Case 1: 11 -cv cma Document 1 Entered on FLSD Docket 02/17/2011 Page 1 of 29

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1 Case 1: 11 -cv cma Document 1 Entered on FLSD Docket 02/17/2011 Page 1 of 29 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF FLORIDA MIAMI DIVISION NORMAN ABRIL, individually and on behalf ) of all others similarly situated, ) ) Plaintiff, ) ) v. ) ) MANUEL MEDINA, JOSEPH WRIGHT, ) MARVIN ROSEN, TIMOTHY ELWES, ) GUILLERMO AMORE, ARTHUR MONEY, ) RODOLFO RUIZ, ANTONIO FERNANDEZ, ) MELISSA HATHAWAY, FRANK ) BOTMAN, TERREMARK WORLDWIDE, ) INC., VERIZON COMMUNICATIONS ) INC., and VERIZON HOLDINGS INC., ) ) Defendants. ) CLASS ACTION COMPLAINT Plaintiff, by his attorneys, alleges upon information and belief, except for his own acts, which are alleged on knowledge, as follows: 1. Plaintiff brings this class action on behalf of the public stockholders of Terremark Worldwide, Inc. ( Terremark or the Company ) against Terremark s Board of Directors (the Board or the Individual Defendants ), seeking equitable relief for their violations of Sections 14(d)(4) and 14(e) of the Securities Exchange Act of 1934 (the Exchange Act ) and for their breaches of fiduciary duties arising out of their attempt to sell the Company to Verizon Communications Inc. ( Verizon ) (the Proposed Transaction ) by means of an unfair process and for an unfair price and without adequate disclosure of information.

2 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 2 of Terremark is a leading global provider of IT infrastructure services delivered on the industry s most robust and advanced technology platform. Terremark delivers government and enterprise customers a comprehensive suite of managed solutions including managed hosting, colocation, disaster recovery, security, data storage and cloud computing services. 3. On January 27, 2011, Verizon and the Company announced a definitive agreement under which Verizon, through its wholly owned subsidiary, Verizon Holdings Inc. ( Merger Sub ), will commence a tender offer to acquire all of the outstanding shares of Terremark for $19.00 per share in cash. The Proposed Transaction is valued at $1.4 billion. Verizon commenced the tender offer on February 10, 2011, and it is currently scheduled to expire on March 10, The Board has breached their fiduciary duties by agreeing to the Proposed Transaction for grossly inadequate consideration. As described in more detail below, given Terremark s recent strong performance as well its future growth prospects and the expected growth of the cloud computing market, the consideration shareholders are to receive is inadequate and significantly undervalues the Company. According to Gartner, Inc., the industry for cloud computing may reach $148.8 billion by 2014 from approximately $68 billion in 2010 Indeed, the Discounted Cash Flow Analysis conducted by the Company s financial advisor yielded a value for the Company as high as $24.17 per share. 5. In agreeing to the unfair price of $19.00 per share, the Company exacerbated their breaches of fiduciary duties by failing to conduct a pre-signing market check and also agreeing to preclusive deal protection devices in the merger agreement that ensure that no competing offers will emerge for the Company. Specifically, pursuant to the merger agreement dated January 27, 2011 (the Merger Agreement ), defendants agreed to: (i) a strict no-solicitation 2

3 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 3 of 29 provision that prevents the Company from soliciting other potential acquirors or from even continuing prior discussions and negotiations with potential acquirors; (ii) a provision that provides Verizon with three business days to match any competing proposal in the event one is made; and (iii) a provision that requires the Company to pay Verizon a termination fee of $52.5 million (or $37.5 million under certain circumstances) in order to enter into a transaction with a superior bidder. These provisions substantially and improperly limit the Board s ability to act with respect to investigating and pursuing superior proposals and alternatives including a sale of all or part of Terremark. As described in more detail below, the failure to conduct a proper presigning and post-signing market check and the preclusive deal protection devices are significant in light of the fact that there are likely numerous interested parties seeking to enter into the growing cloud computing industry through acquisitions. 6. In addition, on February 10, 2011, the Company filed a Schedule 14D-9 Recommendation Statement (the Recommendation Statement ) with the United States Securities and Exchange Commission ( SEC ) in connection with the Proposed Transaction. The Recommendation Statement fails to provide the Company s shareholders with material information and provides them with materially misleading information thereby rendering the shareholders unable to make an informed decision on whether to tender their shares in favor of the Proposed Transaction. 7. The Individual Defendants have breached their fiduciary duties of loyalty, due care, candor, independence, good faith and fair dealing, and Terremark and Verizon have aided and abetted such breaches by Terremark s officers and directors. Plaintiff seeks to enjoin the Proposed Transaction unless and/or until defendants cure their breaches of fiduciary duty. 3

