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The recent decision of In re Appraisal of AOL Inc., C.A. No. 11204-VCG (Del. Ch. Feb. 23, 2018) constitutes yet another Delaware Court of Chancery appraisal decision in which fair value of the corporation fell below the deal price of the merger.  Petitioners beware.

Here, the Court relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc.  This resulted in fair value below the deal price paid in its acquisition by Verizon Communications Inc.

Vice Chancellor Glasscock did indicate that deal price is the best evidence of fair value when appraising “Dell‑compliant” transactions, where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself.”  (Slip op., at 20).

However, the Court held this was not such a transaction.  The Court found that certain of the deal protections, combined with informational disparities between potential bidders, and actions of the parties were preclusive to other bidders.  Thus, Vice Chancellor Glasscock assigned no weight to the deal price in the Court’s fair value determination.  Applying its own DCF analysis, the Court ultimately determined fair value to be approximately 3% lower than the deal price.

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.

In a long awaited and highly anticipated ruling, the Delaware Supreme Court overturned the Court of Chancery’s decision in the Dell appraisal action, Dell v. Magnetar Global Event Driven Master Fund, No. 565, 2016 (Del. Supr. Dec. 14, 2017).

By way of background, in the 2016 Court of Chancery opinion, In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016), Vice Chancellor Laster found fair value of the Dell merger to be 22% greater than the deal price, holding that deal price is not a fair value indicator in the context of a management-led buyout.  For a review of the Court of Chancery’s decision, click here.

On appeal, the High Court reversed and remanded the Chancery’s decision in an unanimous en banc decision.  Of significance, the Supreme Court found that where a company is sold in a clean M&A auction process, the Court of Chancery must give the merger price significant weight in its ruling, leaving it to the trial court to decide just how much weight that should be in this case.  Accordingly, the Supreme Court ruled that the Court of Chancery abused its discretion in placing no weight upon the transaction price when valuing the Dell shares at the time of its going-private merger in 2013, and instead relying exclusively on its own discounted cash flow analysis.

This Dell opinion is consistent with the Delaware Supreme Court’s August 2017 decision in DFC Global v. Muirfield Value Partners, No. 518, 2016 (Del. Supr. Aug. 1, 2017), whereby the High Court held that a deal price should represent strong evidence of fair value.  To review a prior post highlighting the DFC Global decision, click here.

Key Takeaway:

The Delaware Supreme Court’s decisions in DFC Global and now Dell make clear that significant weight to the deal price must be afforded when analyzing fair value of a company that is merged or consolidated in a clean, arm’s-length transaction.  Appraisal petitioners therefore will need to demonstrate flaws in the merger process to overcome the “heavy weight” afforded to the deal price.

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.

In the latest of a wave of appraisal opinions issued in Delaware, on August 1st, the Delaware Supreme Court reversed the highly-publicized DFC Global appraisal ruling, in DFC Global Corporation v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Ch. Aug. 1, 2017).

A recent string of decisions have found that the deal price of a merger, when there was an arm’s length transaction achieved after a well-structured and robust sales process, may be the best evidence of “fair value” of the merger proceeds at issue.  This decision reinforces this notion, although the Supreme Court declined to go so far as declaring a bright-line rule.

In DFC Global, the Delaware Supreme Court reversed a Court of Chancery ruling that payday lender DFC Global Corp. (“DFC” or the “Company”) was sold for an amount less than fair value in 2014.  Last year, Chancellor Bouchard determined that the fair value of the petitioners’ 4.6 million DFC shares was $10.21 each, a roughly 7 percent increase over the deal price.  For a discussion of the lower court’s decision, click here.

This was one of two decisions in 2016, where the Court of Chancery found fair value to be greater than the deal price.  In the other decision, In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016), Vice Chancellor Laster found fair value to be 22% greater than the deal price, which stood for the premise that deal price is not a fair value indicator in the context of a management-led buyout.  The Dell decision is similarly pending before the Delaware Supreme Court.  For a review of this decision, click here.

In reversing the Court of Chancery, the High Court found that reversible error had been committed by only according a one-third weighting of the deal price to the valuation of DFC’s common stock.  Under these circumstances, the deal price should have been accorded greater emphasis.  The Supreme Court further addressed the ability of the market to reflect regulatory impact on the stock price, and rejected the trial court’s conclusions that regulatory upheaval justified a downward weighting of the deal price.  The Supreme Court ordered the Court of Chancery to explain its weighting methodology on remand.

