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By Jacob Rund
Delaware judges are grappling with a “judicial correction” that’s shaken up the process for assessing merger prices.
The state’s high court last year issued a pair of high-profile decisions in cases where a target company’s stockholders sat out a merger to ask the Chancery Court to assess the fair value of their shares. Critics complain Delaware’s appraisal statute has fueled appraisal arbitrage, where investors buy a company’s shares after a deal is announced with the sole intent of petitioning the court for an increased price.
Lower court judges have cited the Supreme Court’s rulings to hold that the share price negotiated during two recent deals was fair — or even too high. These recent decisions by the chancery court and the Supreme Court have created uncertainty among transactional lawyers about the fate of appraisal cases in Delaware.
The actions of the high court are the result of a “judicial correction,” the trial court’s chief judge, Chancellor Andre Bouchard, told attendees gathered at a corporate law conference this month in New Orleans. “Significant” differences between deal price and the chancery court’s valuation in several cases prompted the high court to step in, he said.
“Obviously it’s a pretty tumultuous time in the jurisprudence that we’re going through right now,” Bouchard told the Tulane Corporate Law Institute on March 15. Both he and Vice Chancellor Joseph Slights spoke at the conference, offering uncommon insight into how they approach these cases.
“Appraisal is the screwiest thing I’ve ever dealt with as a trial judge,” Slights said during a separate panel discussion March 16.
The number of appraisal petitions is declining, likely due in part to decisions of the Delaware courts, even though the state’s legislature has kept the appraisal statute in place.
The Delaware Supreme Court used two opinions in the second half of 2017 to give the chancery court new guidance on assessing the fair value of investors’ shares.
In DFC Global Corp. v. Muirfield Value Partners LP, the court overturned the chancery court’s determination that “fair value” of the deal was actually above the negotiated deal price, a decision the lower court had reached through its own analysis. The deal price reached by the merging companies should be given “significant weight” unless the sale process wasn’t robust, the high court said.
And in Dell Inc. v. Magnetar Global, the Supreme Court partially reversed the lower court’s opinion that the “fair value” of each Dell share was almost 30 percent higher than the deal price.
In both cases, the Supreme Court refused to adopt the presumption that negotiated deal value should be fair value in most instances, but the decisions inched the lower courts in that direction.
The lower court last month had its first chance to apply DFC and Dell. In Verition Partners Master Fund Ltd. v. Aruba Networks Inc., Vice Chancellor J. Travis Laster ruled that HP Inc.'s purchase of Aruba Networks Inc. for $24.67 per share was more than fair.
He valued the petitioners’ shares at $17.13 each, relying on Aruba’s 30-day average unaffected market price before the deal was announced. This excluded any benefits gained by the merging companies, including synergies and a decrease in “agency costs.”
Aruba was a “controversial decision, and it’s obviously going to influence other cases,” Ann Lipton, a Tulane University business law professor, told Bloomberg Law. “It really finally puts something like the nail in the coffin for almost all appraisal arbitrage cases.”
Less than two weeks later, Vice Chancellor Sam Glasscock awarded dissenters less than the deal price for Verizon Communications Inc.'s $4.4 billion buyout of AOL Inc. Glasscock gave no weight to the deal price in his own analysis due to concerns with the way the merger agreement was struck, but his valuation still came in below the negotiated price after factoring out any earned synergies.
If Delaware’s high court backs the lower court’s reliance on market price for most deals, it could make appraisal cases far less profitable and thus less frequent.
Lipton said that there could still be cases where parties argue that the market wasn’t efficient, thereby refuting the market price debate. “But for most publicly traded companies, that will be a tough sell,” she said.
There might also be arguments that there was information not known to the market, which is “probably more plausible,” she said.
If the underlying idea in Aruba — that market price reflects fair value — becomes the norm, “then that’s a set of risks that you can’t control by picking your cases” as a petitioner, she added.
“What’s clear is that the Delaware Supreme Court thinks that appraisal arbitrage has gotten out of control,” Lipton said. “They think that the reliance on [the court’s] analyses when there are other kinds of reliable evidence just sets the Chancery Court to be making decisions that it really isn’t equipped to do.”
Slights told the Tulane conference that having to rely on “accepted financial principles” in appraisal decisions can present a challenge when parties don’t provide enough supportive financial research and accompanying explanations.
The state Supreme Court, in its DFC opinion, encouraged the Chancery Court to use corporate finance standards and the facts in the record to justify its fair value assessments.
“What I am not going to do until I’m told otherwise is do my own independent search, either pre-trial or post-trial, for what are or are not accepted financial principles,” Slights said. “Financial principles are matters of fact, they are not matters of law.”
“They are not something for me to go on” a legal database and look for if parties don’t cite enough law to help me, he added.
Bouchard echoed this point. “The mandate we’re operating under as trial court judges now is to have the accepted financial principles. Well, where do you go for it?” he said.
Slights said attorneys should tell their financial experts — used by both parties to support their own valuations — to rely on and explain the importance of any financial text that they want him to read.
“Don’t expect that I’m going to go out and look for it,” he said. “That’s not happening.”
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