Free Amended Complaint - District Court of California - California

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 1 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

HULETT HARPER STEWART LLP KIRK B. HULETT, SBN: 110726 BLAKE MUIR HARPER, SBN: 115756 SARAH P. WEBER, SBN: 239979 550 West C Street, Suite 1600 San Diego, CA 92101 Telephone: (619) 338-1133 Facsimile: (619) 338-1139 e-mail: [email protected] [email protected] [email protected] Attorneys for Plaintiff, Capital Partners [Additional Counsel on Signature Page] IN THE UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA ­ SAN JOSE DIVISION CAPITAL PARTNERS, on Behalf of Itself and All Others Similarly Situated, Plaintiff, v. DR. MALCOLM J. THOMPSON, JEFFREY A. HAWTHORNE, TERRY H. CARLITZ, DR. DONALD C. FRASER, EDWARD ROGAS, JR., CURTIS S. WOZNIAK, PHOTON DYNAMICS, INC. AND ORBOTECH, LTD., Defendants. JURY TRIAL DEMANDED Case No. 08-03688RS FIRST AMENDED COMPLAINT FOR BREACH OF FIDUCIARY DUTY AND FAILURE TO DISCLOSE

FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 2 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Plaintiff, as and for its First Amended Class Action Complaint, alleges upon personal knowledge as to itself and its own acts, and upon information and belief derived from, inter alia, a review of documents filed with the Securities and Exchange Commission ("SEC") and publicly available news sources, such as newspaper articles, as to all other matters, as follows:1 NATURE OF THE ACTION 1. This is a shareholder class action on behalf of Plaintiff and the other public

stockholders of Photon Dynamics, Inc. ("Photon Dynamics" or the "Company") common stock against Photon Dynamics, Inc., the Company's directors and Orbotech, Ltd. It challenges the sale of Photon Dynamics to Orbotech, Ltd. and its wholly owned subsidiary, PDI Acquisition, Inc. (collectively "Orbotech") in a proposed transaction (the "Sale Agreement") which protects and advances the interests of Photon Dynamics' directors and Orbotech at the expense of Photon Dynamics' public shareholders and also challenges the Individual Defendants' efforts to conceal material information from Plaintiff and Photon Dynamics' other public shareholders in conjunction with the same. Specifically, as further alleged below, all of Photon Dynamics' directors will receive extensive personal compensation as a result of the Sale Agreement - compensation that they would not otherwise receive at this time absent the Sale Agreement. This conflict of interest caused these directors to be unable to fairly and thoroughly evaluate the Sale Agreement to ensure that it is in the best interest of Photon Dynamics and its public shareholders. Additionally, Photon Dynamics' directors caused Photon Dynamics to file a definitive proxy statement with the SEC on or about August 4, 2008 (and mail it to Photon Dynamics' shareholders on or about August 5, 2008) which concealed material information from Plaintiff and Photon Dynamics' other public shareholders (the "Proxy Statement"). JURISDICTION 2. The Superior Court of California for the County of Santa Clara (the "Superior

Court") has jurisdiction over the subject matter of this action pursuant to the California

This action has been removed to the United States District Court by certain of the Defendants. Plaintiff is moving to remand and by filing this amended complaint in no way consents to the jurisdiction of the District Court or concedes that removal was proper. 1 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

1

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 3 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Constitution, Article VI, Section 10, because this case is an action not given by statute to other trial courts. 3. The Superior Court has jurisdiction over the Defendants in this action because

Photon Dynamics is a California corporation headquartered in Santa Clara County, California and because the improper conduct alleged in this Complaint occurred in and/or was directed at Santa Clara County, California. Additionally, that Court has jurisdiction over each of the Defendants because their wrongful conduct challenged in this Complaint was directed at, and intended to have its primary effect in, Santa Clara County, California. 4. Venue lies in the Superior Court for Santa Clara County because Photon

