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.

Today, Vice Chancellor Laster issued a lengthy 114 page opinion in connection with the appraisal of shares of Dell Inc.  The Court of Chancery found that Michael Dell and Silver Lake Partners underpriced their 2013 $24.9 billion buyout of Dell by approximately 22%, such that the fair value of Dell’s stock at the time of the buyout was $17.62 per share, not the original price of $13.75.  The decision can be found here: In re: Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016).

Notably, the opinion is largely dedicated to explaining why deal price is not a fair value indicator, especially in a management-led buyout.  The Court opined that the Dell buyout took advantage of a fall in the company’s stock price, and its board failed to determine the intrinsic value before negotiating. According to the Vice Chancellor:

Taken as a whole, the foregoing evidence, along with other evidence in the record, establishes that the Original Merger Consideration was dictated by what a financial sponsor could pay and still generate outsized returns. This fact is a strong indication that the Original Merger Consideration undervalued the Company as a going concern.

As explained by the Vice Chancellor, the optimal time to take a company private is “after it has made significant long-term investments, but before those investments have started to pay off and market participants have begun to incorporate those benefits into the price of the Company‘s stock.” An appraisal proceeding “can and should address the problem of opportunistic timing”.

The opinion also discussed the “valuation gap between the market‘s perception and the Company‘s operative reality.”  Described as a so-called “anti-bubble”, such gap is driven by “(i) analysts’ focus on short-term, quarter-by-quarter results and (ii) the Company‘s nearly $14 billion investment in its transformation, which had not yet begun to generate the anticipated results.”

In sum, the In re: Appraisal of Dell Inc. opinion highlights the fact that the Court did not give weight to the final merger consideration, but rather relied exclusively on the discounted cash flow methodology to determine the fair value of the Company.

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 opinion of In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 11, 2016), the Delaware Court of Chancery issued an opinion finding that certain record holders of Dell Inc. stock were barred from seeking appraisal of their shares as a result of inadvertently voting in favor of the Dell going-private merger.  As a result, such shareholders failed to adhere to the “dissenting stockholder” requirement of 8 Del. C. Section 262.

In the opinion, the court considered appraisal demands of mutual funds sponsored by T. Rowe Price & Associates Inc. and institutions that relied upon T. Rowe to direct the voting of their shares. The T. Rowe petitioners held their shares through custodial banks, who in turn held the shares in the name of its nominee, Cede & Co., the record holder.  Although T. Rowe publicly opposed the merger, its voting system generated instructions for Cede to vote the T. Rowe petitioners’ shares in favor of the merger.

Because petitioners’ shares voted in favor of the merger, the court dismissed the appraisal claim of the T. Rowe petitioners, and they will receive the merger consideration without interest.

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 decision of Merion Capital LP v. BMC Software Inc., C.A. No. 8900-VCG (Del. Ch. Oct. 21, 2015), the Court of Chancery accepted the merger consideration provided by the company where a “robust marketing effort for a corporate entity results in an arm‘s length sale where the stockholders are cashed out, which sale is recommended by an independent board of directors and adopted by a substantial majority of the stockholders themselves.”

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 appraisal actions, expert witnesses are often retained by parties and serve very important roles in the determination of the value of a company’s shares.  We recently highlighted a decision involving a “battle of the experts” in the context of a Delaware appraisal proceeding here.

In the course of discovery, parties are required pursuant to scheduling order to identify their expert witnesses to the other side.  What happens if a party discloses their expert as a firm or company rather than as an individual person?

This very issue was addressed in the recent decision of the consolidated cases of In re Dole Food Co., Inc., Stockholder Litig., and In re Appraisal of Dole Food Company, Inc., C.A. Nos. 8703-VCL and 9079-VCL (Feb. 27, 2015). There, defendants identified a financial firm as its expert, not a particular individual working for the firm.

In this succinct opinion, Vice Chancellor Laster cites to various provisions of the Delaware Rules of Evidence in support of his holding that an expert must be a “biological person”.  This is so because, for example, D.R.E. 602 requires that a witness must testify from “personal knowledge”, D.R.E. 703 contemplates an expert to perceive facts, and D.R.E. 603 requires an expert witness to take an oath.

The Court found that a corporation can do none of these things, and therefore held that a financial corporation as a whole could not serve as an expert witness.  To avoid prejudicing defendants, however, the Court allowed the individual author of the expert report who worked for financial firm to instead serve as the expert witness.

Carl D. Neff is a lawyer 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 prior posts, we discussed the methodology employed by the Court in determining the fair value of shares under a challenge to a merger under 8 Del. C. § 262.  As previously discussed in this post, the Court generally will utilize the discounted cash flow (“DCF”) methodology in evaluating a target company’s shares.

