Selected Cases and Issues Regarding Projections 11-6-15 (One Hour Briefing)

Copyright 2015©
Financial Projections in M&A Transactions
A PLI One Hour Briefing
Steven M. Haas
Hunton & Williams LLP
Richmond, VA
Kevin Miller
Alston & Bird LLP
New York, NY
Blake Rohrbacher
Richards, Layton & Finger, PA
Wilmington, DE

Copyright 2015©
Selected Cases and Issues
Regarding Projections

- 3 - Copyright 2015©
Discussion Topics
 When and on what basis should projections be prepared?
 What is the role of the board and company counsel in supervising the preparation and approval of projections?
 Dealing with unrealistic projections or projections that change or are updated during a sale process.
 What should a buyer be told and when?
 What if a board/special committee or a financial advisor has reservations regarding a counterparty’s projections?
 Which are more relevant:
 counterparty management’s projections for counterparty; or
 client management’s projections for counterparty?
 Avoiding disputes regarding the projections on which financial advisors were authorized to rely.
 What to do if a counterparty won’t provide internal projections?
 Criteria for determining whether to press for obtain buyer projections?
 Under what circumstances can you consider relying on publicly available analyst estimates in lieu of internal
management projections?
 How should multiple projections cases be considered by the board/special committee and financial advisors?
 What if management cannot or will not identify a single set of projections representing its best estimates as to the
future financial performance of the company?
 Federal v. Delaware disclosure regimes.
3

The Preparation of Projections
Dicta from In re CDX Holdings
Fox v. CDX Holdings, CA No. 8031-VCL (Del. Ch. July 28, 2015)
 "During a sales process, a company may provide optimistic or bullish projections to bidders, even 'extremely
optimistic valuation scenarios for potential buyers in order to induce favorable bids."16 There is an important
line, however, between responsibly aggressive projections and outright falsehoods: "Pushing an optimistic
scenario on a potential buyer is to be expected; shoveling pure blarney at that stage is another." Pennaco
Energy, 787 A.2d at 713. "An optimistic prediction regarding a company‘s future prospects" may rise to the
level of a "falsehood" if accompanied by "evidence that it was not made in good faith (i.e., not genuinely
believed to be true) or that there was no reasonable foundation for the prediction."
___________
16 In re Pennaco Energy, Inc., 787 A.2d 691, 713 (Del. Ch. 2001) (Strine, V.C.) (citations and internal quotation marks omitted);
see also In re Topps Co. S’holders Litig., 926 A.2d 58, 76 (Del. Ch. 2007) (Strine, V.C.) ("[O]ne of the tasks of a diligent sell-side
advisor is to present a responsibly aggressive set of future assumptions to buyers, in order to extract high bids.").
4

Preparation of Projections
In re Ancestry.com S’holder Litig.
In re Ancestry.com, Inc. S’holder Litig., CA 7988-CS (December 17, 2012) (Hearing Transcript)
On the Preparation of Projections
 “MR. GRANT [Plaintiffs’ counsel]: It is true that by August 6th, [Target financial advisor] is working on
sensitivities. So they're working on, you know, Gee, what's going on? Not even sure exactly why. But
they're starting to work on sensitivities. And this is true during September.
 Now, the interesting question is, you know, why are they doing this? Because the board doesn't ask
them to do this exercise until the 16th of October. The board doesn't ask them to do this exercise
until the 16th of October. So they're doing things and they're communicating with management and
they're putting these things together, and I think it's because they see where this is going. . . . . -- so [Target
financial advisor] says that, you know, we're trying to work on this fairness opinion to get an idea that this
may be coming in the low 30s and we're having trouble getting to it. And then in late September,
Hochhauser and [Target financial advisor] are going back and forth saying, Look, we're going to
have a problem here. I'm telling you, we can't give you a fairness opinion given these numbers. And
you're going to have to change these numbers if we're going to be able to give a fairness opinion.
And then Hochhauser steps in and starts working on some of the numbers. And one of the interesting
things here -- . . . .

Preparation of Projections (cont’d)
In re Ancestry.com, Inc. S’holder Litig., CA 7988-CS (December 17, 2012) (Hearing Transcript)
On the Preparation of Projections (cont’d)
 MR. GRANT: — there is a lot of information, and you've got to be careful where — but I'm pretty sure they
didn't do that. The other interesting thing, you say to me, Gee, I think there is sinister reasons. Well, when
management — when [Target financial advisor] is working on this, they want to change it to, you
know, we got these projections based on our discussions with management and we put a lot
together. And counsel to the bidder says, We really ought to be saying that these were just based on
management discussions because we know that management isn't really the one who put these
together. And [Target financial advisor] says, Woah, no way. This cannot at all look like these are
our numbers. We need to put on this "management's numbers.“ . . . .
 THE COURT: You know how there is always — there's the reality, is that no — the banker's barking
dog lawyer is never going to let the bank — you know, if you read a fairness opinion, if you read a
fairness opinion literally, no one should ever rely on them because they're just entirely a disclaimer
of anything. Which is I relied blindly, deafly, dumbly, on everything that was told to me. Anything in
here cannot be regarded as my professional judgment.
 But I mean, when I read that, it was just like, No way. That doesn't match our disclaimer. These have
to be your projections.”

