Posts in Appraisal

Chancery Declines to Defer to the Deal Price in Appraisal Proceeding Involving a Controller Squeeze-Out Subject to MFW Protections

HBK Master Fund L.P. v. Pivotal Software Inc., C.A. No. 2020-0165-KSJM (Del. Ch. Aug. 14, 2023)
The Delaware Court of Chancery engages in an independent valuation process when determining the fair value of petitioners' stock in appraisal actions. In this case, Chancellor McCormick addresses an interesting question concerning the deal price primacy under Delaware law and ultimately rejects deference to it in controlling stockholder squeeze-out transactions subject to the MFW protections. More ›

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Delaware Supreme Court Explains Appraisal Rights and Finds Disclosure Violation Relating to Pre-Closing Dividend Contingent on a Merger

In re GGP, Inc. Stockholder Litig., C.A. No. 2018-0267 (Del. July 19, 2022)
Here, the defendants organized a merger so that a large majority of the total value of the merger would be granted as a pre-closing dividend to stockholders and that the remaining amount would be granted in return for the stockholder’s shares. In the resulting litigation, stockholders argued that the defendants’ structuring of the merger unlawfully denied or diluted the stockholders’ right to seek appraisal and that the defendants’ disclosures regarding the structuring were deficient. The defendants prevailed on a motion to dismiss before the Court of Chancery. On appeal, the Delaware Supreme Court found that the dividend conditioned on the merger’s consummation was part of the merger consideration for appraisal purposes under Delaware law, that receipt of the dividend did not disqualify stockholders from seeking appraisal, and that plaintiff’s claim regarding the structure, therefore, was properly dismissed. But the Supreme Court reversed the trial court’s dismissal of the related disclosure claim. The plaintiffs alleged that the director defendants, aided and abetted by the acquirer, had deprived stockholders of their appraisal rights by improperly describing what would be subject to appraisal. The Supreme Court agreed and held that the disclosures were confusing and materially misleading. The proxy stated that stockholders were entitled only to the amount that remained after the pre-closing dividend. But this was incorrect as a matter of Delaware law, as the stockholders were also entitled to appraisal for the pre-closing dividend. Two justices dissented from the majority’s holding regarding the disclosure claim.

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Superior Court CCLD Determines D&O Insurance Policy Does not Cover Defense Costs in Statutory Appraisal Proceeding

MPM Holdings, Inc. v. Federal Ins. Co., C.A. No. N20C-07-014 MMJ CCLD (Del. Super. Ct. Mar. 17, 2022)
In recent years, the Delaware Supreme Court has pointed out that directors and officers liability insurance might not cover defense costs in statutory appraisal proceedings.  In In re Solera Insurance Coverage Appeals, 240 A.3d 1121 (Del. 2020), the Supreme Court held that an appraisal action is not a securities claim because it does not involve a violation of the law.  Subsequently, the Supreme Court affirmed a Superior Court decision that an appraisal action is not based on a wrongful act, but rather is a creature of statute and neutral in nature.  Jarden, LLC v. ACE American Ins. Co., 2021 WL 3280495 (Del. Super. Ct.), aff'd sub nom. Jarden LLC v. ACE American Ins. Co., 2022 WL 618962 (Del.). More ›

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Chancery Adjusts Deal Price to Account for Synergies and Post-Signing Change in Value in Statutory Appraisal of Investment Bank

BCIM Strategic Value Master Fund, LP v. HFF, Inc., C.A. No. 2019-0558-JTL (Del. Ch. Feb. 2, 2022)
In a statutory appraisal proceeding, Delaware courts may rely upon the deal price adjusted for net synergies as the most persuasive evidence of fair value provided the transaction process contains sufficient indicia of reliability. More ›

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Chancery Curtails Discovery in Appraisal Action Instituted as a Substitute for Books and Records Demand

Wei v. Zoox, Inc, C.A. No. 2020-1036-KSJM (Del. Ch. Jan. 31, 2022)
Often, stockholders who suspect corporate wrongdoing in connection with M&A transactions demand to inspect the company’s books and records under Section 220. But if, through no fault of the stockholder, the timing of a closing makes Section 220 relief more difficult to obtain, may the stockholder use Section 262, the appraisal statute, and its broader available discovery, to accomplish the same goal? In this case, the Court concludes that the answer is a qualified yes. That is, the stockholders are entitled to discovery in the appraisal proceeding. But if it appears the proceeding is just a means to investigate a potential class action for breach of fiduciary duties, the stockholder is entitled to discovery only to the limited extent it would have been available under Section 220, and not to the broader extent typically available under Section 262. 

