An Eckert Seamans associate prepared this overview.
The thorough 75-page post-trial decision in Merion Capital L.P. v. Lender Processing Servs., Inc., C.A. No. 9320-VCL (Dec. 16, 2016), is a must read for those involved in appraisal proceedings. In the memorandum opinion, Vice Chancellor Laster provides a comprehensive analysis of the fair value of Merion Capital L.P.’s and Merion Capital II L.P.’s (collectively “Merion”) shares in Lender Processing Services, Inc. (“LPS”) upon LPS’s merger with Fidelity National Financial, Inc. (“Fidelity”).
Background: LPS provided services and analytics related to the mortgage lending industry. Merion had purchased 5,682,276 shares of LPS stock after the merger with Fidelity was announced, but before a stockholder vote. On January 2, 2014, the merger closed. Fidelity’s stock price had increased in the interim, resulting in an increase in the merger consideration. The “Initial Merger Consideration” was $33.25 per share. The aggregate merger consideration received by LPS’s stockholders at closing was $37.14 per share (the “Final Merger Consideration”).
Merion demanded appraisal, did not withdraw its demand, and did not vote in favor of the merger. Merion pursued the instant action to obtain a judicial determination of the fair value of its shares. LPS asserted that the Final Merger Consideration was a ceiling for the fair value of the company.
Court’s Analysis: The Court provided a detailed overview of its valuation methodology. Pursuant to DGCL § 262(h), it was required to consider all relevant factors to determine the fair value of the shares. In contrast to other types of proceedings, in this statutory appraisal action, both sides were required to prove their respective valuation positions by a preponderance of the evidence.
Under Delaware law, the concept of fair value is different than fair market value. Thus, as set forth by the Delaware Supreme Court in Tri-Continental Corp. v. Battye, 74 A.2d 71 (Del. 1950), the Court explained that “fair value” encompasses consideration of market value, asset value, dividends, earning prospects, the nature of the enterprise, and other relevant facts at the time of the merger.
The Court noted that deal price is a relevant factor in appraisal proceedings. However, price data alone is not conclusive in determining fair value. The Court may only rely on the merger price as evidence of fair value when the process leading up to the transaction is reliable, which is a fact-specific inquiry. Accordingly, the Court advised that a skillful and persuasive argument presented by counsel in a particular case may not prevail in another case given the unique qualities of different transactions.
With this background in mind, the Court determined that LPS demonstrated that its Initial Merger Consideration provided reliable evidence of LPS’s value at the effective time of the merger. This holding was based on many factors, including the existence of meaningful competition among multiple, different types of bidders during the pre-signing phase, input from management and financial advisors regarding strategic alternatives, equal treatment and the availability of adequate and reliable information to each potential bidder, and the absence of evidence of collusion or favoritism.
Additionally, taken as a whole, the trial evidence established that the Final Merger Consideration was a reliable indicator of the fair value as of the closing of the merger. Because of synergies and a post-signing decline in LPS’s performance, the fair value of LPS as of the closing date did not exceed the Final Merger Consideration. Specifically, during the seven month period between signing and closing, no other bidder submitted an indication of interest or made a competing proposal. While the Court was critical of go-shop and window-shop phases in the months prior to the stockholder vote, it found that the existence of such was inconclusive, as LPS was still able to entertain superior proposals. Moreover, immediately after the merger was announced, the record indicated that Fidelity’s performance improved, causing an increase in the value of the merger consideration, as reflected by the Final Merger Consideration.
The Court also considered expert opinions in reaching its valuation determination. Although the Final Merger Consideration was $37.14 per share, Merion proffered a DCF analysis to support that LPS’s fair value at closing was $50.46 per share. LPS relied on a DCF analysis to support that the fair value at closing was $33.57 per share. Vice Chancellor Laster noted that “[t]he DCF…methodology [as opposed to deal price] has featured prominently in [the Chancery] Court because it is an approach that merits the greatest confidence within the financial community.” The Vice Chancellor outlined the DCF methodology, and adopted values from both sides’ experts at different steps based on the persuasiveness of their opinions. Accordingly, the Court’s best estimate of the fair value of LPS based on the DCF methodology resulted in a figure of $38.67 per share.
However, the Court explained that it has discretion to adopt one methodology over another, i.e., deal price or the DCF methodology. While noting that its DCF valuation was within 3% of the Final Merger Consideration, the Court gave 100% of its weight to the transaction price because a DCF analysis relies heavily on assumptions.
Conclusion: Ultimately, the Court found that the fair value of LPS on the closing date was $37.14 per share, the value of the Final Merger Consideration, or the deal price. This conclusion was based largely on a finding of reliability in the process leading up to the transaction.