Stay tuned for the Delaware Supreme Court’s decision in Dell.

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.

In a recent appraisal action before the Court of Chancery, In re Appraisal of SWS Group, Inc., C.A. No. 10554-VCG (Del. Ch. May 30, 2017), Vice Chancellor Glasscock found that the fair value of the acquired entity, SWS Group, Inc., (“SWS” or the “Company”), was less than deal price as a result of synergies between SWS and the acquiring company, Hilltop Holdings, Inc. (“Hilltop”).  Prior to the merger, SWS was a relatively small bank holding company.

Although the Court acknowledged that “a public sales process that develops market value is often the best evidence of statutory ‘fair value’”, what drove the Court to not rely upon deal price was its finding that “the sale of SWS was undertaken in conditions that make the price thus derived unreliable as evidence of fair value….”  Slip op., at 1.

Per the Court, the sale process of SWS was not a reliable proxy for statutory fair value because, among other things, “the probable effect on deal price of the existence of the [Hilltop] Credit Agreement under which the acquirer exercised a partial veto power over competing offers.”  Slip op., at 30.  Notably, neither side’s expert relied upon the deal price to determine fair value.

The Court was presented with competing discounted cash flow analyses from petitioning stockholders and the Company, along with a less frequently used comparable companies analysis provided by the petitioners.  The latter approach was rejected by the Court given that the sample of comparables chosen by the expert differed in significant ways.

In comparing the competing DCF analyses, the Court noted the way in which each side’s respective expert factored in the projections of the Company’s management.  In determining the appropriate cash flow projections, the Court of Chancery “has long expressed its strong preference for management projections.”  Slip op., at 32.

Of significance, respondent’s expert adopted management projections of the Company, while the petitioning stockholders’ expert made major adjustments to the projections, including extending the projections by two years.  The Court largely adopted the management projections with certain adjustments, which favored the Company’s DCF valuation.

The Court also analyzed the expert’s agreements over certain additional inputs, including equity risk premium, equity beta, and size premium.  After a careful consideration of each input, the Court determined that the fair value of the Company was $6.38/share, down from a merger price of $6.92/share.  Vice Chancellor Glasscock noted “that the fact that my DCF analysis resulted in a value below the merger price is not surprising: the record suggests that this was a synergies-driven transaction whereby the acquirer shared value arising from the merger with SWS.”

Key Takeaway: Appraisal actions in the Delaware Court of Chancery can come at real risk to petitioners when a robust sales process did not take place, management projections are significantly altered, and the sale included large synergies between the seller and acquirer that would be inappropriate to factor into the fair value of the entity.

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.

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.

In the first Chancery opinion of 2017, Vice Chancellor Montgomery-Reeves granted dismissal of a class action complaint which alleged breach of the duty of disclosure in connection with a short-form merger, in the decision of In re United Capital Corp. S’holders Litig., Cons. Case Nos. 11619-VCMR (Del. Ch. Jan. 4, 2017).

Lead Plaintiff Louis B. Geser (“Plaintiff”) owned shares of common stock in United Capital Corporation (“United Capital”).  Defendant A.F. Petrocelli owned approximately 94% of the outstanding shares of United Capital before the transaction at issue. On September 30, 2015, Petrocelli through his controlled entities merged with United Capital at $32 a share, thus becoming the sole shareholder of United Capital.

Plaintiff’s complaint alleged the notice of merger failed to disclose the following information:

  • The controller’s reasoning behind the merger price,
  • Special committee’s process,
  • Financial projections used to determine the value of the company,
  • Information regarding the working capital and future use of cash of the company,
  • The lack of independence of two members of the special committee, and
  • The identities of two directors and a director’s spouse who participated in a multi-million dollar note with the company.

The Court granted defendants’ motion to dismiss on the grounds that all material information was disclosed in the notice and, in the realm of a short-form merger, any omitted information is not material to the decision of whether the minority stockholders should accept the merger consideration or seek appraisal.

In granting the motion, the Court found that plaintiff did not allege adequately that the omitted information was material to the decision to seek appraisal and the duty of disclosure was not violated.  The Court found that Plaintiff’s sole remedy was one of appraisal.

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.

