Background re the Net2Phone NetSpeak Patents [from Net2Phone's response]
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Events Relating to the NetSpeak Patents
The Company entered into the IP Legal Services Agreement (“IP Agreement”) with IDT effective January 1, 2004, pursuant to which IDT obtained a right of first refusal to fund any enforcement of the Company’s NetSpeak patents against third parties via non- litigation assertions or litigation, in exchange for 50% of the proceeds (after recovery of expenses) resulting from such enforcement efforts. The IP Agreement also provided that the Company would pay IDT $25,000 per month and 5% of any recoveries resulting from enforcement efforts not funded by IDT for a broad scope of IP services to be provided by IDT’s IP legal services group. The IP Agreement was terminable by either party upon three months prior written notice. The IP Agreement, which was approved by the Independent Committee on March 8, 2004, is set forth as Exhibit 27
(a)(8) hereto and incorporated by reference herein. The IP Agreement was terminated as of April 4, 2005, upon notice provided by the Company on January 4, 2005.
Following the notice of termination of the IP Agreement on January 4, 2005, and before the effective date of termination on April 4, 2005, Mr. Greenberg, Chairman of the Board, had discussions with Ira Greenstein, President of IDT about IDT’s continued interest in the Company’s NetSpeak patents, in particular IDT’s interest in funding any enforcement action of the NetSpeak patents in exchange for 50% of the net recovery.
IDT also advised the Company that it was interested in retaining Mr. Doug Derwin, a patent attorney, to lead the enforcement program. On or about March 8, 2005, IDT advised the Company that counsel for IDT was drafting an agreement to retain Mr. Derwin for such purpose. The Independent Committee believes that IDT intended to retain Mr. Derwin on a contingency fee basis to enforce the NetSpeak Patents, and that Mr. Derwin found such arrangement acceptable.
On March 18, 2005, the Independent Committee retained Kirkland & Ellis as its legal advisor in anticipation of the Offer.
On April 1, 2005, the Company delivered a draft agreement to IDT based upon the terms discussed between Mr. Greenstein and Mr. Greenberg.
On April 4, 2005, Net2Phone’s termination of the IP Agreement became effective.
On or about April 12, 2005, Mr. Greenberg and Mr. Jonas discussed a different arrangement between the Company and IDT regarding the enforcement of the NetSpeak Patents. Under this proposed arrangement, the Company would relinquish control of the NetSpeak Patents to IDT. IDT was to exploit the NetSpeak Patents, at its own expense, and IDT would determine whether and how to exploit the NetSpeak Patents. To the extent there was any recovery from these efforts, IDT would share 50% of the net recovery (after recovering its expenses) with the Company, and any fee to be paid to Mr. Derwin would be paid by IDT.
On May 2, 2005, IDT delivered a draft agreement to the Company based upon the revised arrangement discussed between Mr. Jonas and Mr. Greenberg.
On May 4, 2005, Mr. Williams provided IDT’s proposed agreement to Kirkland & Ellis, as counsel to the Independent Committee, for review in anticipation of the Independent Committee’s role in reviewing of such inter company agreements as they arise from time to time. Together with the draft agreement, Mr. Williams also delivered to Kirkland & Ellis other documents indicating the scope of the patents and the potential market, including an undated report prepared in 2004 by IDT personnel and third-party advisors entitled “Netspeak Patent Portfolio Monetization Plan” (the “Monetization Plan”). The Monetization Plan concluded that enforcing the NetSpeak Patents presented a litigation and potential licensing revenue opportunity from 2000 to 2015 (which corresponds to the life of the NetSpeak Patents) of $1 billion. The Monetization Plan also reviewed various enforcement strategies. The Monetization Plan estimated that the recommended strategy provided a potential licensing revenue opportunity over that period of $969 million, with the estimated present value of this opportunity equaling $373 million.
On several occasions during the following weeks, the Company and IDT negotiated the terms of a new agreement relating to the NetSpeak Patents based upon the terms discussed between Mr. Jonas and Mr. Greenberg.
On May 13, 2005, Mr. Williams attended a meeting of the Independent Committee, by invitation of the Committee, to discuss the proposed agreement.
On several occasions during the following two weeks, Messrs. Greenberg and Jonas, as well as management for the Company and IDT, continued to negotiate the terms of a new agreement regarding exploitation of the NetSpeak Patents. On May 25, 2005, Mr. Courter sent to Mr. Williams an electronic mail, asking for Mr. Williams’ estimate of the time needed to complete such an agreement, and indicating that Mr. Jonas was eager to have the agreement completed quickly.
On June 3, 2005, during a meeting of the Independent Committee, Kirkland & Ellis advised the Independent Committee that it would not be advisable for the Company to enter into an agreement with IDT respecting the NetSpeak Patents while IDT was considering making an offer to purchase the Publicly Held
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Shares. The Independent Committee discussed and concurred in this recommendation, noting in particular that the full value of the NetSpeak Patents would need to be taken into account in determining whether any particular offer for the Publicly Held Shares would be acceptable.
