Management forecasts receive close scrutiny from courts

In assessing the soundness of valuations, courts in a variety of cases have been paying close attention to the management projections appraisers have used or decided not to use in performing their value analyses. If courts are scrutinizing projections for reliability and plausibility, experts hoping to prevail in the litigation context must do so as well.

BVLaw recently profiled a series of cases from different areas of law, including bankruptcy, statutory appraisal, and ESOP litigation, in which the proffered projections elicited a strong response from the court.

For example, in In re PetSmart, Inc., a statutory appraisal decision, the Delaware Court of Chancery adopted the merger price as the indicator of fair value. The court dismissed the management projections as “at best, fanciful.” It found the company’s management had lacked experience preparing long-term projections, since the company did no long-term forecasts in the ordinary course of business. What’s more, management was relatively new and was under ever-increasing pressure from the board to be ever more aggressive in its forecasts. And yet, when it became clear the company couldn’t meet the forecasts, the board distanced itself from the projections. However, for litigation purposes, the petitioners’ valuation expert was told to use the projections for his DCF analysis. Given this backdrop, the court, not surprisingly, rejected the expert's valuation.