Wednesday, February 8, 2017
Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v. Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court. The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever: "By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open."
Point #1: Master Class in Persuasive Legal Writing: Framing the Issue
Reversal Framing: "This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process."
Affirmance Framing: "This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale."
Point #2: Summary of Brief Supporting Fair Market Valuation: Why the Court of Chancery should defer to the deal price in an arm's length auction
- It would reduce litigation and simply the process.
- The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that's a rough point to make).
- Appraisal does not properly incentivize the use of arm's length auctions if they are not sufficiently protected/respected.
- Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range. The inquiry should be whether the transaction price is within the range of a fair price. A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
- Appraisal process is flawed because the court discounted the market price in its final valuation. The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
- Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of "real" valuations.
- The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process. Evidence of this is the creation of appraisal closing conditions.
Point #3: Summary of Brief Supporting Appraisal Actions: Why the Court of Chancery should reject a rule that the transaction price—in an arm's length auction—is conclusive evidence of fair price in appraisal proceedings.
- Statutory interpretation requires the result. Delaware Section 262 states that judges will "take into account all factors" in determining appraisal action prices. To require the deal price to be the "fair" price, eviscerates the statutory language and renders it null.
- The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the "all factors" language.
- The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
- There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
- The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
- Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
- Any distortion of the THE market by appraisal actions is a feature, not a bug. All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts. Any affect that appraisal actions create have social benefits and are an intended benefit.
- Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.
My thinking in the area more closely aligns with the "keep appraisal action full review" camp on the theory--both policy and economic. Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!). I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow. I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome. Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief. These are all points that I invite readers to weigh in on the comments--especially those with experience litigating these cases.
I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty. This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.
For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic-- these two briefs distill the relevant case law and competing theories with considerable force.