On June 8, 2005, during a meeting of the Board of Directors, Mr. Mellor reported that the Independent Committee had determined it would be not advisable for the Company to enter into an agreement with IDT regarding the NetSpeak Patents while IDT was also considering a significant corporate transaction with the Company. A discussion then took place, during which certain directors affiliated with IDT proposed that the Board of Directors consider approving an agreement regarding the NetSpeak Patents without Independent Committee approval. Mr. Williams reminded the Board of Directors of the role of the Independent Committee respecting agreements and material issues between IDT and the Company, and reported that the agreement had not been fully negotiated at that point in time.
On June 28, 2005, IDT issued a press release announcing its intention to offer to purchase all outstanding Shares of the Company for $1.70 in cash.
On June 29, 2005, at a meeting of the Independent Committee, the Independent Committee instructed Kirkland & Ellis to retain an independent valuation firm to value the NetSpeak Patents.
On July 18, 2005, during a meeting between Independent Committee and its advisors and IDT and its advisors, the Independent Committee discussed the Monetization Plan and the conclusions reached therein. The Independent Committee presented its belief, based on the Monetization Plan, that the NetSpeak Patents likely had significant value that was not fully captured in the market price of the Shares. The IDT representatives informed the Independent Committee that they were unaware of the existence of the Monetization Plan, after which Kirkland & Ellis distributed copies of the Monetization Plan to the attendees. The IDT representatives then expressed their beliefs that (i) any valuation conclusions in the Monetization Plan were highly speculative and did not reflect the views of IDT management and (ii) IDT possessed a legal right of ownership over the NetSpeak Patents and (iii) the Company was obligated to enter into an agreement with IDT regarding exploitation of NetSpeak Patents.
At a meeting of the Independent Committee later that same day, the Independent Committee further discussed the valuation of the NetSpeak Patents and authorized Kirkland & Ellis to request additional information relating to the NetSpeak Patents from Kramer Levin.
On July 20, 2005, Mr. Fraidin of Kirkland & Ellis, on behalf of the Independent Committee delivered to Mr. Dienstag of Kramer Levin the following letter:
“Dear Abbe:
I am writing on behalf of the committee of independent directors (the “Independent Committee”) of Net2Phone, Inc. (“Net2Phone”). We understand that IDT Corporation (“IDT”) and Net2Phone entered into an intellectual property services agreement (the “Agreement”) in early 2004. Under the Agreement, IDT was entitled to a percentage of licensing fees that Net2Phone might receive related to specific technologies as a result of IDT’s assistance in certain intellectual property matters, in addition to a monthly fee for these services.
The Agreement, which by its terms was terminable upon 90 days notice at the discretion of either party, was terminated by Net2Phone effective April 4, 2005. We are not aware of any other arrangements that give IDT any interest in the Netspeak patents, other than its indirect interest as a shareholder of Net2Phone. Accordingly, we understand that no agreement exists between IDT and Net2Phone that gives IDT an interest in the Netspeak patents. If you or IDT believe otherwise, or if either of you believes that IDT has any other interest in these patents or any other intellectual property asset of Net2Phone, please provide us with the basis of your belief.
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In addition, I would like to take the opportunity to request that IDT deliver to the committee any formal or informal reports, opinions or appraisals, whether prepared by IDT, Net2Phone or third parties, that in any way relate to the value of Net2Phone. As we discussed, it is important for the Independent Committee to have access to all such materials.
Regards,
/s/ Stephen Fraidin
Stephen Fraidin”
On July 22, 2005, at a telephonic meeting, the Independent Committee authorized Kirkland & Ellis to retain CRA, an independent intellectual property valuation firm, to advise the Independent Committee as to the value of the Company’s intellectual property.
On August 3, 2005, Kirkland & Ellis met with Kramer Levin at the New York offices of Kramer Levin. Among the other matters discussed as described above, Kirkland & Ellis discussed various issues relating to the NetSpeak Patents, including (i) the Monetization Plan, (ii) the efforts IDT had made during the pendency of the potential tender offer to have the Company to enter into an agreement that would give IDT significant rights in the NetSpeak Patents and (iii) the status of the valuation efforts performed by CRA. Kramer Levin confirmed that IDT no longer found the valuations of the NetSpeak Patents contained in the Monetization Plan to be credible, and that IDT was performing its own valuation of the NetSpeak Patents and anticipated a materially lower valuation.
On the same day, CRA requested from the Company (through Kirkland & Ellis) information relating to the NetSpeak Patents and other intellectual property of the Company. CRA additionally requested a meeting with personnel involved in the preparation of the Monetization Plan.
On August 5, 2005 and August 18, 2005, at telephonic meetings, the Independent Committee discussed CRA’s progress in valuing the Company’s intellectual property.
On August 5, 2005, Mr. Williams contacted James DiGiorgio, a patent attorney who was one of authors of the Monetization Plan while he was an employee of IDT, regarding his availability to discuss the Monetization Plan with CRA. Mr. DiGiorgio indicated he would be willing to have such a conversation, provided that such activity did not violate his severance arrangement with IDT. Mr. Williams subsequently contacted IDT by electronic mail regarding the availability of Mr. DiGiorgio.
