Opinion ID: 2165124
Heading Depth: 2
Heading Rank: 2

Heading: Goldman's Valuation of Bancorp at $19.26 Per Share

Text: Plaintiff argues that Goldman's valuation of Bancorp at $19.26 per share in the Executive Summary of the May Proposal was material in light of the value of those shares under the Merger  $17.30 as of August 28, 1992. [23] Defendants counter that Goldman never fixed Bancorp's share value at $19.26 because the May Proposal explicitly, inextricably bound that figure to a number of speculative contingencies, such as the uncertain value of the stub. The Court of Chancery held that exclusion of the $19.26 figure was proper because it was not material. We agree. Goldman's share valuation was too unreliable to be material. A board of directors must balance potential benefit versus harm when deciding whether or not to disclose an investment advisor's earnings per share valuation. In re Vitalink Communications Corp. Shareholders' Litig., Del.Ch., C.A. No. 12085, slip op. at 28, Chandler, V.C., 1991 WL 238816 (Nov. 8, 1991) reprinted in 17 DEL.J.CORP.L. 1311, 1335 (1992). In opining that an offer is fair, where an investment advisor promulgates a best case projection predicated on an interplay of several, uncertain variables, the forecasted value need not be disclosed because it is too speculative and thus immaterial. Weinberger v. Rio Grande Indus., Del.Ch., 519 A.2d 116, 129-30 (1986) (earnings projection immaterial even though it depicted outlook more optimistic than that underlying the offer). Disclosing an overly optimistic per share figure may be harmful because it might induce stockholders to hold out for an elusive, higher bid. This risk cannot be reduced significantly by attempting to qualify the figure. Vitalink, slip op. at 29, 17 DEL.J.CORP.L. at 1335-36. In fact, disclosure of an unreliable share valuation can, under some circumstances, constitute material misrepresentation. Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 891 (1985). In the instant case, plaintiff argues that the $19.26 figure found in the Estimated Values section of the Executive Summary, which Goldman used to describe the May Proposal to the board, was fixed. The record refutes plaintiff's claim. First, footnote (c) in the Estimated Values section qualifies the Stub Security value. It states that the stub requires some cash to satisfy indemnity. Amount of cash is subject to negotiations with various buyers. Second, in the section in the Executive Summary titled Issues to Consider Regarding Valuation Changes, two concerns are indicative of the uncertainty attached to the $19.26 valuation: (i) if there is a [m]aterial deterioration of loan portfolio's credit quality, existence of environmental issues, [or] inability to obtain clear title, there would be no positive effect and the following negative effect  Assets will be transferred to stub reducing cash value to stockholders. Deterioration may impair deal economics; and (ii) if the [l]oan does not meet secondary market documentation standards, there again would be no positive effect and the following negative effect  Legal restrictions in loan documents or servicing agreements may prohibit sale or transfer of loans. Failure to meet standards will increase assets in the stub entity, reducing cash value to shareholders. Additionally, defendants submitted several affidavits and deposition testimony confirming the unreliability of the stub's estimated value, which in turn made the $19.26 figure unreliable. Connell in his affidavit stated in relevant part: [T]here was a fourth element to the May Proposal. Society had and still has substantial assets which are essentially unsalable, generally comprised of foreclosed commercial real estate which, in many cases, have a negative value due to environmental or other problems.... The necessity for this stub entity created further complexity and made it difficult, if not impossible, to value accurately the entire transaction. Although Goldman indicated that the value of the stub might be as high as $3.32 per share ... Goldman made it clear to Board that that value was based on the book value of the stub assets, which is not reflective of the amount of their market or liquidation value. Stated differently, no buyer would purchase such assets at book value at that time. In pertinent part, Berlinski in his affidavit stated: The Board ... determined not to proceed further with [the May Proposal] since it viewed it as too speculative, complex and difficult to value.... [T]he values it would achieve were uncertain, in part due to the inability to assess the likely trading value of the stock in the stub entity that would hold the Bank's unsalable assets, such as its foreclosed real estate. We told the Board that the $3.32 per share value we attributed to the stub was simply its estimated book value and that stock in the stub was likely to trade for considerably less. In the relevant portion of Stone's affidavit, he stated: [W]hile I believed [in May 1992 that] it was worth at least pursuing the [May Proposal] further, I certainly did not believe, and to the best of my knowledge, no one else on the Board believed that that proposal  even if it could be successfully concluded  would be worth as much as $19.26. This was in part because the existence of the stub security (representing ownership of generally unsalable assets) made it difficult if not impossible to know what the actual value of the proposal would be and the need to set aside cash in the stub to indemnify purchasers of Society's assets created further uncertainty as to that value. Although Goldman indicated in its presentation to the Board that the stub could have a book value of $3.32 per share, Goldman made it clear to the Board both in its written presentation and orally that this value was speculative and by no means represented the value at which the stub security would trade in the market. In his deposition testimony, Chase stated: What Goldman has done in this executive summary ... is offer a projection ... which may or may not have materialized[.]... [The Executive Summary] does talk about the stub security as it describes $3.32 as a value [ sic ], and that was one that I just described prior to looking at this, that would have been like a $3.00 minus rather than $3.00 plus. Take $3.00 off the 15.94 which is the per share basic bid and [that] would have dropped the bottom line from $19.26 to like maybe $12 and change, and that's why I didn't like [the May Proposal] at all. [24] Defendants' submissions shifted the burden to plaintiff to counter their claim that the stub had some value less than the estimated $3.32 per share. See Ch.Civ.R. 56(e); Irwin & Leighton, Inc. v. W.M. Anderson, Del.Ch., 532 A.2d 983, 986 (1987); Tanzer v. International Gen. Indus., Del.Ch., 402 A.2d 382, 385 (1979). Rather than make any such offer of proof, plaintiff elected to argue in the alternative without ever having made an affirmative case that the $3.32 figure reflected a realizable value. [25] Accordingly, plaintiff failed to meet his counter-burden. See Ch. Civ.R. 56(e); Irwin & Leighton, 532 A.2d at 986; Tanzer, 402 A.2d at 385. [26] Unlike the elliptical disclosure of facts surrounding Norwest's $275 million bid for FAC, discussed supra, defendants made a simple, accurate disclosure in the proxy statement relating to the value of Bancorp shares under the May Proposal: [T]he Board was advised that, in light of uncertainties involving the value of negative assets, the value ultimately distributable to stockholders could only be estimated. Given that the finding of the Court of Chancery as to the unreliability of the $19.26 figure is supported by the record, the statement above was neither misleading nor incomplete. Thus, the trial court did not err in holding the $19.26 estimate immaterial as a matter of law. E.g., Vitalink, slip op. at 28-29, 17 DEL.J.CORP.L. at 1335-36; Rio Grande, 519 A.2d at 129-30.