On May 13, 2010, in Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., Vice Chancellor Strine preliminarily enjoined the acquisition of PLATO Learning by Thoma Bravo LLC on the basis of misleading disclosures in PLATO’s proxy statement. The opinion provides guidance on Delaware’s requirements for merger proxy disclosure regarding management projections, financial advisors’ analyses and contacts between the acquiror and target management.
After receipt of a fairness opinion from its financial advisor, Craig-Hallum Capital, the board of PLATO Learning agreed to an acquisition by Thoma Bravo for $5.60 per share in cash. The stockholder vote was set for May 19, and stockholder-plaintiff Maric Capital sought to enjoin the vote on several grounds, including materially misleading omissions in the merger proxy statement. The court concurred with Maric Capital’s contentions with respect to three disclosures.
Selection of a Discount Rate. According to the proxy statement, in its discounted cash flow analysis, Craig-Hallum used a discount rate range of 23% to 27% “based upon an analysis of PLATO Learning’s weighted average cost of capital.” The court noted, however, that Craig-Hallum calculated two estimates of WACC using a variation of the capital asset pricing model for one and a comparable companies analysis for the other which resulted in discount rates of 22.6% and 22.5%, respectively. Because the lower end of the rate range used in the DCF analysis was higher than the two actual WACC analyses, and as result, the deal price was presented in a more favorable light, the court concluded that the DCF disclosure was misleading. The court ordered “corrective disclosure indicating the value that would be obtained by using the discount rates Craig-Hallum actually calculated.”
The Maric Capital opinion argues in favor of the practice followed by many investment banks of providing details in board presentations regarding the bases used to select the range of discount rates, particularly in the context of a cash deal. The decision also counsels caution in the event a financial advisor makes material adjustments to a valuation range arrived at pursuant to any key analysis. At a minimum, disclosure of the reasoning behind those adjustments should be considered.
Management Projections. With regard to the projections provided to Craig-Hallum, the proxy statement included management’s estimates for revenue, gross profit, operating income and EBITDA, but the court noted, “the proxy statement for some inexplicable reason excised the free cash flow estimates that had been made by PLATO’s management and provided to Craig-Hallum.” Given that shareholders were being asked to decide between $5.60 per share and the right to participate in the potential future performance of the company, the court concluded that “the proxy statement omits material information by, for reasons not adequately explained, selectively removing the free cash flow estimates from the projections provided to PLATO’s stockholders.”
The decision reinforces the lesson that in determining the extent to which projections provided to a financial advisor should be disclosed, a company certainly should consider the key metrics underlying the financial advisor’s analyses. In addition, the court clearly signaled that, in cash deals, there is a strong presumption that, if provided to the financial advisor, estimates of free cash flow should be disclosed.
Conversations with Management. The proxy statement noted that in approving the transaction, the PLATO board considered the fact that Thoma Bravo “did not negotiate terms of employment, including any compensation arrangements or equity participation in the surviving corporation” with PLATO management. The proxy statement did not mention, however, that PLATO’s CEO was assured that Thoma Bravo typically retained management after an acquisition or that Thoma Bravo had discussed with the CEO the typical management equity incentive package provided by Thoma Bravo. The court concluded that the proxy statement, therefore, created “the materially misleading impression that management was given no expectations regarding the treatment they could receive from Thoma Bravo,” and the proxy statement should “clarify the extent of the actual discussions between [the PLATO CEO] and Thoma Bravo.”
In view of the Maric Capital opinion, in cases such as the PLATO acquisition, it is advisable to include customary disclosure that, even though management and the financial buyer have not yet held formal negotiations, the acquiror is likely to retain management and may well enter into compensation and co-investment arrangements with management. Given the scant disclosure in the PLATO proxy statement, however, it is unclear whether Vice Chancellor Strine would have required more disclosure than is customary.