## Facts

- Netsmart Technologies, Inc., a profitable niche healthcare IT company, pursued growth through acquisitions, including a 2005 purchase of its largest competitor.
- After that acquisition, private equity firms expressed interest in acquiring Netsmart, and management urged the board to consider a sale in 2006.
- Management and the company’s longtime financial advisor recommended a quick auction focused on a limited set of private equity bidders, citing historically unsuccessful, intermittent contacts with strategic (industry) buyers.
- A special committee of independent directors was formed after the basic private-equity-focused strategy had been adopted; it worked closely with management, permitted the CEO to attend meetings, and used the same financial advisor.
- The committee contacted seven private equity firms; four submitted bids. The board approved a cash-out merger at $16.50 per share (about $115 million) with Insight and Bessemer, taking the company private.
- Post-merger, the existing executive team would remain and participate in incentive equity arrangements typical of private equity transactions.
- Stockholders sued, alleging (1) an unreasonable Revlon process for not meaningfully pursuing strategic buyers and (2) materially misleading proxy disclosures, including omissions about management projections and the banker’s analyses.
- Plaintiffs sought a preliminary injunction to delay the stockholder vote and/or prevent closing until alleged defects were cured.

## Issues

1. Whether the board likely breached its Revlon duties by running a process largely limited to private equity buyers without reasonably informing itself about potential strategic-buyer interest.
2. Whether the proxy statement likely omitted or misstated material information required for an informed stockholder vote on the merger.

## Decision

- The court declined to issue a deal-blocking preliminary injunction based solely on the challenged sale process.
- The court granted a narrow preliminary injunction requiring corrective and supplemental disclosures before the stockholder vote.
- The required disclosures included fuller information about management projections, the financial advisor’s valuation work, and a more complete account of the sale-process chronology and the limited exploration of strategic alternatives.

## Legal Principles

- When a board initiates a sale of control for cash, Revlon applies and directors must take reasonable steps to seek the best value reasonably available; there is no single mandated process, but the approach must be reasonable in light of the company and market.
- A board in Revlon mode may not rely uncritically on management’s assumptions to exclude plausible value-maximizing buyer categories (including strategic buyers), especially where synergies could enable higher bids.
- When seeking stockholder action, directors must disclose all material information reasonably available; omissions that significantly affect how stockholders evaluate the transaction can justify injunctive relief.
- If a proxy describes a banker’s fairness opinion, stockholders are entitled to a fair summary of the substantive analyses, including key inputs, methods, and assumptions, not merely the bottom-line conclusion.
- Management financial projections used by the board and its advisor in evaluating a merger are often material and, when relied upon in soliciting a vote, generally must be disclosed in a fair and balanced manner.
- At the preliminary-injunction stage, courts may tailor relief to the demonstrated harm; where the primary defect is informational, a disclosure-based injunction is favored over stopping the transaction.

## Conclusion

The court refused to halt the merger based only on plaintiffs’ challenges to the private-equity-focused sale process, but it enjoined the stockholder vote until the company issued supplemental disclosures—particularly management projections, meaningful detail about the banker’s valuation work, and a more candid description of the sale process—so stockholders could vote on an informed record.


In re Netsmart Techs., Inc. S’holders Litig., 924 A.2d 171 (Del. Ch. 2007)