Preparation of Projections (cont’d)
On the Preparation of Projections [cont’d]
[The Court’s ruling]
 “The Court: [ . . . .] Let me talk first about the change in the projections. I do think that this scenario is one
that's a bit vexing to deal with. I'm not sure what I think is the reality. I think the defendants' story
that the original projections were bullish, plausible but bullish, makes a lot of sense. It could have
been documented much better. And I think there are lessons in this, again, for everybody writing these
hygienic depictions of the process where they take everything that's actually told to the directors that might
be valuable out of it because the directors are actually supposed to be entitled to rely upon that. And when
there is nothing contemporaneously when you get to write the script, and when the script in terms of the
PowerPoint presentations -- PowerPoint is ubiquitous. Doesn't even have to be in the minutes. Could be a
discussion of the banker's process. There are all ways to do it. But when none of it is in there, it makes you
wonder. But even if it's optimistically plausible, you have a situation where the investment banker says
something that's more than a little bit in tension with the idea that these things were never going to be the
basis for an actual valuation of the deal. When the banker says, I can't render a fairness opinion based
on these numbers, well, if they were just sell-side puffery to begin with, you would never expect that
that would have been the case. That might have been your high side in your sensitivity case; right?
With a base case and a low case.
 But you would never have the discussion that where -- it's just odd to have a discussion about these
are the projections we've been using. You've got to know that if we use these to give our valuation
opinion, we can't give one. Why would it have ever been thunk that they would be the basis for it?
Which creates some cognitive dissonance and adds color to the plaintiffs' claim.”

Unrealistic Management Projections
Extract from In re Dole Food
In re Dole Food Co. S’holder Lit., CA No. 8703-VCL (Del. Ch. Aug. 27, 2015)
 “The July Projections were so low that [Special Committee’s financial advisor] did not think they would support
Murdock‘s $12.00 offer, much less provide a basis for negotiating a higher price. Conrad concluded that the
projections were not “an accurate representation of the value of the Company.” [Banker at Special
Committee’s financial advisor] thought that “management had taken a meat cleaver to the projections
in a way that it would be very difficult, if not inappropriate, for a committee to weigh these projections
as the basis for determining the adequacy of a price.”
 “Once the Committee and [Special Committee’s financial advisor] realized that they could not rely on the July
Projections, they decided to prepare their own forecasts. They used the December Projections as a starting
point and made their own adjustments. The Committee instructed [Special Committee’s financial advisor] to
attempt to replicate Dole‘s normal bottom-up budgeting process and to draw on other sources within Dole,
such as materials used to secure financing, public statements about value, and Board presentations. Using
these inputs, [Special Committee’s financial advisor] prepared the “Committee Projections.” Conrad
personally spent many hours working with [Special Committee’s financial advisor] on the new projections. The
Committee and [Special Committee’s financial advisor] concluded that the Committee Projections
represented an aggressive but reasonable and achievable forecast.”
8

Unrealistic Management Projections (cont’d)
Extract from Summary of A Fairness Opinion in Another Proxy
“In arriving at its opinion, [Financial Advisor]: . . .
 reviewed (a) certain information relating to the historical, current and future operations, financial condition and
prospects of the Company provided to or discussed with [Financial Advisor] by the Company, including, among other
things, financial projections with respect to the future financial performance of the Company for the fiscal years ended
June 30, 2010, June 30, 2011 and June 30, 2012 prepared and provided to [Financial Advisor] by management of the
Company and financial projections with respect to the future financial performance of the Company for the fiscal years
ended June 30, 2013 and June 30, 2014 based on discussions with management of the Company, or together, the
Projections, and (b) certain information relating to the future financial results and condition of the Company,
including, among other things, two additional sets of projections, or Alternative Growth Projections (A) and
Alternative Growth Projections (B), respectively, prepared at the request of the special committee that reflect
certain adjustments to the assumptions underlying the Projections. . .
 The special committee had reservations regarding the Company’s ability to fully achieve the Projections, and
consequently the special committee asked [Financial Advisor] to prepare two additional sets of projections,
Alternative Growth Projections (A) and Alternative Growth Projections (B), that reflected certain adjustments
to the assumptions underlying the Projections (including, among other things, reduced revenue growth
rates, reduced profitability and differing working capital and capital expenditures for fiscal years 2011
through 2014 more consistent with industry growth rates and historic Company results). For purposes of
[Financial Advisor]’s advice, analyses and its opinion, the special committee instructed [Financial Advisor] to use and
rely on Alternative Growth Projections (A) and Alternative Growth Projections (B) in addition to the Projections.
[Financial Advisor] expressed no opinion with respect to the Projections, Alternative Growth Projections (A) or
Alternative Growth Projections (B) or the assumptions on which they were based.”
9

