Delaware Chancery Court Finds No Fiduciary Duty Breach, Notwithstanding Entire Fairness Review, And Determines Appraisal Value To Be Well Below Deal Price
07/25/2017On July 21, 2017, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery (i) entered judgment in favor of defendants Sprint Nextel Corporation (“Sprint”) and Softbank Corp. (“Softbank”) on claims of breaches of fiduciary duty and aiding and abetting, respectively, in connection with Sprint’s merger with Clearwire Corporation (“Clearwire”); and (ii) appraised the fair value of Clearwire’s stock at the time of the merger, awarding the dissenting stockholder petitioners $2.13 per share, notwithstanding that the transaction closed at $5.00 per share. ACP Master, Ltd., et al. v. Sprint Corporation, et al. & ACP Master, Ltd., et al. v. Clearwire Corporation, C.A. No. 8508-VCL, C.A. No. 9042-VCL (Del. Ch. July 21, 2017). Stockholder petitioners had challenged the merger, alleging that Sprint was a controlling stockholder of Clearwire and allegedly breached its fiduciary duties during negotiations leading to a deal price that substantially undervalued Clearwire. Applying an entire fairness standard of review, the Court found that Sprint did not breach any fiduciary duties. Noting that the appraisal statute requires the exclusion of “any synergies present in the deal price,” the Court evaluated the competing discounted cash flow (“DCF”) analyses offered by the parties and adopted the $2.13 per share value determined by the approach offered by Sprint, even though it amounted to less than half of the $5.00 per share deal price.
In a deal that closed in July 2013, Sprint acquired the 49.8% of Clearwire’s equity that it did not already own for a price of $5.00 per share. At the same time, Softbank acquired majority control of Sprint. Sprint and Clearwire had previously entered into a merger agreement in December 2012 after a period of complicated negotiations involving all three parties. That initial merger agreement had set the acquisition price at $2.97 per share and conditioned the transaction on approval of a vote of a majority of the non-Sprint stockholders. Thereafter, Clearwire received a higher offer from a competing bidder and an additional series of complicated negotiations ensued, ultimately leading to a revised merger agreement setting the final $5.00 per share price in June 2013. That deal was approved by a vote of approximately 70% of the non-Sprint stockholders.
Petitioners, which were Clearwire stockholders that had dissented from the merger on the grounds of an allegedly inadequate price, (i) asserted that Sprint, allegedly aided and abetted by Softbank, breached its fiduciary duties as a controlling stockholder during the negotiation process, and (ii) sought an appraisal of the fair value of their shares. After a ten-day trial, the Court issued its post-trial decision holding that Sprint proved there was no breach of fiduciary duty and that the fair value of Clearwire’s common stock at the time of the merger was $2.13 per share.
As to the breach of fiduciary duty claim, the Court assumed but did not decide that Sprint was a controlling stockholder and, therefore, applied the “entire fairness” standard of review, which requires defendants to establish “to the court’s satisfaction that the transaction was the product of both fair dealing and fair price.” Even though the Court acknowledged instances of alleged unfair dealing in the process before the initial merger agreement, the Court found that the revised merger agreement was entirely fair. In this regard, the Court highlighted that there was “overwhelming evidence that the final deal price of $5.00 per share was fair to Clearwire and its minority stockholders.” The Court also emphasized that the deal was approved by approximately 70% of the non-Sprint stockholders, including sophisticated groups of stockholders “with deep knowledge of Clearwire’s business.” The Court also found that “[t]he record establishes” that the Special Committee of non-Sprint affiliated directors tasked with negotiating the deal “was independent” and “bargained at arm’s-length.”
Under the Delaware appraisal provision, 8 Del. C. 262(h), the Court concluded that it was obligated to determine the “fair value” of Clearwire shares as of the date of the merger, independent of “any element of value arising from … the merger.” Consequently, “[i]f the court relied on Clearwire’s deal price, it would have to determine the value of those synergies and back them out.” Instead, the Court relied on a DCF analysis, which it noted “is an established method of determining the going concern value of a corporation.”
The parties had offered competing expert DCF analyses, with petitioners’ expert finding that Clearwire had a fair value of $16.08 per share, while defendant’s expert found a fair value of $2.13 per share. The Court explained that the primary disagreement — accounting for 90% of the difference — between the analyses was the choice of projections to use. According to the Court, petitioners’ expert used projections created by Sprint outside of the ordinary course of business and for an independent purpose, and that those projections “did not reflect Clearwire’s operative reality in the event [the merger] did not close.” By contrast, the projections used by defendant’s expert were “prepared by Clearwire’s management in the ordinary course of business [and] reflected Clearwire’s operative reality on the date of the merger.” Finding other aspects of defendant’s expert’s analysis more persuasive as well, the Court thus determined to “adopt [defendant’s expert’s] DCF valuation in full.”
Vice Chancellor Laster’s decision is a significant departure from recent Delaware cases addressing appraisal proceedings that involve controlling stockholder mergers, which have assessed whether courts should focus on deal price in determining fair value. Vice Chancellor Laster’s decision is notable for appraising the fair value far below the deal price, when Delaware courts have tended to award the deal price or higher when controlling shareholders are involved.