4 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 4 of 29 JURISDICTION AND VENUE 8. This Court has subject matter jurisdiction under 28 U.S.C (federal question jurisdiction), as this Complaint alleges violations of Sections 14(d)(4) and 14(e) of the Exchange Act. This court has jurisdiction over the state law claims pursuant to 28 U.S.C Venue is proper in this District because many of the acts and practices complained of herein occurred in substantial part in this District. In addition, Terremark maintains its principal executive offices in Miami, Florida. PARTIES 10. Plaintiff is, and has been at all relevant times, the owner of shares of common stock of Terremark. 11. Terremark is a corporation organized and existing under the laws of the State of Delaware. It maintains its principal corporate offices at One Biscayne Tower, 2 South Biscayne Boulevard, Suite 2800, Miami, Florida Defendant Manuel Medina ( Medina ) founded Terremark in 1980 and has served as Chief Executive Officer and Chairman of the Board of the Company since that time. 13. Defendant Joseph Wright ( Wright ) has been Vice Chairman of the Board since April Defendant Marvin Rosen ( Rosen ) has been a director of the Company since Defendant Timothy Elwes ( Elwes ) has been a director of the Company since Defendant Guillermo Amore ( Amore ) has been a director of the Company since

5 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 5 of Defendant Arthur Money ( Money ) has been a director of the Company since Defendant Rodolfo Ruiz ( Ruiz ) has been a director of the Company since Defendant Antonio Fernandez ( Fernandez ) has been a director of the Company since Defendant Melissa Hathaway ( Hathaway ) has been a director of the Company since Defendant Frank Botman ( Botman ) has been a director of the Company since Defendants referenced in 12 through 21 are collectively referred to as Individual Defendants and/or the Board. 23. Defendant Verizon Communications Inc. is a Delaware corporation headquartered in New York and is a global leader in delivering broadband and other wireless and wireline communications services to mass market, business, government and wholesale customers. 24. Defendant Verizon Holdings Inc. is a Delaware corporation wholly owned by Verizon that was created for the purposes of effectuating the Proposed Transaction. INDIVIDUAL DEFENDANTS FIDUCIARY DUTIES 25. By reason of Individual Defendants positions with the Company as officers and/or directors, they are in a fiduciary relationship with Plaintiff and the other public shareholders of Terremark and owe them, as well as the Company, a duty of care, loyalty, good faith, candor, and independence. 26. Under Delaware law, where the directors of a publicly traded corporation undertake a transaction that will result in either a change in corporate control or a break up of the 5

6 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 6 of 29 corporation s assets, the directors have an affirmative fiduciary obligation to obtain the highest value reasonably available for the corporation s shareholders, and if such transaction will result in a change of corporate control, the shareholders are entitled to receive a significant premium. Moreover, such change of control or sale of the corporation subjects the Board s actions to heightened scrutiny, imposing upon them the burden of proving that they took all reasonable steps to maximize shareholder value. As set forth below, the Terremark Board has failed to meet this burden. 27. To diligently comply with their fiduciary duties, the Individual Defendants may not take any action that: (a) (b) adversely affects the value provided to the corporation s shareholders; favors themselves or will discourage or inhibit alternative offers to purchase control of the corporation or its assets; (c) adversely affects their duty to search and secure the best value reasonably available under the circumstances for the corporation s shareholders; and/or (d) will provide the Individual Defendants with preferential treatment at the expense of, or separate from, the public shareholders. 28. In accordance with their duties of loyalty and good faith, the Individual Defendants are obligated to refrain from: (a) participating in any transaction where the Individual Defendants loyalties are divided; (b) participating in any transaction where the Individual Defendants receive, or are entitled to receive, a personal financial benefit not equally shared by the public shareholders of the corporation; and/or 6

7 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 7 of 29 (c) unjustly enriching themselves at the expense or to the detriment of the public shareholders. 29. Defendants also owe the Company s stockholders a duty of candor, which includes the disclosure of all material facts concerning the Proposed Transaction and, particularly, the fairness of the price offered for the stockholders equity interest. Defendants are knowingly or recklessly breaching their fiduciary duties of candor by failing to disclose all material information concerning the Proposed Transaction, and/or aiding and abetting other Defendants breaches. 30. Plaintiff alleges herein that the Individual Defendants, separately and together, in connection with the Proposed Transaction, are knowingly or recklessly violating their fiduciary duties, including their duties of care, loyalty, good faith, candor, and independence owed to plaintiff and other public shareholders of Terremark. CLASS ACTION ALLEGATIONS 31. Plaintiff brings this action on his own behalf and as a class action on behalf of all owners of Terremark common stock and their successors in interest, except Defendants and their affiliates (the Class ). 32. This action is properly maintainable as a class action for the following reasons: (a) the Class is so numerous that joinder of all members is impracticable. As of February 10, 2011, Terremark has approximately million shares outstanding. (b) questions of law and fact are common to the Class, including, inter alia, the following: 7

8 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 8 of 29 (i) Have the Individual Defendants misrepresented and omitted material facts in violation of Section 14(d)(4) and 14(e) of the Exchange Act; (ii) Have the Individual Defendants breached their fiduciary duties of undivided loyalty, independence, or due care with respect to plaintiff and the other members of the Class in connection with the Proposed Transaction; (iii) Have the defendants breached their fiduciary duty to secure and obtain the best price reasonable under the circumstances for the benefit of Plaintiff and the other members of the Class in connection with the Proposed Transaction; (iv) Have the defendants breached any of their other fiduciary duties to plaintiff and the other members of the Class in connection with the Proposed Transaction, including the duties of good faith, diligence, honesty and fair dealing; (v) Have the defendants misrepresented and omitted material facts in violation of their fiduciary duties owed by them to Plaintiff and the other members of the Class; (vi) Have the defendants, in bad faith and for improper motives, impeded or erected barriers to discourage other strategic alternatives including offers from interested parties for the Company or its assets; 8