Dynamics' principal place of business is located in San Jose, California within Santa Clara County, and Defendants' wrongful acts occurred in substantial part in or were directed toward Santa Clara County. 5. This action challenges the internal affairs or governance of Photon Dynamics and

hence is not removable to Federal Court under the Class Action Fairness Act of 2005 or the Securities Litigation Uniform Standards Act ("SLUSA"), 15 U.S.C. § 78bb(f). THE PARTIES 6. Plaintiff Capital Partners is the owner of shares of Photon Dynamics' common

stock and has been the owner of such shares at all relevant times. 7. Defendant Photon Dynamics is a California corporation with executive offices

located at 5970 Optical Court, San Jose, California 95138-1400. The Company is a global supplier utilizing advanced machine vision technology for liquid crystal display flat panel display test and repair systems and for digital imaging systems for defense, surveillance, industrial inspection and medical imaging applications. 8. Defendant Dr. Malcolm J. Thompson ("Thompson") has served as a director of the

Company since 1992. Thompson has served as the Executive Chairman of Photon Dynamics from October 2003 until September 2005 and is now Chairman of the Company's Board of Directors. In connection with the Sale Agreement, Thompson (i) is expected to receive a cash payment of approximately $111,280.00 for the accelerated vesting of his unvested Photon 2 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 4 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Dynamics stock options and restricted stock units and (ii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Thompson because Photon Dynamics is headquartered in California and many of Thompson's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 9. Defendant Jeffrey A. Hawthorne ("Hawthorne") has served as a director of the

Company since December 2003. Hawthorne has also served as the Company's President and Chief Executive Officer since October 2003. From July 2003 to October 2003, Hawthorne was the Company's Chief Operating Officer. From November 2001 to July 2003, Hawthorne was the Company's Vice President and President of the Company's Image Processing Systems Division. Hawthorne joined the Company in 1991 and has held a series of other management positions including Vice President of Development from September 1994 to November 2001. In

connection with the Sale Agreement, Hawthorne (i) is expected to receive a cash payment of $1,560,000.00 for the accelerated vesting of his unvested Photon Dynamics stock options and restricted stock units, (ii) is expected to receive a cash severance payment of $700,000.00, and (iii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Hawthorne because Photon Dynamics is headquartered in California and many of Hawthorne's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 10. Defendant Terry H. Carlitz ("Carlitz") has served as a director of the Company

since December 2004. In connection with the Sale Agreement, Carlitz (i) is expected to receive a cash payment of approximately $111,280.00 for the accelerated vesting of her unvested Photon Dynamics stock options and restricted stock units and (ii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Carlitz because Photon Dynamics is headquartered in California and many of Carlitz's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 3 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 5 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

11.

Defendant Dr. Donald C. Fraser ("Fraser") has served as a director of the

Company since October 2007. In connection with the Sale Agreement, Fraser (i) is expected to receive a cash payment of approximately $155,818.00 for the accelerated vesting of his unvested Photon Dynamics stock options and restricted stock units and (ii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Fraser because Photon Dynamics is headquartered in California and many of Fraser's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 12. Defendant Edward Rogas, Jr. ("Rogas") has served as a director of the Company

since October 2007. In connection with the Sale Agreement, Rogas (i) is expected to receive a cash payment of approximately $91,780.00 for the accelerated vesting of his unvested Photon Dynamics stock options and restricted stock units and (ii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Rogas because Photon Dynamics is headquartered in California and many of Rogas' actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 13. Defendant Curtis S. Wozniak ("Wozniak") has served as a director of the

