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Summaries and analysis of recent Delaware court decisions concerning business-related litigation.
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This another, albeit rare, decision that demonstrates there is real risk in petitioning for appraisal. The Court found that the fair value was LESS than the merger price, in part due to the synergies the buyer expected to receive by the acquisition. Admittedly, this case presented a rare set of facts. However, in almost every appraisal case the defendant argues the merger price was inflated by synergies that must be backed out in determining fair value. A party considering asking for appraisal needs to be mindful of that risk.
Delaware Supreme Court Reverses DFC Global And Clarifies The Deal Price’s Role In Appraisal Litigation
Delaware law has long made clear that the deal price for a company, while relevant, does not necessarily equate to the “fair value” that petitioners are entitled to receive in an appraisal proceeding. A string of recent Court of Chancery decisions, however, adopted the deal price as fair value, reinforcing the view that the market price for an arm’s-length transaction achieved after a thorough sale process likely will be the best evidence of fair value. Two decisions in mid-2016 arguably departed from this line of cases in setting fair value above the deal price, although on different grounds: Dell and DFC Global. Both decisions have been widely-reported, hotly-debated, and appealed. More ›
The Court of Chancery continues to wrestle with the issue of when the negotiated deal price represents "fair value" in an appraisal case. Here, serious problems with the management projections led the Court to reject a discounted cash flow valuation based on those forecasts. Instead, after finding the deal price was the product of a process reasonably designed and appropriately implemented to achieve a fair value, the Court accepted it as fair value. While it is unusual for the Court to find management was too optimistic about their company's future, this decision is not unique in expressing a preference for the product of real-world negotiations between sophisticated parties. Deal prices will continue to heavily influence appraisal valuations when the evidence shows "the price is right.”
Recent criticism of appraisal arbitrage argues that it comes without real risk to the petitioners. This appraisal decision, which values the company below the deal price based on a discounted cash flow analysis, should be part of any reform discussion. The petitioners in SWS Group suffered a sizable loss after refusing to accept the deal price. SWS Group also comes right on the heels of the PetSmart decision, which found the deal price represented the company’s fair value. Hence, petitioners again lost, given all the expense involved in an appraisal proceeding. In short, appraisal litigation is not for the weak at heart. The key to this decision is the Court’s finding that synergies for the buyer drove the merger price past fair value. Of course, while based on precedent, a finding of synergies is always controversial. To petitioners, those possible benefits are what made the company worth buying and are thus part of its inherent appeal.
It is well understood that minority stockholders have limited rights to object to a short-form merger under Delaware law. This decision affirms that minority stockholders cannot challenge the merger on fairness grounds alone, but must seek appraisal as the remedy for an inadequate price. However, since the stockholders are faced with the decision of whether to accept the deal price or seek appraisal, the duty of disclosure still applies. This decision is helpful for its in-depth analysis of the many disclosure allegations.
This is another decision in the continuing development of Delaware law on how to determine the acquired company’s fair value in an appraisal action. The decision carefully reviews the more recent opinions on whether the merger price constitutes fair value, concluding that, in this case, it did. Factors considered in weighing the use of the merger price included: meaningful competition during the pre-signing phase, that adequate and reliable information was provided to all parties during the pre-signing phase, and the lack of collusion or unjustified favoritism towards particular bidders. In addition, because fair value is determined at closing, evidence from the post-signing period may also be relevant, such as the absence of a topping bid, and the company’s post-signing performance. The decision is also useful for seeing how the Court will work carefully through the parties’ competing expert reports.
Appraisal petitioners normally agree to consolidate their actions, on which law firm(s) will represent them, and on how their common objectives will be carried out. That did not happen in this case: the petitioners disputed whose attorneys should take the lead counsel role. Significantly, the Court found it had the authority to choose one of the two competing law firms to lead on behalf of all petitioners despite one petitioner’s objection. The Court also observed, however, that there may be instances in which each petitioner should be allowed to chart its own course without consolidation or coordination.
Plaintiffs’ attorneys in representative litigation may obtain awards of fees and expenses when their efforts prove successful and provide benefits to the represented class. This decision explains how the Court of Chancery will calculate a fee award in an appraisal case based on the benefit conferred to the dissenting stockholders; here, a $21 million bump in the consideration. The decision addresses several important issues, including when expenses should be deducted from the benefit conferred before calculating the fees. Indicative of this litigation’s complexity, the expert witness fees alone were over $3.3 million. The decision will serve as a useful guide to any future fee awards in the growing field of appraisal cases.
This decision deals with the always difficult world of what beta to use in a DCF valuation. The Court’s analysis is an exhaustive review of the alternative approaches and is particularly helpful in valuing a publicly traded company in some financial turmoil.
This decision explains when a price in a management lead buy out that is close to a merger price set after a shopping of a company may still not be the “fair value” required by Delaware appraisal law. Thus, it is a good review of the more-recent decisions that have accepted a merger price as fair value when that price was the product of a competitive process. In short, the facts really matter and management lead buy outs will have a hard time doing almost any deal that will be adequate to establish an appraisal value.
It is well understood that to be entitled to the appraisal of your stock you need to not vote for the merger. However, in the complex world of how shares are held by beneficiaries and depositories, it is easy to overlook the importance of this requirement. This decision provides an excellent review of how shares are held and actually voted and reveals how it is now possible in many instances to determine how a beneficial owner’s stock was actually voted. The petitioners thought they had instructed the record holder to object to the merger. They were wrong. An intermediary failed to have the vote cast against the merger due to a communication error. The result was that the Court denied the petitioners' appraisal rights.
This decision illustrates the dangers of appraisal arbitration. More ›
This decision permits non-appearing dissenters to settle their appraisal claims over the objection of the appraisal petitioner. This right is limited, however, to the non-appearing former stockholders and should not be read as permitting appearing stockholders to settle out.
To obtain appraisal rights following a merger a stockholder needs to continuously hold her stock through the merger date. But as this decision holds (and is almost certain to be appealed as the Court has itself invited), losing technical record title to the stock before the merger is complete also loses the right to an appraisal. Hence, great caution is needed by those who seek appraisal to be sure their stock is not retitled by their nominee.
This decision turns on rejecting the projections of management about the future cash flow of the company to be appraised. More ›