Delaware Court Of Chancery Finds Fair Value Equal To Deal Price Of Publicly Traded Company In Appraisal Action
On August 12, 2019, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the fair value of Columbia Pipeline Group, Inc. (“Columbia”) was equal to the deal price in an appraisal action arising from Columbia’s acquisition by TransCanada Corporation (“TransCanada”). In re Appraisal of Columbia Pipeline Group, Inc., Cons. C.A. No. 12736-VCL (Del. Ch. Aug. 12, 2019). Relying on the Delaware Supreme Court’s recent decisions in DFC, Dell, and Aruba, the Court found the deal price of $25.50 per share to be Columbia’s fair value as of the closing date.
Delaware Court Of Chancery Again Dismisses Aiding And Abetting Claims For Pleading Deficiencies
On July 15, 2019, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery dismissed an aiding and abetting claim asserted against a private equity buyer and its principals in a stockholder class action involving breach of fiduciary duty claims against the former CEO of a technology company in connection with its take-private sale to the private equity buyer. In re Xura Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. July 12, 2019). As we discussed in a prior post, Vice Chancellor Slights declined to dismiss a different stockholder’s breach of fiduciary duty claims against the former CEO based on his allegedly self-interested participation in the merger, but the Court dismissed aiding and abetting claims asserted against the buyer and its principals. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Ten days after this opinion was issued, a different stockholder filed a “nearly identical” complaint—this time asserting class action claims—raising “the same theories of aiding and abetting” that the Court had dismissed just days earlier. In a separate summary order, the Court denied the former CEO’s motion to dismiss this new complaint. In this decision, the Court dismissed the aiding and abetting claims for the same reason it did so in the prior suit—the complaint failed to include “well-pled allegations that [the buyer] ‘knowingly participated’ in the … alleged breaches of fiduciary duty.”
Delaware Supreme Court Finds Deal Price Minus Synergies As Fair Value In Aruba Networks Appraisal Appeal, Rather Than Average Preannouncement Stock Price
On 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.
Delaware Court Of Chancery Holds That Concurrent Appraisal Action Does Not Preclude Post-Closing Fiduciary Duty Breach Claims
On December 11, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to dismiss breach of fiduciary duty claims against the former CEO of a technology company (the “Company”) in connection with its take-private sale to a private equity firm. In re Xura, Inc. Stockholder Litigation, C.A. No. 12698-VCS (Del. Ch. Dec. 11, 2018). Plaintiff alleged that the CEO was conflicted by self-interest while he steered the Company into the transaction. As a stockholder at the time of the transaction, plaintiff simultaneously pursued appraisal of its shares of the Company. Defendant argued that plaintiff lacked standing to pursue breach of fiduciary duty claims in light of the pending appraisal petition and, in any event, the approval by the majority of the stockholders cleansed the transaction under Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015). The Court, however, held that a plaintiff seeking appraisal can nevertheless maintain breach of fiduciary duty claims related to the same transaction and that the alleged omission from the proxy of various information material to the stockholder vote precluded the application of the Corwin doctrine at the pleading stage.
Delaware Court Of Chancery Denies Motion To Exclude Post-Signing Evidence
On September 7, 2018, Vice Chancellor Joseph R. Slights III of the Delaware Court of Chancery denied a motion to exclude certain documents relating to Jarden Corporation’s (“Jarden”) post-signing financial performance offered as evidence during a statutory appraisal trial. In re Appraisal of Jarden Corporation, C.A. No. 12456-VCS (Del. Ch. Sep. 7, 2018). Newell Rubbermaid, Inc. (“Newell”) acquired Jarden pursuant to a merger agreement executed on December 13, 2015, in a deal that closed on April 15, 2016. Petitioners filed for appraisal on June 14, 2016. At trial, petitioners objected to the admission of certain documents relating to Jarden’s post-signing financial performance. Rejecting petitioners’ relevancy objection, the Court determined that “[t]he post-signing financial documents address the condition of Jarden during a timeframe relevant to the ‘fair value’ determination.” In making the relevancy determination, the Court relied on prior cases indicating that a change in value between signing and closing should be addressed in an appraisal analysis because “fair value” must be measured by the “operative reality” of the corporation at the effective time of the merger. However, the Court highlighted that it had not yet determined “[w]hat weight, if any, the evidence will be given in the Court’s deliberations.”