9 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 9 of 29 (vii) Whether Plaintiff and the other members of the Class would be irreparably harmed were the transactions complained of herein consummated. (viii) Have Terremark, Verizon, and Merger Sub aided and abetted the Individual Defendants breaches of fiduciary duty; and (ix) Is the Class entitled to injunctive relief or damages as a result of defendants wrongful conduct. (c) Plaintiff is committed to prosecuting this action, is an adequate representative of the Class, and has retained competent counsel experienced in litigation of this nature. (d) (e) (f) Plaintiff s claims are typical of those of the other members of the Class. Plaintiff has no interests that are adverse to the Class. The prosecution of separate actions by individual members of the Class would create the risk of inconsistent or varying adjudications for individual members of the Class and of establishing incompatible standards of conduct for the party opposing the Class. (g) Conflicting adjudications for individual members of the Class might as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests. (h) Plaintiff anticipates that there will be no difficulty in the management of this litigation. A class action is superior to other available methods for the fair and efficient adjudication of this controversy FURTHER SUBSTANTIVE ALLEGATIONS Company Background and its Poise for Growth 9

10 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 10 of Terremark is a leading global provider of IT infrastructure services. Headquartered in Miami, Terremark is a widely recognized Infrastructure-as-a- Service leader with a proven track record of delivering cloud-based resources with the highest levels of security and availability in the industry. Operating 13 data centers in the U.S., Europe and Latin America, Terremark combines secure cloud computing, colocation and managed hosting services into a seamless hybrid environment. Its Enterprise Cloud platform provides some of the world s largest companies and U.S. government agencies with on-demand access to secure and reliable computing resources. 34. The Company has been performing well recently and is poised for significant growth. On February 4, 2010, Terremark reported its financial results for the quarter ending December 31, 2010, its third fiscal quarter of fiscal year Terremark delivered strong growth with total revenues of $94.3 million and adjusted EBITDA of $28.5 million for the quarter, representing increases of 27% and 44%, respectively, over the same period in fiscal year In addition, for the full 2011 fiscal year, the Company increased its guidance for revenues to range from $352.0 million to $355.0 million and EBITDA, as adjusted, to range from $100.0 million to $102.0 million. 35. The Company expects to continue to grow in fiscal year For the full 2012 fiscal year, the Company expects revenues between $445.0 million and $455.0 million and EBITDA, as adjusted, to range from $145.0 million to $150.0 million. 36. The Company has many bright years in its future. The demand for cloud computing, provided by Terremark, is expected to grow rapidly over the next few years. According to Gartner, Inc., the industry for cloud computing may reach $148.8 billion by 2014 from approximately $68 billion in

11 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 11 of 29 The Proposed Transaction is Unfair 37. Seeking to capitalize on the future growth of the cloud computing market, Verizon is attempting to purchase the Company for wholly inadequate consideration. In a press release dated January 27, 2011, the Company announced that it had entered into a merger agreement with Verizon pursuant to which Verizon, through Merger Sub, will commence a tender offer for all of the outstanding shares of the Company for $19.00 per share. 38. As stated in the press release announcing the Proposed Transaction, the transaction will accelerate Verizon s everything-as-a-service cloud strategy by delivering a powerful portfolio of highly secure, scalable on-demand solutions to business and government customers globally through a unified enterprise IT platform and unique business cloud offerings that leverage the companies collective strengths. As stated by Lowell McAdam, president and chief operating officer of Verizon, Cloud computing continues to fundamentally alter the way enterprises procure, deploy and manage IT resources, and this combination helps create a tipping point for everything-as-a-service. Our collective vision will foster innovation, enhance business processes and dynamically deliver business intelligence and collaboration services to anyone, anywhere and on any device. 39. Following consummation of the Proposed Transaction, Verizon plans to operate Terremark as a wholly owned subsidiary retaining the Terremark name. While Verizon shareholders will realize the benefits of the cloud computing growth as a result of the Proposed Transaction, Terremark s shareholders will lose their stake in the future growth of the Company. 40. In addition, Verizon will realize significant synergies as a result of the Proposed Transaction. As stated by Verizon s CFO, Fran Shammo, in a conference call discussing the Proposed Transaction: As far as the impacts on the income statement are concerned, we see 11

