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Delaware Chancery Court Employs Transaction Price To Determine Fair Value In Appraisal Action
01/02/2017On December 16, 2016, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery relied on the final deal price to determine the fair value of stock in Lender Processing Services, Inc. (“LPS”), in an appraisal action brought by shareholder petitioners after Fidelity National Financial, Inc. (“Fidelity”) acquired LPS. Merion Capital L.P., et al. v. Lender Processing Services, Inc., C.A. No. 9320-VCL. While the court conducted its own DCF (discounted cash flow) analysis drawing from expert submissions, Vice Chancellor Laster ultimately deferred entirely to the deal price, finding that the sale process was fair and based on meaningful competition in a well-functioning market, and thus generated reliable evidence of fair value.
Respondent LPS provided integrated technology products, data, and services to the mortgage lending industry. Following a lengthy sale process involving discussions and negotiations with multiple potential acquirers, on May 27, 2013, Fidelity and LPS entered into a merger agreement whereby Fidelity would acquire LPS for $33.25 per LPS share in consideration of cash and Fidelity stock. The merger closed on January 2, 2014. Because Fidelity’s stock price had increased in the interim, the final merger consideration was $37.14 per share.
Petitioners purchased 5,682,276 shares after the announcement of the merger and before the stockholder vote. In accordance with Section 262 of the Delaware General Corporation Law, petitioners demanded appraisal and did not vote in favor of the merger or accept the merger consideration, and then pursued this appraisal action. During the trial, both petitioners and the respondent company submitted valuation opinions from their respective experts. Petitioners’ expert used a DCF analysis and found that LPS had a fair value of $50.46 per share at closing. Respondent’s expert also used a DCF analysis but opined that the company’s fair value at closing was $33.57 per share.
After an extensive review of Delaware precedent regarding determinations of fair value in appraisal actions, Vice Chancellor Laster found that the final deal price provided a reliable indicator of the company’s fair value at closing. In this regard, Vice Chancellor Laster highlighted several factors. First, the transaction was the result of a process informed by the company’s financial consultants that involved meaningful competition among multiple bidders—both strategic and financial—during the pre-signing phase. Second, all potential bid participants had equal access to adequate and reliable information about the company. Third, the transaction process proceeded at arm’s length without collusion or favoritism.
The court also assessed the significance of the seven-month temporal gap between the signing of the merger agreement and the closing of the merger because the relevant determination for appraisal purposes is the fair value at closing. In this regard, Vice Chancellor Laster noted in particular that LPS’s financial performance declined and Fidelity’s stock price—and thus the merger consideration—increased during the interim period.
Vice Chancellor Laster also emphasized that the record evidence demonstrated that the transaction price included a portion of the value that Fidelity expected to generate from synergies. This fact, according to the court, suggested that the deal price likely exceeded the fair value of LPS as a going concern.
The court also conducted its own DCF analysis utilizing portions of the DCF analyses advanced by experts for both sides and arriving at a value of $38.67 per share (i.e., between the values espoused by the experts and slightly above the final deal price of $37.14 per share). Vice Chancellor Laster found, however, that “[s]mall changes in the assumptions that drive the DCF analysis . . . generate a range of prices that starts below the merger price and extends far above it.” Thus, in light of the favorable assessment of the transaction process (as discussed above) and noting that “the proximity” of the court’s DCF valuation result and the deal price “is comforting,” Vice Chancellor Laster “g[a]ve 100% weight to the transaction price” in determining the appraisal value.