Applying Dell and DFC, Delaware Court Of Chancery Finds “Fair Value” Is Deal Price Less Synergies In Appraisal Action
On July 30, 2018, Chancellor Andre Bouchard of the Delaware Court of Chancery determined that the deal price minus synergies was the best evidence of the fair value of Solera Holdings, Inc. (“Solera”) in an appraisal action arising from the acquisition of Solera by Vista Equity Partners. In re Solera Holdings Stockholder Litigation, C.A. No. 12080-CB (Del Ch. July 30, 2018). Applying recent guidance from the Delaware Supreme Court, the Court found that the deal price should be afforded “dispositive” weight because the transaction process was characterized by “objective indicia of reliability,” including a robust sales process directed by an independent special committee and an efficient market for Solera shares. Accordingly, the Court found petitioners were entitled to $53.95 per share, consisting of the deal price ($55.85 per share) less the value of merger synergies ($1.90 per share).
Delaware Court Of Chancery Rejects Appraisal Rights For Stockholders Of Merger Parent, Even When Transaction Results In Sale Of Control Over The Surviving Corporation.
On May 25, 2018, Chancellor Andre G. Bouchard dismissed a class action lawsuit brought by stockholders of Dr. Pepper Snapple Group, Inc. (“Dr. Pepper”) against the company and its directors asserting that the merger with Maple Parent Holdings Corp. (“Maple Parent”), the parent company of Keurig Green Mountain, Inc., deprived them of their statutory appraisal rights. City of North Miami Beach General Employee’s Retirement Plan v. Dr. Pepper Snapple Group, Inc., C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018). Plaintiffs alleged that Dr. Pepper’s directors breached their fiduciary duties, and the corporation violated Section 262 of the Delaware General Corporation Law, when Dr. Pepper filed a proxy statement that informed stockholders that they were not entitled to appraisal rights in connection with the proposed merger.
Delaware Court Of Chancery Reaffirms Decision That “Fair Value” For Appraisal Was The Unaffected Market Price, Based On Dell And DFC
On May 21, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery reaffirmed the Court’s earlier ruling that the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) for purposes of appraisal in connection with its acquisition by Hewlett-Packard Company (“HP”) was Aruba’s 30-day average unaffected market price ($17.13 per share), notwithstanding the deal price ($24.67 per share). Verition v. Aruba Networks, C.A. No. 11448-VCL (Del. Ch. May 21, 2018). As we discussed in our post regarding the prior decision, the Court made that determination by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell and DFC, but seemed to express reservations about doing so. Petitioners moved for reargument, contending the Court misapprehended the law and facts, in part due to “frustration” with the Delaware Supreme Court’s recent pronouncements on appraisal in those two cases. In this new decision denying the motion for reargument, the Court explained that it viewed “the Delaware Supreme Court’s endorsement of the efficient capital markets hypothesis and its emphasis on market indicators over the subjective views of knowledgeable insiders as altering the decisional landscape and authorizing greater reliance on market value.”
Delaware Supreme Court Affirms Court Of Chancery Appraisal Determination At Nearly 60% Discount To Deal Price
On April 23, 2018, the Supreme Court of Delaware affirmed a decision by Vice Chancellor J. Travis Laster of the Delaware Court of Chancery appraising the shares of Clearwire Corporation at $2.13 per share, notwithstanding that Clearwire was acquired for $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. Apr. 23, 2018). As discussed in our post regarding that decision, stockholder petitioners had challenged the merger of Clearwire with Sprint Nextel Corporation, alleging that Sprint had been a controlling shareholder of Clearwire prior to the transaction and had breached its fiduciary duties during merger negotiations. Petitioners also sought appraisal, asserting that the $5.00 deal price substantially undervalued their shares. As we highlighted previously, the Court of Chancery found no breach of fiduciary duties even under an entire fairness standard and determined that fair value of the shares amounted to $2.13, even though that price reflected nearly a 60% discount to the deal price. With regard to the breach claims, the Court of Chancery concluded that instances of unfair dealing in an early phase of the process were “render[ed] immaterial” in light of subsequent arm’s-length negotiations and “overwhelming evidence” that the final deal price was fair. As to the appraisal finding, the Court of Chancery explained that the appraisal statute requires the exclusion of “any synergies present in the deal price” and was persuaded by the discounted cash flow analysis offered by defendants’ expert. The Delaware Supreme Court, sitting en banc, affirmed without issuing an opinion.
