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Delaware Chancery Court Awards Appraisal Value In Merger Of Pennsylvania-Based Community Banks
11/14/2016On November 10, 2016, Chancellor Andre Bouchard of the Delaware Chancery Court granted the appraisal petition of former stockholders in Farmers & Merchants Bancorp of Western Pennsylvania, Inc. (“F&M”), awarding a “fair value” of $91.90 per share, rather than the merger price ($83 per share) at which the bank was actually acquired in October of 2014 by NexTier, Inc., another community bank in western Pennsylvania. Dunmire et al. v. Farmers & Merchants Bancorp of Western Pennsylvania, Inc., C.A. No. 10589-CB (Del. Ch. Nov. 10, 2016). The judicially determined appraisal amount reflects the Court’s decision to reject the valuations and certain methodologies advanced by both parties’ experts and instead to rely exclusively on a “discounted net income” valuation—a method that both parties agreed was conceptually appropriate—as applied by the Court.
Delaware affords appraisal rights to shareholders that dissent from a merger under Section 262 of the Delaware General Corporation Law. The purpose of this provision is “to provide shareholders who dissent from a merger, on the basis of the inadequacy of the offering price, with a judicial determination of the fair value of their shares.” Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989). As noted in a recent opinion by Chancellor Bouchard in In re Appraisal of DFC Global Corp., when determining “fair value,” the Court has “significant discretion to use the valuation methods it deems appropriate, including the parties’ proposed frameworks, or one of the Court’s own making.” 2015 WL 3753123, at *5 (Del. Ch. July 8, 2016).
In this case, as in DFC, the Court determined that the actual merger price did not represent the value of the company at the time of the transaction. However, unlike in DFC, here, Chancellor Bouchard “place[d] no weight” on the merger price as an indicator of fair value. In this regard, Chancellor Bouchard highlighted the following: the merging entities were controlled by the same family, which had business ties to the members of F&M’s special committee; the record did “not inspire confidence that the negotiations were truly arms-length”; the scope of the special committee’s financial advisor’s engagement was limited; and no competing buyers were solicited or considered.
The Court also completely rejected the comparable transactions analysis advanced by petitioners and the “M&A method” and public company guidelines analysis espoused by the respondent. The Court explained that each of these methodologies—as applied by the respective experts—suffered from various flaws that rendered them unreliable. One notable deficiency in the comparable transactions analysis, according to the Court, was that it did not adjust for the synergies embedded in the comparable transaction prices even though “[u]nder Section 262, ‘fair value’ means the value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the context of an acquisition or other transaction.”
To replace these methodologies, the Court used what Chancellor Bouchard called a “discounted net income analysis,” which is similar to a discounted cash flow model and which the parties had agreed could reasonably determine the fair value of F&M. This methodology uses a historical stream of earnings as a starting point for projected earnings, determines the present value using a discount rate, and applies adjustments based on the company’s capital structure. Making independent determinations with respect to the inputs for this analysis, the Court determined the share value at the time of the merger to be $91.90 per share, a substantial increase over the actual merger price of $83 per share and within the range of the widely divergent share prices advocated by the parties’ experts: $76.45 and $137.97, respectively.
This case thus continues the recent trend of decisions largely disregarding the expert analyses and share valuations advanced by the parties in appraisal cases in favor of a more independent analysis undertaken by the Delaware Chancery Court.
