Canada: You Can’t Always Get What You Want

Making realistic projections during an auction process

The recent Delaware ruling in In Ancestry.com Inc. Shareholder Litigation provides a cautionary tale relating to a target company developing aggressive projections during an auction process.

The Relevant Facts

Following the announcement of a going-private transaction, some shareholders of Ancestry.com filed suit in the Delaware Court of Chancery alleging, among other things, that the board preferred the interests of the winning bidder over shareholders. Previously:

  1. Ancestry hired Qatalyst Partners LLP as its financial advisor and initiated an auction process.
  2. Ancestry's management prepared "bullish" projections for the auction process. Notably, Ancestry does not develop long-term projections in the usual course of business. These aggressive projections were provided to Qatalyst.
  3. The auction had a promising start with 12 potential bidders entering into confidentiality agreements and conducting due diligence. However, following due diligence, only three bidders remained, including Permira Advisers, LLC.
  4. Permira indicated that it would make a partial offer for Ancestry in the $32/share range, subject to the participation of other equity sources. Ancestry's largest shareholder and its management agreed to roll their equity interest into the surviving entity.
  5. Qatalyst informed Ancestry's board that it could not provide a fairness opinion at $32/share based on the aggressive projections.
  6. Permira made a firm partial bid for Ancestry at $32/share.
  7. Ancestry's management revised the aggressive projections to, among other things, account for the issues raised by potential bidders during the due diligence process.
  8. Qatalyst provided a fairness opinion based on the revised projections, thereby enabling the board to recommend the Permira offer to shareholders. The board's proxy circular provided shareholders with the aggressive projections and the revised projections.

The Ruling

The Court accepted the board's position that the optimistic projections were deliberately "bullish" and that the board appropriately refined its views as to the future prospects of Ancestry with advice from management and its financial advisors, and in light of feedback received from potential bidders during the prolonged auction process. Nevertheless, the Court found it problematic that there were no entries in the board minutes or in other contemporaneous documentation alluding to the aggressive projections being "optimistic". The Court also found the process by which the aggressive projections were revised "a bit unusual." The Court was perplexed that Qatalyst formally informed the board that it could not provide a fairness opinion based on the aggressive projections; presumably, this would have been unnecessary if the numbers were understood by everyone to be "sell-side puffery".

While denying the relief sought by the shareholders (to enjoin the shareholder vote on the merger), the Court ordered the board to revise its proxy circular to inform shareholders about a "fairly important omission of [an] actual objective fact" — that the aggressive projections were revised because of Qatalyst's inability to provide a fairness opinion.

 The Takeaways

  1. An open ongoing dialogue between a target's board, management and the financial advisors is very important when preparing financial projections in contemplation of a sale process.  Management should clearly articulate the assumptions underlying the projections to the board and the financial advisors and ensure that everyone understands their implications.  This will go a long way to ensure there are no surprises later.
  2. Ensure that the minutes from a meeting where the target's board reviews bullish financial projections clearly document that the projections were prepared on that basis.  The record should show that the board carefully reviewed the projections with management and the financial advisors and concluded that it was in the best interests of the corporation to provide bullish projections to potential buyers to maximize the sale price.
  3. In Canada, a target is required to include in its proxy circular for a voting transaction (such as a plan of arrangement or amalgamation) sufficient detail to enable reasonable securityholders to form a reasoned judgment concerning the transaction.  For a take-over bid, the target must disclose in a directors' circular information that would reasonably be expected to affect the decision of securityholders to accept or reject the bid.  It would be interesting to see whether a Canadian securities commission would view the initial refusal of an investment bank to provide a fairness opinion based on aggressive projections as sufficiently material to warrant disclosure in a circular of a Canadian public company.  Note that it is not customary in Canada for a target to include financial projections in a circular.

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