Vedder Thinking | Articles Merlin Partners LP v. AutoInfo, Inc.: Merger Price and Process Key in Determining Appraisal Value
On April 30, 2015, the Delaware Court of Chancery issued its post- trial opinion in Merlin Partners LP v. AutoInfo, Inc., setting forth its findings of fact and conclusions of law and rejecting an attempt by dissenting shareholders to obtain additional value for their shares above the merger price through an appraisal demand pursuant to 8 Del. Code § 262.1 The AutoInfo decision reiterates the importance of merger price and the process of arriving at the same in determining fair value in Delaware appraisal proceedings.
AutoInfo, Inc. (AutoInfo or Company) was a small, publicly traded, non-asset-based transportation services company offering nationwide brokerage and contract carrier services through a network of independent sales agents.2 In the first quarter of 2011, based on growing concern that it was undervalued in the market relative to comparable companies, AutoInfo's board of directors decided to explore strategic options, including a potential sale.3 AutoInfo retained Stephens Inc. (Stephens), an investment bank with expertise in the industry, to serve as its advisor through this process.4 At Stephens's direction, AutoInfo's management prepared a five-year financial forecast (the Management's Projections).5 Management had never prepared multiyear projections before and internally doubted its ability to do so, leading members of management to characterize the projections as "aggressively optimistic" and "a bit of a chuckle and a joke."6
Following a months-long process that involved pitching the Company to 164 potential acquirers and the formation of a special committee to evaluate several formal bids, Comvest emerged as the highest bidder, valuing the Company at $1.26 per share.7 During due diligence, however, Comvest learned of various issues with AutoInfo's business, including accounting irregularities, poor bookkeeping and weaknesses in the Company's financial reporting practices.8 As a result, Comvest reduced its offer and, after months of negotiations, the parties agreed on a new price of $1.05 per share (Merger Price).9 On April 25, 2013, AutoInfo’s stockholders approved the deal, and the transaction closed the same day.10
Two AutoInfo shareholders petitioned the court for appraisal of their shares pursuant to 8 Del. Code § 262, which allows stockholders who elect against participating in certain merger transactions to petition the court to determine the fair value of their stock.11 The petitioning shareholders' expert valued the Company at $2.60 per share using both a discounted cash flow (DCF) analysis and two comparable companies' analyses.12 AutoInfo's expert, on the other hand, valued the Company at $0.967 per share by analyzing the merger price and market evidence regarding the strength of AutoInfo's sales process.13
The court rejected the petitioners' valuation for several reasons. First, the court discredited the DCF analysis because it relied exclusively on the Management's Projections, which the court found to be unreliable because: (1) such projections were not prepared in the ordinary course of business, but rather at Stephens's request and with the guidance that they "needed to be optimistic," and (2) AutoInfo had never before prepared such projections and admitted having serious doubts about their accuracy.14 Second, the court gave no weight to the petitioners' comparable-companies analyses because the analyses used purportedly "comparable" companies that were significantly larger than AutoInfo and, unlike AutoInfo, were based on the company store business model, generally considered to be more desirable and less risky than the 100% agent-based model used by AutoInfo.15
In ultimately finding that the $1.05 Merger Price was a far more reliable indicator of fair value, the court focused on the fact that the price was the result of a fair and adequate process.16 The court noted that it was undisputed that the Company was "shopped quite a bit" and that the merger was the result of a competition among many potential acquirers.17 Further, there were no allegations of self-interest or disloyalty. Rather, the merger was negotiated with Comvest by a special committee and "at arm's length, without compulsion, and with adequate information."18 Finally, the "base case" DCF analysis performed by Stephens in evaluating the deal, which was based on its own projections and not those prepared by management, supported the Merger Price.
AutoInfo's reliance on the Merger Price (and, more importantly, the process used to arrive at the same) in determining fair value offers potential lessons for companies, directors, shareholders and their counsel. When considering strategic mergers or other transactions, companies and their directors may be able to insulate themselves to some extent from claims that they agreed to sell the company at an inadequate price by creating and implementing a sales process that is fair, negotiated at arm’s length, and free from any self-interest or disloyalty. Conversely, shareholders may need to think twice before challenging the merger price and demanding appraisal where the company and/or its directors can demonstrate that such a proper and fair process has been followed.
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1 Merlin Partners LP v. AutoInfo, Inc., No. 8509-VCN (Del. Ch. Apr. 30, 2015).
2 Id. at *1–2.
3 Id. at *3.
4 Id. at *4.
5 Id. at *6.
7 Id. at *8–10.
8 Id. at *12–13.
9 Id. at *14–16.
10 Id. at *16.
11 Id. at *17; 8 Del. C. § 262.
12 Id. at *16–17.
13 Id. at *17.
14 Id. at *19–20 ("[W]hen reliable inputs are unavailable, 'any values generated by a DCF analysis are meaningless.'")
15 Id. at *21–27.
16 Id. at *35–36.
17 Id. at *35.
18 Id. at *29.
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