Submitted: January 9, 2015
Ronald A. Brown, Jr., Esquire, Marcus E. Montejo, Esquire, Kevin H. Davenport, Esquire, and Eric J. Juray, Esquire of Prickett, Jones & Elliott, P.A., Wilmington, Delaware, Attorneys for Petitioners.
A. Thompson Bayliss, Esquire and David A. Seal, Esquire of Abrams & Bayliss LLP, Wilmington, Delaware, Attorneys for Respondent.
NOBLE, Vice Chancellor.
Petitioners Merlin Partners LP and AAMAF, LP are former common stockholders of Respondent AutoInfo, Inc. ("AutoInfo" or the "Company"). Pursuant to 8 Del. C. § 262, they demanded appraisal of their shares in connection with a merger (the "Merger") whereby AutoInfo's common stockholders were cashed out at a price of $1.05 per share. This memorandum opinion sets forth the Court's post-trial findings of fact and conclusions of law.
A. AutoInfo's Business
At the time of the Merger, AutoInfo was a public non-asset based transportation services company operating through two wholly-owned subsidiaries. It did not own any equipment and provided brokerage and contract carrier services through a network of independent sales agents in the United States and Canada. AutoInfo and its agents split fees generated by freight transportation transactions. The agents developed and maintained all important client relationships.
The Company also provided support services to its agents. Its assistance was primarily financial, such as making long-term loans and short-term advances. AutoInfo also supplied non-financial services, such as training, marketing assistance, market segment data, and business analysis tools.
The Company's 100% agent-based model distinguished it from many others in the transportation logistics industry that rely on a "company store" model. While AutoInfo's brokers were independent contractors, "[b]rokers [in a company store model] are direct employees of the company."
B. AutoInfo's Board and Management
AutoInfo's management (the "Management") consisted of Harry Wachtel ("Wachtel"), the Chairman and Chief Executive Officer ("CEO"); Michael Williams ("Williams"), the President, Chief Operating Officer, and General Counsel; William I. Wunderlich ("Wunderlich"), an Executive Vice President and the Chief Financial Officer ("CFO"); Mark Weiss ("Weiss"), an Executive Vice President; and David Less, the Chief Information Officer and Vice President.
Throughout the sales process, and at the time of the Merger, AutoInfo's board (the "Board") consisted of five directors. Two, Wachtel and Weiss, were inside directors. The others, Peter Einselen, Thomas C. Robertson, and Mark K. Patterson ("Patterson"), were outside directors. Wachtel served as the Board's chairman.
C. The Merger
1. AutoInfo Considers Strategic Alternatives
During a regularly scheduled meeting in the first quarter of 2011, the Board discussed AutoInfo's financial results, budget, business, and financial prospects. It was concerned that the market undervalued AutoInfo relative to comparable agent-based, non-asset based transportation services companies. Part of the problem was that the Company was small, thinly traded on the Nasdaq Over-the-Counter Bulletin Board, and did not receive much analyst coverage. The Board decided that exploring strategic options, including a potential sale, was in the best interests of AutoInfo's stockholders.
The Board was not the only AutoInfo constituent disappointed with the Company's stock price. Around this time, Patterson (a Board member) was contacted by Kinderhook, LP ("Kinderhook"), a stockholder with which he had a relationship. Kinderhook believed that AutoInfo's stock price failed to reflect its financial performance. Although it did not push for a sale of the Company, it encouraged the Board to develop a strategy to increase the stagnant stock price, which was then trading in the $0.50-0.60 per share range.
2. AutoInfo Retains Stephens
In summer 2011, Patterson contacted Stephens Inc. ("Stephens"), an investment bank with experience in the transportation industry, to explore AutoInfo's strategic options. Stephens prepared and presented on July 29, 2011, a Strategic Initiatives Overview, outlining avenues for enhancing stockholder value. While AutoInfo had "built a solid legacy within the transportation and logistics industry, " it "consistently traded at valuation multiples well below its peer group due to the Company's relatively small scale and corresponding lack of interest from the investment community." Stephens believed that if the Company could grow its market capitalization from $20 million to approximately $400-500 million, then it would gain greater Wall Street attention and access capital at a lower cost. The investment bank concluded that AutoInfo might need to alter its strategy to achieve the necessary growth.
Stephens thus proposed strategic alternatives, including organic projects, shareholder distributions, and acquisitions. It identified pros and cons for each option. For example, it suggested that "[e]xecution risk, " related to Management's ability to execute, would be a concern should the Company decide to pursue an organic project. Stephens also preliminarily valued the Company within a range of $0.59 to $1.76 per share. The average of its valuations was $0.98 per share, above the Company's then-current $0.60 price.
In August 2011, after considering its various options, the Board began reaching out to potential purchasers. Patterson contacted parties that were active in mergers and acquisitions in the transportation industry. While there was some interest, AutoInfo could not reach a satisfactory agreement.
