Delaware Supreme Court Upholds Reliance on Merger Price in Appraisal Action
Appraisal is a remedy, available in all private company mergers and all public company mergers where the consideration is anything other than shares of the surviving company or public company stock, by which dissenting stockholders may petition for the “fair value” of their shares without having to prove fault. The past several years have seen the rise of so- called “appraisal arbitrage,” in which entities purchase shares after the announcement of the merger in order to pursue an appraisal claim. As a result, guidance from the Delaware courts as to the contours of, and valuation methods used in, an appraisal proceeding has become more and more relevant both to lawyers and their clients.
In an appraisal proceeding, stockholders are entitled to receive in cash the judicially determined “fair value” of their shares, which excludes any value that arises as a consequence of the merger. To determine fair value, the Court of Chancery will consider “all relevant factors,” but has been instructed by the Delaware Supreme Court that it may not presumptively favor the merger price. Notwithstanding this prohibition on presumptively favoring the merger price, in Huff Fund Investment Partnership v. CKx, Inc., the Delaware Supreme Court affirmed the Court of Chancery’s decision concluding that the price paid in a third-party arms’-length merger was the most probative evidence of fair value.
In Huff Fund, the Court of Chancery found that the merger process included “a full market canvas and auction” and that the respondent company’s board had successfully “instigated a bidding war” for the company. The Court further determined that the company could not be reliably valued using standard valuation methodologies such as a comparable companies analysis or a discounted cash flow analysis. Thus, although the Court of Chancery did not give presumptive weight to the merger price, given the lack of other reliable valuation evidence, the Court determined that “the merger price [was] the most reliable indicator of value.”
After determining that the merger price was the best evidence of the fair value of the appraisal petitioners’ shares, the Court separately considered any element of value that arose from the accomplishment or expectancy of the merger that was required to be excluded from its appraisal award. Although the Court noted that the record did not reflect that any value in the merger price was attributable to post-merger synergies, the Court allowed both parties to submit additional evidence on that issue. Both parties declined to submit additional evidence, and after hearing oral argument, the Court set the fair value of the shares at the merger price.
The Delaware Supreme Court affirmed the Huff Fund opinions in a two paragraph order relying completely on the Court of Chancery’s analysis. The Delaware Supreme Court’s affirmance of Huff Fund follows a recent Court of Chancery decision similarly awarding the merger price as fair value to an appraisal arbitrageur. See In re Appraisal of Ancestry.com, Inc., 2015 WL 399726, at *24 (Del. Ch. Jan. 30, 2015). Whether the timing of these opinions indicates a trend toward more “fair value” determinations reflecting the merger price that arose from a third-party arms’-length bargaining process remains to be seen.
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