Are Post-Merger Facts Ever Relevant?
Appraisal litigation is unique under Delaware law. In almost every instance you can think of, once an event provides a right to recover damages (such as a fire caused by negligence), what happens later is relevant to determining the amount of damages. For example, the actual future earnings of a business is relevant to a claim for lost profits. But, that is not always so in an appraisal case. There the valuation of the company involved is determined as of “the point just before the merger transaction ‘on the date of the merger,’” see Merion Capital v. Lender Processing Services, (Del. Ch. Dec. 16, 2016).
That standard may well mean that even if the company strikes gold a day after the merger, that fact cannot be considered in determining the fair value of that company. This seemingly odd result is based on the rationale that the value should be based on what someone would pay for that company on the merger date in an arm’s-length transaction free of any improper restraints on the active market for that company. The problem this presents is that it is often not entirely clear how to apply this “date of the merger” test. Suppose the gold was on the company’s own property; can it be said that was not part of the company value even if unknown on the merger date?
Various attempts have been made to address this question. If the occurrence of the post-merger event was known to likely occur, or at least could have been reliably predicted on the merger date, that may be considered in the valuation. Yet, even that test may be difficult to apply. Hindsight is often easy to do, but often only reliable in the eyes of who will benefit by saying “I told you so.” Why then should the court have to deal with this problem, rather than just not let post-merger facts be introduced into evidence?
There are several reasons why the date of the merger test makes sense. First, the purpose of appraisal is to compensate the eliminated stockholder for the fair value of her stock. Just as the value of real estate in condemnation proceedings is measured by its value on the date it is taken, so too might the value of stock be measured on the date it is “taken” by a merger. Doing a valuation as of a later date unfairly subjects the excluded stockholder to evidence of risks which she did not agree to assume and conversely subjects post-merger owners to the risk of having to give up some value their company created only after the merger. Either way that seems unfair.
Second, there needs to be some limit on what evidence can be used in an appraisal case. The trial in those cases is often years after the merger. If anything that happens up to the trial date can be used as evidence, pretrial discovery may continue over post-merger events until that day of trial. That seems unduly expensive and difficult for a court to control. Are we to have discovery disputes the day before a trial if the litigation process is to be controlled?
This is not just a theoretical problem. At least for appraisals of privately held companies or for companies that lacked a reliable public market or a proper sale process before the merger, the typical valuation method used in Delaware is a discounted cash flow analysis. That valuation method is notoriously subject to an “expert’s” subjective views of the company’s future earnings that he then discounts to a present value as of the merger date. But, how do you know if those predictions are accurate? One way is to measure the expert’s future earnings prediction against the post-merger reality. Permitting post-merger discovery into that reality will then result if post-merger facts are admissible evidence.
The same problem occurs when the defendant in the appraisal action claims that the deal price included future cost savings or other synergies that the appraisal statute prohibits from being considered as part of the fair value of the company at the time of the merger. While it seems ironic that a buyer claims that the amount it paid for a company is above its fair value, that happens all the time. Does that mean then that discovery into the post-merger cost savings or other synergies is appropriate to see if those really did take place as a result of the merger or were in the works before the merger took place. If so, where does that end?
On the other hand, cutting off evidence of what really happened after a merger as proof of an expert’s accurate or inaccurate opinions does seem troublesome. The Court of Chancery members are dedicated to reaching a just result. To tell them they should ignore a boom or bust in earnings after the merger is a hard argument to make. As a result, the court often reaches a compromise.
The recent decision in In re Appraisal of Jarden, Del. Ch., C.A. No. 12456-VCS (Sept. 7, 2018), is an example. There the court permitted the use of “post-signing financial documents” in an appraisal proceedings because the “weight, if any” would be considered in light of all the evidence. While admittedly “post-signing” evidence is not the same as “post-merger” evidence, the same rationale should apply to both types of evidence. One key may be why the post-merger evidence is offered as proof. An expert who testifies a company’s future is bright or dismal should have that opinion subjected to the light of post-merger events. An expert who testifies a deal price reflects projected future cost savings may have that opinion subjected to evidence that no such savings took place as proof they were never a factor in the sale price.
In short, the answer to the question are post-merger facts ever relevant in an appraisal proceedings is “it depends.” Like much of the law, the actual facts of each case matter to the court. Careful planning is required to deal with this issue.