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On June 30, 2015, in an appraisal action brought pursuant to Section 262 of the Delaware General Corporation Law following Cypress Semiconductor Corporation’s hostile cash acquisition of Ramtron International Corporation, the Delaware Chancery Court issued a post-trial decision rejecting the discounted cash flow (“DCF”) methodology for appraising the value of Ramtron’s shares because it found the underlying management projections “unreliable.” LongPath Capital, LLC v. Ramtron Int’l Corp., 2015 BL 208944 (Del. Ch. 2015) (Parsons, V.C.). The court instead determined that the merger price was “a reliable indication of Ramtron’s fair value” because the sales process was “thorough, effective, and free from any spectre of self-interest or disloyalty.”

Court Finds Ramtron’s Management Projections “Unreliable” Because They Were (1) Prepared by a New Management Team (2) Using a New Methodology (3) in Anticipation of a Potential Acquisition

The Chancery Court stated at the outset that “[t]ypically, Delaware courts tend to favor a DCF model over other available methodologies in an appraisal proceeding.” However, the court explained that the DCF “metric has much less utility in cases where . . . the data inputs used in the model are not reliable.” The court noted that “[t]he foundational inputs of a DCF [analysis] are the company’s cash flows,” which are in turn based on management projections.

The court stated that, as a rule, “management projections . . . made in the ordinary course of business . . . are generally deemed reliable.” However, “projections prepared outside of the ordinary course do not enjoy the same deference.” The court observed that “management projections can be, and have been, rejected entirely when they lack sufficient indicia of reliability, such as when they were prepared: (1) outside of the ordinary course of business; (2) by a management team that never before had created long-term projections; (3) by a management team with a motive to alter the projections, such as to protect their jobs; and (4) when the possibility of litigation, including an appraisal action, was likely and probably affected the neutrality of the projections.” Here, the court found that “the Ramtron management projections suffer[ed] from all of these problems.”

The court explained that the management projections were created by a “new management team” that utilized several new methodologies for creating long-term projections. The court also pointed out that the projections were questionable in light of “management’s lack of success in accurately projecting future revenue in the past” and the fact that the projections “def[ied] historical trends.” In addition, the court determined that the projections relied on “revenue figures that were distorted” due to certain “improper[ ]” revenue recognition practices, and also “incorporate[d] unrealistic assumptions” regarding Ramtron’s transition to a second foundry. The court found that “the final nail in the coffin for [Ramtron’s] [m]anagement [p]rojections [was] that Ramtron did not rely on them in the ordinary course of its business.” Instead, Ramtron created the projections “in anticipation of potential litigation, or, at least, a hostile takeover bid.”

Because the court found that the management projections were “unreliable,” the court determined that “it would be inappropriate to determine [Ramtron’s] fair value based on a DCF analysis.”

Court Determines the Merger Price Is the Best Evidence of Ramtron’s Fair Value, Even Though There Was No Multi-Bidder Auction for Ramtron and Cypress’s Acquisition of Ramtron Was Hostile

In the case before it, the court determined that “the [m]erger price offer[ed] the best indication of fair value.” The court recognized that “[a] merger price does not necessarily represent the fair value of a company” for purposes of a Section 262 appraisal. However, the court noted that “in the situation of a proper transactional process likely to have resulted in an accurate valuation of an acquired corporation,” the Chancery Court has previously “looked to the merger price as evidence of fair value and, on occasion, given that metric one-hundred percent weight.”

The court noted that unlike in prior cases adopting the merger price as the best evidence of fair value, “only one company, Cypress, [had] made a bid” for Ramtron. However, the court stated that it was “not aware of any case holding that a multi-bidder auction of a company is a prerequisite to finding that the merger price is a reliable indicator of fair value.” The court further observed that the Ramtron case was unique insofar as it involved “a hostile deal.” Nevertheless, the court found that the “lengthy” and “publicized” Ramtron sales process was adequately “thorough” and gave the court “confidence that, if Ramtron could have commanded a higher value, it would have.” The court found meritless petitioner’s contention that “the lack of other bidders” for Ramtron “indicate[d] a flawed process.” Rather, the court determined that “[a]ny impediments to a higher bid resulted from Ramtron’s operative reality, not shortcomings of the [m]erger process.” The court therefore “conclude[d] that the [m]erger price [was] a reliable indication of Ramtron’s fair value.”