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In Re: Davco Restaurants, 15912

Court of Chancery of Delaware
Jun 2, 2000
Civil Action No. 15912 (Del. Ch. Jun. 2, 2000)

Opinion

Civil Action No. 15912

Decided: June 2, 2000. Filed: June 7, 2000.

Re: In re DavCo Restaurants, Inc. Shareholders Litig. Consolidated Civil Action No. 15912


Dear Counsel:

Defendant DavCo Restaurants, Inc. ("DavCo") operates over 200 fast-food restaurants throughout the mid-Atlantic region. Defendant Citicorp Venture Capital, Ltd. ("CVC") controlled about 40% of DavCo's stock before the management buyout in controversy and 67% of the post-buyout equity.

On September 5, 1997, DavCo announced that certain of its executive officers, in conjunction with CVC, had proposed a leveraged buyout transaction to DavCo's board of directors. Plaintiffs filed suit in September 1997, shortly after announcement of the transaction, primarily claiming that the interested defendants created materially false buyout projections (the "Buyout Projections") in order to support a below fair value transaction. Plaintiffs contend that these false projections tainted ( i.e., made false or ineffective): (1) the financial advisor's fairness opinion; (2) the proxy statement; and (3) the shareholder vote approving the transaction.

On October 21, 1997, DavCo's board approved the buyout at $20 per share. On March 19, 1998, this Court denied plaintiffs' preliminary injunction motion. DavCo shareholders approved the merger on March 24 and the transaction closed April 1, 1998. The docket evidences that discovery has been ongoing for the last two years.

On January 28, 2000, plaintiffs filed a motion to compel production of all historical balance sheets, income statements, and cash flow statements ( i.e., all financial statements) and all "projections" of defendant DavCo's "FriendCo" subsidiary. DavCo created the FriendCo subsidiary for purposes of acquiring existing Friendly's restaurants and developing others. At the time of the merger, DavCo, through FriendCo, owned thirty-four Friendly's franchises. DavCo now owns "approximately" forty-eight Friendly's restaurants. If divisional ( i.e., FriendCo) financial statements are unavailable, plaintiffs request that DavCo produce all financial statements for the Friendly's restaurants on a store-by-store basis.

Defendants oppose the motion generally on relevance grounds. They also contend that such materials would be redundant of discovery materials already handed over to plaintiffs. Although counsel have requested oral argument on this motion, I find it unnecessary. This is my decision on the motion to compel.

Plaintiffs believe that FriendCo financial statements and projections concerning FriendCo's future performance are relevant because "plaintiffs have consistently targeted, among other things, how the Buyout Projections understated the value to DavCo of its FriendCo subsidiary." Plaintiffs particularly desire financial information and projections DavCo used in order to obtain bank financing for purposes of developing and/or acquiring additional Friendly's restaurants after the merger. This information is relevant, Plaintiffs postulate, because DavCo management would use optimistic projections, in order to obtain lower cost financing, rather than the more pessimistic valuations and projections management allegedly used for buyout purposes.

Defendants raise several objections to plaintiffs' request, none of which seem very compelling. Defendants first argue that projections for time periods following the consummation of the merger are irrelevant because actual results are available. See NRG Barriers, Inc. v. Jelin, C.A. No. 15013, slip op. at 8, Steele, V.C. (Aug. 6, 1996). The Jelin case is inapt; it concerned information made available to minority stockholders, but did not involve a claim (as here) that false financial projections were made so as to unfairly support a below-value transaction. Moreover, defendants appear to be making an argument on the merits. That is, defendants seek to rebut plaintiffs' claim that the Buyout Projections understated FriendCo's operating income and overstated capital costs by arguing that documents already in plaintiffs' possession ( i.e., actual, post-merger financial statements for DavCo) demonstrate that the Buyout Projections in fact overstated operating income. Defendants further contend that plaintiffs' claim with respect to capital costs misrepresents the existing record evidence. Defendants should make these merits arguments at the appropriate time ( i.e., at trial or in a dispositive motion).

Defendants next argue that because a store-by-store breakdown of financial performance does not reflect the performance of either FriendCo as a subsidiary or DavCo as a whole, they also are irrelevant for purposes of valuing DavCo on the date of the merger. Again, this is a merits argument that addresses the significance of the facts plaintiffs seek to discover, not their baseline relevance. Defendants can so argue in an appropriate motion or at trial.

Defendants also contend that any financial information or projections generated in connection with the financing of FriendCo's post-merger expansion is irrelevant because (1) the internal evaluation process by which a bank determines whether to loan money secured by a restaurant is wholly unrelated to valuing the company as a whole and (2) the expansion plan was not in existence at the time of the merger. The first objection, in my view, more appropriately goes to the weight of the evidence, rather than its relevance. Defendants' second objection, I believe, is a fact still in controversy.

Finally, defendants resist production of FriendCo financial information because they consider such information duplicative of material already produced. The material is redundant, defendants argue, because the post-merger financial performance of the FriendCo subsidiary is broken out in a footnote to DavCo's audited financial statements. The financial information set forth in the footnote includes FriendCo's revenue, operating income, total assets, depreciation and amortization, and capital expenditures (attributable to FriendCo). Plaintiffs argue, and I agree, that a single footnote is a poor substitute for the complete financial statements of this apparently significant DavCo subsidiary. To the extent that defendants genuinely believe such financial information is redundant, they should have little cause for concern. If FriendCo financials are unavailable or inadequate, defendants shall produce store-by-store financial information.

IT IS SO ORDERED.

Very truly yours, William B. Chandler III


Summaries of

In Re: Davco Restaurants, 15912

Court of Chancery of Delaware
Jun 2, 2000
Civil Action No. 15912 (Del. Ch. Jun. 2, 2000)
Case details for

In Re: Davco Restaurants, 15912

Case Details

Full title:IN RE DAVCO RESTAURANTS, INC. SHAREHOLDERS LITIG. CONSOLIDATED

Court:Court of Chancery of Delaware

Date published: Jun 2, 2000

Citations

Civil Action No. 15912 (Del. Ch. Jun. 2, 2000)