Chancery Court Holds That Merger Price That Resulted from a Strong Sale Process and Extensive Negotiations Is the Best Estimate of Fair Value in an Appraisal Proceeding
By David Bernstein and Marisa DiLemme
Merlin Partners LP v. AutoInfo, Inc., C.A. No. 8509-VCN (Del. Ch. April 30, 2015) (Noble, V.C.) concerns an appraisal proceeding under Section 262 of the Delaware General Corporation Law in which the Chancery Court found that, where there was a strong sale and negotiation process, and there were no reliable cash flow projections from which to make a discounted cash flow analysis and there were no sales of comparably sized companies in the same business, the price received in the merger was the best indication of fair value at the time of the merger.
Petitioners were former common stockholders of Respondent, AutoInfo, Inc. (“AutoInfo”) who exercised their appraisal rights in connection with AutoInfo’s merger with Comvest Partners (“Comvest”) at a price of $1.05 per AutoInfo share. AutoInfo was struggling financially and had begun a sale process in 2011 using an investment bank, Stephens Inc. (“Stephens”), which had long experience in the applicable industry, transportation. As part of the process, Stephens asked AutoInfo’s management to prepare five year financial projections that were “optimistic” to be used to market AutoInfo. Management had never prepared similar projections before and was doubtful of the validity of the results.
Stephens contacted approximately 164 prospective purchasers, 70 of which signed confidentiality agreements. Several bidders submitted letters of intent, including Comvest, which signed a letter of intent at $1.26 per share, but eventually reduced the price it would pay to $1.05 per share because of problems with the reliability of AutoInfo’s financial information.
At the trial of the appraisal proceeding, Petitioners’ expert presented a discounted cash flow analysis based on the “optimistic” management projections and comparable company analyses based on information about much larger companies that may have been involved in a somewhat different business, and found the fair value to be $2.60 per share. AutoInfo’s expert based his analysis on the results of the marketing effort, which led him to find the fair value to be the agreed upon price minus cost savings that would result from AutoInfo’s no longer being publicly owned. The Court found that the management projections could not be relied upon and therefore a discounted cash flow analysis based on those projections deserved no weight. The Court also found that comparable price analyses based on the share price of much larger companies in somewhat different businesses than AutoInfo were not a valid approach. The Court said that in view of the strong sale process and extensive negotiations, the merger price was the best estimate of value. The Court refused to reduce the merger price by cost savings that could have been achieved without the merger, based on its finding that there was no reason to believe those cost savings were not part of the purchase price analysis.
Merlin Partners LP v. AutoInfo, Inc., C.A. No. 8509-VCN (Del. Ch. April 30, 2015) (Noble, V.C.)