In the recent PetSmart, Inc. appraisal proceeding, styled as In re Appraisal of PetSmart Inc., C.A. No. 10782-VCS (Del. Ch. May 26, 2017), the Delaware Court of Chancery found the deal price to be the fair value of PetSmart, Inc. (“PetSmart” or the “Company”), which was acquired as a going concern by a private equity acquirer.

Petitioners’ discounted cash flow valuation of the Company relied upon management projections, which is generally the preference of the Court.  However here, the Court determined the projections to be too optimistic about the future of the Company, and were “saddled with nearly all of the [ ] telltale indicators of unreliability….” Among other things, the Court found that the projections were prepared for the purpose of the sale process, rather than in the ordinary course.

Accordingly, Vice Chancellor Slights rejected Petitioners’ DCF valuation on that basis.  Rather, the Court held that a merger price “‘forged in the crucible of objective market reality,’ meaning that it was ‘the product of not only a fair sales process, but also of a well-functioning market,’” will generally be considered the best evidence of fair value of the Company.

Key Takeaway: The PetSmart decision,demonstrates that where a robust and competitive sale process exists, the deal price will be considered strong evidence of the fair value of a company. This is especially true when management projections lack sufficient reliability and cannot be relied upon to formulate a discounted cash flow analysis.

Carl D. Neff is a partner with the law firm of Fox Rothschild LLP.  Carl is admitted in the State of Delaware and regularly practices before the Delaware Court of Chancery, with an emphasis on shareholder disputes. You can reach Carl at (302) 622-4272 or at cneff@foxrothschild.com.