What if Reservations Regarding Target Projections
Extract from a Summary of a Fairness Opinion in another Proxy
 “In arriving at its opinion, [Special Committee of Buyer's Financial Advisor]: . . .
 reviewed certain oil and gas reserve reports prepared by [Target]’s third-party oil and gas reserves
consultants with respect to [Target]’s proved, probable and possible oil and gas reserves, which collectively
are referred to herein as the [Target] reserve reports;
 reviewed resource development plans prepared by management of [Target] with respect to certain contingent
oil and gas resources of [Target], which are referred to herein as the [Target] resource development plans,
and collectively with the [Target] reserve and resource data and the [Target] reserve reports, as the [Target]
reserve and resource analysis;
 reviewed analyses of the [Target] reserve and resource analysis by the [special committee]’s third-party oil
and gas reserves consultants, which are referred to herein as the [special committee] consultant’s analyses
and together with the [Target] reserve and resource analysis, as the oil and gas analyses;

What if Reservations Regarding Target Projections (cont’d)
Extract from a Summary of a Fairness Opinion in Another Proxy (cont’d)
 “With respect to the [Target] reserve and resource analysis that [Special Committee of Buyer's Financial Advisor]
reviewed, management of [Target] advised [Special Committee of Buyer's Financial Advisor], and [Special Committee
of Buyer's Financial Advisor] assumed, that such data and analysis were reasonably prepared in good faith on bases
reflecting the best available estimates and judgments of the management of [Target] and [Target]’s third party oil and
gas reserve consultants, as applicable, as to the oil and gas reserves and contingent oil and gas resources of
[Target], and were a reasonable basis on which to evaluate [Target], and [Special Committee of Buyer's Financial
Advisor] expressed no opinion with respect to such [Target] reserve and resource analysis or the assumptions upon
which they were based. With respect to the [Special Committee] consultant’s analyses which [Special Committee of
Buyer's Financial Advisor] reviewed, [Special Committee of Buyer's Financial Advisor] was advised and assumed, that
the [Special Committee] consultant’s analyses were reasonably prepared in good faith on bases reflecting the best
available estimates and judgments of the [Special Committee]’s third-party oil and gas reserves consultants as to the
oil and gas reserves and contingent oil and gas resources of [Target], and were a reasonable basis on which to
evaluate [Target], and [Special Committee of Buyer's Financial Advisor] expressed no opinion with respect to such
[Special Committee] consultant’s analyses or the assumptions upon which they were based. For purposes of [Special
Committee of Buyer's Financial Advisor]’s analyses, [Special Committee of Buyer's Financial Advisor], at the direction
of the [Special Committee], assumed that the capital expenditures, expenses and production development plans
contemplated by the [Target] resource development plans will, in all respects material to [Special Committee of
Buyer's Financial Advisor]’s analyses, be incurred and achieved in the amounts and at the times indicated thereby. At
the direction of the [Special Committee], [Special Committee of Buyer's Financial Advisor] relied upon the [Target]
reserve and resource analysis and the [Special Committee] consultant’s analyses for purposes of [Special Committee
of Buyer's Financial Advisor]’s analyses and assumed that they were a reasonable basis on which to evaluate
[Target].”
11

Lack of DCF/Reliability of Projections
In re Answers Corp., CA 6170-VCN (April 11, 2011)
Lack of DCF/Reliability of Projections
 “The Plaintiffs contend that UBS’s fairness opinion contains multiple flaws; for example, they argue
that it is not based on a discounted cash flow analysis of Answers’ value as a going concern and that
the comparable company analysis undertaken by [Target financial advisor] failed to use companies that were
actually comparable to Answers. They contend that, as a result of these flaws, the Board cannot rely on the
[Target financial advisor] opinion to argue that it was informed and that these flaws suggest that the price
offered is inadequate relative to Answers’ value as a stand-alone company.
 The Board’s reliance on that opinion, however, appears reasonable. [Target financial advisor] ’s
independence and qualifications are not seriously challenged here, and it made seemingly sensible
judgments in the methodologies it utilized in view of the limited data the Board was able to provide given its
inability to generate reliable long-term financial projections. Although Shelffo testified that is was “unusual,
particularly for a public company to have such challenging fundamentals in their business that they have an
inability to forecast financial performance beyond the next fiscal year,” she further explained that “there were
clearly some unique characteristics of this business, in particular its dependence on Google that made it an
understandable issue from our perspective.” The inability to make long-term financial projections
apparently prevented [Target financial advisor] from generating a reliable discounted cash flow
analysis of Answers’ value.”
12