Delaware Court Of Chancery Denies Stay Of Columbia Pipeline Appraisal, Finding That Pendency Of An Appeal Of Aruba Networks Did Not Warrant A Stay
On March 7, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery denied a motion to stay or extend discovery filed by an appraisal petitioner in light of Vice Chancellor Laster’s recent ruling in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (the subject of a prior post). In re Appraisal of Columbia Pipeline Group, Inc., C.A. No. 12736-VCL (Del. Ch. Mar. 7, 2018). Vice Chancellor Laster rejected petitioners’ assertion that Aruba Networks created a “cloud of uncertainty” about the evidence considered and standards applied in Delaware appraisal proceedings, and held that the Court’s reliance on unaffected market price to determine fair value was in line with the Delaware Supreme Court’s decisions in DFC and Dell.
Delaware Court Of Chancery Uses DCF Analysis To Arrive At Fair Value Below Deal Price, Even Though Deal Process Was Not “Dell Compliant”
On February 23, 2018, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery ruled, based on his own discounted cash flow (“DCF”) analysis, that the fair value of AOL Inc. (“AOL”) was below the deal price paid by Verizon Communications Inc. (“Verizon”) to acquire it. In re: Appraisal of AOL Inc., C.A. 11204-VCG. The Court reached this conclusion after finding that the deal process was not “Dell Compliant”—a newly coined phrase—because various deal protections and statements by AOL’s CEO may have discouraged other potential buyers who would have paid more to acquire AOL. Accordingly, the Court afforded no weight to the deal price in its valuation of AOL but rather used that price as a “check” on his DCF analysis.
Delaware Court Of Chancery Applies Dell And DFC To Find “Fair Value” Of Widely Traded Company With No Controlling Stockholder Is Equal To Unaffected Market Price
On February 15, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) in an appraisal action arising from the acquisition of Aruba by Hewlett-Packard Company (“HP”). Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Feb. 15, 2018). The Court reached this conclusion by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell but expressed reservations about doing so. Though facially helpful for defendants in appraisal actions, the decision effectively invites the Supreme Court to revisit Dell and DFC, suggesting that those decisions compelled the trial court to ignore evidence of a less-than-robust deal process and undervaluation of Aruba by stock market analysts.
Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price
On December 14, 2017, the Delaware Supreme Court, in an opinion by Justice Karen L. Valihura, reversed and remanded an appraisal ruling by the Court of Chancery that had determined that the management-led buyout (“MBO”) of Dell, Inc. (“Dell”) by its CEO and founder, Michael Dell, and affiliates of a private equity firm, Silver Lake Partners (“Silver Lake”), at $13.75 per share significantly undervalued the stock of Dell. In re Appraisal of Dell Inc., No. 565, 2016 (Del. Dec. 14, 2017). After a trial, the Court of Chancery had disregarded the deal price and instead applied its own discounted cash flow (“DCF”) analysis, arriving at a valuation of $17.62 per share reflecting an approximate 28% premium. The Delaware Supreme Court, however, found that the evidence suggested that the market for Dell shares was efficient and that features of an MBO that might render a resulting deal price unreliable were largely absent here. Therefore, the Court concluded that “the deal price deserved heavy, if not dispositive, weight.” The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or—at the Court of Chancery’s discretion—to enter judgment at the deal price without further proceedings.