In the recent case of In re Appraisal of Ancestry.com, Inc.,  C.A. No. 8173-VCG (Jan. 30, 2015), the Court of Chancery determined the fair value of merger shares of Ancestry.com, Inc.  Of note, each expert in this action relied exclusively upon the DCF methodology.  The merger price was $32 a share.  Petitioners’ expert calculated the value to be at least $42.81 per share, whereas Respondent valued the shares at $30.63.  The Court then provides a detailed analysis of how it ultimately determined that the value of Ancestry’s shares was in fact $32 a share. (see Opinion, pp. 42-56).

Carl D. Neff is a lawyer 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.

Under Section 262 of the Delaware General Corporation Law (“DGCL”), the Court is authorized to add simple or compound interest to the appraised value to a dissenting shareholder.

The Court has discretion whether to award simple or compound interest.  In some cases, the court has simply awarded the legal rate of interest, or the Federal Reserve discount rate plus 5 percent. In other cases, the court has awarded interest equal to the average of the acquirer’s cost of borrowing and the so-called “prudent investor” rate.

Historically, Delaware courts have awarded simple interest. However, compound interest has been awarded in more recent cases.  Factors considered by the courts include the amount of the appraised value and the amount of time that has elapsed since the completion of the merger.

Carl D. Neff is a lawyer 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 prior post, we discussed valuation methodologies utilized by the Delaware Court of Chancery.  The Court of Chancery generally utilizes a discounted cash flow methodology in appraisal proceedings.

However, Delaware courts have incorporated other elements of future value in their valuation processes, so long as these elements were not “speculative.” For example, the court in Cede & Co. v. Technicolor, Inc., 684 A.2d 289 (Del. 1996) held that the breakup plan of Technicolor could be used to calculate the value of Technicolor stock.  Ultimately, including this future potential value of the breakup plan led to shares being valued at approximately 24% greater than the tender offer price.

Further, in ONTI, Inc. v. Integra Bank, 751 A.2d 904 (Del. Ch. 1999), minority stockholders of OTI, Inc. objected to their cash-out value in a short-form merger of approximately $6 million.  They argued that subsequent mergers of the acquiring company should be computed in the price, which would lead to a higher valuation of their shares.  The Court agreed, citing Cede, and valued their shares at $16 million.

These decisions are important for any stockholder who has received what they believe to be a low valuation for their shares in the context of a merger.

Carl D. Neff is a lawyer 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.

 

If you own shares of a Delaware company that has been merged or consolidated, and believe that you have not been given fair value for your shares, then you may want to consider petitioning the Court of Chancery to appraise your shares.

How are shares appraised during a stock appraisal proceeding?

The discounted cash flow valuation methodology is the primary valuation method employed by the Delaware Court of Chancery in appraisal proceedings.  Under this methodology, the equity value of the target company is projected from the target’s future cash flows and discounting them to their present value.  This can require a complex analysis, and can involve a “battle of the experts.”

Recent decisions of Towerview LLC v. Cox Radio, C.A. 4809-VCP (Del. Ch. June 28, 2013) and in Merion Capital LP v. 3M Cogent, C.A. 6247-VCP (Del. Ch. July 8, 2013) have demonstrated that the Court generally utilizes the discounted cash flow method when appraising a company’s shares.

Carl D. Neff is a lawyer 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 matter of Huff Fund Investment Partnership v. CKx, Inc., C.A. No. 6844-VCG, Petitioner, Huff Fund Investment Partnership (“Huff Fund”), instituted an appraisal action against Respondent, CKx, Inc. (“CKx”).  In a decision issued on November 1, 2013, the Court of Chancery determined that the “best indicator of fair value of the Petitioner’s shares was the merger price generated by an arm’s length sales process.”  Id. at *1.  Thereafter, and in connection with a decision on Huff Fund’s Motion for Reargument, the Court permitted the parties to supplement the record with certain information regarding the merger price.

Due the ongoing nature of the proceedings, during which interest continued to accrue on the appraisal value, CKx filed a Motion to Stop the Accrual of Interest.  The Motion sought an order requiring Huff Fund to accept an unconditional tender of $3.63 per share.  The per share value offer was based upon CKx’s expert’s base scenario of value plus accrued interest.  The Court succinctly explained, “In effect, [CKx] seeks the equitable analog offer-of-judgment rule, which allows Superior Court, but not Chancery litigants the ability to limit the adverse effects of a verdict.”  Id. at *2.

Though the Court noted the potential utility of the approach proposed by CKx, it declined to grant the Motion.  In reaching its conclusion, the Court was guided by Section 262(h) of Title 8 of the Delaware Code, which sets forth a formula for an award of interest.  Section 262(h) provides in relevant part:

Unless the Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.

After careful consideration of the statue, the Court concluded:

the discretion . . . to be exercised upon a finding of good cause, permits [the Court] to deviate from the statutory formula where a consideration of circumstances at the end of the process – of which a wide variety might be relevant – indicates that an award of the statutory rate would be unjust; but do not direct that respondents may avoid the running of interest by prepayment as a matter or right, which is ultimately, what the Respondent suggests here.  While I am sympathetic to the incentives driving this Motion, ultimately I find the relief sought incompatible with the statute.  Id. at *7.

The decision may be read in its entirety here.