April 7, 2008

Delaware Chancery Court Denies Preliminary Injunction Based on Inadequate Disclosure in Merger Proxy Regarding Financial Analyses (and Other Matters)

From Kevin Miller of Alston & Bird: In this decision by Vice Chancellor Lamb, the Delaware Chancery Court denied a motion for preliminary injunction in an oral ruling delivered shortly after the completion of oral argument on the motion. He concluded his ruling by stating that the fact that information is included in materials provided to a board of directors does not mean it is per se material and required to be disclosed.

When considering a motion for a preliminary injunction the court must decide: 1. whether the moving party has shown a reasonable probability of success on the merits; 2. whether the moving party will be irreparably harmed by the denial of relief; 3. whether granting the relief will result in even greater harm to the nonmoving party; and 4. whether granting the preliminary relief will be in the public interest.

In his ruling, VC Lamb first addressed point #3 and noted that “the circumstance presented in this transaction and the circumstances that exist in the markets today that we’ve all been living through for the last several months suggest that the opportunity to take this premium offer is a valuable one. I refer to the fact that this transaction has been known for some time. The company was shopped before it reached its agreement with Oracle. There is an opportunity in the merger agreement for the company to accept a better proposal if one comes along, but none has. The transaction is a third-party, arms-length negotiated transaction. The board of directors are, with the exception of [a large shareholder and one of the founders], independent and highly distinguished individuals. The board was advised by highly reputable bankers and lawyers. And so the transaction on the table and which the shareholders are expected to vote on next week is the only available transaction at this time.”

VC Lamb further noted that “It is also a transaction that is priced at a significant premium. . . . To that let me add, as I observed at the beginning, the disruptions in the market place that exist that make it more risky certainly for the court to undertake to interfere with the completion of a transaction in the time frame that is set forth by the parties and agreed to in the deal, that those risks give me – – would give any judge even greater pause before moving to restrain a transaction unless very substantial grounds existed that required such action.”

Having set the bar extremely high for granting a preliminary injunction by focusing on the potential harm to BEA’s shareholders, VC Lamb proceeds to explain why the plaintiffs’ disclosure claims were inadequate to justify a preliminary injunction.

Among other things, the plaintiffs claimed that the merger proxy contained material omissions or misleading statements relating to the financial analyses performed by its financial advisor and its fee.

Claim: The fact that BEA’s financial advisor did not perform a DCF analysis

Court’s Analysis: “The proxy material discloses accurately the analyses that Goldman Sachs did rely upon, and there is no reason whatsoever to believe that there’s any materiality to some possible disclosure about why Goldman didn’t use a DCF analysis”

The court noted that while Goldman had performed certain preliminary DCF analyses with respect to BEA prior to Oracle’s bid, such analyses were based on two year management projections extrapolated for a further three years (note: it was not clear to the Court who performed the extrapolation); BEA does not as a matter of practice prepare five-year projections because they don’t believe that any projections beyond two years are reliable; none of Goldman’s analysis done after the Oracle bid contained a DCF analysis; and “from that, when you put it together, you would have to conclude that the five-year numbers that were used in these preliminary DCF analyses consisted of unreliable information.”

The Court concluded that: “There is nothing in the law that suggests that it’s necessary for the proxy material to explain why in its final — and, indeed, in the work that it did after the Oracle bid emerged and in its final work, Goldman didn’t use a DCF model.”

Claim: The absence of disclosure regarding certain synergies analyses performed by BEA’s financial advisor

Court’s Analysis: According to the Court: “The record is clear that the company had no information from, and has no information from Oracle, and Goldman had no such information from Oracle about the actual synergies that Oracle expects to achieve in this transaction. Instead, the information that Goldman compiled for the presentation to the board of directors apparently consisted of publicly-available information about other transactions”

The testimony elicited by the Court in the hearing on the motion indicated that the analyses performed by Goldman related to the amount of synergies buyers had achieved in similar deals and the amount of synergies Oracle would need to achieve to avoid the transaction being dilutive to Oracle shareholders at various purchase prices.

The Court concluded that “the information available is certainly not considered in any way to be a reliable indication of the synergies that would actually be achieved in this transaction”

Claim: The absence of disclosure regarding certain sensitivity analyses performed by BEA’s financial advisor relating to present value of BEA’s potential future stock price

Court’s Analysis: The merger proxy disclosed a range of values indicated by Goldman’s present value of future stock price analysis using both a base case and street estimates, but failed to disclose either a low or high sensitivity analysis also performed by Goldman and included in the materials discussed with BEA’s board.

The Court concluded that: “the record reflects that while that analysis appears in a presentation that Goldman made to the board of directors, Goldman did not regard, and management did not regard, the high case or the low case to be reliable. It is also the case that Goldman did not rely on either of them in forming its valuation opinion. I don’t understand why it would have been material to disclose that information, as it is considered to be unreliable and could well mislead shareholders rather than inform them.”

Claim: The absence of disclosure regarding the actual amount of the financial advisor’s fee that was contingent upon consummation of the proposed merger.

Court’s Analysis: The Court noted that the proxy statement discloses the total fee and discloses that the fee is at least in part contingent but doesn’t disclose which part of the fee was contingent and which was not. “This might be a good claim if some very large part of the fee was in fact contingent. . . at least as I understand things, of the $33 million that Goldman will be paid, only $8 million is contingent. And given that it’s only 8 out of 33, I can’t see it’s materially misleading to have merely stated that a part of the fee was contingent without saying how much.”

The Court concluded by stating that:

“To double back to where I began on this issue of materiality, the fact that something is included in materials that are presented to a board of directors does not, ipso facto, make that something material. Otherwise every book that’s given to the board and every presentation made to the board would have to be part of the proxy material that follows the board’s approval of a transaction. That certainly is not the law. What the law is, is that a plaintiff has to show why the omission of information in the disclosure material amounts to a material omission. That is, why a reasonable shareholder reading the material would find it important in deciding how to vote to know this particular omitted fact.”

The New Business Combination Accounting

We recently posted the transcript from the webcast: “The New Business Combination Accounting.”