Disclosure of Free Cash Flow Projections in a Merger or Tender Offer
In what is unlikely to be the last in a long line of hotly debated cases, spanning at least the last decade, the Delaware Court of Chancery recently held that management’s free cash flow projections are not material. By way of illustration, Company A, the acquiring corporation, is interested in acquiring Company T, the target corporation. The acquiring corporation negotiates with the target corporation and the companies agree to a first-step tender offer for all of the target corporation’s shares, followed by a second-step merger. The target corporation chooses to disclose certain information to its shareholders, in anticipation of a shareholder vote on the merger, so that the shareholders can decide how to vote and whether to tender their shares. The target corporation’s shareholders have an important decision to make: whether to accept the consideration offered in the tender offer in exchange for tendering their shares or to decline to tender their shares and either later accept the merger consideration as part of the proposed second-step merger or seek appraisal rights after the consummation of the merger. For the target corporation’s shareholders, certain information they wish for the target corporation to disclose as they make their decision is material and thus required to be disclosed. Other information is simply helpful and thus not required to be disclosed.
This Comment will address the issue of what disclosures Delaware law requires a company to make to its shareholders in a merger proxy or consensual tender offer situation and whether a target company’s internal free cash flow projections rise to the level of materiality. Chancellor Chandler of the Delaware Court of Chancery recently concluded that projected free cash flow estimates are not material and disclosure of a target company’s projected free cash flows are not necessary. Additionally, Chancellor Chandler offered to sign an order certifying an interlocutory appeal to the Delaware Supreme Court on the issue of whether free cash flows are material and should always be disclosed as a per se rule. The plaintiff in that case, however, decided not to pursue the interlocutory appeal.