In the recent appraisal decision of Merion Capital L.P. v. Lender Processing Services Inc., C.A. No. 9320-VCL (Del. Ch. Dec. 16, 2016), the Delaware Court of Chancery determined the fair value of petitioners’ shares of stock in Lender Processing Services, Inc. (the “Company”). In January 2014, Fidelity National Financial, Inc. completed the merger by which it acquired the Company. The Court found that the fair value of the Company’s common stock at the effective time of the merger is $37.14

Each party’s expert used the discounted cash flow analysis in determine fair value of the shares, but came to different numbers.  Petitioners’ expert determined that shares were worth $50.46/share, whereas the Company’s expert came to a value of $37.14/share.  As cited by Vice Chancellor Laster: “[T]he DCF . . . methodology has featured prominently in this Court because it is the approach that merits the greatest confidence within the financial community.” Owen v. Cannon, 2015 WL 3819204, at *16 (Del. Ch. June 17, 2015) (quotation marks omitted).”

The Court provided a thorough and helpful analysis in terms of determining fair value, including discussions of the risk-free rate, the supply-side equity risk premium, beta, and size premium.  The Court also considered a string of Delaware Chancery decisions which demonstrated how much weight the Court can give to the merger or deal price as evidence of fair value, stating as follows:

In a series of decisions since Golden Telecom II, this court has considered how much weight to give the deal price relative to other indications of fair value. In five decisions since Golden Telecom II, the Court of Chancery has given exclusive weight to the deal price, particularly where other evidence of fair value was unreliable or weak. In five other decisions since Golden Telecom II, the court has declined to give exclusive weight to the deal price in situations where the respondent failed to overcome the petitioner’s attacks on the sale process and thus did not prove that it was a reliable indicator of fair value.

The Court likened the case to AutoInfo and BMC, and gave full weight to the sale price.  Here, Vice Chancellor Laster found that the Company ran a sale process that generated reliable evidence of fair value, and created a reliable set of projections that support a meaningful DCF analysis. Accordingly, the Court agreed with the Company’s expert appraiser and found that the fair value per share was $37.14.

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.

In the Dell Inc. appraisal action, the Court previously held that the fair value of Dell common stock at the effective time of the merger was $3.87 per share more than the merger price.  For a link to a prior post discussing the decision, click here.  The appraisal statute authorizes a party that has incurred expenses litigating an appraisal to have its expenses, including reasonable attorneys’ fees, allocated pro rata among the shares comprising the appraisal class.

The recent decision of In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. Oct. 17, 2016) provides a useful discussion of the Court of Chancery’s calculation of a fee award in an appraisal case based on the aforementioned benefit conferred to the dissenting stockholders.

The decision discusses when expenses should be deducted from the benefit conferred before calculating the fees, and other issues of import. This opinion will undoubtedly serve as a roadmap for future fee awards granted in appraisal cases.

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.

In a recent Court of Chancery appraisal decision, In re ISN Software Appraisal Litigation, C.A. No. 8388-VCG (Del. Ch. Aug. 11), Vice Chancellor Glasscock relied upon the discounted cash flow (DCF) valuation method to value an entity whose stock was not traded publicly, lacked historical sales of its stock that were reliable indicators of fair value, and for which no comparable company evaluations existed.

The Court started its valuation analysis using the DCF framework of the expert of ISN Software Corp. because his valuation used the standard five-year cash flow projection period, which the Court had found appropriate. After making adjustments for inputs where the parties diverged, the court subsequently concluded that $98,783 per share, which far exceeded the merger consideration of $38,317 per share, was the fair value of ISN Software as of the date of the merger.

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.

John O’Toole writes:

In In re Appraisal of DFC Global Corp., the Court of Chancery conducted an in-depth analysis of three common valuation methodologies—discounted cash flow analysis, multiples-based comparable company analysis, and deal price.  After discussing how each methodology was and should be applied, Chancellor Bouchard ultimately determined that although “all three metrics suffer from various limitations” the fair value of the merger in question was best ascertained by weighting all three methods equally.

The Court’s opinion serves a number of useful purposes.  First, it provides a comprehensive overview of each the methodologies discussed.  Second, given the context in which the Court’s analysis was done, it offers guidance on how to best determine the fair value of a company following a deal consummated in a “tumultuous environment” where a company’s “future profitability and…viability” are at issue.

John O’Toole is a summer associate, resident in the firm’s Wilmington office.