HERE is an interesting article from McCarthy Tetrault discussing a ruling with respect to the use of aggressive financial projections for the divestiture of a public company.
A short summary of the facts:
1. The company hired an M&A Adviser that marketed the company and managed the sale process.
2. The Adviser used management prepared financial projections that were purposefully “bullish” (false, or “puffery” as the judge pointed out).
3. The sale process generated an offer of $32 per share, which was less than the bullish projections (if true) suggested the company should be worth.
4. The Adviser was asked to prepare a fairness opinion for minority shareholders and refused because $32 per share was not fair value based on the bullish projections.
5. As a result, the company revised the projections, the Adviser prepared the fairness opinion to support $32 per share and the minority shareholders sued (presumably because they believed the company was worth more based on the bullish financial projections).
The primary takeaway, from a legal perspective, is that when bullish projections are used to support a sale, the fact that they are bullish and that they are being used to attract a better sale price should be documented in the minutes of the Board of Directors of the vendor.
We are not legal counsel. Notwithstanding, I am having a difficult time imagining us recommending to a Board of Directors and their legal counsel that they should sign off on knowingly aggressive forward looking financial information intended for the sole purpose of enticing a potential purchaser to pay more than fair value. Surely this strategy will lead to more serious litigation.
Here are a few better thoughts for a Board of Directors:
1. Realistic projections with documented assumptions, together with sensitivity analyses based on more aggressive assumptions, is a better presentation for a sale process. Bullish projections do not attract a higher price. In fact, they speak to lack of credibility of the vendor and the Adviser and potentially damage the functioning of the auction. Issuing false projections is a bad idea.
2. Do not ask your M&A Adviser, the firm that ran the auction and that presumably has fees tied to its success, to prepare the fairness opinion. That is a conflict that you should recognize even if the Adviser does not. An independent opinion may have stopped this litigation before it started.
3. If a valuation firm refuses to provided a fairness opinion solely because overly-aggressive management projections taken at face value support a higher price, you should seek a new valuation firm. It is the job of the valuator to risk adjust financial projections and to base an opinion on all available information. There is no reason the Adviser could not have issued a fairness opinion in this case other than their likely conclusion that they were not independent of the aggressive financial information and therefore potentially exposed to liability if they appropriately discounted the same information in a valuation report.
Posted by Scott Sinclair, Range Advisors
Our passion is to support business owners in pursuit of their dreams.
We believe that for professional advice to be truly valuable to medium, small and entrepreneurial businesses, the adviser’s professional skills must be world-class, the adviser must participate in the effective execution of the solution and the advice must be affordable by the business. With this, these businesses can overcome all challenges.