This is my fourth installment of live blogging from the above seminar in New Orleans. The second panel on this second day of this corporate law gathering is titled: "Roles Played and Issued Faced by Financial Advisors in Today’s Deals". Among the panel members are Delaware Supreme Court Justice Henry duPont Ridgely as well as leading corporate practitioners and a representative of the SEC.
Justice Ridgely discussed the definition of "independence" of directors according to the Delaware case law, and mentioned that DGCL Section 141 specifically allows directors to rely on reports of experts such as financial advisors. Another panel member suggested however, that there is no requirement that experts be used per se. One panel member emphasized that "at the end of the day" the board needs to make the "business decision" on a particular deal.
Disclosure requirements were discussed and in particular the Delaware Chancery Court’s Pure Resources opinion which said that the shareholders are entitled to a "fair summary" (in the proxy statement) of the basis of the fairness opinion on which the board relied. For example, a "fair summary" includes a description of exercises employed by the bankers and their assumptions used, and fair values resulting. However, other Chancery cases, such as Globis, said that one does not need to include so much that it would allow the shareholders to duplicate the same analysis made by the bankers. In addition, if the data was merely "helpful" that does not make it material. However, if there is "partial reference" to a topic, then it needs to be a complete disclosure on that topic. (i.e., not a misleadingly incomplete disclosure).
One panel member noted that the Chancery decision in JCC Holdings stands for a "no quibble" rule. That is, quibbling with the results of the valuation is not a disclosure claim as long as there is a disclosure about what "the banker did" as opposed to what analysis the banker did "not do".
Bottom line: Disclose the "meat" of the banker’s analysis so that it is meaningful for the shareholders in making a decision based on the banker’s valuation.
Fees paid to bankers: If it is contingent, the entire details of fee must be disclosed, otherwise all the details of the fee are not needed.
Netsmart was a Chancery Court decision that discussed what projections need to be provided to shareholders in a valuation. For example, a shareholder being cashed-out in an LBO would want to see and would need management’s projections on which the valuation was based. One key is to determine whether the projections are "reliable". If they are reliable, then they need to be provided (even if determining "reliability" of projections is not always subject to certainty.) Plaintiff must prove reliability if the goal is to enjoin a transaction due to lack of disclosure of projections.