Publications

(Article from Securities Law Alert, August 2018) 

For more information, please visit the Securities Law Alert Resource Center

Last year, the Delaware Supreme Court issued two decisions emphasizing the significance of the deal price in appraisal litigation. See DFC Glob. Corp. v. Muirfield Value Partners, 172 A.3d 346 (Del. 2017); Dell v. Magnetar Glob. Event Driven Master Fund, 177 A.3d 1 (Del. 2017).[1] Two recent appraisal rulings suggest that the weight a court places on the deal price will depend on the court’s assessment of the sales process. Compare Blueblade Capital Opportunities v. Norcraft Cos., 2018 WL 3602940 (Del. Ch. July 27, 2018) (Slights, V.C.) (no weight on the merger price where the court found the sales process defective) with In re Appraisal of Solera Holdings, 2018 WL 3625644 (Del. Ch. July 30, 2018) (Bouchard, C.) (dispositive weight on the merger price where the court found the sales process thorough and effective).

Blueblade Court Places No Weight on the Merger Price Because of Deficiencies in the Sales Process

In Blueblade, the Delaware Chancery Court determined the deal price did not reflect the fair value of petitioners’ shares as of the merger date in view of what the court found to be “significant flaws in the process leading to the [m]erger.” 2018 WL 3602940. The court stated that it was “cognizant of the Delaware Supreme Court’s embrace of ‘deal price’ as a strong indicator of fair value in Dell and DFC.” But the court noted that in both cases, the Delaware Supreme Court “declined to adopt a rule that the deal price is presumptively reflective of fair value.”

The Blueblade court stated that “[i]n an appraisal action under the Delaware General Corporation Law, the trial court’s ‘fair value’ determination must ‘take into account all relevant factors.” Id. (quoting 8 Del. C. § 262(h)). The court explained that the Delaware Supreme Court has “reiterated the ‘flexible’ nature of the trial court’s fair value calculus, while also noting its lack of ‘confidence in its ability to craft, on a general basis, the precise pre-conditions that would be necessary to invoke a presumption’ in favor of the deal price.” Id. (quoting DFC, 172 A.3d 346).

In the case before it, the Blueblade court found the “deal process did not include a meaningful market check and, consequently, the [m]erger [p]rice was not arrived upon by the collective views of many sophisticated parties with a real stake in the matter.” With respect to the company’s decision to negotiate with a single bidder during the pre-signing phase, the court recognized that such an approach “can, in certain instances, lead to significant value.” Here, however, “the [b]oard’s focus on only one bidder was tainted” because the board member who served as the company’s “lead negotiator from start to finish” was “conflicted.” The court found the post-signing go-shop process “equally ineffective as a price discovery tool” because of the restrictions placed on the process by the acquiror.

The court also deemed the company’s unaffected trading price unreliable as an indicator of fair value because “at the time of the [m]erger, [the company] was fresh off an initial public offering of its stock, [the stock] was relatively thinly traded given the niche market in which it operated and [the company] was also thinly covered by analysts.”

The court opted to place no weight on either the merger price or the unaffected trading price, and instead employed a discounted cash flow analysis. The court did then use the merger price as a “‘reality check’” on its fair value determination. The court determined that each share was worth $26.16, an additional 66 cents over the deal price of $25.50 per share.

Solera Court Relies on the Merger Price Where the Company Was Sold in an Open Process With Objective Indicia of Reliability

In contrast with the Blueblade court, the Solera court gave the deal price, as adjusted for merger synergies, “sole and dispositive weight in determining the fair value of petitioners’ shares as of the date of the merger.” 2018 WL 3625644. The court found “the [m]erger price resulted from an open process, informed by robust public information, and easy access to deeper, non-public information, in which many parties with an incentive to make a profit had a chance to bid.” The court also found it significant that there was “an efficient and well-functioning market for [the company’s] stock” at the time of the merger.

The Solera court stated that the Delaware Supreme Court’s recent decisions in DFC and Dell “teach that deal price is the best evidence of fair value” in cases where the sales process “is characterized by objective indicia of reliability.” The Solera court also noted that both rulings “emphasized” that “the price of a widely dispersed stock traded in an efficient market may provide an informative lower bound in negotiations between parties in a potential sale of control.”

The Solera court found unpersuasive petitioners’ contention that the deal price was not reliable because the sale “took place against the backdrop of extraordinary market volatility, such that it was not the product of a well-functioning market.” The court explained that petitioners “are only entitled to the fair value of [the company’s] stock at the time of the [m]erger, not the best price theoretically attainable had market conditions been the most seller-friendly.”

The court also rejected petitioners’ argument that a management buyout transaction (“MBO”) “should be subject to heightened scrutiny.” The court stated that “even though there may be theoretical characteristics of an MBO that could detract from the reliability of the deal price, the deal price that results from an MBO is not inherently suspect or unreliable per se.”

In addition, the court found no basis for petitioners’ request that the merger fees should be added to fair value as part of what the acquiror was willing to pay for the company. The court observed that “[i]f stockholders received payment for transaction fees in appraisal proceedings, then it would compel rational stockholders in even the most pristine deal processes to seek appraisal to capture their share of the transaction costs (plus interest) that would otherwise be unavailable to them in any non-litigated arm’s-length merger.”

Finally, the court rejected defendants’ contention that the deal price should be downwardly adjusted for the value of control. The court found that a number of recent appraisal decisions “suggest that the value of control is properly part of the going concern and not an element of value that must be excised under Section 262(h).” Moreover, the court stated that it did not read DFC and Dell “to suggest that agency costs represent an element of value attributable to a merger separate from synergies that must be excluded under Section 262(h).” If that had been the Delaware Supreme Court’s intention in either case, the Solera court reasoned that “it would have said so explicitly.”