What if the Projections Used by the Acquiror’s and the Target’s
Financial Advisors are Not the Same?
Extract from Projections Disclosure in a Proxy
 “In connection with the proposed merger, management of the Partnership GP and Holdings GP prepared
projections for the Partnership on a stand-alone basis. Management initially prepared these projections, which
we refer to as the “initial projections,” based on existing operations and specifically identified growth capital
expenditures. Management subsequently revised its projections to, among other things, reflect incremental
EBITDA from identified growth capital expenditures in 2013 and 2014, maintenance capital and reserve
replacement expenditure projections and to include certain adjustments for phantom equity units. The initial
projections, as revised, which we refer to as the “revised projections,” were approved by management
for use by [Financial Advisor to Partnership Conflicts Committee] and [Financial Advisor to Holdings
Conflicts Committee] in connection with the preparation of their opinions to the Partnership Conflicts
Committee and the Holdings Conflicts Committee, respectively. The revised projections were
discussed by [Financial Advisor to Holdings Conflicts Committee] with the Holdings Conflicts
Committee and by [Financial Advisor to Holdings Conflicts Committee] with the Partnership Conflicts
Committee. . . .”
13

What if the Projections Used by the Acquiror’s and the Target’s
Financial Advisors are Not the Same? (cont’d)
Extract from Projections Disclosure in Another Proxy
 “In August 2010, management of the Partnership GP and Holdings GP discussed with the financial advisors to the
Partnership Conflicts Committee and the Holdings Conflicts Committee management’s projection that the Partnership
would be able to consummate an average of $100 million annually in unidentified acquisitions through 2014 at
purchase prices reflecting an 8.5x EBITDA multiple, which we refer to as the projected unidentified acquisitions.
Management also discussed with [Financial Advisor to Partnership Conflicts Committee ] and [Financial Advisor to
Holdings Conflicts Committee] the uncertainty associated with projecting the amount, timing and financial implications
of unidentified acquisitions. Based in part on discussions with management regarding the risks and uncertainty
associated with projecting the amount, timing and financial implications of unidentified acquisitions and in
the absence of a financial model prepared by management that reflected the projected unidentified
acquisitions, [Financial Advisor to Holdings Conflicts Committee] and the Holdings Conflicts Committee
understood the projected unidentified acquisitions to reflect a hypothetical and speculative scenario and,
consequently, [Financial Advisor to Holdings Conflicts Committee] primarily relied upon the revised
projections in rendering its opinion to the Holdings Conflicts Committee on September 20, 2010. At the
request of the Holdings Conflicts Committee, on October 18, 2010, [Financial Advisor to Holdings Conflicts
Committee] confirmed to the Holdings Conflicts Committee that if, in addition to the revised projections, it
had, prior to September 20, 2010, been provided by management with the projection case set forth below
reflecting the projected unidentified acquisitions, which we refer to as the additional projections, and
[Financial Advisor to Holdings Conflicts Committee] and the Holdings Conflicts Committee had understood
that both the revised projections and the additional projections represented management’s best estimate
with respect to the future financial performance of the Partnership, [Financial Advisor to Holdings Conflicts
Committee] would still have been able to render its opinion to the Holdings Conflicts Committee on
September 20, 2010 subject to the assumptions, qualifications, limitations and other matters set forth
therein.”
14

What if the Buyer Won’t Provide Projections
Extract from Summary of Fairness Opinion in Another Proxy
 “As you are aware, the management of the Acquiror did not provide us with, and we did not have access to,
financial forecasts relating to the Acquiror prepared by the management of the Acquiror. Management of the
Acquiror directed [Financial Advisor to the Target] to, and discussed with [Financial Advisor to the Target],
the Analyst Estimates for the Acquiror and [Financial Advisor to the Target] have, with your consent,
assumed that the Analyst Estimates for the Acquiror are a reasonable basis upon which to evaluate the future
financial performance of the Acquiror and have relied upon the Analyst Estimates for the Acquiror for
purposes of our analyses and this Opinion. We express no opinion with respect to the Company Projections
or the Analyst Estimates for the Acquiror or the assumptions on which they are based.” (emphasis added).”
15

