Provocative Delaware Chancery decision favors stock price over other fair value indicators
After the Delaware Supreme Court struck down the Court of Chancery’s fair value determinations in DFC Global and Dell, the lower court recently sought to apply the high court’s directives in another statutory appraisal proceeding. The Supreme Court said that, when there’s an efficient market, “the collective judgment of the many,” reflected in the deal price, provides a better gauge of fair value than a single analyst’s discounted cash flow analysis. But what if there is more than one market indicator, as happened in the recent Court of Chancery case? Neither DFC Global nor Dell addressed this possibility, and the Court of Chancery’s resolution of the issue is likely to trigger more litigation.
Synergy-driven merger: In May 2015, Hewlett-Packard (HP) acquired Aruba Networks for $24.67 per share. This was a synergy-driven transaction. As part of the statutory appraisal proceeding, the Court of Chancery found the deal price minus synergies was $18.20 per share. In contrast, the 30-day average unaffected market price was $17.13 per share.
The parties’ trial experts offered DCF-based valuations. While the petitioner expert’s model “appears to be sound,” the court was concerned about the degree to which the $32.57-per-share price diverged from market indicators. The company’s expert prepared a number of valuations. While his final value—$19.75 per share—was relatively close to the market evidence, the court questioned the “methodological underpinnings” of the analyses. It disregarded the experts’ DCF results and did not perform its own valuation.
The choice of most reliable indicator of fair value came down to stock price versus deal price minus synergies. The court, finding this was an arm’s-length deal and there was an efficient market, said the stock price represented “direct evidence of the collective view of market participants as to Aruba’s fair value.” It was preferable to the deal price, which required adjusting for synergistic value as well as value related to the “reverse agency costs.” Vice Chancellor Laster, who wrote this opinion, as well as the original Dell opinion, thought the high court’s recent opinions militated against the “judgment-laden exercise of backing out synergies.” However, Vice Chancellor Laster also acknowledged that “no one argued for this result.” The court’s fair value was below the deal-price-minus-synergies and the company expert’s DCF-based result, not to mention the petitioners’ proposed value. Stay tuned.
