Delaware Supreme Court Finds Deal Price Minus Synergies As Fair Value In Aruba Networks Appraisal Appeal, Rather Than Average Preannouncement Stock Price
04/23/2019On April 16, 2019, the Delaware Supreme Court, in a per curiam decision, held that Aruba Networks, Inc.’s (“Aruba”) fair value in an appraisal action was $19.10 per share, reversing the Court of Chancery’s valuation of $17.13 per share. Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019). As we discussed in a prior post, the Court of Chancery ruled that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba in connection with its acquisition by Hewlett-Packard Company (“HP”). In his opinion, Vice Chancellor Laster concluded that he was compelled by recent decisions of the Delaware Supreme Court to disregard other metrics, but expressed reservations about doing so. Moreover, while the Court of Chancery viewed the deal price minus synergies as compelling evidence of fair value, it indicated that it could not estimate agency cost reductions to exclude from that calculation.
Aruba itself had proposed deal price minus synergies—amounting in its estimate to $19.10 per share—as one of its suggested outcomes. Following the Delaware Supreme Court’s decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), and DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017), the Court of Chancery requested post-trial supplemental briefing on the “market attributes” of Aruba’s stock. At that point, Aruba asked the Court of Chancery to award the thirty-day average unaffected market price of $17.13 per share, which the court accepted.
The Delaware Supreme Court reversed, explaining that the lower court’s concern about agency costs was unjustified, because there was no evidence that the deal price paid involved the reduction of agency costs that were not captured by Aruba’s synergies estimate. Clarifying that nothing in its prior decisions should have been read to compel the lower court to find otherwise, the Court held that “deal price minus the portion of synergies left with the seller” reflected fair value.
The Delaware Supreme Court emphasized that “Dell and DFC did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time.” The Court noted that “[u]nder the semi-strong form of the efficient capital markets hypothesis, the unaffected market price is not assumed to factor in nonpublic information.” Further, according to the Court, HP had material, nonpublic information that “improved the parties’ ability to estimate Aruba’s going-concern value over that of the market as a whole,” including the fact that Aruba was about to release strong earnings, which would not have been reflected in the thirty-day average market price. Moreover, HP “had a much sharper incentive to engage in price discovery than an ordinary trader because it was seeking to acquire all shares.” Finally, the Court found that the deal price minus synergies estimate of $19.10 was also “corroborated by HP’s and Aruba’s real-time considerations and Aruba’s DCF, comparable companies, and comparable transactions analyses.”