What if Merger Partner Won’t Provide Projections
Extract from Summary of a Fairness Opinion in Another Proxy
“In arriving at its opinion, [Target’s financial advisor]: . . .
 reviewed certain other information relating to [Target], including certain financial forecasts and operating data,
provided to [Target’s financial advisor] by the management of [Target];
 reviewed certain other information relating to [Acquiror], including estimates with respect to certain
prospective financial and operating data provided to [Target’s financial advisor] by the management
of [Acquiror] and certain financial forecasts developed from such estimates based on assumptions
provided by and discussions with the management of ‘[Target]; . . .
With respect to the financial forecasts for [Target] that [Target’s financial advisor] used in its analyses, the
management of [Target] advised [Target’s financial advisor] , and [Target’s financial advisor] assumed, that
such forecasts were reasonably prepared on bases reflecting the best available estimates and judgments of
[Target]’s management as to the future financial performance of [Target], and [Target’s financial advisor]
expressed no opinion with respect to such projections or the assumptions on which they were based. With
respect to the financial forecasts for [Acquiror] that [Target’s financial advisor] used in its analyses,
the management of [Target] advised [Target’s financial advisor] , and [Target’s financial advisor]
assumed, that such forecasts were reasonably prepared on bases reflecting the best available
estimates and judgments of [Target]’s management as to the future financial performance of
[Acquiror] and were a reasonable basis on which to evaluate [Acquiror], and [Target’s financial
advisor] expressed no opinion with respect to such projections or the assumptions on which they
were based. . . .”
16

Accuracy of Disclosures re: Projections in Fairness Opinions
Chen v. Howard-Anderson, CA 5878-VCL (April 8, 2014)
On the Disclosure of Projections in Fairness Opinions
 “The plaintiffs next argue that the [Target financial advisor] fairness opinion, which was included in the Proxy
Statement, falsely described the information provided to [Target financial advisor] by Occam’s management.
The fairness opinion stated that [Target financial advisor] reviewed “certain information furnished to [it] by the
Company’s management, including financial forecasts for calendar years 2010 and 2011 only, having been
advised by management of the Company that it did not prepare any financial forecasts beyond such period,
and analyses, relating to the business, operations and prospects of the Company.” Management prepared
three sets of projections: the April Projections, June Projections, and August Projections. All three included
financial forecasts for 2012. . . [Target financial advisor] was provided with the August Projections, which
included financial forecasts for 2012.”
17

SEC Staff Position – Disclosure of Projections Under the Federal
Securities Laws
Example of SEC Staff Comment
May 21, 2015
Re: Horizon Bancorp Registration Statement on Form S-4 Filed May 5, 2015 File No. 333-203868
“We note that senior management of both Horizon and Peoples Bancorp provided financial projections to their
respective financial advisors. Please disclose two years of any material projections or other material non-public
information, including revenue, income, and income per share provided by Horizon to either Peoples Bancorp or
its financial advisor. Similarly, please revise this section to disclose any projections or other material non-public
information provided by Peoples Bancorp to Horizon or its financial advisors.”

Delaware Cases – Disclosure of Free Cash Flows
Will Delaware Courts Require Disclosure of Free Cash Flows?
 Maric Capital Masterfund, Ltd. v. Plato Learning, Inc., 11 A.3d 1175, 1178 (VC Strine 2010).
 Steamfitters Local Union 447 v. Walter, No. 5492-CC (C Chandler June 21, 2010).
 Gaines v. Narachi, No. 6784-VCN (VC Noble October 6, 2011).
 In re SeraCare Life Sciences, CA No. 7250-VCG (VC Glasscock March 20, 2012).
 In re Midas, Inc. S’holders Litig., CA 7346-VCP (VC Parsons April 12, 2012).
 In re Transatlantic Holdings, Inc. S’holders Litig, C.A. Nos. 6574 & 6776 (C Strine Aug. 22, 2011) (Hearing
Transcript).
 Cox v. Guzy, CA No. 7529-CS (C Strube June 8, 2012) (Hearing Transcript).
 Nguyen v. Barrett, CA No. 11511-VCG (VC Glasscock Oct. 8, 2015).