12 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 12 of 29 increasing contributions to top-line growth, margins and earnings as a result of this transaction. The transaction is neutral to EPS in 2011 and accretive longer-term as the business grows and synergies are realized. We estimate synergies with an MPV of approximately $500 million coming from a revenue lift, operating expense savings and capital avoidance. In short, we see an opportunity for significant value creation with this transaction. Despite the significant synergies inherent in the transaction for Verizon, however, the Board failed to secure a fair price for the Company, either for the intrinsic value of its assets or the value of the Company s assets to Verizon 41. Accordingly, given Terremark s recent strong performance as well as its future growth prospects and the expected growth of the cloud computing market, and the synergies expected to be realized by Verizon shareholders, the consideration shareholders are to receive is inadequate and significantly undervalues the Company. 42. In commenting on the Proposed Transaction, Michael Nelson, an analyst at Mizuho Securities USA Inc., stated that the cloud-computing industry is growing significantly faster than the service providers core businesses. The industry is in its infancy right now. There is significant potential. 43. Indeed, the Discounted Cash Flow Analysis conducted by Credit Suisse Securities (USA) LLC ( Credit Suisse ), the Company s financial advisor, yielded a value for the Company as high as $22.97 per share (not including the Company s net operating losses), and up to $24.17 per share including the Company s net operating losses. These figures greatly exceed the value presented by the Proposed Transaction, and provide a strong indicator that the Terremark Board has egregiously failed to maximize shareholder value in agreeing to the Proposed Transaction. 12

13 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 13 of 29 The Unfair Process and Preclusive Deal Protection Devices 44. In agreeing to the unfair price of $19.00 per share, the Company exacerbated their breaches of fiduciary duties by failing to conduct a pre-signing market check and also agreeing to preclusive deal protection devices in the Merger Agreement that ensure that no competing offers will emerge for the Company. 45. In October 2010, Verizon expressed their unsolicited interest to purchase the Company. On December 13, 2010, Verizon indicated an interest to acquire the Company for $19.00 per share. As part of their offer, Verizon required a 45 day exclusivity period and stated that it would not participate in any competitive bidding or auction process. 46. On December 14, 2010, the strategic transaction committee (the Committee ) of the Board determined that the Company should engage in the proposed transaction process with Verizon on the terms offered by Verizon. 47. Thereafter, between mid-december 2010 through January 26, 2011, Verizon conducted due diligence on the Company and Verizon and the Company engaged in discussions and negotiations regarding the terms of the Merger Agreement. 48. During this time, and as part of their agreement with Verizon, the Company did not conduct any type of pre-signing market check to seek out other potential parties that might be interested in acquiring the Company. Rather, the Company engaged in exclusive negotiations with Verizon. As such, the Board lacks any reliable basis for concluding that the Proposed Transaction offers the best possible value for the Company s shareholders, and is actually in possession of information including the Discounted Cash Flow Analysis that strongly indicates that the value offered by the Proposed Tranaction is woefully inadequate and unfair. 13

14 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 14 of Aware of their failure to perform a proper pre-signing market check, the Company realized it was necessary to conduct a proper post-sign market check that included a go-shop provision. As stated in the Recommendation Statement, at a January 13, 2011 Committee meeting, Greenberg Traurig [the Company s outside counsel] then described various fiduciary protections to expose the deal to the market for purposes of facilitating a meaningful post-sign market check, including a go-shop provision. Accordingly, on January 17, 2011, as directed by the Committee, Greenberg Traurig delivered to Verizon a revised draft of the Merger Agreement, which included, among other things insertion of a 40-day go-shop period commencing upon the signing and first public announcement of the Merger Agreement during which the Company would be permitted to actively solicit potential purchasers. 50. On January 18, 2011, a representative of Verizon informed defendant Medina that the go-shop provision should be removed. In addition, Weil, Gotshal and Manges LLP, Verizon s legal advisor, also communicated to Greenberg Traurig and Goldman Sachs, Verizon's financial advisor, and Credit Suisse that the go shop provision was not acceptable. 51. Having not performed any type of pre-market check, the Company shockingly agreed to remove the go-shop from the Merger Agreement. 52. Rather, as part of the Merger Agreement, the Board agreed to certain onerous and preclusive deal protection devices that operate conjunctively to make the Proposed Transaction a fait accompli and ensure that no competing offers will emerge for the Company. These deal protection provisions serve only to lock up the Proposed Transaction for Verizon, and continue to isolate and insulate the Proposed Transaction from any market forces that could test the adequacy and fairness of the consideration to be offered by Verizon. As such, the Board 14

15 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 15 of 29 continues to lack any reliable basis whatsoever to conclude that the Proposed Transaction represents a value maximizing prospect for shareholders. 53. By way of example, 5.2(a) of the Merger Agreement includes a no solicitation provision barring the Company from soliciting interest from other potential acquirers in order to procure a price in excess of the amount offered by Verizon. This section also demands that the Company terminate any and all prior or on-going discussions with other potential acquirors. 54. In addition, pursuant to 5.2(c) of the Merger Agreement, should an unsolicited bidder submit a competing proposal, the Company must notify Verizon of the bidder s identity and the terms of the bidder s offer. Thereafter, should the Board determine that the unsolicited offer is superior, before the Company can terminate the Merger Agreement with Verizon in order to enter into the competing proposal, it must grant Verizon three business days in which the Company must negotiate in good faith with Verizon (if Verizon so desires) and allow Verizon to amend the terms of the Merger Agreement to make a counter-offer so that the competing bid no longer constitutes a superior proposal In other words, the Merger Agreement gives Verizon access to any rival bidder s information and allows Verizon a free right to top any superior offer simply by matching it. Accordingly, no rival bidder is likely to emerge and act as a stalking horse, because the Merger Agreement unfairly assures that any auction will favor Verizon and piggy-back upon the due diligence of the foreclosed second bidder. 55. Further, the Merger Agreement provides that a termination fee of $52.5 million, which equates to 3.75% of the $1.4 billion Proposed Transaction value (unless the Company terminates the Merger Agreement on or prior to February 26, 2011, in which case the termination fee payable to Verizon in this circumstance would be $37.5 million), must be paid to Verizon by Terremark if the Company decides to pursue the competing offer, thereby essentially requiring 15

