Court rejects expert testimony

In September 2000, Rainforest Cafe Inc., a struggling “eatertainment” operator, entered into a two-part merger with Landry’s Restaurants Inc. At the time of the merger, Rainforest’s stock was trading on NASDAQ for around $2 per share.

Landry’s tender offer of $3.25 per share represented a 62% premium over the company’s publicly traded price. Nonetheless, approximately 20% of Rainforest Cafe’s shareholders dissented to the merger.

The testimony - Both sides in this dissenters’ rights suit provided their own valuation experts who testified on the fair value of Rainforest’s shares. They also used separate rebuttal witnesses to identify the weaknesses in the opposing experts’ reports. The experts’ opinions differed significantly:

Appellant’s expert - Although the net asset value of Rainforest yielded a fair value of $3.87 per share, the appellant’s expert rejected this approach. Instead, he relied on a combination of the guideline company and discounted cash flow methods, which yielded a range of fair values between $4.80 and $5.23 per share.

After arriving at a preliminary fair value estimate of $4.98 per share, the appellant’s expert made adjustments for more than $22 million in excess assets, income tax benefits and severance payments to arrive at his final conclusion of $6.10 per share.

Respondent’s rebuttal witness - The rebuttal witness offered several criticisms of the appellant’s expert witness’s analyses. Among his most noteworthy responses were that:

1. The appellant’s expert failed to interview management,

2. His guideline companies — including Applebee’s, Bob Evans Farms Inc. and Panera Bread Co. — bore little resemblance to Rainforest, and

3. He failed to consider Rainforest’s public stock price as an indicator of its market value.

Respondent’s expert - The respondent’s expert concluded that the fair value of Rainforest’s shares was $3 each. He arrived at this conclusion by performing discounted cash flow analyses on four alternative financial projections provided by Rainforest’s management. Two of these projections assumed that Rainforest would file for Chapter 11 bankruptcy (reorganization).

Appellant’s rebuttal witness - He argued that the respondent’s expert’s testimony had several problems, including that:

1. The projections extended too far into the future,

2. The discount rate was inappropriate,

3. The long-term growth rate was unreasonably low, and

4. The projections assumed an unrealistic number of store closures.

Court ruling - The Minnesota district court determined that “the experts’ conflicting testimony provided no aid in determining the fair value of the stock.” The court found that the appellants’ experts were overly optimistic and the respondent’s experts were overly pessimistic.

As a result, the lower court rejected both valuation experts’ conclusions. Instead, the court used the tender offer of $3.25 to approximate the fair value of Rainforest’s shares.

The Minnesota appellate court affirmed this decision, stating that:

“The district court may reject the valuation opinions of expert witnesses and base its determination of fair value on all factors that the court finds relevant and any valuation method that is generally accepted in the relevant financial community even if the valuation method was not used by the corporation or the dissenter.”

The appellate court also ruled that the district court had no obligation to reconcile differences between experts’ opinions. Further, the district court wasn’t required to recognize book value as a “floor” for a company’s value.