Disclosure of Free Cash Flows
Maric and Steamfitters
Compare
 Maric (VC Strine 2010) − “[I]n my view, management’s best estimate of the future cash flow of a corporation
that is proposed to be sold in a cash merger is clearly material information.” Maric Capital Masterfund, Ltd. v.
Plato Learning, Inc., 11 A.3d 1175, 1178 (Del. Ch. 2010); and
 Steamfitters (C Chandler 2010) − “But this isn’t a case where free cash flow estimates were deliberately
removed or excised from a proxy disclosure. Unlike in Maric, in this case no free cash flow estimates were
actually provided to Goldman Sachs. The internal analyses that were approved by management for
Goldman’s use in this case didn’t have a line item for free cash flow estimates, and so unlike the Maric
decision, there was no deliberate excising of free cash flow numbers. And in addition, this isn't like Netsmart,
where management undertook to disclose certain projections but then disclosed projections that were actually
stale and not, therefore, meaningful. The proxy here gave management’s projections that were actually used
by Goldman, and those projections included net revenue, net income, EPS and EBITDA estimates for five
years. . . . Now, having said all of that, and with due respect to Mr. Liebesman, who I know disagrees with me
-- and I appreciate that, and respect his point of view, and can understand his point of view, frankly. And so I
am quite willing, if Mr. Liebesman believes that I have erred and that there are truly reasons why in every case
Delaware ought to require -- even if management hasn't produced it to the investment advisor -- that
Delaware law ought to require as a per se rule that free cash flow estimates going out into the future be
provided, disclosed, I would be, in the interests of clarification of Delaware law, and in the interests of perhaps
leading to the creation of a bright-line rule in disclosure, which I think would be a good thing in some ways – I
would be happy, Mr. Liebesman, to sign, today, an order certifying an interlocutory appeal to the Delaware
Supreme Court on this question. ” Steamfitters Local Union 447 v. Walter, No. 5492-CC (Del. Ch. June 21,
2010). [NTD – No appeal was taken by plaintiffs]

Disclosure of Free Cash Flows (cont’d)
Gaines v. Narachi
 Gaines v. Narachi (VC Noble Oct 6, 2011) – granting plaintiffs’ motion for reconsideration/reargument.
While not ruling on the merits of the claims, the Court found that “[a]lthough the Proxy disclosed the EBIT
projections—essentially a precursor to free cash flow-used by Morgan Stanley in its DCF analysis, the Proxy
did not disclose the related free cash flow estimates. This Court has stated that shareholders who are being
advised to cash out are entitled to the best estimate of the company’s future cash flows. While application of
this standard has not always resulted in a finding that free cash flows, specifically, must be disclosed, there is
a colorable argument that, in this case, free cash flows should be disclosed to meet this standard. Indeed, in
Maric this Court enjoined the proposed merger until free cash flow projections were disclosed, despite the fact
that the proxy already disclosed projected revenues, EBIT, and a variation of EBITDA. Finally, it should be
noted that from the record it is unclear whether AMAG management provided Morgan Stanley with free cash
flow projections or if Morgan Stanley derived its free cash flow estimates from the disclosed EBIT projections.”
Gaines v. Narachi, No. 6784-VCN (Del. Ch. October 6, 2011). [NTD – atypical litigation brought by a
stockholder of the Acquiror for whom the proposed merger was not an end-stage transaction.]

Disclosure of Fairness Opinion Provider’s Financial Analyses:
Disclosure of Free Cash Flows and NOLs
In re SeraCare
 In re SeraCare Life Sciences (VC Glasscock March 20, 2012) – In SeraCare the Court denied plaintiffs’
motion to expedite discovery based on disclosure and process claims, including the failure to disclose free
cash flows developed by the target’s financial advisor and the failure to disclose the target’s expectations
regarding its ability to utilize its net operating loss carry forwards.
 Standard of Review
 “In order to receive expedition, the plaintiffs must assert colorable claims and a sufficient possibility of threatened
irreparable injury to justify the high cost of expedition. And while colorable claim is certainly a low standard, the costs that
are involved with expedition are not, in themselves, insignificant. And so I take the colorable claim part of this analysis
seriously. . . . Here, the plaintiffs assert a variety of challenges to the merger, including disclosure violations, preclusive
deal protections, and insufficient process. None of these allegations satisfy, in my opinion, the standard of colorability in
light of the costs that would be required for expedition, and so I am denying the motion to expedite.”
 The Disclosure Claims
 “And I first turn to the disclosure violations alleged. I note the board must disclose all information material to the
stockholders in deciding how to vote. The issue in examining whether that has been done is whether the sought-
after information would have significantly altered the total mix of information in the eyes of a reasonable stockholder. The
information material to a stockholder deciding on whether to vote in favor of a merger is the information related to the
fairness of the proposed merger, not mergers that fell through or never happened or were unattainable. A list of disclosure
requirements of the “more details please” kind tend not to constitute colorable claims worthy of significant expense through
an expedited proceeding.
 The plaintiffs here focused on two disclosure issues at the teleconference: The non-disclosure of free cash flows derived
and used by Lazard, and the non-disclosure of the details of what consideration the board or Lazard gave to
SeraCare’s net operating losses.”

