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 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.

What Mechanism Can Shareholders Use To Appraise Their Shares in a Corporation That Is a Party to a Merger or Consolidation?

Section 262 of the DGCL provides appraisal rights to the holders of record of shares of any corporation that is a party to a merger or consolidation, subject to specified exceptions and to compliance with specified procedural requirements.

What Are Some of the Requirements To Making a Request for Appraisal of Shares Pursuant to Section 262 of the DGCL?

  • Shareholder must have continuous record ownership of the relevant shares from the date of the demand for appraisal through the effective date of the merger.
  • Shareholder must not vote in favor of the merger or consent to it in writing.
  • Shareholder must make delivery of a written demand for appraisal prior to the taking of the stockholder vote on the merger.
  • Shareholder must file a petition with the Delaware Court of Chancery within 120 days after the effective date 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.

When a Delaware corporation merges or consolidates with another company, shareholders can petition the Delaware Court of Chancery to appraise the value of their shares.  This post will address a shareholder’s right to request judicial appraisal of such shares of a Delaware corporation that is a party to a merger consolidation.

What Mechanism Can Shareholders Use To Appraise Their Shares in a Corporation That Is a Party to a Merger or Consolidation?

Section 262 of the DGCL provides appraisal rights to the holders of record of shares of any corporation that is a party to a merger or consolidation, subject to specified exceptions and to compliance with specified procedural requirements.

What Are Some of the Requirements To Making a Request for Appraisal of Shares Pursuant to Section 262 of the DGCL?

• Shareholder must have continuous record ownership of the relevant shares from the date of the demand for appraisal through the effective date of the merger.

• Shareholder must not vote in favor of the merger or consent to it in writing.

• Shareholder must make delivery of a written demand for appraisal prior to the taking of the stockholder vote on the merger.

• Shareholder must file a petition with the Delaware Court ofChancery within 120 days after the effective date of the merger.

What Are the Exceptions to the Availability of Appraisal Rights Under Section 262?

Exceptions to the availability of appraisalrights include the denial ofappraisal rights when:

1) the merger does not require the approval of the stockholders of such corporation; and

2) shares of any class or series are listed on any national security exchange or held of record by more than 2,000 holders.

These exceptions do not apply in certain circumstances, however.

Are Appraisal Rights Available to Shareholders of a Subsidiary of a Corporation That Is a Party to a Merger or Consolidation?

Yes, if all of the stock of such subsidiary corporation is not owned by the parent immediately prior to the merger.

How Does the Process Work for Obtaining an Appraisal of Shares?

After filing a petition under Section 262 demanding appraisal of shares, the surviving corporation must file with the Court a list of the names and addresses of all stockholders who have demanded payment of fair value for their shares and with whom agreements regarding such value have not been reached.

Thereafter, the Court will hold a hearing on the petition and determine the stockholders who have properly perfected their appraisal rights under Section 262. At the hearing, the Court will determine the “fair value” of the shares as well as the fair rate of simple or compound interest, if any, to be paid upon such fair value. Following this determination, the Court will order the surviving corporation to pay the dissenting shareholders the applicable amount.

How Are the Shares Valued by the Court?

Under Delaware law, an appraisal petitioner is entitled to receive a proportionate share of fair value in the going concern on the date of the merger. The Court of Chancery considers proof of value of the shares by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in Court, and nearly always utilizes some type of discounted cash flow methodology.

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.

 

On January 10, 2012, in the case of In Re Appraisal of the Aristotle Corporation, the Delaware Court of Chancery addressed an issue of first impression with respect to the standing of stockholders, who dissented to a short form merger under Section 253 of the Delaware General Corporation Law (“DGCL”) and perfected their appraisal rights, to bring an additional claim alleging that the directors breached their fiduciary duty to disclose the material facts necessary for the stockholders to determine whether to seek appraisal.

In connection with a short form merger, the petitioners filed an appraisal action under Section 262 of the DGCL seeking the fair value of their shares. Despite the fact that the appraisal action was pending, on the eve of trial and eighteen months into their appraisal case, the petitioners filed a separate complaint for breach of fiduciary duty of disclosure in connection with the merger seeking the difference between the fair value of their shares and the price of the merger.  The defendants moved to dismiss the fiduciary complaint for lack of standing.

Because there were no prior cases that squarely addressed this issue, the Court relied on its prior decision of Andra v. Blount, 772 A.2d 183 (Del. Ch. 2000) by analogy.  There, the Court was faced with an action for breach of the duty of disclosure in connection with a tender offer, which culminated in a cash out of remaining shareholders through a short form merger.  The plaintiff initially moved for expedited proceedings to enjoin the consummation of the tender offer until corrective disclosures were issued.  Thereafter, the plaintiff withdrew her request to enjoin the tender offer and instead waited to bring a post-closing action for money damages in the form of an appraisal proceeding.  After the short form merger was consummated, in which plaintiff refused to accept the merger consideration and preserved her appraisal rights, plaintiff renewed her fiduciary duty challenge to the disclosures.  The Court ruled that plaintiff did not have standing to pursue her disclosure claim because she did not tender her shares and thus, could not have been injured by the allegedly misleading disclosures.

Importantly, the Andra Court noted that a different result might have been obtained if the plaintiff had timely sought to enjoin her disclosure claim before her decision to tender.  This would have given the Court an opportunity to order corrective disclosures, a remedy that would inure to the benefit of all the stockholders contemplating the decision to tender.  The Court refused to look at the potential injury to the other shareholders because the plaintiff withdrew her injunction motion through which she could have sought to demonstrate collective injury to other investors. Instead, plaintiff chose to press her disclosure claim only after the merger closed. As a result, the Court held plaintiff to the traditional standing requirement that she show individual injury as a result of the misleading disclosures—a burden plaintiff could not satisfy, because she chose not to tender.

“When a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”

Relying on the reasoning in Andra, the Chancellor in the instant case ruled that the petitioners did not have standing to pursue their disclosure claim because the petitioners never sought to represent other investors, did not promptly seek to enjoin the merger and thus, did not suffer any cognizable individual injury that could be redressed by the Court of Chancery. The Court further found this to be particularly true because the relief sought in the fiduciary duty action is the same as the exclusive remedy afforded in a Section 262 appraisal action—a fair value determination.

The Chancellor reasoned that “when a litigant files a new claim that, if proven, would not entitle it to any relief that it does not already have a right to receive, that litigant in my view has no proper standing.”  In other words, the alleged disclosure inadequacies did not in any way impair the petitioners’ ability to seek appraisal, and addressing the fiduciary duty claim could at best result in the petitioners’ “right to a ‘quasi’ version of something they already possess in its actual form.”  Such a moot court determination, according the Chancellor, would result in an advisory opinion, against which the Delaware Supreme Court has warned.

The Court further found that there was no need to evaluate the possibility of nominal damages in connection with the fiduciary duty action, because the petitioners’ voting interests were not harmed, and they will receive a fair value determination in connection with the appraisal action.

This case is important to shareholders who seek appraisal in connection with a short form merger but also choose to bring a subsequent action for breach of the duty of disclosure in connection with merger.  If the stockholder refuses to tender in connection with the short form merger, thereby preserving their appraisal rights, but fails to seek an injunction of the merger, he will not be able to demonstrate cognizable injury to bring a fiduciary action for breach of the directors’ duty of disclosure after the closing of the short form merger transaction.