Court of Chancery Explains When Market and Deal Price Are Not Fair Value In Appraisals
Blueblade Capital Opportunities LLC v. Norcraft Cos. Inc., C.A. No. 11184-VCS (Del. Ch. July 27, 2018)
This is an important appraisal decision because it examines, post-Dell and DFC, when the market price and deal price of the stock being appraised may not represent fair value. That might occur when, as here, there is a lack of evidence supporting the market’s efficiency for the subject corporation and the deal has process flaws. In such a scenario, the traditional valuation methodology of a discounted cash flow analysis—a battle of the experts—is likely to control. The deal price, however, still has value as a reality check on this analysis. The decision also is noteworthy for the petitioner’s use of expert testimony to show the flaws in the post-announcement market check.
Finally, while the end product was an appraisal above the deal price, it was not a significant bump. The petitioners used experienced, highly competent trial counsel and had an expert whose past valuations had been accepted by Delaware courts. Yet, Petitioners recovery probably did not exceed their legal and expert fees, at least not by much. In other words, the litigation turned out to be an unworthy investment. Thus, this is yet another decision demonstrating the risks in appraisal arbitrage.