Company since December 2004. In connection with the Sale Agreement, Wozniak (i) is expected to receive a cash payment of approximately $111,280.00 for the accelerated vesting of his unvested Photon Dynamics stock options and restricted stock units and (ii) will be granted a right to indemnification for acts or omissions occurring prior to the consummation of the Sale Agreement. The Superior Court has jurisdiction over Wozniak because Photon Dynamics is headquartered in California and many of Wozniak's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have their primary effect in, California. 14. Defendant Orbotech is a foreign corporation. Orbotech is principally engaged in

the design, development, manufacture, marketing and service of yield-enhancing and production solutions for specialized applications in the supply chain of the electronics industry. The Superior 4 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 6 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Court has jurisdiction over Orbotech because many of Orbotech's actions challenged in this Complaint occurred in substantial part, were directed at, and/or intended to have its primary effect in, California. 15. The Defendants identified in paragraphs 8 through 13 collectively constitute the

entirety of the Company's board of directors. These six individuals are hereinafter referred to collectively as the "Individual Defendants." THE INDIVIDUAL DEFENDANTS' FIDUCIARY DUTIES 16. Under applicable common law, the directors of a publicly held company such as

Photon Dynamics have fiduciary duties of care, loyalty, disclosure, good faith and fair dealing and are liable to shareholders for breaches thereof. They are required to exercise good faith and subordinate their own selfish interests to those of the corporation where their interests conflict. Where it appears that a director has obtained any personal profit from dealing with the corporation, and the transaction is drawn into question as between him and the stockholders of the corporation, the burden is upon the director or officer to show that the transaction has been fair, open and in the utmost good faith. 17. As alleged in detail below, Defendants have breached, and/or aided other

Defendants' breaches of, their fiduciary duties to Photon Dynamics' public shareholders by acting to cause or facilitate the Sale Agreement because it is not in the best interests of those shareholders, but is in the best interests of the Individual Defendants who will collectively receive significant personal profits as a result of the Sale Agreement, which they would not otherwise receive at this time. 18. Because Defendants have knowingly or recklessly breached their fiduciary duties

in connection with the Sale Agreement, and/or are personally profiting from the same, the burden of proving the inherent or entire fairness of the Sale Agreement, including all aspects of its negotiation, structure, and terms, is borne by Defendants as a matter of law. 19. Further, as alleged in detail infra, the Individual Defendants have breached their

fiduciary duty of disclosure in that on August 4, 2008, they filed the Proxy Statement with the SEC (and mailed to the shareholders of Photon Dynamics on or about August 5, 2008 in 5 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 7 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

connection with seeking their vote on the Sale Agreement) but concealed certain material information which a reasonable shareholder would find material in determining whether to vote for the Sale Agreement. Among other things, the Individual Defendants concealed the extent of the conflicts of interest of their financial advisor including, inter alia, (i) information pertaining to Credit Suisse Securities (USA) LLC's ("Credit Suisse") investments in Orbotech and/or its affiliates and payments that Credit Suisse has received and/or expects to receive for services rendered to Orbotech, and (ii) the percentage of Credit Suisse's fees which are contingent upon the consummation of the Sale Agreement. CLASS ACTION ALLEGATIONS 20. Plaintiff brings this action as a class action pursuant to California Code of Civil

Procedure § 382, or alternatively Fed. R. Civ. P. 23, on behalf of itself and all other shareholders of the Company except the Defendants herein and any person(s), firm(s), trust(s), corporation(s), or other entit(ies) related to or affiliated with them, who are or will be threatened with injury arising from Defendants' actions, as more fully described herein (the "Class"). 21. The members of the Class are so numerous that joinder of all of them would be

impracticable. While the exact number of Class members is unknown to Plaintiff, and can be ascertained only through appropriate discovery, Plaintiff believes there are many hundreds, if not thousands, of Class members. Photon Dynamics had over 17 million shares of common stock outstanding as of July 9, 2008. 22. Plaintiff's claims are typical of the claims of the Class, since Plaintiff and the other

members of the Class have and will sustain harm arising out of Defendants' breaches of their fiduciary duties. Plaintiff does not have any interests that are adverse or antagonistic to those of the Class. Plaintiff will fairly and adequately protect the interests of the Class. Plaintiff is committed to the vigorous prosecution of this action and has retained counsel competent and experienced in this type of litigation. 23. There are questions of law and fact common to the members of the Class that

predominate over any questions which, if they exist, may affect individual Class members. The predominant questions of law and fact include, among others, whether: 6 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 8 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 25. relief; and

a.

the Defendants have and are breaching their fiduciary duties to the

detriment of Photon Dynamics shareholders; b. Plaintiff and the Class are entitled to an injunction and other equitable

c.

