SLC concludes that, in the best interests of the
Company. the Company should pursue the claims asserted against Amnon Landan . The SLC
concludes that the claims against Douglas Smith . Kenneth Klein, and Susan Skaer should be
pursued . if at all, in the context of the pending Santa Clara Superior Court litigation. The SLC
concludes that the claims alleged against the remaining officer and director defendants be
terminated. Finally, the SLC concludes that the Company should request a further stay of
proceedings against PricewaterhouseCoopers for at least an additional six months .
-30-
rnnter rnendty: Mercury Appoints Stanley Keller to Board of Directors Page 1 of 1
MERCURY`
Press Releas e
Mercury Appoints Stanley Keller to Board of Directors
Adds Nationally Recognized Corporate and Securities Expert to Board of Directors
Mountain View, CA - February 15, 2006 - Today, Mercury Interactive Corporation (OTC: MERQ), the global leader inbusiness technology optimization (BTO) software, announced that it has appointed Stanley Keller, a nationally recognizedcorporate and securities lawyer to its board of directors .
Stanley Keller is a. partner with the law firm Edwards Angell Palmer & Dodge LLP, and is a nationally recognized corporateand securities lawyer. For over a decade, Stan has been included in the nationally recognized Best Lawyers in America forthe categories of Corporate Law and Corporate Governance and Compliance Law . Keller has played an active role in thedevelopment of corporate and securities laws through leadership positions in the American Bar Association (ABA) and otherprofessional organizations, and through his writings and frequent speaking engagements .
"Stan is a recognized leader and expert in corporate governance and is an important addition to the Mercury Board ofDirectors," said Tony Zingale, president and CEO at Mercury. "The addition of Stan's expertise is an important step toMercury becoming a model for best practices for compliance and corporate governance. "
About MercuryMercury Interactive Corporation (OTC : MERQ), the global leader in business technology optimization (BTO) software, iscommitted to helping customers optimize the business value of information technology . Founded in 1989, Mercury conductsbusiness worldwide and is one of the largest enterprise software companies today . Mercury provides software and servicesfor IT Governance, Application Delivery, and Application Management . Customers worldwide rely on Mercury offerings togovern the priorities, processes and people of IT and test and manage the quality and performance of business-criticalapplications. Mercury BTO offerings are complemented by technologies and services from global business partners. Formore information, please visit http_//www . .rn rcury com .
Mercury, Mercury BTO Enterprise and the Mercury logo are trademarks of Mercury Interactive Corporation and may beregistered in certain jurisdictions .
All other company, brand and product names may be trademarks or registered trademarks of their respective holders .
Editorial ContactsRobin StoeckerMercury(650) [email protected]
Investor Relations ContactsMichelle Ahlman nMercury(650) 603-5464m.a...hlmenn@rnercurycom
© 2006, Mercury Interactive Corporatio n
http://www.mercury.com/cgi-bin/display/printv.cgi 11/17/2006
Printer Friendly: Mercury Appoints Joseph Costello to Board of Directors Page 1 of 1
MERCURY'"
Press Release
Mercury Appoints Joseph Costello to Board of Directors
Former Cadence CEO, thInk3 Chairman and CEO Joins Mercury Board of Director s
Mountain View, CA - February 22, 2006 - Today, Mercury Interactive Corporation (OTC: MERQ), the global leader inbusiness technology optimization (BTO) software, . announced that it has appointed Joseph ("Joe") Costello to its board ofdirectors .
For more than a decade, Joe Costello served as president and CEO of Cadence Design Systems, Inc . where he built it froma start up into a billion dollar software company . Under Costello's leadership, Cadence became a leading supplier ofelectronic design automation (EDA) software and services and one of the top ten largest software suppliers in the world .Costello is currently the chairman and CEO of think3 . Since joining think3 In 1998, Costello has led the company to becomeone of the most innovative product design and development companies in the product lifecycle management (PLM) industry .
"Joe's deep experience and proven track record of success at high-growth companies will be an invaluable addition toMercury," said Tony Zingale, president and CEO at Mercury . "Expanding our board with a seasoned professional like Joehelps round out the right mix of professional leadership, industry innovation, and governance expertise on our board ."
"Mercury is fast becoming a strategic partner to CIOs worldwide," said Joe Costello . "1 am excited to join the Mercury Boardof Directors and help Mercury execute on its large , long-term market opportunity."
About MercuryMercury Interactive Corporation (OTC : MERQ), the global leader in business technology optimization (BTO) software, iscommitted to helping customers optimize the business value of information technology . Founded in 1989, Mercury conductsbusiness worldwide and is one of the largest enterprise software companies today. Mercury provides software and servicesfor IT Governance, Application Delivery, and Application Management . Customers worldwide rely on Mercury offerings togovern the priorities, processes and people of IT and test and manage the quality and performance of business-criticalapplications . Mercury BTO offerings are complemented by technologies and services from global business partners. Formore information, please visit http://www .mercury .com .
f
Mercury and the Mercury logo are trademarks of Mercury Interactive Corporation and may be registered in certainjurisdictions .
All other company, brand and product names may be trademarks or registered trademarks of their respective holders .
