November 13, 2007
In re Checkfree Corp.: Delaware vs. the SEC
On Nov. 1 the Delaware Chancery Court issued an opinion in In re Checkfree Corp Securities Litigation. The case is yet another in the recent line of Chancery Court opinions examining the required disclosure in takeover proxy statements of financial analyses underlying a fairness opinion. The particular issue in Checkfree was whether management projections are required to be disclosed in a proxy statement if they are utilized by the financial advisor in the preparation of their fairness opinion.
In this case, Checkfree had agreed to be acquired by Fiserv for $48 a share. In connection with their agreement, the Checkfree Board had received a fairness opinion from Goldman Sachs. Checkfree's proxy statement to approve the transaction contained the usual summary description of the financial analyses underlying the fairness opinion. Plaintiffs' claimed that this was deficient under Delaware law and sued to preliminary enjoin completion of the transaction. More specifically, plaintiffs alleged that:
the CheckFree board breached its duty to disclose by not including management's financial projections in the company's definitive proxy statement. They argue that the proxy otherwise indicates that management prepared certain financial projections, that these projections were shared with Fiserv, and that Goldman utilized these projections when analyzing the fairness of the merger price.
Here, the plaintiffs' relied heavily on the recent case of In re Netsmart Technologies, Inc. Shareholders Litigation, 924 A.2d 171 (Del. Ch.2007), for the proposition that a company is required to disclose all of the information underlying its fairness opinion in its takeover proxy statement.
The court began its analysis by rejecting this sweeping requirement. Chancellor Chandler wrote:
"disclosure that does not include all financial data needed to make an independent determination of fair value is not ... per se misleading or omitting a material fact. The fact that the financial advisors may have considered certain non-disclosed information does not alter this analysis."
The court then put forth the relevant standard:
The In re Pure Resources Court established the proper frame of analysis for disclosure of financial data in this situation: "[S]tockholders are entitled to a fair summary of the substantive work performed by the investment bankers upon whose advice the recommendations of their board as to how to vote on a merger or tender rely."
It then went on to distinguish Netsmart by stating:
the proxy at issue [in Netsmart] did not include a fair summary of all the valuation methods the investment bank used to reach its fairness opinion. Although the Netsmart Court did indeed require additional disclosure of certain management projections used to generate the discounted cash flow analysis conducted by the investment bank, 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.
Finally, the court held:
Here, while a clever shareholder might be able to recalculate limited portions of management's projections by toying with some of the figures included in the proxy's charts, the proxy never purports to disclose these projections and in fact explicitly warns that Goldman had to interview members of senior management to ascertain the risks that threatened the accuracy of those projections. One must reasonably infer, therefore, that the projections given to Goldman did not take those risks into account on their own. These raw, admittedly incomplete projections are not material and may, in fact, be misleading.
This is the right decision under Delaware law. M&A lawyers in the future should now be careful about unnecessary disclosure of projections in proxy statements to avoid triggering NetSmart's requirements. Relatively simple.
The problem with this decision is of wider consequence. Namely, can anyone tell me what exactly is required to be disclosed concerning fairness opinion financial analyses under Delaware law? In Pure Resources, Netsmart and here, the Delaware courts have created an obligation of disclosure for the analyses underlying fairness opinions under Delaware law. Yet, while a worthy goal, judge-made disclosure rules are standard-based and decided on a case-by-case basis. This is a poor way to regulate disclosure. It would be better done through the traditional way -- SEC rule-making under the Williams Act and proxy rules. Yet, the SEC has largely abandoned takeover regulation. In the last seventeen years it has only initiated two major rule-making procedures (the M&A Release and all-holders/best price amendments). There were rumors two years ago that the SEC was looking at fairness opinion disclosure, but nothing has come of it. Instead, we are stuck with this, uncertain disclosure rules that arguably do not ameliorate the fundamental issues underlying fairness opinions. I'm not criticizing Delaware here -- they are doing their best to fill the gap with the tools at hand. But, this all would be much better done by the SEC. Is anybody out there?
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