June 11, 2008

Disclosure of Internal Financial Projections

From guest blogger Steve Haas of Hunton & Williams:

A hot M&A issue of late has been the need to disclose internal financial projections under Delaware law. In 2002, the Court of Chancery in Pure Resources directed a target corporation to disclose substantive portions of its investment banker’s work in responding to a controlling stockholder’s tender offer. Many practitioners assumed that Pure Resources was distinguishable from third-party negotiated transactions because, as that court observed, the transaction involved a controlling stockholder who presumably had more knowledge about the company than did the minority stockholders.

But that rationale was implicitly called into question last year in Netsmart, where the court ordered disclosure of management’s financial projections in connection with a go-private deal with a private equity fund. Subsequent Delaware decisions, however, including CheckFree and Globis Partners, made clear that there is no bright-line common law rule requiring disclosure of management’s projections.

It’s not clear how to reconcile all of these decisions, and practitioners are left with generalized standards that require disclosure of all “material information” and a “fair summary” of the target’s financial analysis, but the required disclosures do not need to enable stockholders to perform their own independent valuation. In assessing these disclosure obligations, the accuracy and reliability of the projections and the extent to which they were relied upon by the target board and its investment bankers seem to be the most important factors.

One Delaware jurist also suggested recently that the presence of target insiders on the buy-side would help tilt the court’s analysis in favor of disclosure, since those insiders likely prepared the projections and understand their utility. That rationale supports the positions taken in Pure Resources and Netsmart. Mike Tumas and Michael Reilly at Potter, Anderson & Corroon recently put together a very helpful analysis of these issues in this memo, which originally appeared in Deal Points.