Plaintiff and the Class have been damaged and the extent to which they

have sustained damages, and what is the proper measure of those damages. 24. A class action is superior to all other available methods for the fair and efficient

adjudication of this controversy, since joinder of all members is impracticable. Further, as individual damages may be relatively small for most members of the Class, the burden and expense of prosecuting litigation of this nature makes it unlikely that members of the Class would prosecute individual actions. Plaintiff anticipates no difficulty in the management of this action as a class action. Further, the prosecution of separate actions by individual members of the Class would create a risk of inconsistent or varying results, which may establish incompatible standards of conduct for Defendants. SUBSTANTIVE ALLEGATIONS Discussions regarding a potential sale of Photon Dynamics to Orbotech began in

August 2005, at which time the Company's shares were trading at the high $19.00 range. Following negotiations, the parties reached an understanding pursuant to which Orbotech would acquire Photon Dynamics at a value of $24.50 per share. However, several weeks later, Orbotech withdrew from that understanding. 26. In late 2006, Orbotech again proposed to acquire the Company at a price of $15.50

per share, however the Company's board rejected that proposal. 27. In March 2008, Orbotech again made an unsolicited proposal to acquire the

Company at a price of $14.00 per share. The Company determined to engage in negotiations with Orbotech at that time and, to that end, retained Credit Suisse to serve at its financial advisor. During negotiations with Orbotech, Credit Suisse indicated that a price of "$16.50 to $17.00" was an appropriate basis to continue negotiations with Orbotech. However, days later, the Board lowered that price to $16.10 per share, then again to $15.80 per share. 7 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 9 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

28.

On June 26, 2008, Orbotech and Photon Dynamics announced that they have

signed a definitive agreement for Orbotech to acquire Photon Dynamics. Under the terms of the agreement, Orbotech will pay $15.60 per share in cash for all of the issued and outstanding shares of Photon Dynamics' common stock, making an aggregate merger consideration value for the transaction of approximately $290 million. CONFLICTS OF INTERESTS Each Member of Photon Dynamics' Board of Directors Has a Conflict of Interest with Regard to a Sale of the Company Because Each Will Receive Significant Payments that He/She Would Not Otherwise Receive at This Time Absent the Sale of the Company 29. As set forth in the chart below, each member of Photon Dynamics' board of

directors has a conflict of interest with regard to a sale of the Company because each will receive significant payments in the form of the accelerated vesting of unvested stock options and restricted share units (RSU) that they would not otherwise receive at this time absent the Sale of the Company. Director Dr. Malcolm J. Thompson Ms. Terry H. Carlitz Dr. Donald C. Fraser Mr. Edward Rogas, Jr. Mr. Curtis S. Wozniak Mr. Jeffrey A. Hawthorne 30. Value of # of Unvested # of Accelerated Restricted Unvested Equity Awards Options Share Units 7,500 4,167 $111,280 12,500 4,167 $111,280 13,750 4,450 $155,818 17,500 2,917 $91,780 12,500 4,167 $111,280 8,640 100,000 $1,560,000

Further, Defendant Hawthorne, the Company's Chief Executive Officer and

President will also receive a cash payment of $700,000 in change of control severance payments as a result of the sale of the Company. 31. In addition, under the terms of the Sale Agreement, all of the Company's stock

options and RSUs, including those held by members of the Company's board of directors, will be assumed by Orbotech and converted into an option to purchase Orbotech shares. Thus, these directors will be able to share in Photon Dynamics' continued growth via Orbotech. The table below, which sets forth the number of RSUs and Stock Options held by each director, demonstrates that each director also held significantly more stock options and RSUs than Photon 8 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 10 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

