In the case of In Re Netsmart Technologies, Inc. Shareholders Litigation, (Del. Ch., March 14, 2007), read 77-page opinion here, Vice Chancellor Strine of the Delaware Chancery Court opines on the substance and procedure of a private equity deal which certain shareholders sought to enjoin. Thanks to Kurt Heyman, one of the Delaware lawyers on the case, for sending me a copy. My schedule will not allow a more thorough review at this time, but I provide the following introductory summary quote from the court’s very recent decision:
In this opinion, I conclude that the plaintiffs have established a reasonable probability of success on two issues. First, the plaintiffs have established that the Netsmart board likely did not have a reasonable basis for failing to undertake any exploration of interest by strategic buyers. The record, as it currently stands, manifests no reasonable, factual basis for the board’s conclusion that strategic buyers in 2006 would not have been interested in Netsmart as it existed at that time. Likewise, the board’s rote assumption (encouraged by its advisors) that an implicit, post-signing market check would stimulate a hostile bid by a strategic buyer for Netsmart — a micro-cap company — in the same manner it has worked to attract topping bids in large-cap strategic deals appears, for reasons I detail, to have little basis in an actual consideration of the M&A market dynamics relevant to the situation Netsmart faced. Relatedly, the Proxy’s description of the board’s deliberations regarding whether to seek out strategic buyers that emerges from this record is itself flawed.
Second, the plaintiffs have also established a probability that the Proxy is materially incomplete because it fails to disclose the projections William Blair used to perform the discounted cash flow valuation supporting its fairness opinion. This omission is important because Netsmart’s stockholders are being asked to accept a one-time payment of cash and forsake any future interest in the firm. If the Merger is approved, dissenters will also face the related option of seeking appraisal. A reasonable stockholder deciding how to make these important choices would find it material to know what the best estimate was of the
company’s expected future cash flows.
The plaintiffs’ merits showing, however, does not justify the entry of broad injunctive relief. Because there is no other higher bid pending, the entry of an injunction against the Insight Merger until the Netsmart board shops the company more fully would hazard Insight walking away or lowering its price. The modest
termination fee in the Merger Agreement is not triggered simply on a naked no vote, and, in any event, has not been shown to be in any way coercive or preclusive. Thus, Netsmart’s stockholders can decide for themselves whether to accept or reject the Insight Merger, and, as to dissenters, whether to take the next step of seeking appraisal. In so deciding, however, they should have more complete and accurate information about the board’s decision to rule out exploring the market for strategic buyers and about the company’s future expected cash flows. Thus, I will enjoin the procession of the Merger vote until Netsmart discloses information on those subjects.
Here is an updated post on the status of the merger as a result of the decision, by the Litigation Consulting Blog.