16 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 16 of 29 that the competing bidder agree to pay a naked premium for the right to provide the shareholders with a superior offer. The $52.5 million termination fee amounts to 76% of the Company s cash on hand, as detailed in their latest quarterly statement for the quarter ending on December 31, The Board s failure to conduct either a proper pre-signing or post-signing market check and its agreement to preclusive deal protection devices are significant in light of the fact that there are likely numerous parties interested in the Company. For example, in a January 28, 2011 article on businessweek.com titled Verizon Terremark Deal May Spur Cloud Acquisitions, the article described how many companies were actively seeking to enter the growing cloud computing industry. We also believe other telecom providers are actively assessing opportunities in this area, David Dixon, an analyst at Friedman Billings Ramsey, said. We see significant disruption of existing business models, he stated. In a research note regarding the Proposed Transaction, Oppenheimer analyst Tim Horan stated: The transaction highlights the attractive fundamentals of the Internet infrastructure space driven by the ongoing migration to cloud computing. Other providers in this space that represent potential targets include Savvis, Rackspace, Cogent Communications Group, Level 3 and Limelight Networks. Potential suitors include the incumbents AT&T, Verizon, CenturyLink, Windstream and foreign carriers. 57. Ultimately, these preclusive deal protection provisions illegally restrain the Company s ability to solicit or engage in negotiations with any third party regarding a proposal to acquire all or a significant interest in the Company. The circumstances under which the Board may respond to an unsolicited written bona fide proposal for an alternative acquisition that constitutes or would reasonably be expected to constitute a superior proposal are too narrowly circumscribed to provide an effective fiduciary out under the circumstances. 16

17 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 17 of Verizon is also the beneficiary of a Top-Up provision that ensures that Verizon gains the shares necessary to effectuate a short-form merger. Pursuant to the Merger Agreement, if Verizon receives 90% of the shares outstanding through its tender offer, it can effect a shortform merger. In the event Verizon fails to acquire the 90% required, the Merger Agreement also contains a Top-Up provision that grants Verizon an option to purchase additional shares from the Company in order to reach the 90% threshold required to effectuate a short-form merger. 59. Moreover, all of the Company s executive officers and directors who own shares of common stock of Terremark have notified the Company that they intend to tender their respective shares in the tender offer. As of February 10, 2011, the directors and executive officers together owned 5,010,587 Shares, or approximately 7% of the outstanding stock of the Company. 60. In addition, Verizon required as a condition to entering the Merger Agreement that three of the Company s largest stockholders, Cyrte Investments GP I B.V. in its capacity as general partner of CF I Invest C.V., Sun Equity Assets Limited and VMware Bermuda Limited, together holding approximately 27.6% of the outstanding shares of the Company, enter into separate tender and support agreements, pursuant to which each stockholder agreed to tender their respective shares in the tender offer and vote in favor of the merger and. Accordingly, along with the 7% of Terremark stock held by the Company s directors and officers, approximately 34.6% of the Company s outstanding stock is locked up in favor of the Proposed Transaction. Terremark s Executives Officers and Directors Stand to Receive Unique Material Financial Benefits in the Proposed Transaction Not Available to Terremark s Public Shareholders 17

18 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 18 of The Company s executive officers and directors have material conflicts of interest and are acting to better their own personal interests through the Proposed Transaction at the expense of Terremark s public shareholders. 62. The Company s executive officers and directors hold restricted stock and/or unvested stock options of the Company that, pursuant to the Merger Agreement, will vest and entitle the holder to receive the Proposed Transaction of $19.00 for each such share. The chart below shows the amount of stock option and restricted stock held by each of the Company s executive officers and directors: Number of Weighted Payment in Shares Average Payment in Number of Respect of Subject to Exercise Price Respect of Shares of Restricted Options per Share Options Restricted Stock Name Position (#) ($) ($) Stock ($) Manuel D. Medina Chairman of the Board, 213, ,836, ,000 7,125,000 President and Chief Executive Officer Joseph R. Wright, Jr. Vice Chairman of the 63, ,498 Board Guillermo Amore Director 63, ,498 Timothy Elwes Director 63, ,498 Jose A. Segrera Chief Financial Officer 135, ,721, ,332 3,578,308 Nelson Fonseca Chief Operating Officer 87, ,023, ,332 3,578,308 Marvin Wheeler Chief Strategy Officer 140, ,861, ,332 2,533,308 Jaime Dos Santos Chief Executive Officer 102, ,249,850 36, ,654 of Terremark Federal Group, Inc. Antonio S. Fernandez Director 63, ,498 Adam T. Smith Chief Legal Officer 58, , ,332 2,533,308 Arthur L. Money Director 63, ,498 Marvin S. Rosen Director 63, ,498 Rodolfo A. Ruiz Director 63, ,498 Frank Botman Director 31, ,198 Melissa Hathaway Director 31, ,598 Potential Payments For Options and Restricted Stock: 15,938,990 20,044, Moreover, Terremark s current management team is expected to stay on and continue managing the company. As stated in the Recommendation Statement, Verizon has informed the Company Verizon currently intends to retain the executive officers and management personnel of the Company. 18

