Courts’ eyes are on management projections

BVWireIssue #181-1
October 4, 2017

As we mentioned in last week’s profile of a complex bankruptcy case, in assessing the soundness of valuations, courts are paying close attention to management projections—which means appraisers need to as well.

BVLaw recently covered the following cases in which the proffered projections prompted strong reactions from the courts.

  • In re PetSmart, Inc.: In a statutory appraisal decision, the Delaware Court of Chancery adopted the merger price, calling the management projections “at best, fanciful.” Management had no experience in preparing long-term projections and was pressured by the board to be more aggressive. The company did not prepare long-term projections in the ordinary course of business. When it became clear the company couldn’t meet the forecasts, the board distanced itself from them. Yet, the petitioners’ valuation expert was asked to use the projections for his DCF analysis. The court rejected the valuation.
  • Lund v. Lund: In a court-ordered buyout, a Minnesota trial court performed its own DCF analysis to value a chain of high-end grocery stores. The court found the bottom-up management projections had proved reliable in the past, and it disapproved of “after-the-fact adjustments” that the defense expert made relating to the impact of tax and pension fund liabilities. The court also chided the plaintiff’s expert for failing to use the projections in developing his long-term growth rate.
  • Brundle v. Wilmington Trust (and Brundle II): One of the major issues in this controversial ESOP case was the reliability of management projections underlying the ESOP financial advisor’s valuation. In finding the trustee was liable for causing the ESOP to overpay, the court said the trustee’s approach to the management projections was “lackluster.” The trustee should have questioned the projections’ reliability where management stood to gain (in the form of bonuses) from the transaction, where it had prepared numerous projections in a short period, and where the projections did not account for contract concentration, the court said.
  • DFC Global Corp. v. Muirfield Value Partners: In overturning a 2016 statutory appraisal decision from the Delaware Court of Chancery, the Delaware Supreme Court questioned the integrity of the Chancery’s DCF analysis, particularly in light of the Chancery’s post-trial (unlitigated) changes to the projections related to the working capital and perpetuity growth rate inputs. The Supreme Court noted the growth rate in the projections was aggressive to begin with and involved projections the company did not meet in the short-term period before the transaction closed. The Chancellor should have solely relied on the deal price as the best evidence of fair value, the Delaware Supreme Court suggested.
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