United States: The Importance Of Merger Price And Process In Delaware Appraisal Actions

On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights.  See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015).  Vice Chancellor Noble's decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price.  AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.

Background

AutoInfo, Inc. was a small transportation services company that provided nationwide brokerage and contract carrier services through a network of independent agents.  In August 2011, the board began shopping the Company to potential purchasers and retained Stephens Inc., an investment bank with expertise in the transportation industry, to serve as its financial advisor.  At Stephens' instruction, AutoInfo's management prepared an "aggressively optimistic" five-year financial forecast.  Preparing multi-year financial projections was a first for AutoInfo management, which "questioned how to go about a process it had never before attempted."  The Company's chief operating officer described the process as "a bit of a chuckle and a joke."

By October 2012, Comvest Partners emerged as the highest bidder at $1.26 per share.  During its due diligence, however, Comvest uncovered accounting irregularities, poor financial record keeping, and concerns over AutoInfo's ability to recruit new agents that would grow the Company's business.  As a result, Comvest lowered its offer to $0.96 per share.  After negotiations, the parties settled on a price of $1.05 per share.

Two of the Company's shareholders petitioned for an appraisal of their shares pursuant to 8 Del. C. § 262.  The petitioners' expert valued the Company at $2.60 per share based on a discounted cash flow analysis using management-prepared projections and two "comparable companies" analyses.  The Company's expert valued AutoInfo at $.0967 per share based on the $1.05 merger price and after deductions for certain merger-related savings.  The Court ultimately agreed with AutoInfo's expert that the $1.05 merger price was the best indicator of the Company's value at the time of the deal.

Takeaways and Analyses

  • The Court rejected the valuation arrived at by petitioners' expert for several reasons: (1) his DCF analysis was entitled to no weight because it relied on the highly optimistic management-prepared projections, which management acknowledged it had never done before and had no confidence in preparing; (2) the companies he used as purported "comparables" were "all significantly larger than AutoInfo," ranging "from more than twice, to more than 300 times, AutoInfo's size," notwithstanding that the increased risk associated with smaller companies contributed to AutoInfo trading well below its peers; and (3) he did not distinguish between companies using AutoInfo's agent-based business model and those using their own employees even though the market perceived the agent-based model as inferior.

    A valuation analysis is only as reliable as the inputs used.  Financial projections prepared solely for the purpose of pursuing strategic transactions are unlikely to be accorded the same weight as projections that are routinely prepared in the ordinary course of business.  In addition, companies that operate in the same industry may nonetheless be unreliable indicators of value if the market perceives them differently based on differences in business model, size or other relevant considerations.

  • The Court found that the $2.60 per share valuation offered by petitioners' expert did not accord with reality.  AutoInfo's stock had not reached as high as $1.00 in the prior two years, and the $1.05 merger price, which was the highest offer made by any bidder in the sales process, exceeded the highest price that AutoInfo's stock reached in the past five years.  The $2.60 value also failed to account for the serious issues with AutoInfo's accounting and internal controls.

    In determining fair value in appraisal proceedings, courts may test the reliability of the dissenting shareholder's claimed value by measuring it against real world factors such as the company's historical trading price, the bidding history for the company in the sales process, any deficiencies in the company's controls and processes, and the competitive realities of the industry in which the company operates.  Valuations that are meaningfully out of sync with these types of reality checks will be accorded little weight.

  • The Court seemed to have no issue with Stephens' decision, in issuing its fairness opinion, to use a multiple range below the median and mean of the range for its selected comparable companies.  While Delaware courts are typically skeptical of an expert who "chooses his own multiple in a directional variation from the median and mean that serves his client's cause," the Court recognized that AutoInfo's smaller size and riskier agent-based business model supported Stephens' decision to use a lower multiple than that applied to the Company's larger store-based peers, and, importantly, "Stephens's choice of a multiple was not a post hoc determination made during litigation, but a reasoned selection based on industry experience."

    Delaware courts have issued numerous decisions over the past few years critical of what they perceived as result-oriented financial analyses.  See In re: El Paso Pipeline Partners, L.P. Deriv. Litig., No. 7141-VCL (Del. Ch. Apr. 20, 2015); In re Rural/Metro Corp. S'holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S'holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014).  Here, although not formally opining on Stephens' fairness opinion, the Court at least suggested a situation where an advisor's discretionary decisions that skew in favor of its client's desired outcome nevertheless might be able to withstand scrutiny, namely, where the decision is supported by objective, verifiable justifications and the analysis is made outside of the litigation context.

  • The Court found that the $1.05 merger price was a reliable indicator of fair value because: (1) it was the product of an adequate process, as the board was considering a sale even before the Company's larger institutional shareholders began pressuring the board for improved performance, the Company was "'shopped quite a bit,'" and negotiations with Comvest were conducted at arm's length by an independent special committee; and (2) the "base case" DCF analysis performed by Stephens for its internal use in evaluating the deal, which was based on projections prepared by Stephens rather than the unreliable management-prepared projections, generally supported the merger price.

    "The dependability of a transaction price is only as strong as the process by which it was negotiated."  Where a dissenting shareholder has not offered any reliable analysis of comparable companies or cash flow projections, "the merger price [may be] the most reliable indicator of value," and the "Court may assign 100% weight to the negotiated price."  Directors should take care to ensure that a sales process is negotiated at arm's length, free of any self-interest or disloyalty.  A fair process will go a long way toward substantiating the reliability of the merger price as the indicator of fair value.

  • In any appraisal action, "the Court must value Petitioners' shares 'exclusive of any element of value arising from the accomplishment or expectation of the merger.'"  To that end, AutoInfo's expert adjusted his fair value opinion downward to account for "(i) public company costs that Comvest could eliminate once AutoInfo ceased trading as a public company, and (ii) executive compensation costs that Comvest planned to eliminate."  The Court declined to adjust the merger price downward to reflect this theorized cost savings because those figures were based on an internal Comvest analysis that was not subject to outside objective assessment.  The Court observed indicta that potential cost savings that an acquirer discovers in due diligence should not be subtracted from a merger price where the seller could have achieved those cost savings on its own as a stand-alone company.

    Just as dissenting shareholders are expected to come to the table with reliable fair value estimates in appraisal proceedings, any attempt by the company and its directors to obtain a downward adjustment to the appraisal value based on merger-specific value must be based on reliable analyses.  If the seller could have achieved the cost savings on its own, it does not matter that the potential for those savings were discovered by the acquirer in connection with the merger negotiations—no downward adjustment is warranted if cost savings could be achieved by the seller on its own.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
21 Nov 2018, Seminar, New York, United States

“Big data” is changing our economy. It has allowed Amazon, Google, Facebook and many others to redesign traditional business models and to create new or improved products and services with greater utility for consumers and often at very little cost.

24 Nov 2018, Speaking Engagement, New York, United States

Each year, the New York Region of IFA hosts a panel and reception at the NYU Law School. This year’s panel will include a discussion of the TCJA international provisions.

27 Nov 2018, Speaking Engagement, New York, United States

Employment Managing Associates, Alexandra Stathpoulos and Alexandra Heifetz are presenting at the University of California, Berkeley School of Law’s FORM+FUND Series.

Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions