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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.”

After the CEO and co-founder of the respondent corporation negotiated a sale of the company for $59.21 per share, several stockholders refused to accept the sale price and pursued their appraisal rights. Of the valuation methodologies presented at trial, Vice Chancellor Joseph R. Slights, III determined that only the $48.31 unaffected market price reliably determined fair value. Because of a flawed sale process, a lack of comparable companies to assess, and wildly divergent discounted cash flow analyses, all other valuation methods received little to no weight.   

On appeal, the Supreme Court rejected the petitioners’ argument that the Court’s earlier decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019) foreclosed, as a matter of law, using the unaffected market price to support fair value. The Court surveyed its more recent appraisal opinions in DFC Global Corp., Dell and Aruba. The Court explained that the DFC Global decision took issue with the Court of Chancery’s rejection of the deal price as relevant to fair value and specifically noted that the pre-transaction price of a public company may be relevant to a fair value analysis. In Dell, the Court of Chancery was reversed for assigning no weight to market value or deal price, which the Supreme Court found had substantial probative value in the circumstances of that case. Aruba discussed the considerable weight to be afforded the deal price absent deficiencies in the deal process, because a buyer possessing material non-public information about the seller is better positioned to value the seller when negotiating the purchase price. The Aruba Court further opined that when there were indications that the market was “informationally efficient” – i.e., that it digested and assessed all of the publicly available information such that it was quickly impounded into the stock price – then the market price may be indicative of fair value. The notable “takeaway” from these opinions – which the Supreme Court indicated the court-below got “exactly right” – is the requirement that the Court of Chancery explain its fair value calculation in a manner that is based upon the evidence presented.

Turning to the valuation methodologies presented to the Court of Chancery and its conclusions, the Supreme Court reasoned that the Court of Chancery did not abuse its discretion in rejecting those calculations, in arriving at factual conclusions reached in making that determination and in ultimately relying upon the unaffected market price. The court-below had a basis in the record to conclude that the market did not lack material information about the corporation’s prospects. The record supported the Court’s finding that the fact management’s and analysts’ projections diverged was attributable to a difference of opinion, not a material difference in available information. The Supreme Court also declined to find fault with the Court of Chancery’s decision not to rely upon the deal price as a floor for its fair value analysis. The petitioners had attacked the sale process and the deal price it yielded as unreliable and argued to the court-below that synergies were only relevant if the deal price was reliable. After noting this differed from the petitioners’ argument below, the Supreme Court held that the Court of Chancery did not err in reasoning that, based on the record, the deal price included significant synergies. In any event, the trial court did not err in declining to give the deal price weight. The Supreme Court similarly affirmed with the court-below’s decision to find certain market evidence more reliable, including the price of share issuances and repurchases occurring near in time, and to find certain other evidence as less reliable, such as certain analysts’ targets or certain results-oriented valuations in the record. Lastly, the Supreme Court held that the court did not abuse its discretion in calculating a terminal investment rate for its DCF model, a method the court used only as a check on the market price, based on convergence theory (also known as the McKinsey formula), as the Court of Chancery has done in certain other recent matters.       



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