Mitchell Mengden, a second-year law student at the Georgetown University Law Center, who will be clerking at the Delaware Court of Chancery for the 2020 term, prepared the following synopsis:
The Delaware Supreme Court, in a per curiam decision, recently determined that “deal price less synergies” was the appropriate determination of fair value in the appraisal action before it. In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Apr. 16, 2019), the Court reversed the Court of Chancery’s holding that “unaffected market price” was the fair value on the date of the merger. This case is the third in a recent trilogy of precedent-setting Delaware appraisal cases, preceded by DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017). This case has been the subject of extensive commentary by scholars and practitioners in the short time since its publication. Thus, we will only highlight key aspects of this important decision.
Background:
Hewlett-Packard Company approached Aruba Networks about a potential combination. Both were publicly traded companies. Aruba shopped the deal, approaching five other strategic bidders in the process. After several months of negotiations with HP, the Aruba board accepted HP’s offer of $24.67 per share.
Once the transaction was consummated, Verition Partners Master Ltd. and Verition Multi-Strategy Master Fund Ltd. sought appraisal in the Court of Chancery under Section 262 of the DGCL. Verition argued that Aruba’s fair value was $32.57, but Aruba maintained that its fair value was “deal price less synergies”—$19.10 per share.
After the Supreme Court issued its opinion in Dell, the Vice Chancellor requested supplemental briefing on “the market attributes of Aruba’s stock.” In its brief, Aruba abandoned its “deal price less synergies” approach and instead argued that its preannouncement stock price was its fair value at the time of the merger. The Court of Chancery subsequently considered three approaches to fair value in its post-trial opinion: the “unaffected market price” of Aruba’s stock before the merger announcement (i.e., thirty-day unaffected market price); deal price less synergies; and two expert witnesses’ valuations, which were based primarily on DCF models.
The Court of Chancery ultimately gave no weight to the parties’ DCF models. In calculating deal price less synergies, the Vice Chancellor found that the appropriate value was $18.20. But the Court of Chancery nonetheless neglected to adopt this value because the “deal-price-less-synergies figure continues to incorporate an element of value resulting from the merger” in the form of “reduced agency costs that result from unitary (or controlling) ownership.” The Court of Chancery therefore concluded that the unaffected market price of Aruba’s stock before the merger announcement—$17.13—was the fair value at the time of the merger.
The Court of Chancery denied Verition’s Motion for Reargument. This appeal followed.
Analysis of the Court:
The Court emphasized that in an appraisal action under DGCL Section 262, the Court of Chancery must evaluate the value of the company as a “going concern” less any synergy or other value the buyer expects from changes it plans to make to the company.
The Supreme Court, in particular, took issue with the Court of Chancery’s determination that deal price less synergies must be further reduced to account for “reduced agency costs.” The Vice Chancellor’s theory appeared to be that consolidation of ownership aligns the interest of a company’s managers and its public stockholders in such a way that reduces agency costs. As the Court alludes to, this theory is more applicable to a private equity deal that results in a concentrated group of owners, whereas this transaction was merely “swap[ping] out one set of public stockholders for another: HP’s.” Slip op. at 10. Even if reduced agency costs were applicable to this transaction, it is likely that they were priced into HP’s estimate of its expected synergies. See id. at 9–11.
The Court also discussed Delaware’s long history of applying corporate finance principals in appraisal proceedings in ways that depend on market efficiency. See id. at 15–18. In addition the court noted that:
Dell and DFC did not imply that the market price of a stock was necessarily the best estimate of the stock’s so-called fundamental value at any particular time. Rather, they did recognize that when a market was informationally efficient in the sense that ‘the market’s digestion and assessment of all publicly available information concerning [the Company] [is] quickly impounded into the Company’s stock price,’ the market price is likely to be more informative of fundamental value. See footnotes 51–52 and accompanying text.
Yet, this does not necessarily imply that an informationally efficient market price reflects the company’s fair value on appraisal. The Court explained that, as in DFC and Dell, deal price is a better indicator of fundamental value than preannouncement market price because it is further informed by the due-diligence of arm’s length buyers that prices in confidential non-public information. See footnote 56 and accompanying text. For example, HP was privy to Aruba’s strong quarterly results. When the results were made public (after the period the Court of Chancery used to measure “unaffected market price”), Aruba’s stock price jumped 9.7%.
In addition to arguing that the Court of Chancery double counted agency costs, the Supreme Court raised due process and fairness concerns. See id. at 21–23. The Court reasoned:
As Verition argued, the Vice Chancellor’s desire not to award deal price minus synergies could be seen—in light of his letter to the parties and the overall tone of his opinion and reargument decision—as a results-oriented move to generate an odd result compelled by his personal frustration at being reversed in Dell. . . Because the Vice Chancellor introduced this issue late in the proceedings, the extent to which the market price approximated fair value was never subjected to the crucible of pretrial discovery, expert depositions, cross-expert rebuttal, expert testimony at trial, and cross examination at trial. Id. at 21–22.
The Court concluded that Aruba’s deal price less synergies value was supported by the record and, therefore, a final judgment in the amount of $19.10 plus any interest to which the petitioners are entitled should be entered.
Key Takeaways:
- Agency costs are priced into synergy and therefore, in appraisal actions, the Court of Chancery need not further reduce deal price less synergies to account for such costs. Although the Court distinguished between strategic and private equity buyers, noting that agency costs are more likely to be relevant in a private equity transaction, it suggested that such costs would be priced into synergies in either situation.
- Despite not explicitly creating a presumption in favor of deal price, the Court continues to hint that such a presumption exists. The Court held:
DFC and Dell recognized that when a public company with a deep trading market is sold at a substantial premium to the preannouncement price, after a process in which interested buyers all had a fair and viable opportunity to bid, the deal price is a strong indicator of fair value, as a matter of economic reality and theory. The apparent novelty the trial judge perceived is surprising, given the long history of giving important weight to market-tested deal prices in the Court of Chancery and this Court, a history that long predated the trial judge’s contrary determination in Dell. See footnote 41 and accompanying text.
The Court’s discussion of the value of access to non-public information further supports this contention. See id. at 17–22.
- It is unclear whether the Court would accept “unaffected market price” in a future appraisal action. This case suggests that such a valuation is inapplicable in an arms-length-transaction, such as HP’s acquisition of Aruba. But the Court did not indicate whether unaffected market price may be used with respect to a transaction that was not arms length, particularly in a case in which such an argument was raised in a timely manner.