- Case Name:
- CITY OF MIAMI GENERAL EMPLOYEES’ AND SANITATION EMPLOYEES’ RETIREMENT TRUST, ET AL. V. C&J ENERGY SERVICES, INC., ET. AL.
- Case Conclusion:
- Delaware Court of Chancery, C.A. No. 9980-CB
- Economic Damages, Fiduciary Duties, Sale Process
- Oil and Gas Production; Oilfield Servicing; Fracking
- William Jeffers, CFA, Joseph W. Thompson, CFA, ASA
In June 2014, a wholly-owned subsidiary of Nabors Industries Ltd. (“Nabors”) agreed to acquire a majority equity interest in a $2.8 billion stock-for-stock merger with C&J Energy Services, Inc. (“C&J”). The transaction involved the merger of two oil and gas services companies.
In July, the plaintiff, City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, filed a motion to enjoin the defendants from consummating the proposed merger. The plaintiff alleged that the transaction was a “sale of control,” as C&J shareholders would receive a 47% minority interest in a company controlled by Nabors and incorporated under the laws of Bermuda. Furthermore, the plaintiff contended that the C&J Board of Directors failed to fulfill its Revlon duties because it approved the Nabors deal based on incorrect and misleading information regarding the Nabors subsidiary and because it analyzed the deal as an acquisition of assets rather than a sale of a controlling equity interest.
William Jeffers, CFA, a Principal at The Griffing Group, issued an expert report which demonstrated that the C&J Board utilized projections from Nabors that were overly optimistic, and that the EBITDA multiples used to justify the fairness of the merger were well above industry averages. These factors served to overvalue the contribution to be made by Nabors, resulting in a transaction that represented a negative premium for C&J shareholders.
The Court of Chancery ruled in November to enjoin the merger for a period of 30 days, finding that the Board breached its Revlon duties and requiring the Board to solicit competing bids and to compare those bids (if any) with the value provided in the merger with Nabors. A Special Committee of the C&J Board retained Morgan Stanley to run a solicitation process based solely on publicly available information. A financially superior bid was submitted by Cerberus, but was rejected by the Board.
In December, the Delaware Supreme Court reversed the ruling of the Chancery Court, holding that the C&J Board satisfied its Revlon duties, despite the fact that it did not disclose the Cerberus bid to shareholders. Shareholders voted to approve the transaction in March 2015.
The Chancery Court held a hearing in April to consider the dismissal of the Amended Complaint and C&J’s motion to recover damages against the preliminary injunction bond posted by the Plaintiffs. In August 2016, the Chancery Court dismissed the plaintiff’s case, citing the recent Corwin decision as support for the applying the business judgment rule.
Plaintiffs appealed to the Delaware Supreme Court, and their appeal was denied in March 2017.
William Jeffers, CFA was assisted by Joseph W. Thompson, CFA, ASA and David J. Neuzil, CFA. The plaintiffs were represented by Stuart M. Grant, Mary S. Thomas, and Jonathan M. Kass of Grant & Eisenhofer P.A.; and Mark Lebovitch, Jeroen Van Kwawegen, and Christopher J. Orrico of Bernstein Litowitz Berger & Grossmann LLP.
- Case Name:
- EDGEWATER GROWTH PARTNERS, LP V. H.I.G. CAPITAL, INC.
- Case Conclusion:
- Delaware Court of Chancery, C.A. No. 3601-CS
- Economic Damages, Foreclosure Sale, Sale Process
- ATM Servicing
- David G. Clarke, ASA, William Jeffers, CFA, William P. McInerney, ASA
The plaintiff contested the foreclosure of an ATM servicing company, Pendum, Inc., in the Delaware Court of Chancery, claiming it was not commercially reasonable under the Uniform Commercial Code (UCC) as to the sale process and price, considering the plaintiff’s expert’s valuation and “real world” indications of value.
In its suit, the plaintiff claimed the debt purchaser and its affiliate violated Article 9 of the UCC by staging a sale that was not commercially reasonable in terms of process and price. The defendants argued the plaintiff sued to avoid paying on the $4 million guaranty.
To support its position that the foreclosure price bore no relation to the value of the company, the plaintiff retained a valuation expert who performed a discounted cash flow (DCF) analysis to establish the company’s enterprise value. He also used the guideline public company method and the mergers and acquisitions method to derive valuation multiples for Pendum. The plaintiff’s expert testified that on the date of sale, the company was worth $110 million, significantly more than sale price.