Disclosure of Free Cash Flows and NOLs (cont’d)
In re SeraCare
 In re SeraCare Life Sciences (cont’d)
 The Disclosure of Free Cash Flows
 “In the recent Nighthawk case, Vice Chancellor Laster plainly found that, unlike a situation where the
board provides free cash flow projections to its financial advisor, where the advisor derived
the projections on its own, those projections do not have to be disclosed. To me, this is consistent with
the principle that the board need not disclose every piece of information used by its financial advisor,
such that an investor could conduct its own fair value analysis using that same data.”
 The Disclosure of Net Operating Losses
 “As far as the net operating losses, the actual net operating losses have been disclosed. The plaintiffs
instead seek details, disclosure details, to the stockholders of how the company expects that net
operating loss carry-forward to be used in the future. In the Micromet case, Vice Chancellor Parsons
unequivocally found that this exact information was, I quote, “a level of granular disclosure not required
under our law.”
 Now, the plaintiffs point out Micromet was a decision on preliminary injunction and not at the stage that
we are of an expedition motion. But the Vice Chancellor’s statement was an articulation of the law, not a
finding of whether the plaintiffs had met its burden under the reasonable likelihood standard for
preliminary injunction, which is, indeed, different from the colorable expedition standard. The net
operating losses have been disclosed. The stockholders thus have sufficient information to evaluate the
proposed deal in light of the existing net operating losses.” In re SeraCare Life Sciences, CA No. 7250-
VCG (Del. Ch. March 20, 2012).

Disclosure of Free Cash Flows & Size Risk Premium
In re Midas
 In re Midas, Inc. S’holders Litig. (VC Parsons April 12, 2012) – In Midas, the Court denied plaintiffs’ motion to
expedite proceedings based on a variety of disclosure and process claims including claims that the Board of Midas
breached its fiduciary duty by failing to disclose Midas’s free cash flows and whether the discount rate used in the
DCF analysis performed by its financial advisor included a small stock premium..
 Disclosure of Free Cash Flows
 “Plaintiffs claim here that the defendants breached their duty of disclosure in several respects. The first one that I
will focus on is the failure to include Midas’ five-year unlevered free cash flow projections in its 14D-9.
Specifically, plaintiffs argue that these projections should have been disclosed because such projections are
“highly prized disclosures for shareholders facing a tender offer” and that such projections were material because
Midas’ financial advisor, J.P. Morgan, used these cash flows to conduct its DCF analysis.
 Although it may be true that projections of unlevered free cash flows may be helpful to a shareholder in
assessing whether to tender his shares, omitted facts are not material simply because they might be helpful.
 Moreover, it is well-established that there is no per se duty to disclose financial projections furnished to and relied
upon by an investment banker. Instead, what is relevant in assessing a disclosure claim is whether the omitted
information would have materially altered the total mix of information available to shareholders in deciding
whether to tender their shares. The mere fact that some issue may have proven material in a past case cannot
endow that issue with talismanic properties or reduce it to a magic word forever after. That is, the materiality of
any fact, projection, or figure cannot be divorced from the particular circumstances facing the defendant
company and the challenged transaction. In other words, context matters.

Disclosure of Free Cash Flows & Size Risk Premium (cont’d)
In re Midas
 In re Midas, Inc. S’holders Litig. (VC Parsons April 12, 2012) (cont’d)
 Disclosure of Free Cash Flows (cont’d)
 “Here, the plaintiffs have not alleged any specific basis for why Midas’ unlevered free cash flows, as opposed to its
projections of sales, EBIT and EBITDA, which were disclosed in the 14D-9, would substantially alter the total mix of
information for a shareholder in deciding whether to tender his shares.
 It appears that plaintiffs are content to rest their claim on the fact that this Court previously has required the disclosure of
unlevered free cash flows in certain cases. Having reviewed the precedent on which plaintiffs rely, however, I do not find
that our case law supports the proposition that unlevered free cash flows must always be disclosed as a general rule.
 Without a further explanation as to why the company’s currently disclosed projections are insufficient or an allegation that
the disclosures are misleading to shareholders in deciding whether to tender their shares in this case, I find that plaintiffs
have failed to state a colorable claim that defendants breached their fiduciary duty of disclosure by not including the
company’s unlevered free cash flow projections.”
 Disclosure of Small Company Premium in Discount Rate Calculation
 “There also was a challenge to the disclosures relating to the use of the 10.5 to 11.5 percent discount range and whether
that discount range included a small company stock premium. Plaintiffs claim that defendants should have disclosed
whether the 10.5 to 11.5 percent discount range includes a small company stock premium. This Court previously has noted
in In re Sauer-Danfoss, however, that a supplemental disclosure explicitly stating that the board and its advisers did not
adjust its projections was immaterial and did not benefit stockholders.
 Defendants are not required to disclose all of the calculations and adjustments that they did or did not make in undertaking
their analysis. In this instance, I find that this supplemental information is not even possibly sufficiently material that it would
support a colorable claim.” In re Midas, Inc. S’holders Litig., CA 7346-VCP (Del. Ch. April 12, 2012) (Transcript).

