Private-Equity Buyout: PLATO Learning, Inc.
Motley Rice fights on behalf of shareholders to enforce corporate fiduciaries’ duties of care, loyalty and candor. These duties require corporate directors to disclose—fully, fairly and accurately—all material facts when seeking shareholder approval of the sale of a company.
Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc
In May 2010, the Delaware Court of Chancery held that the private-equity buyout of PLATO Learning, Inc., an educational software company, by Thoma Bravo, LLC, a private equity fund, should be preliminarily enjoined because the proxy statement issued ahead of the shareholder vote contained misleading information and omitted material information important to the shareholders’ decision as to whether to approve the merger. In rendering its decision, the court addressed three different disclosure issues:
Flawed Discounted Cash-Flow Analysis
The court found that the proxy presented a misleading description of how the company’s investment bank calculated its discount rate for its discounted cash flow valuation. Specifically, the proxy disclosed a higher discount rate than was actually used, making the deal price appear more favorable to shareholders than the financial advisor’s own analysis for the company’s board of directors.
Failure to Disclose Projected Free Cash Flows
The court found that the proxy statement “selectively disclosed projections relating to PLATO’s future performance,” but “for some inexplicable reason excised the free cash flow estimates” made by the company’s management and provided to its investment bankers. Vice Chancellor Strine held that “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” and that the company’s directors had breached their fiduciary duties by “selectively removing” this information.
Misrepresentation of Buyer’s Equity Incentive Package with CEO
The court found that the proxy contained a material misstatement in representing that the company’s management “did not negotiate terms of employment, including any compensation arrangements or equity participation in the surviving corporation.” Contrary to this statement, the court found that the company’s CEO had “extended discussions” in which the company’s prospective buyer assured him that it typically retained incumbent management and described the buyer’s “typical equity incentive package” of “10% of the common stock, with 4% going to the CEO.”
The court ruled that the preliminary injunction would be lifted after “timely and satisfactory disclosures are made in a way that gives the PLATO stockholders adequate opportunity to digest them before a final merger vote.”
To date, the published decision of this precedent-setting case has been cited in more than a dozen state, federal and appellate court opinions and orders; in hundreds of trial and appellate court briefs and numerous law review articles.
Motley Rice served as sole class counsel in this case, Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc., 11 A.3d 1175 (Del. Ch. 2010).
If you have questions regarding cases similar to Maric Capital Master Fund, Ltd. v. PLATO Learning, Inc. or if you would like to discuss a potential case, contact securities attorney Bill Norton by email or call 1.800.768.4026.
*Prior results do not guarantee a similar outcome.