August 26, 2010
Disclosure of Projections: Delaware Chancery Court Invites Appeal to Resolve Whether Free Cash Flows are Required to be Disclosed
From Kevin Miller of Alston & Bird: In this transcript of a hearing on a motion to expedite discovery and the scheduling of a preliminary injunction hearing in Steamfitters v. , Delaware Chancellor Chandler concluded that, based on the parties’ briefings and arguments, he did not believe that the disclosure of the target’s free cash flows would meaningfully alter the total mix of information that is available through the definitive merger proxy.
In so doing, Chancellor Chandler distinguished the facts presented from the facts in Vice Chancellor Strine’s recent Maric decision and earlier Netsmart decision, but expressed an appreciation and understanding of the plaintiff’s arguments “that Delaware law ought to require as a per se rule that free cash flow estimates going out into the future be provided, disclosed” and invited the plaintiff to file an interlocutory appeal to the Delaware Supreme Court:
I would be, in the interests of clarification of Delaware law, and in the interests of perhaps leading to the creation of a bright-line rule in disclosure, which I think would be a good thing in some ways — I would be happy, Mr. Liebesman [plaintiff’s counsel], to sign, today, an order certifying an interlocutory appeal to the Delaware Supreme Court on this question.
The spectrum of views expressed by the Delaware Courts creating the present uncertainty include:
A. Disclosure of projections is not generally required:
– Skeen (Del. Sup. Ct. 2000) (in which the Delaware Supreme Court considered and rejected a claim that the Board of House of Fabrics breached its fiduciary duties by failing to disclose (i) management’s projections and (ii) a summary of the methodologies used and the ranges of values generated by the financial analyses performed by its financial advisor):
Appellants are advocating a new disclosure standard in cases where appraisal is an option. They suggest that stockholders should be given all the financial data they would need if they were making an independent determination of fair value. Appellants offer no authority for their position and we see no reason to depart from our traditional standard.
[plaintiffs] say, in essence, that the settled law governing disclosure requirements for mergers does not apply, and that far more valuation data must be disclosed where, as here, the merger decision has been made and the only decision for the minority is whether to seek appraisal. We hold that there is no different standard for appraisal decisions.
– Best Lock (C Chandler 2001):
[T]he plaintiffs contend that the Information Statement contains misrepresentations about the financial data supplied to Piper by the management of the Best Companies and also fails to disclose that data. . . . Delaware courts have held repeatedly that a board need not disclose specific details of the analysis underlying a financial advisor’s opinion. Moreover, even if such facts were required to be disclosed, this information would not have altered significantly the total mix of information available to shareholders. . . . Accordingly, the motion to dismiss with regard to these claims is granted.
B. Projections are per se material and the disclosure of projections is consequently required:
– Netsmart (VC Strine 2007):
It would therefore seem to be a genuinely foolish (and arguably unprincipled and unfair) inconsistency to hold that the best estimate of the company’s future returns, as generated by management and the Special Committee’s investment bank, need not be disclosed when stockholders are being advised to cash out. . . . Indeed, projections of this sort are probably among the most highly prized disclosures by investors. Investors can come up with their own estimates of discount rates or (as already discussed) market multiples. What they cannot hope to replicate are management’s insisted view of the company’s prospects.
– Maric (VC Strine 2010):
in my view, management’s best estimate of the future cash flow of a corporation that is proposed to be sold in a cash merger is clearly material information.
C. Disclosure of projections was not required under the circumstances presented as distinguished from other circumstances addressed by the Chancery Court:
– CheckFree (C Chandler 2007):
Although the Netsmart Court did indeed require additional disclosure of certain management projections . . . the proxy in that case affirmatively disclosed an early version of some of management’s projections. Because management must give materially complete information “[o]nce a board broaches a topic in its disclosures,” the Court held that further disclosure was required. . . . Because [the CheckFree] plaintiffs have failed to establish that management’s projections constitute material omitted information, they have failed to demonstrate a likelihood of success on the merits of their claim and, therefore, I deny their motion for a preliminary injunction on this ground.
– Steamfitters (C Chandler 2010):
But this isn’t a case where free cash flow estimates were deliberately removed or excised from a proxy disclosure. Unlike in Maric, in this case no free cash flow estimates were actually provided to Goldman Sachs. The internal analyses that were approved by management for Goldman’s use in this case didn’t have a line item for free cash flow estimates, and so unlike the Maric decision, there was no deliberate excising of free cash flow numbers. And in addition, this isn’t like Netsmart, where management undertook to disclose certain projections but then disclosed projections that were actually stale and not, therefore, meaningful. The proxy here gave management’s projections that were actually used by Goldman, and those projections included net revenue, net income, EPS and EBITDA estimates for five years.