Delaware Business Litigation Report

Chancery Explains When Deal Price is a Persuasive Indicator of Fair Value in an Appraisal Proceeding

In re Appraisal of Stillwater Mining Co., Consol. C.A. No. 2017-0385-JTL (Del. Ch. Aug. 21, 2019).

Recent Delaware Supreme Court decisions on appraisal proceedings have stressed the pivotal importance of the deal price in establishing fair value.  In this case, the Court of Chancery faced an appraisal for a transaction in which the company’s General Counsel expressed ongoing concerns about the CEO’s potential conflict in spearheading the sale process.  That gave rise to the question:  In measuring fair value, what weight should be accorded to the deal price when there is some “hint of self-interest” that may have compromised the market check? 

The Court of Chancery evaluated DFC, Dell and Aruba and attempted to draw from those decisions both the “minimum characteristics that a sale process must have before a trial court can give it weight” and also the characteristics of a deal that “makes a sale process sufficiently bad that a trial court cannot give it weight.”  (Op. at 47).  According to the Court, the “objective indicia of reliability” present in this case included:

(i) The merger was an arms-length transaction with a third party;

(ii) A majority of the board was disinterested and independent;

(iii) The acquirer undertook due diligence, including accessing confidential information;

(iv) The negotiations involved multiple price increases; and,

(v) No bidders emerged during the post-signing phase.

The Court stressed that evaluating fair value is a fact-intensive undertaking, and that the presence of even all of the above-listed factors did not establish a presumption in favor the deal price.  Yet, their presence provided “a cogent foundation for relying on the deal price as a persuasive indicator of fair value, subject to further review of the evidence.”  (Op. at 52).

Because the transaction before the Court involved limited initial outreach to other potential bidders, the decision also discusses reliance upon the deal price where there is limited active outreach in the pre–signing phase.  The Court noted that the Delaware Supreme Court has never explicitly confirmed that the deal price could establish fair value in a transaction where the negotiations focused upon a single bidder.  The Court concluded, however, that a single-bidder transaction could still result in an appraisal where the deal price established fair value, assuming other factors were present.  The key consideration, according to the Court, was whether any aspect of the pre-signing process “impaired the sale process as a whole,” including the post-signing phase.  If not, then the deal price could serve as a persuasive indicator of fair value in an appraisal.  Applying these principles to the case before it, the Court awarded the deal price as fair value.  

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