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Delaware Supreme Court Upholds Contractual Waiver of Statutory Appraisal Rights

Manti Holdings, LLC, et al. v. Authentix Acquisition Co., Inc., No. 354, 2020 (Del. Sept. 13, 2021)
This decision arose out of the acquisition of Authentix Acquisition Company, Inc. and a subsequent appraisal proceeding brought by dissenting stockholders under 8 Del. C. § 262. As a condition of an earlier merger involving the private equity firm Carlyle, the petitioners were parties to a stockholders agreement binding the corporation and all of its stockholders that purported to waive the stockholders’ statutory appraisal rights. At the trial court level, the Court of Chancery enforced the contractual waiver and granted the company’s motion to dismiss. On appeal, alongside other contentions, the petitioners argued that statutory appraisal rights are one of the fundamental features of corporate identity and should be found nonwaivable under Delaware law and public policy. More ›

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Superior Court CCLD Dismisses Complaint Seeking Insurance Coverage for Appraisal Proceeding

Jarden, LLC v. ACE Am. Ins. Co., C.A. No. N20C-03-112 AML CCLD (Del. Super. July 30, 2021)
Director and corporate liability insurance coverage is determined by the specific language of the insurance policies. Last year, the Delaware Supreme Court held that an appraisal claim under 8 Del. C. § 262 was not a “securities claim” because it was not a claim for a “violation of law[,]” as required under that policy’s definition. See In re Solera Ins. Coverage Appeals, 240 A.3d 1121 (Del. 2020). This case addressed similar issues under somewhat different policy language.  More ›

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Chancery Finds that Deal-Price-Less-Synergies was Best Indicator of Fair Value in Statutory Appraisal of Public Company

In re Appraisal of Regal Entertainment Grp., C.A. No. 2018-0266-JTL (Del. Ch. May 13, 2021)
Recent Delaware appraisal cases have found that reliable market indicators present the best evidence of a corporation’s “fair value.” Where the deal price itself provides the best evidence, the Court will deduct from the deal price any synergies paid to the sellers. Changes in value between signing and the closing date of the merger may also be taken into account. This decision applies these principles in determining the “fair value” payable to certain stockholders of Regal Entertainment Group, a public company, following its 2018 sale to Cineworld Group, a strategic acquirer, for $23 per share. More ›

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Chancery Modifies Confidentiality Order to Permit Assertion of Plenary Claims in Appraisal Action

Harris v. Harris FRC Corp., C.A. No. 2019-0736-JTL (Del. Ch. Jan. 7, 2021)
Under Rule 5.1, the Court of Chancery may enter a confidentiality order upon a showing of good cause that such an order is necessary to protect against disclosure of sensitive, non-public information. But Rule 5.1 does not set an express standard for later modification of the order. In this case, the Court of Chancery clarified that the standard for modifying a confidentiality order is the same as for entering one: good cause shown, taking into account related factors including the parties’ reliance on the existing order and the potential prejudice from modification. More ›

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High Court Affirms Deal Price Was Reliable Indicator of Fair Value Despite Flawed Process

Brigade Leveraged Capital Structures Fund Ltd. v. Stillwater Mining Co., C.A. No. 427, 2019 (Del. Oct. 12, 2020)

This case illustrates that, notwithstanding a flawed process for the sale of a company, the deal price may still provide a reliable indicator of the fair value of shares in an appraisal action. Petitioners had contended that the Court of Chancery abused its discretion in upholding a rushed sale process and in failing to make an upward adjustment to the deal price based on an increase in the company’s value post-signing. More ›

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Delaware Supreme Court Affirms Use of Unaffected Market Price to Determine Public Corporation’s “Fair Value” in Appraisal Proceeding

Fir Tree Value Master Fund, L.P. v. Jarden Corp., No. 454, 2019 (Del. July 9, 2020)

Adding to its appraisal jurisprudence, the Supreme Court of Delaware recently affirmed the use of the unaffected trading price of a public corporation’s stock to determine its “fair value” in the circumstances presented, while clarifying that “it is not often that a corporation’s unaffected market price alone could support fair value.” More ›

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Chancery Values Non-Public Company with No Reliable Market-Based Data Using Discounted Cash Flow Analysis

Kruse v. Synapse Wireless, Inc., C.A. No. 12392-VCS (Del. Ch. July 14, 2020)