Dynamics stock. Thus, the Individual Defendants' interests were clearly not aligned with the interest of Photon Dynamics' other public shareholders. # of Photon # of Restricted # of Stock Options Dynamics Share Units Shares 1,250 5,000 84,201 5,000 50,000 4,550 13,750 208 2,917 29,375 5000 50,000 15,138 100,000 277,983

Director Dr. Malcolm J. Thompson Ms. Terry H. Carlitz Dr. Donald C. Fraser Mr. Edward Rogas, Jr. Mr. Curtis S. Wozniak Mr. Jeffrey A. Hawthorne 32.

Finally, each of the Individual Defendants will be granted rights to indemnification

for acts or omissions occurring prior to the consummation of the Sale Agreement (the "Effective Time") for six years after the Effective Time ­ thereby insulating them from all liability arising from this transaction. 33. Because of these financial and other incentives, each of the Individual Defendants

has a conflict of interest in deciding whether Photon Dynamics should be sold at this time. 34. Moreover, the Individual Defendants retained Credit Suisse to serve as their

financial advisor and render a fairness opinion on the consideration offered pursuant to the Sale Agreement. However they incentivized Credit Suisse to render a favorable fairness opinion by ensuring that a substantial majority of Credit Suisse's fee was payable only upon a consummation of the Sale Agreement. THE MATERIALLY MISLEADING AND/OR INCOMPLETE PROXY 35. In addition, Defendants are breaching their fiduciary duties of full disclosure to

Photon Dynamics' public shareholders in connection with the Sale Agreement. In this regard, on August 4, 2008, the Individual Defendants caused Photon Dynamics to file the Proxy Statement with the SEC and mail it to Photon Dynamics' public shareholder on or about August 5, 2008 in connection with seeking their vote on the Sale Agreement. However, the Proxy Statement is deficient in that it misrepresents and/or omits the following material information: (i) According to chart below extracted from the Proxy Statement (emphasis added) the projections for EBIT, Net Operating Profit 9 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 11 of 16

1 2 3 4 5 6

after Tax and Unlevered Free Cash Flow for CY 2010 are significantly lower than the comparable projections for CY 2008, 2008, 2011 and 2012. The Proxy Statement is deficient because it fails to explain the rationale for the significantly lower projections for 2010. PROJECTED FINANCIAL INFORMATION (in millions) 2H-CY 2008 $114 $ 18 $ 17 $ 29 Calendar Period CY 2009 CY 2010 CY 2011 $172 $130 $152 $ 26 $ 4 $ 14 $ 23 $ 4 $ 12 $ 20 $ 2 $ 13 CY 2012 $183 $ 26 $ 24 $ 23

7 Total Revenue EBIT NNet Operating Profit after Tax 8 UUnlevered Free Cash Flow (1) 9 Any discrepancy in the information utilized by the Company's financial advisor to render its fairness opinion is material to the 10 public shareholders of Photon Dynamics in determining how much weight to place on the fairness opinion and must therefore 11 be disclosed. 12 (ii) According to the Proxy Statement, in the ordinary course of business, Credit Suisse and its affiliates may acquire, hold or sell 13 for its and its affiliates, own accounts and the accounts of 14 customers, equity, debt and other securities of the Company and Orbotech, as well as provide investment banking and other 15 financial services to such Companies. The Proxy Statement is deficient because it fails to disclose (a) the amount of the fees 16 that Credit Suisse has received for work it has done for Orbotech and/or its affiliates, (b) any work, and the fees payable 17 therefrom, that Credit Suisse expects to perform for Orbotech 18 and/or its affiliates in the future, and (c) the extent of Credit Suisse's holdings in any equity, debt and/or other securities of 19 Orbotech. 20 Information with regard to any conflict of interest that the Company's financial advisor may have is material to the 21 Company's public shareholders in determining how much weight to place on its opinion and must therefore be disclosed. 22 23 24 25 26 27 28 (iii) According to the Proxy Statement, a substantial majority of Credit Suisse's $4.5 million fee is contingent upon the close of the Sale Agreement. The Proxy Statement is deficient because it fails to disclose the percentage of that fee which is contingent upon the close of the transaction. Information with regard to any conflict of interest that the Company's financial advisor may have is material to the Company's public shareholders in determining how much weight to place on its opinion and must therefore be disclosed. 10 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 12 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