19 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 19 of Further, each of the Company s executive officers, including Defendant Medina, has an employment agreement with the Company which entitles them to certain severance and other benefits in the event of their termination under certain circumstances within two years following a change of control. The following chart shows the potential payments to each such officer in the event of such termination: Potential Payments Upon Termination Following a Change of Control Accelerated Vesting of Equity Value Severance Pay Benefit Continuation Options Restricted Stock Total Name ($)(1)(2) ($)(3) ($)(4) ($) ($) Manuel D. Medina 3,325,000 15,000 2,836,998 7,125,000 13,301,998 Jose A. Segrera 1,140,000 22,000 1,721,850 3,578,308 6,462,158 Jaime Dos Santos 700,000 12,000 1,249, ,654 2,658,504 Nelson Fonseca 1,140,000 25,000 1,023,280 3,578,308 5,766,588 Marvin Wheeler 880,000 28,000 1,861,450 2,533,308 5,302,758 Adam T. Smith 1,045,000 25, ,280 2,533,308 4,367, Based on the above, the Proposed Transaction is unfair to Terremark s public shareholders, and represents an effort by the Individual Defendants to aggrandize their own financial position and interests at the expense of and to the detriment of Class members. The Materially Misleading and Incomplete Recommendation Statement 66. On February 10, 2011, the Company filed the Recommendation Statement with the SEC in connection with the Proposed Transaction. The Recommendation Statement fails to provide the Company s shareholders with material information and provides them with materially misleading information thereby rendering the shareholders unable to make an informed decision on whether to tender their shares in favor of the Proposed Transaction. Disclosures Concerning the Company s Projections 67. The Recommendation Statement fails to disclose adequate information concerning the Company s projections that were prepared by Company management. For example, on page 24 of the Recommendation Statement, it states that on October 29, 2010, the 19

20 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 20 of 29 Board discussed the importance, at the outset of any potential process, to update, as necessary, management s forecasts and budgets for the three to five-year period ending March 31, 2014 and The Recommendation Statement must disclose such forecasts and budgets, including whether these forecasts and budgets were updated, the updates made, and the reasons for such updates. 68. In addition, on page 45 of the Recommendation Statement, the Recommendation Statement provides the Net Income and EBITDA projections for the Company for years ending December 31, 2011 through December 31, 2015, but fails to disclose, the Company s free cash flow projections for each year, as well as all line items necessary to calculate the Company s free cash flows. 69. The Recommendation Statement should also disclose the assumptions used by Company management in preparing its forecasts and projections. Disclosure of this information is important so a shareholder can assess whether the Company properly took into account the tremendous growth prospects of the cloud computing industry. Disclosures Concerning The Financial Analyses Conducted by Credit Suisse 70. The Recommendation Statement completely fails to disclose the underlying methodologies, key inputs and multiples relied upon and observed by Credit Suisse, the Company s financial advisor, so that shareholders can properly assess the credibility of the various analyses performed by Credit Suisse and relied upon by the Board in recommending the Proposed Transaction. 71. With respect to the Discounted Cash Flow Analysis, the Recommendation Statement fails to, but should, disclose (a) the projected financial information used by Credit Suisse in the analysis, including the earnings before interest expense/income and income taxes, 20

21 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 21 of 29 depreciation and amortization, net working capital, and capital expenditure projections for years 2011 through 2015; (b) the projected NOLs of the Company provided to Credit Suisse for use in its analysis; (c) the criteria and key inputs used to select LTM terminal EBITDA multiples of 7.5x to 9.5x used in the analysis; (d) the key inputs used to calculate a discount rate range of 8.00% to 11.00% used in the analysis; and (e) the reasons Credit Suisse did not consider the $3.5 million per year for NOLs acquired by the Company in the acquisition of Data Return LLC in conducting its analysis. Disclosure of this information is important considering the wide per share value range calculated by Credit Suisse in the analysis. Specifically, the results of the analysis yielded a per share equity value of the Company ranging from $14.51 to $22.97 per share not including the Company s net operating losses, and an additional $1.10 to $1.20 per share including the Company s net operating losses. Shareholders need full disclosure of the forecasts and key inputs used to calculate this range in order to properly assess the true value of the Company. 72. With respect to the Selected Public Company Analysis, the Recommendation Statement fails to disclose (a) the criteria used to determine the companies considered similar to the Company and selected for the analysis; (b) the Company s 2011 EBITDA used in the analysis, including the quantitative adjustments to EBITDA performed by Credit Suisse ; and (c) the reasons Credit Suisse calculated an implied per share equity range for the Company using only the EV/2011 EBITDA multiples, but did not calculate an implied per share equity range using the EV/2012 EBITDA or the EV/Growth Adjusted EBITDA multiples that were observed. 73. With respect to the Selected Transaction Analysis, the Recommendation Statement fails to disclose (a) the criteria used to determine the transactions that involve companies considered similar to the Company selected for the analysis; (b) the criteria used to 21