Public Relations ContactsRobin StoeckerMercury(650) 603-5854rstoeckpr@rnercu y .com
Investor Relations ContactsMichelle AhlmannMercury(650) 603-5464mahlmann@mercury .com
© 2006, Mercury Interactive Corporatio n
http ://www.mercury.com/cgi-bin/display/printv .cgi 11 /17/2006
Page 1 of 4
8-K 1 dp02799_8k.htm
UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C . 20549
FORM S-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) : June 7, 2006
Mercu ry Interactive Corporation(Exact name of registrant as specified in its charter)
Delaware 0-22350 77-0224776
(State or other jurisdiction of incorporation) (Commission File No.) (IRS Employer Identification No .)
379 North Whisman Road, Mountain View, California 9404 3(Address of Principal Executive Offices )
(Registrant's Telephone Number, Including Area Code)(650) 603-5200
(former name or former address, if changed since last report )
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of theregistrantunder any of the following provisions :
❑ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230 .425 )
❑ Solicitation material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 241 .14a-12)
❑ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
❑ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Page 2 of 4
Item 8.01. Other Events
In July 2005, Mercury Interactive Corporation (the "Company") announced that a Special Committee, consisting ofdisinterested members of the Audit Committee of the Board of Directors (the "Special Committee"), had been formed toconduct an internal investigation relating to past stock option grants . Certain determinations of the Special Committee wereannounced on November 2, 2005, and May 19, 2006.
In February 2006, the Board of Directors of the Company formed a Special Litigation Committee consisting of two non-management directors (the "Special Litigation Committee"), whose purpose is to determine the course of action that is in thebest interests of the Company in response to the shareholder derivative actions filed on and after October 14, 2005 in theSuperior Court of California for the County of Santa Clara, the Delaware Chancery Court and the U .S . District Court for theNorthern District of California.
On June 7, 2006, the Special Litigation Committee issued a report which made the following determinations :
• The claims against Amnon Landan, the former Chairman and CEO, should be pursued by the Company using counselretained by the Company.
• The Special Litigation Committee also recommended that the Special Committee void Mr . Landan's vested and
unexercised options to the extent such options are found by the Special Committee to have been dated improperly .
• The derivative claims asserted against former Chief Operating Officer Ken Klein, former Chief Financial Officer
Doug Smith and former General Counsel Susan Skaer should be pursued by a shareholder plaintiff in the context of aderivative action in the Santa Clara County Superior Court, rather than in the Delaware Chancery Court or theNorthern District of California.
• The derivative claims against non-management directors Giora Yaron, Igal Kohavi and Yair Shamir should bedismissed. The Special Litigation Committee determined that the derivative claims against Dr . Yaron, Dr. Kohavi and
Mr. Shamir will fail in the face of the provisions of the Company's Certificate of Incorporation and the Delaware
General Corporation Law which would permit damages claims against them only for breach of their duty of loyalty orfor actions taken in bad faith .
• The derivative claims against current CEO and director Tony Zingale, outside directors Clyde Ostler and Brad
Boston, and former principal accounting officer Bryan LeBlanc should be dismissed because none of theseindividuals was affiliated with the Company at the time of the principal events at issue .
• The derivative claims against the Company's auditor, PricewaterhouseCoopers, should be stayed at least six
additional months.
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Page 3 of4
The Special Committee has determined to follow the Special Litigation Committee's recommendation and has declared voidand unenforceable an aggregate of 2,625,416 vested and unexercised options granted to Amnon Landan, its former CEO,between 1997 and 2002. Information concerning such options is as follows :
Stated GrantDate
# of Vested,Unexercised Options Stated Strike Price
3/31/97 197,320 $2.44
1/9/98 322,680 $6.3 1
1/21/99 600,000 $12 .03
7/15/99 120,000 $18.25
1/6/00 700,000 $40 .7 2
1/22/02 685,416 $29.29
The Special Litigation Committee's other determinations will be presented for consideration by the courts adjudicating thefiled shareholder derivative claims .
There is no assurance that Mr. Landan will not contest the action of the Special Committee in voiding Mr . Landan's options,or that the courts adjudicating the filed shareholder derivative claims will accept the determinations made by the SpecialLitigation Committee. There is no assurance that other actions may not be filed against the Company, the Special LitigationCommittee or the Special Committee as a result of the actions taken by the Special Litigation Committee or the SpecialCommittee . The Company undertakes no duty to provide updates on any such actions which may be taken by Mr . Landan orothers or the courts adjudicating the filed shareholder derivative claims or on any additional lawsuits with respect to thematters referred to herein .
http://www.sec.gov/Archives/edgar/data/867058/000095010306001488/dpO2799_8k .htm 11/13/2006
Page 4 of4
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused thisreport to be signed on its behalf by the undersigned hereunto duly authorized .
Date: June 8, 2006 MERCURY INTERACTIVE CORPORATION
By: /s/ David J . Murphy
Name : David J. Murphy
Title : Chief Financial Officer
http://www.sec.gov/Archives/edgar/data/867058/000095010306001488/dpO2799_8k .htm 11/13/2006
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