Several months later, in November 2011, activist hedge funds Baker Street Capital L.P. and Khrom Capital Management, through affiliated entities ("Baker Street"), acquired a 13% equity interest in AutoInfo. Baker Street began expressing its desire that AutoInfo be sold. According to Patterson, those demands did not impact the Board's sales process, which was already underway.
In early 2012, after interviewing several investment banks, AutoInfo formally retained Stephens to run a sales process. The parties agreed to an incentive-based fee structure whereby Stephens would be paid 2% on the first $54 million of a transaction price and 5% on any additional value. Stephens had extensive industry experience; Michael Miller ("Miller"), who worked on AutoInfo's engagement, had focused on the transportation logistics space since 2002.
3. Management's Financial Projections
To implement the sales process, Stephens asked Management to prepare a bottoms-up five-year financial forecast (the "Management Projections").Stephens specified that because they would be used to market the Company, the projections should be optimistic. Management had never prepared multi-year projections before and its first attempt fell largely on Wunderlich's (its CFO) shoulders. Internally, Management doubted its ability to forecast the Company's future performance accurately and perceived its attempt as "a bit of a chuckle and a joke." It questioned how to go about a process it had never before attempted.
Recognizing that the Management Projections would be used to shop the Company, Wunderlich focused on painting an "aggressively optimistic" picture. Williams, AutoInfo's President, helped develop the forecast by projecting agent revenue. He started with each agent's historical revenue and "took the most optimistic view of [the] agents' performance in the marketplace . . . ." He categorized agents by size and assumed that larger agents would grow at a lower percentage than smaller agents." Williams testified that there "was no science" behind those assumptions. He also looked at agent-by-agent historical results and predicted, based on knowledge of the individual agents, how much the agent's business could grow during 2012-2013. Those growth assumptions were extrapolated to later years. The Management Projections also included estimates of how successfully the Company would recruit new agents.
4. Comvest Emerges as the Highest Bidder
In the spring of 2012, Stephens contacted 164 potential strategic and financial acquirers, focusing on those most interested in the transportation space.Approximately seventy bidders signed non-disclosure agreements ("NDAs") and received a Confidential Information Memorandum ("CIM"). Those interested were provided several weeks for due diligence before a deadline to submit an indication of interest ("IOI"). By the end of May, ten bidders had presented IOIs, with bids ranging from $0.90-$1.36 per share. Nine moved on to a second round of the sales process, at which point they attended Management presentations and received access to an electronic data room.
On June 28, 2012, the Board formed a special committee (the "Special Committee") to evaluate the competing offers. The Special Committee consisted of the three outside directors, with Patterson serving as chair. It proceeded, with the assistance of a legal advisor and a financial advisor, to review the bids.
By July, three would-be acquirers had submitted written letters of intent ("LOI") and two others had presented verbal valuation ranges. After receiving legal advice regarding its fiduciary duties, the Special Committee weighed the proposals as against each other and the alternative option of foregoing a sale at that time. It decided to continue with the sales process and instructed Stephens to negotiate with the bidders over price.
Later that month, Stephens updated the Special Committee with final terms for the written bids. HIG Capital ("HIG") had made the highest offer at $1.30 per share. The Special Committee determined that the highest offer was also the best and recommended that the Board pursue a transaction with HIG. The Board accepted this determination and on August 14, 2012, executed an LOI at the $1.30 per share price, which provided for a forty-five day exclusivity period to negotiate and perform further due diligence.
HIG conducted due diligence for the next thirty days but by mid-September, it decided not to proceed with the purchase. HIG's lead partner on the deal had left the firm, apparently due to various disagreements with his colleagues, including whether HIG should decrease its offer for AutoInfo. After that partner's departure, HIG opted against pursuing AutoInfo. The parties terminated their LOI, and AutoInfo decided to continue with the sales process. Stephens contacted previously interested parties, as well as others it recommended to AutoInfo.
By October 2012, two interested parties had submitted written LOIs and two others had indicated interest verbally. The highest offer came from Comvest Partners ("Comvest") and valued the Company at $1.26 per share. The others were substantially lower, ranging from $1.00-$1.07 per share. After determining that Comvest's offer was the best, the Special Committee recommended that the Board pursue that transaction. The Board unanimously agreed and on November 12, 2012, AutoInfo executed an LOI with Comvest at $1.26 per share with a thirty day exclusivity period. Comvest then hired accounting, legal, industry, and other advisors to conduct due diligence.
5. Comvest's Due Diligence Process
Comvest hired L.E.K. Consulting ("LEK"), a strategy consultant, to assess AutoInfo's competitive positioning in the trucking freight brokerage market.LEK evaluated growth trends and dynamics in the brokerage market generally, as well as concerns associated with AutoInfo's ...