22 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 22 of 29 select the NTM EBITDA multiples reference range of 1 1.0x to 14.0x used in the analysis; and (c) the reasons Credit Suisse did not calculate an implied per share equity range using the LTM EBITDA multiples that were observed. 74. The Recommendation Statement states that Credit Suisse also reviewed and considered equity research analysts price targets for the Company but fails to disclose which analysts were reviewed and the price targets of each analyst. Disclosures Concerning Credit Suisse s Interest In Verizon and Terremark 75. The Recommendation Statement fails to disclose material information concerning Credit Suisse s interest in the parties involved in the Proposed Transaction. 76. For example, the Recommendation Statement states that in 2007, the Company obtained from Credit Suisse... financing to prepare [certain property] for future development, including $13.25 million of lease financing and the issuance to Credit Suisse of $10 million aggregate principal amount of its Senior Subordinated Secured Notes and $4 million aggregate principal amount of its Senior Subordinated Convertible Notes. The Recommendation Statement must disclose the material terms of the notes issued to Credit Suisse as well as the current status of the obligations under the notes. 77. The Recommendation Statement also states that Credit Suisse has in the past and is currently providing services to the Company and its affiliates for which Credit Suisse have received, and would expect to receive compensation but fails to disclose the amount of compensation received and expected to be received fur such services. 78. The Recommendation Statement further states that Credit Suisse has in the past providing services to Verizon, but again fails to disclose the amount of compensation received and/or still owed for such services. 22

23 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 23 of It is material for shareholders to be informed of the financial and economic interests Credit Suisse has in the parties involved that could be perceived or create a conflict of interest. Disclosures Concerning the Events Leading to the Announcement of the Proposed Transaction 80. The Recommendation Statement fails to disclose the events leading to the announcement of the Proposed Transaction, including information pertaining to other unsolicited offers received by the Company, and its negotiations and discussions with Verizon. In particular, the Recommendation Statement: (a) States on page 19 that the Company received various unsolicited indications of interest from time to time but fails to disclose the terms/value of these indications of interest, when they were received, and how the Company responded to such indications. (b) Fails to disclose the significant percentage of stock held by the Company that was interested in participating in an acquisition of the Company in April (c) States that during 2008, the Company s strategic committee engaged a well-recognized independent financial advisor but fails to disclose (i) the identity of the advisor, (ii) the role and responsibility authorized to and conducted by the advisor, (iii) the amount of compensation received by the advisor, including whether such advisor will be owed any compensation as a result of the Proposed Transaction, and (iv) the reasons the committee did not retain an advisor again in 2010 to evaluate the Proposed Transaction. (d) Fails to disclose the criteria used to select the 21 parties contacted by Credit Suisse in 2008 including how many parties were financial and how many were strategic parties. 23

24 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 24 of 29 (e) States that during the fourth quarter of 2009, several new strategic and financial transaction candidates submitted to the Company preliminary indications of interest to acquire the Company but fails to disclose the value/terms of each indication of interest, and how the Company responded to such indications of interest. (f) Fails to disclose the value of the certain contracts which the Company anticipated would be entered into considered by the Board during the first quarter of 2010, and whether the Company subsequently entered into such contracts or still expects to enter into such contracts. (g) States that during the remainder of the first half and during the summer of 2010, the Company continued to receive unsolicited indications of interest from financial buyers, but fails to disclose the terms/value of each such indication of interest. (h) States that on October 29, 2010, the Board determined to pursue a potential transaction with Verizon provided that certain conditions were met but fails to disclose what those conditions were. (i) States that on January 20, 2011, the Committee discussed certain hypothetical scenarios whereby a third-party suitor might submit an unsolicited takeover proposal and how the provisions of the Merger Agreement would work in that circumstance. The Recommendation Statement should disclose the scenarios discussed and how the provision of the Merger Agreement would work as discussed by the Committee. (j) Fails to disclose the period of time a bona fide third-party suitor might need to submit a topping bid and enter into a confidentiality agreement with the Company and conduct and complete due diligence discussed by the Committee on January 20,

