(Article from Securities Law Alert, May 2015)
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On April 30, 2015, the Delaware Chancery Court determined that the merger price was “the best estimate” of the fair value of AutoInfo’s shares in a Section 262 appraisal action brought in connection with Comvest Partners’ acquisition of AutoInfo.
Merlin Parters LP v. AutoInfo, Inc., 2015 WL 2069417 (Del. Ch. Apr. 30, 2015) (Noble, V.C.).
Pursuant to 8
Del. C. § 262, “stockholders who elect against participating in certain merger transactions may petition the Court to determine the fair value of their stock.” In “fair value” for purposes of Section 262, a court must “independently evaluate[ ] the evidence concerning fair value” and may not “presumptively defer to any particular valuation metric.” The court may consider a discounted cash flow (“DCF”) analysis, “a comparable transactions analysis, a comparable companies analysis, or the merger price itself” in making its determination.
In evaluating "fair value" of AutoInfo’s shares, the court found plaintiffs’ expert’s DCF analysis unreliable because plaintiffs had “failed to establish the credibility” of the management projections on which that analysis was based. The court explained that AutoInfo’s management had not prepared projections in the ordinary course of business, and that the projections “created during the sales process” were “indisputably optimistic” and thus “deserve[d] little deference.”
The court also gave “no weight” to plaintiffs’ experts’ comparable companies analyses because the comparable companies were “all significantly larger than AutoInfo.” The court explained that it may “reject comparable companies analyses based on purported comparables that differ significantly in size from the company being appraised” because “smaller firms are riskier and thus [typically] face higher costs of equity capital” than larger firms. The court also faulted plaintiffs’ expert for failing to consider business model differences between AutoInfo and the comparable companies selected.
In view of the absence of other “credible valuations,” the court found that the merger price was “a strong indicator of value.” The court reasoned that “the sales process was generally strong and [could] be expected to have led to a [m]erger price indicative of fair value.” The court observed that the case did “not involve self-interest or disloyalty.” Moreover, “[t]he [m]erger was negotiated at arm’s length, without compulsion, and with adequate information.” The court further observed that “[i]t was the result of competition among many potential acquirers.” While “[a]ny real-world sales process may be criticized for not adhering completely to a perfect, theoretical model,” the court determined that “AutoInfo’s process was comprehensive” and there was no evidence “that the outcome [could] have been a merger price drastically below fair value.”
Prior to “placing full weight on the [m]erger price, the [c]ourt performed its own DCF analysis” and arrived at a price of 0.93 per share — less than the merger price of $1.05 per share. Nevertheless, because the court found that “the [m]erger price appear[ed] to be the best estimate of value,” the court “put full weight on that price” for purposes of plaintiffs’ appraisal action.