In response, IDT initially expressed reluctance as to permitting Mr. DiGiorgio’s meeting with CRA. On August 9, 2005, Mr. Tendler of IDT responded to Mr. Williams by electronic mail, stating that IDT would waive any restrictive covenants in its agreements with Mr. DiGiorgio, but only with respect to the valuation services to be provided regarding the NetSpeak Patents. However, Mr. DiGiorgio later declined the Independent Committee’s request to meet with CRA.
In late August 2005, Mr. Jonas had discussions with Mr. Greenberg regarding IDT’s interest in enforcing the NetSpeak Patents against a particular competitor of the Company.
On September 6, 2005, the Independent Committee met telephonically with Kirkland & Ellis, Blackstone and CRA. CRA reported that, based on its preliminary findings and certain assumptions, it estimated the fair value of certain intellectual property of the Company to be between $20 million and $35 million. The Independent Committee engaged CRA in an extensive discussion regarding the analysis, limitations, assumptions and methods presented by CRA. The Independent Committee and its advisors, at the meeting and in subsequent conversations, discussed with CRA their understanding that significantly higher valuations than those estimated by CRA were possible depending on a range of reasonable assumptions that could be made regarding (i) the damages awarded or license fees received following a successful enforcement action, (ii) the probability of a successful enforcement and (iii) the method of discounting future payments to a present value.
On September 14, 2005, Mr. Williams notified Kirkland & Ellis that IDT proposed yet another agreement between IDT and the Company relating to a program to exploit the NetSpeak Patents, which was based upon the arrangement originally discussed between Mr. Greenstein and Mr. Greenberg and incorporated in the April 1, 2005, draft agreement provided by the Company to IDT. Kirkland & Ellis informed
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Mr. Williams that because the Independent Committee did not plan to discuss or approve such an agreement during its review of IDT’s proposed tender offer, management should not engage in any negotiations regarding such an agreement.
Between September 13, 2005 and September 16, 2005, IDT contacted the Company on several occasions to discuss the terms of the latest proposed agreement to exploit the NetSpeak Patents. On September 16, 2005, during the meeting between Kirkland & Ellis, Blackstone, IDT and Kramer Levin at the offices of Kirkland & Ellis in New York, the Independent Committee and its advisors presented the preliminary valuation results of CRA and indicated that CRA had noted that other reasonable assumptions would result in significantly higher values. Kirkland & Ellis additionally noted IDT’s efforts to enter into a new agreement with the Company following termination of the original IP Agreement, to secure rights to the NetSpeak Patents, and requested that IDT cease such efforts given the Independent Committee’s review of the potential IDT tender offer. IDT reiterated the statements it had made at the July 18 meeting, that IDT possessed rights in the NetSpeak Patents. IDT additionally characterized the range of values found by CRA as speculative.
The Independent Committee is not aware of any attempt by IDT subsequent to September 16, 2005 to enter into an agreement with the Company regarding the NetSpeak Patents.
On October 7, 2005, Mr. Tendler sent an electronic mail to Mr. Williams, with copies delivered to IDT, the Company, Kramer Levin and Kirkland & Ellis. In this message, Mr. Tendler stated that Doug Derwin, a patent lawyer who had been contacted by IDT regarding the exploitation of the NetSpeak Patents, after diligence and analysis with IDT personnel, had now concluded that there was insufficient basis for him to proceed with the plan to exploit the NetSpeak Patents. Mr. Tendler’s message stated that Mr. Derwin’s “determination [was] highly relevant to the consideration by NTOP and its advisors of IDT’s proposed offer for the publicly held shares of NTOP” and offered to make IDT technical personnel and Mr. Derwin available to discuss their concerns with the NetSpeak Patents.
On October 11, 2005, at a meeting between Kirkland & Ellis, Blackstone, IDT, Kramer Levin and certain technical personnel from both the Company and IDT at the offices of Kirkland & Ellis in New York, Mr. Derwin, on behalf of IDT, presented his analysis and conclusions that he was not interested in entering into a contingency fee arrangement to enforce the NetSpeak patents against a certain competitor of the Company identified by IDT as a potential target back in late August 2005. IDT then expressed its opinion that, as a result of Mr. Derwin’s findings, the Company would likely realize no positive value from any effort to enforce, license or otherwise monetize any of the Company’s intellectual property. The Independent Committee noted that the analysis presented by Mr. Derwin was inconsistent with his earlier willingness to exploit the NetSpeak Patents on a contingency fee basis. Technical personnel from IDT and the Company discussed issues relating to Mr. Derwin’s analysis in depth and planned to meet in the near future to conduct a more detailed technical review of the methodologies and analysis used by Mr. Derwin and IDT.
On October 20, 2005, Mr. Williams provided the Independent Committee with a report that certain technical personnel of the Company had met with representatives of IDT to review the testing and analysis conducted by Mr. Derwin and had determined that Mr. Derwin’s studies were flawed.
On November 10, 2005, the Purchaser commenced the Offer at a cash price of $2.00 per Share. |