(iv)

According to the Proxy Statement, Credit Suisse indicated to Orbotech that a price range of $16.50 to $17.00 per share was an "appropriate basis to continue negotiations" regarding a sale of Photon Dynamics to Orbotech. The Proxy Statement is deficient because it fails to disclose the basis upon which Credit Suisse arrived at this price range. This information is material to Photon Dynamics' public shareholders in determining the extent to which the Individual Defendants complied with their duties of loyalty and care to protect the best interests of the Company's public shareholders.

(v)

With regard to Credit Suisse's Discounted Cash Flow Analysis, the Proxy Statement fails to disclose the methodology Credit Suisse used to arrive at (a) discount rates of 12.0% to 16.0% that it used for this analysis and (b) the after taxes multiples of 12.0x to 20.0x that it used for this analysis. The methodologies employed by a financial advisor to render its fairness opinion are material to the public shareholders of Photon Dynamics in determining how much weight to place on the fairness opinion and must therefore be disclosed.

(vi)

With regard to Credit Suisse's Selected Companies Analysis, the Proxy Statement is deficient because it fails to disclose (a) the criteria Credit Suisse used to select the Companies it reviewed for this analysis, and (b) the range of selected multiples that Credit Suisse derived from this analysis and applied to derive the implied estimated per share equity reference ranges. The methodologies employed by a financial advisor to render its fairness opinion are material to the public shareholders of Photon Dynamics in determining how much weight to place on the fairness opinion and must therefore be disclosed.

(vii)

With regard to Credit Suisse's Selected Transactions Analysis, the Proxy Statement is deficient because it fails to disclose (a) the criteria Credit Suisse used to select the transactions it reviewed for this analysis, and (b) the range of selected multiples that Credit Suisse derived from this analysis and applied to derive the implied estimated per share equity reference ranges. The methodologies employed by a financial advisor to render its fairness opinion are material to the public shareholders of Photon Dynamics in determining how much weight to place on the fairness opinion and must therefore be disclosed. This information becomes particularly important in this context given Credit Suisse's admission that it accorded less weight to this analysis than to the other analysis "in light of the lack of direct comparability between the companies engaged in the selected transactions and the Company." 11

FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 13 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 (viii) According to the Proxy Statement, Orbotech advised the Company that it would "agree to forego an employee-related closing condition in the merger agreement." The Proxy Statement is deficient because it fails to disclose what that condition is. This information is material to Photon Dynamics' public shareholders in determining the extent to which the Individual Defendants complied with their duties of loyalty and care to protect the best interests of the Company's public shareholders. COUNT I Breach of Fiduciary Duties of Care, Good Faith and Loyalty Under California Law (Against the Individual Defendants) 36. 37. Plaintiff repeats and realleges all previous allegations as if set forth in full herein. The Individual Defendants have violated the fiduciary duties of care, good faith,

and loyalty they owe to the shareholders of Photon Dynamics under California Law. The Individual Defendants' negotiation of and agreement to the terms of the Sale Agreement demonstrate a clear absence of the exercise of due care, good faith, and of loyalty to Photon Dynamics' public shareholders. 38. In agreeing to the Sale Agreement, the Individual Defendants failed to adequately

inform themselves of Photon Dynamics' highest transactional value and failed to do so because of their interest in quickly signing the Sale Agreement and thereby obtaining the improper personal benefits they will receive thereunder. 39. In addition, the $15.60 per share price to be paid to Photon Dynamics' public

shareholders is inadequately low given that (a) the intrinsic value of Photon Dynamics' common stock is in excess of the $15.60 per share offered by Orbotech, giving due consideration to the Company's prospects for growth and profitability in light of its business, earnings power, present and future; and (b) it is not the result of an appropriate consideration of the value of Photon Dynamics because the Individual Defendants approved the Sale Agreement without undertaking adequate steps to fairly and accurately ascertain Photon Dynamics' value. 40. By reason of the foregoing, Plaintiff and each member of the Class are suffering

irreparable injury, including injury for which there is no adequate remedy at law. 12 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 14 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 45. 46. 41. 42.