Disclosure of Projections and Free Cash Flows
Transatlantic and Cox v. Guzy
See also Transatlantic (C Strine Aug. 22, 2011) (Hearing Transcript)
 THE COURT: “… I’m just saying the cases – I’m like Mr. Projections. The banks don’t like me. They don’t
like me. But here, you’ve got a range, and you’ve got the discount rate in the range. It’s actually good. I
mean, people could vote no if they really believe this and vote no on it. It’s not affected – if you saw a
discount range of 17.7 to 24 percent, I mean, do we really have more than this? Or is it just you know you’ve
got Strine, and he’s Mr. Projection, and so we put that in here?” MR. NOTIS: “On that point, on the Moelis,
we don’t draw a distinction between coming up with a range above the deal price or below the deal price to
deviate from the Court’s general preference for projections. And also – ”THE COURT: “I don’t have a general
preference for anything.” In re Transatlantic Holdings, Inc. S’holders Litig, C.A. Nos. 6574 & 6776 (Del. Ch.
Aug. 22, 2011) (Hearing Transcript); and
Cox v. Guzy (C Strine June 8, 2012) (Hearing Transcript)
 THE COURT: “And I happen to know that EBITDA is essentially a very close proxy to free cash flow and that
the metrics are almost indistinguishably different, usually. I know that when I read this, I've got management, I
know I've got EBIT because there is an EBIT line. And, you know, I actually have I believe pretty much an
EBITDA line if you go down to the non-GAAP net income. . . . What I'm going to say then is -- this has been
very helpful -- I'm not expediting this case. I don't see any colorable argument made by the plaintiffs that
adding the free cash flow into the mix would materially change the mix of information available to
stockholders.” Cox v. Guzy, CA No. 7529-CS (Del. Ch. June 8, 2012) (Hearing Transcript).

Disclosure of Projections and Free Cash Flows
Dent v. Ramtron
A recent Court of Chancery decision, citing Skeen, denied a motion for a preliminary injunction for failure to
disclose projections.
Dent v. Ramtron, CA No. 7950-VCP (Del. Ch. Nov. 19, 2012)
 [Plaintiffs’ Counsel]: . . . Cutting right to it, Your Honor, the basis for plaintiff's motion for a preliminary
injunction is that the proxy statement that's been issued by the defendants is materially false and misleading.
And it's materially false and misleading because it omits information that the minority shareholders need in
order to be fully informed in connection with making their decision as to how to vote at tomorrow's meeting
and whether or not to exercise their appraisal rights. And the proxy omits any reference whatsoever -- any
information whatsoever as to the company's projections . . .
 THE COURT: So what's the best case that you have? Give me the two best cases that you have. Because
you're almost arguing for a per se all projections have to be -- if you've got management projections that are
relied upon by an investment banker to make an analysis, and especially a DCF analysis, they have to be
produced. That seems to be what you're saying.
 [Plaintiffs’ Counsel]: In this particular context of a cash-out merger, Your Honor, where the company's
shareholders are being taken out, and one of the primary bases for the board's recommendation is a banker's
fairness opinion utilizing management's best estimates, projections, this is a situation where the projections
should be disclosed. And I think –
 THE COURT: Isn't that, dead on, the Skeen case? . . . the Skeen case is the Supreme Court. The later cases,
I think, are the Court of Chancery, which I, of course, still respect as a member of it.
Copyright 2012 27

Recent Cases – Disclosure of Free Cash Flows
Dent v. Ramtron
Dent v. Ramtron (VC Parsons 2012) (cont’d)
 RULING OF THE COURT:
The omitted disclosure at issue in this case is Ramtron management's financial projections. "There is no per
se duty to disclose financial projections furnished to and relied upon by an investment banker. To be a subject
of mandated disclosure, the projections must be material in the context of the specific case." [citation omitted]
. . .In this case, the evidence demonstrates that the projections are not material. Here, as in the Delaware
Supreme Court case Skeen v. Jo-Ann Stores, Inc., there are no facts suggesting that the undisclosed
information is inconsistent with, or otherwise significantly differs from, the disclosed information.
Copyright 2012 28

Recent Case – Disclosure of Projections and Free Cash Flows
Nguyen v. Barrett
Nguyen v. Barrett, CA No. 11511-VCG (VC Glasscock Oct. 8, 2015)
 Our case law provides that, where the bankers derive unlevered, after-tax free cash flows rather than relying
on management projections, the inputs on which they rely are not per se subject to disclosure. As this Court
has previously noted, “a disclosure that does not included all financial data needed to make an independent
determination of fair value is not per se misleading or omitting a material fact.”
Copyright 2012 29

Selected Cases and Issues Regarding Projections 11-6-15 (One Hour Briefing)

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