David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a rebuttal report and testified at deposition and trial, opining that the report prepared by the plaintiff’s expert contained serious flaws and errors and could not be relied upon in determining the value of Pendum.
Mr. Clarke noted that the expert largely ignored Pendum’s high degree of financial distress. For example, as part of the guideline public company method, the expert used valuation multiples from profitable companies to value Pendum, which was not profitable. In addition, Mr. Clarke identified an error in the expert’s calculations that led to an overstatement (by double) of one of the expert’s valuation multiples. Further, the expert used guideline mergers and acquisitions that were not comparable to Pendum and were missing certain key financial data. Mr. Clarke also identified a number of unreasonable assumptions underlying the expert’s DCF analysis, which was premised upon outdated projections that predicted the company would undergo a dramatic turn-around after restructuring its debt.
Citing Mr. Clarke’s criticisms of the plaintiff’s expert’s report, Chancellor Strine wrote that he “did not come away persuaded” of the $110 million value offered by the plaintiff’s expert, and that the company’s “poor performance and operational mess” showed in the lower value its assets received at the auction. Because the Court concluded the sale was commercially reasonable, the price the buyer paid for the assets was reasonable as well. Ruling for the defendants, the Court required the plaintiff to pay the $4 million it owed under its guaranty.
David G. Clarke, ASA was assisted by William Jeffers, CFA and William P. McInerney. The defendants were represented by Peter J. Walsh, Jeremy W. Ryan, Daniel A. Mason, and Ryan T. Costa of Potter Anderson & Corroon LLP.
- Case Name:
- THE UNION ILLINOIS 1995 INVESTMENT LIMITED PARTNERSHIP, ET AL. V. UNION FINANCIAL GROUP, LTD.
- Case Conclusion:
- Delaware Court of Chancery, C.A. No. 19586-VCS
- Appraisal Action, Fair Value, Sale Process, Synergies
- Commercial Banking
- David G. Clarke, ASA
Following the 2001 merger of Union Financial Group, Ltd. (UFG) and a subsidiary of First Banks, Inc., certain UFG shareholders filed an appraisal action asking the Delaware Court of Chancery to determine the fair value of their shares as of the merger date.
UFG was a bank holding company that owned two small community banks in southern Illinois. In 2000, the subsidiary banks were struggling. Following an examination, the Federal Reserve labeled UFG a “troubled financial institution” due to its low profitability, inadequate capital, and high leverage. UFG and the Federal Reserve entered into a formal memorandum of understanding (MOU) that required UFG to raise its capital levels and reduce its debt (which the company was defaulting upon at the time). The MOU also prevented UFG from declaring dividends or increasing its debt to pursue growth opportunities.
The price paid in the transaction was $9.40 per UFG share, with the possibility of two additional payments to UFG shareholders of $0.80 per share if the performance of UFG’s loan portfolio did not fall below certain thresholds. The petitioners’ valuation expert determined a fair value of over $16 per share, based on a DCF analysis that deviated from company management’s projections by significantly increasing UFG’s projected net interest margin and reducing its projected operating expenses. Vice Chancellor Leo E. Strine, Jr. was critical of these optimistic assumptions and ultimately rejected the analysis prepared by the petitioners’ expert.
On behalf of the respondent, David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at deposition and trial, opining that the merger price, less expected synergies, (i.e., $8.20 per share) was the best evidence of UFG’s fair value. Mr. Clarke concluded this in view of the facts that, at the time, the mergers and acquisitions market for banks (including distressed banks) was very active, and the price realized in the sale of the company was the result of a robust sale process. As Delaware law requires that synergistic value must be excluded in determining fair value, Mr. Clarke calculated and subtracted synergies from the sale price to determine UFG’s fair value.
While Mr. Clarke also derived value indications using a discounted cash flow analysis, guideline public company analysis, and guideline transactions analysis, he determined that in the subject case, the merger price (which was higher than any of the values indicated by the other analyses) was the best evidence of value. The Court agreed, finding that sale process represented a competitive and fair auction, and that the merger price, less synergies, was the best indication of the fair value of UFG’s common shares. The Court concluded that the fair value was $8.74 per share.
The respondent was represented by Lewis H. Lazarus, Michael A. Weidinger, and Thomas E. Hanson, Jr. of Morris, James, Hitchens & Williams LLP.