This case illustrates how appraisal works outside of the public market context when a lack of data hinders a reliable valuation. Here, stockholder William Richard Kruse (“Kruse”) sought appraisal of his shares of SynapseWireless, Inc. (“Synapse”), a privately-owned corporation. McWane Inc. (“McWane”) acquired Synapse in two rounds of investments: McWane, first, acquired a controlling interest in 2012, and, then, acquired the remaining Synapse shares in 2016 in a cash-out merger (the “Merger”). As part of the 2012 transaction, McWane gained the right to purchase newly issued Synapse shares at a price set by the 2012 acquisition. Synapse had disappointing performance after the 2012 merger, posting less than half of the projected revenues used to calculate the 2012 merger price. To mitigate Synapse’s poor performance, McWane provided loans and purchased Synapse shares at the price set by the 2012 merger. For example, in 2014, McWane bought $31 million of shares at $4.99 per share to keep Synapse afloat, and to increase McWane’s ownership of Synapse to realize tax benefits. More ›

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Chancery Appraisal Decision Illustrates the Importance of Reliable Expert Testimony and Witness Credibility to Fair Value Determinations

Manichaean Capital, LLC v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (Del. Ch. Jan. 30, 2020).

Even when its role is to determine the fair value of shares in an appraisal proceeding, credibility matters to the Court of Chancery. Following a three-party business combination, Petitioners (former minority stockholders) exercised appraisal rights under 8 Del. C. § 262. Petitioners and Respondent agreed to use a discounted cash flow analysis to determine the fair value because there was insufficient market-based evidence of fair market value. But the parties’ experts disagreed on the input values and results of the DCF analysis, leaving the Court to “grappl[e] with expert-generated valuation conclusions that [were] solar systems apart.” Mem. Op. 2.

After a lengthy comparison of the competing DCF analyses, the Court concluded that Petitioners’ calculation (with minor adjustments) represented fair value. By contrast, Respondent’s position suffered from significant credibility issues. One of the executives involved in the business combination transactions requested a backdated valuation, misrepresented the date of the valuation in discovery responses, and continued with its misrepresentation until the eve of trial. The Court also found Respondent’s expert was not credible because elements of his valuation approach were bespoke, were not used in the industry, and relied heavily on the ipse dixit of the expert. Complicating things further, Respondent disagreed with its own expert’s calculations and conclusions. These factors, combined with the superior DCF analysis by Petitioner’s expert, led the Court to accept Petitioner’s fair value calculation with only minor adjustments.

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Appraisal of Panera Bread: Court of Chancery Again Defers to Deal Price, Denies Request for a Refund of the Amount of Synergies

In re Appraisal of Panera Bread Co., C.A. No. 2017-0593-MTZ (Del. Ch. Jan. 31, 2020).

JAB Holdings B.V. (“JAB”), a private company that also owns Einstein Bros., Caribou Coffee and Krispy Kreme, acquired Panera Bread Company (“Panera”) via a cash-out merger for $315.00 per share on July 18, 2017. Multiple dissenting shareholders (the “Petitioners”) filed an appraisal action, asserting that the fair value of their shares was $361.00 per share. Post-trial, the Court of Chancery disagreed with the Petitioners, ruling that the deal price minus synergies was the best evidence of fair value. This was because Panera had followed a reliable sale process and any flaws in that process did not undermine its reliability. Specifically, the Court held that, among other factors, the parties’ arm’s length negotiations, Panera’s disinterested and independent board, price increases during negotiations, the fact that no other parties bid on Panera either before or after the announcement of the merger, and the outreach that Panera did with potential buyers provided persuasive evidence of a reliable sale process. More ›

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Chancery Court Confirms a Stockholder May Contractually Waive Appraisal Rights

Manti Holdings, LLC v. Authentix Acquisition Co., Inc., C.A. No. 2017-0887 SG (Del. Ch. Aug 14, 2019).

In Manti Holdings, LLC v. Authentix Acquisition Co., Inc., the Court of Chancery held that a contract provision limiting or waiving future appraisal rights may be enforceable as a matter of law.  The Court had previously ruled that the petitioner stockholders had waived their right to an appraisal in a stockholders agreement.  On re-argument, the Court was asked to determine whether the petitioners could, as a matter of law under the Delaware General Corporation Law (“DGCL”), waive their appraisal rights.  Because Section 262 of the DGCL confers a statutory right to appraisal upon shareholders, the petitioners argued that the provision of the stockholders agreement purporting to waive appraisal rights was not enforceable.  Relying upon its prior precedent concerning waiver of statutory rights, the Court explained that a contractual relinquishment of appraisal rights was permissible when the contract language is clear and unambiguous and the record reflects that the petitioners were sophisticated investors who were fully informed and represented by counsel when they signed the stockholders agreement.              

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