COUNT II Breach of Fiduciary Duty of Disclosure Under California Law (Against All Defendants Except Orbotech) Plaintiff repeats all previous allegations as if set forth in full herein. Under California Law, the fiduciary duties of Defendants other than Orbotech

require them to disclose to Plaintiffs and the class all information material to the decisions confronting Photon Dynamics' public shareholders with regard to their vote on the Sale Agreement. 43. As set forth above, Defendants have breached their fiduciary duty through

materially inadequate disclosures and material omissions. 44. By reason of the foregoing, Plaintiff and each member of the Class are suffering

irreparable injury, including injury for which there is no adequate remedy at law. COUNT III Aiding and Abetting Under California Law (Against Orbotech) Plaintiff repeats all previous allegations as if set forth in full herein. The Individual Defendants owed Plaintiff and Photon Dynamics' other

shareholders duties of care, good faith and loyalty under California Law. As earlier alleged, the Individual Defendants breached these fiduciary duties. Orbotech has aided and abetted the Individual Defendants in the breaches of their fiduciary duties to Photon Dynamics' shareholders by, among other things, (a) negotiating a sale of the Company to Orbotech with knowledge of the conflicts of interest and the inadequate price the Individual Defendants have agreed to as a result of the same, (b) requiring Photon Dynamics to pay it a substantial break-up fee if it accepts a superior proposal, and (c) agreeing to indemnify the Individual Defendants for liability arising as a result of their wrongful conduct as alleged herein. The payment of the break-up fee effectively serves as a substantial deterrence to other prospective buyers since they would be saddled with the burden of paying the termination fee. Further, the proposed sale of Photon Dynamics to Orbotech could not take place without the knowing participation of Orbotech. 13 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 15 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

47.

By reason of the foregoing, Plaintiff and each member of the Class are suffering

irreparable injury. PRAYER WHEREFORE, Plaintiff demands judgment as follows: A. determining that this action is a proper class action, and that Plaintiff is a proper

class representative; B. declaring that Defendants have breached their fiduciary duties to Plaintiff and the

Class and/or aided and abetted such breaches; C. awarding Plaintiff and the Class compensatory and/or rescissory damages as

allowed by law; D. awarding interest, attorney's fees, expert fees and other costs, in an amount to be

determined; and E. granting such other relief as the Court may find just and proper. DEMAND FOR JURY TRIAL Plaintiff hereby demands a trial by jury. DATED: August 7, 2008 HULETT HARPER STEWART LLP KIRK B. HULETT BLAKE MUIR HARPER SARAH P. WEBER

/s/ Sarah P. Weber SARAH P. WEBER 550 West C Street, Suite 1600 San Diego, CA 92101 Telephone: (619) 338-1133 Facsimile: (619) 338-1139 Attorneys for Plaintiff, Capital Partners

14 FIRST AMENDED COMPLAINT; Case No. 08-03688RS

Case 5:08-cv-03688-RS

Document 10

Filed 08/07/2008

Page 16 of 16

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

THE BRUALDI LAW FIRM, P.C. RICHARD B. BRUALDI GAITRI BOODHOO SUE LEE AYESHA N. ONYEKWELU 29 Broadway-24th Floor New York, NY 10006 Telephone: (212) 952-0602 Facsimile: (212) 952-0608 Of Counsel for Plaintiff Capital Partners

15 FIRST AMENDED COMPLAINT; Case No. 08-03688RS