WILMINGTON, Del (Reuters) - A judge on Delaware’s Court of Chancery, which is often called on to review Wall Street mergers for potential conflicts and shoddy advice, on Tuesday singled out a valuation analysis by Grant Thornton as “a new low” for deal-related work.
Vice Chancellor Travis Laster blasted Grant Thornton’s work in an opinion on Tuesday in a class action lawsuit by option holders against Caris Life Sciences Inc over its sale in 2011.
Laster found the tax advisory firm largely cribbed a report from rival PricewaterhouseCoopers, made “significant errors” on the work it did do and abandoned its prior valuation method to come up with numbers to satisfy a top Caris executive.
Grant Thornton in a statement said, “We stand behind the work we performed at the client’s request and based upon the information provided to us by the client.”
The firm was not a defendant in the suit, did not participate in the trial and did not owe any fiduciary duty to the plaintiffs.
“The Grant Thornton report deserves separate mention because its contents were so flawed as to support both an inference of bad faith and a finding the process was arbitrary
and capricious,” wrote Laster in an 84-page opinion.
“Previous Delaware decisions have criticized erroneous or seemingly motivated analyses by financial advisors, but the Grant Thornton report reached a new low.”
Laster has a reputation for taking a tough stance on what he finds are advisers with conflicts. Last year he ordered Royal Bank of Canada to pay $75.8 million in damages to former shareholders of ambulance operator Rural/Metro and criticized Barclays for alleged conflicts in the 2011 sale of Del Monte Foods Co.
Tuesday’s opinion stemmed from the sale of Caris Life Sciences Inc, a cancer diagnostic business, to Miraca Holdings Inc of Japan, and allegations that holders of Caris stock were cashed out at an unfair price. Laster awarded the option holders $16.2 million plus interest.
Caris was controlled by David Halbert, Caris’ chairman and chief executive, and co-investor JH Whitney & Co. They wanted to sell Caris but in a way that avoided taxes on their investment, according to Laster.
To do so, two units, TargetNow and Carisome, were spun off to Caris shareholders, and the remaining profitable diagnostics business was sold to Miraca for $725 million, or $4.46 per Caris share in cash.
Key to capping the taxes was putting a low valuation on the units that were spun off, and Grant Thornton was brought in to provide a second opinion, following a review by PwC.
Grant Thornton had valued the units in July 2011 at around $200 million, according to Laster. But in November 2011, after a discussion with Chief Financial Officer Gerard Martino, Grant Thornton used a new methodology and said the value was $47 million.
That lower valuation undermined stock options held by Caris employees, and Kurt Fox, who held options on 71,600 shares, brought a class action lawsuit on behalf of holders of Caris options.
Fox alleged the process to assign the $5.07 value to the options was not done in good faith, and Laster agreed, awarding damages of $16.2 million plus interest.
The judge dished out plenty of blame beyond Grant Thornton. He said Halbert and Martino did not provide credible testimony and said they admitted to engaging in fraud by providing potential bidders with business projections they did not believe.
A spokesman for Caris did not immediately respond to a request for comment.
Reporting by Tom Hals in Wilmington, Delaware; Editing by Cynthia Osterman