25 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 25 of 29 (k) Fails to disclose whether the Company received unsolicited indications of interest or inquiries regarding a strategic transaction from third parties during their exclusivity period with Verizon, and if so, how many and the specific nature of such indications of interest or inquiries. 81. Lastly, the Recommendation Statement lists the total value that each of the Company s executive officers and directors will receive by cashing out their stock options in the Proposed Transaction, but fails to disclose how many of these options were already vested, and how many were unvested and are accelerating pursuant to the Merger Agreement. 82. Accordingly, Plaintiff seeks injunctive and other equitable relief to prevent the irreparable injury that Company shareholders will continue to suffer absent judicial intervention. CLAIMS FOR RELIEF COUNT I Violations of Section 14(d)(4) and 14(e) of the Exchange Act 83. Plaintiff repeats all previous allegations as if set forth in full herein. 84. Defendants have issued the Recommendation Statement with the intention of soliciting shareholder support of the Proposed Transaction. 85. Sections 14(d)(4) and 14(e) of the Exchange Act require full and complete disclosure in connection with tender offers. Specifically, Section 14(e) provides that: It shall be unlawful for any person to make any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading, or to engage in any fraudulent, deceptive, or manipulative acts or practices, in connection with any tender offer or request or invitation for tenders, or any solicitation of security holders in opposition to or in favor of any such offer, request, or invitation. The Commission shall, for the purposes of this subsection, by rules and regulations define, and prescribe means reasonably designed to prevent, such acts and practices as are fraudulent, deceptive, or manipulative 25

26 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 26 of The Recommendation Statement violates Sections 14(d)(4) and 14(e) because it omits material facts, including those set forth above. Moreover, in the exercise of reasonable care, Defendants should have known that the Recommendation Statement is materially misleading and omits material facts that are necessary to render them non-misleading. 87. The misrepresentations and omissions in the Recommendation Statement are material to Plaintiff and the Class, and Plaintiff and the Class will be deprived of their entitlement to make a fully informed decision if such misrepresentations and omissions are not corrected prior to the expiration of the tender offer. COUNT II Breach of Fiduciary Duties (Against All Individual Defendants) 88. Plaintiff repeats all previous allegations as if set forth in full herein. 89. The Individual Defendants have knowingly and recklessly and in bad faith violated fiduciary duties of care, loyalty, good faith, and independence owed to the public shareholders of Terremark and have acted to put their personal interests ahead of the interests of Terremark shareholders. 90. The Individual Defendants recommendation of the Proposed Transaction will result in change of control of the Company which imposes heightened fiduciary responsibilities to maximize Terremark s value for the benefit of the stockholders and requires enhanced scrutiny by the Court. 91. The Individual Defendants have breached their fiduciary duties of loyalty, good faith, and independence owed to the shareholders of Terremark because, among other reasons: (a) they failed to take steps to maximize the value of Terremark to its public shareholders and took steps to avoid competitive bidding; (b) they failed to properly value Terremark; and 26

27 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 27 of 29 (c) they ignored or did not protect against the numerous conflicts of interest resulting from the directors own interrelationships or connection with the Proposed Transaction. 92. As a result of the Individual Defendants breaches of their fiduciary duties, Plaintiff and the Class will suffer irreparable injury in that they have not and will not receive their fair portion of the value of Terremark s assets and will be prevented from benefiting from a value-maximizing transaction. 93. Unless enjoined by this Court, the Individual Defendants will continue to breach their fiduciary duties owed to Plaintiff and the Class, and may consummate the Proposed Transaction, to the irreparable harm of the Class. 94. Plaintiff and the Class have no adequate remedy at law. COUNT III Breach of Fiduciary Duty -- Disclosure (Against Individual Defendants) 95. Plaintiff repeats all previous allegations as if set forth in full herein. 96. The fiduciary duties of the Individual Defendants in the circumstances of the Proposed Transaction require them to disclose to Plaintiff and the Class all information material to the decisions confronting Terremark s shareholders. 97. As set forth above, the Individual Defendants have breached their fiduciary duty through materially inadequate disclosures and material disclosure omissions. 98. As a result, Plaintiff and the Class members are being harmed irreparably. 99. Plaintiff and the Class have no adequate remedy at law. COUNT IV Aiding and Abetting (Against Terremark, Verizon, and Merger Sub) 100. Plaintiff repeats all previous allegations as if set forth in full herein. 27

28 Case 1:11-cv CMA Document 1 Entered on FLSD Docket 02/17/2011 Page 28 of As alleged in more detail above, Defendants Terremark, Verizon, and Merger Sub have aided and abetted the Individual Defendants breaches of fiduciary duties As a result, Plaintiff and the Class members are being harmed Plaintiff and the Class have no adequate remedy at law. WHEREFORE, Plaintiff demands judgment against defendants jointly and severally, as follows: (A) declaring this action to be a class action and certifying Plaintiff as the Class representatives and his counsel as Class counsel; (B) declaring that the Recommendation Statement is materially misleading and contains omissions of material fact in violation of Section 14(d)(4) and 14(e) of the Exchange Act; (C) (D) enjoining, preliminarily and permanently, the Proposed Transaction; in the event that the transaction is consummated prior to the entry of this Court s final judgment, rescinding it or awarding Plaintiff and the Class rescissory damages; (E) directing that Defendants account to Plaintiff and the other members of the Class for all damages caused by them and account for all profits and any special benefits obtained as a result of their breaches of their fiduciary duties; (F) awarding Plaintiff the costs of this action, including a reasonable allowance for the fees and expenses of Plaintiff s attorneys and experts; and (G) granting Plaintiff and the other members of the Class such further relief as the Court deems just and proper. February 17,