Delaware Supreme Court Affirms Delaware Court Of Chancery’s Use Of Its Own DCF Method To Determine Fair Value After Controller-Directed Cash-Out Merger
On October 30, 2017, the Delaware Supreme Court affirmed the decision of the Delaware Court of Chancery determining the fair value of ISN Software Corp. (“ISN”) in an appraisal action brought by minority stockholders following the cash-out merger of ISN with its wholly-owned subsidiary, at the direction of its controlling stockholder. In re ISN Software Corp. Appraisal Litig., C.A. No. 8388-VCG (Del. Oct. 30, 2017). As discussed in our post regarding the Court of Chancery’s August 11, 2016 decision, the Court rejected the various methodologies advanced by the parties’ competing experts and, instead, conducted its own discounted cash flow analysis to arrive at the “fair value” of ISN, which Vice Chancellor Glasscock determined was $357 million, more than double the consideration paid in the merger but significantly less than the valuations sought by plaintiffs. (See Shearman & Sterling LLP, Delaware Chancery Court Utilizes DCF Method To Determine Fair Value Of ISN Software Corp., August 22, 2016 Need-to-Know Litigation Weekly, http://www.lit-ma.shearman.com/delaware-chancery-court-utilizes-dcf-method-to-de). The short order from the Delaware Supreme Court states that the decision of the Delaware Court of Chancery “should be affirmed on the basis of and for the reasons assigned” in the lower court’s opinion.
Delaware Court Of Chancery Dismisses Post-Closing Stockholder Suit Asserting Fiduciary Duty Breach Claims And Also Seeking Quasi-Appraisal Remedy
On August 28, 2017, Vice Chancellor Sam Glasscock III of the Delaware Court of Chancery dismissed a putative stockholder class action against the directors of Kreisler Manufacturing Corporation (“Kreisler”), rejecting plaintiff’s claims for breach of fiduciary duty and quasi-appraisal in connection with the sale of Kreisler to Arlington Capital Partners (“Arlington”) as inadequately pleaded. Kahn v. Stern, C.A. No. 12498-VCG (Del. Ch. Aug. 28, 2017). Plaintiff alleged that the directors conditioned the merger on “side deals” that benefited themselves at the stockholders’ expense and that misstatements and omissions in the information statement disseminated to stockholders following the execution of a stockholder support agreement that bound more than 50% of outstanding stock in favor of the merger prevented stockholders from exercising their appraisal rights. The Court found that the complaint failed to plead that the directors acted in bad faith, and thus dismissed the claims, notwithstanding that certain of the allegedly inadequate disclosures—if raised in a pre-closing suit—likely would have warranted injunctive relief pending corrective disclosures.
Delaware Supreme Court Reverses And Remands Appraisal Award But Rejects Bright-Line Presumption In Favor Of Deal Price
On August 1, 2017, the Delaware Supreme Court, in an opinion by Chief Justice Leo E. Strine, Jr., reversed and remanded an appraisal ruling that had determined the buyout of DFC Global Corporation (“DFC”) by private equity investor Lone Star at $9.50 per share significantly undervalued the stock of DFC. DFC Global Corp. v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017). The Court of Chancery had calculated a fair value of $10.30 per share, 8.4% higher than the deal price of $9.50 per share, by giving equal weight to: (1) the deal price, (2) a comparable companies analysis, and (3) a discounted cash flow analysis. The Delaware Supreme Court found that the Court of Chancery’s valuation methods were unsupported by the record, which revealed (a) a fair, non-conflicted sale process with a robust market check, (b) debt markets expressing bearish views of DFC’s prospects, and (c) that DFC failed to meet its projections before the deal closed, all of which suggested that the deal price was likely the “most reliable indication of fair value.” The Court, however, expressly rejected the approach urged by DFC: a blanket presumption in favor of the deal price for arm’s-length transactions that were subjected to a robust market check.
Delaware Chancery Court Finds No Fiduciary Duty Breach, Notwithstanding Entire Fairness Review, And Determines Appraisal Value To Be Well Below Deal Price
On 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.
Two Recent Delaware Appraisal Decisions, Though Unlikely To Squelch Plaintiffs’ Enthusiasm For Appraisal Actions, Give Companies Some Comfort That Loss Is Not Guaranteed
Recent rulings issued by the Delaware Chancery Court in two appraisal cases handed wins to the defendant companies, reflecting at least some degree of temperance within the Delaware Chancery and potentially stemming the tide of decisions that favored appraisal petitioners. These decisions, issued while the Dell and DFC Global appraisal decisions (in which the Chancery Court found that the statutory “fair value” of the stocks significantly exceeded the deal price) are before the Delaware Supreme Court, represent significant victories for the defendant companies and a warning to stockholders willing to gamble on a costly appraisal action.