Saturday, February 17, 2018
Dell's Other Shoe
The possibility lurking in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd, 2017 WL 6375829 (Del. Dec. 14, 2017), has now materialized.
For those of you just joining us, in Dell and DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Delaware Supreme Court threw some cold water on the practice of appraisal arbitrage. The two decisions suggest that in an appraisal action, courts should not try to conduct their own valuation of a company except in unusual circumstances; instead, where the deal was negotiated appropriately, the deal price itself represents the best evidence of fair value.
That alone would be enough to discourage would-be appraisers, absent evidence of significant dysfunction in the process by which the deal price was reached, but the decisions went further: both contained extensive endorsements of the efficient markets hypothesis and the accuracy of market pricing. In the context of the opinions themselves, the market price discussions were puzzling, because they played little role in the Court's actual analysis. In both cases, the Court ultimately suggested that the deal prices - which were above market price - were appropriate. At the same time, however, in neither case did the defendants argue that the deal price included value arising from the merger itself (which is unavailable in an appraisal action) - a point that the DFC court in particular highlighted.
That left open the possibility that in future cases, defendants would be able to successfully argue that the market price of a publicly traded company is the best evidence of its value, and that any premium above that amount represents value arising out of the merger. Such an argument would leave appraisal petitioners with, at best, market price - which is usually a figure less than the deal price, rendering the appraisal remedy itself not worth pursuing for most publicly-traded companies. Worse, it would do so even in situations where there were significant problems in the deal negotiations. After all, no matter how hair-raising the process by which the deal price was reached, if that price was above market price - and if market price is evidence of the standalone fair value of the target as a going concern - then appraisal provides no remedy.
Well, that's what just happened. In Verition Partners Master Fund, Ltd., et al. v. Aruba Networks, Inc., C.A. No. 11448-VCL, memo. op. (Del. Ch. Feb. 15, 2018), VC Laster concluded that after Dell, he had no choice but to accept the market price as the best evidence of the target's fair value - even in the face of evidence that the acquirer made an employment offer to the target's CEO while negotiations were continuing (in violation of a prior agreement with the target, and without the Board's knowledge), and in the face of evidence that the target's financial advisors were trying to curry favor with the acquirer. As a result, he awarded the dissenters the pre-deal market price of $17.13 per share, a figure significantly below the merger price of $24.67 per share.
It appears that unless the Delaware Supreme Court steps in to say this isn't what it meant in Dell and DFC, going forward, appraisal arbitrageurs will have to show both that there were dysfunctions in deal negotiations, and that there were significant reasons to distrust the pre-deal market price, before they can hope to come out ahead. That'll be quite an uphill climb.
Great post - I am relieved to see that Cavalier Oil remains untouched as I just finished teaching it in Corporate Finance!
Posted by: Steve Diamond | Feb 21, 2018 2:02:25 PM
Heh - I keep being relieved, as compared to other areas of law these days, Biz Law is relatively stable!
Posted by: Ann Lipton | Feb 21, 2018 2:03:45 PM
Frank - yeah, the issue of course is Corwin. Just how much do we trust the stockholder vote to cleanse fiduciary breaches? Are stockholder votes truly uncoerced in these circumstances? Etc.
Posted by: Ann | Feb 21, 2018 3:15:50 PM
This seems right to me. Unless the acquirer and the target somehow suppressed alternative bids, the sale price is the best measure, even if those conducting the transaction had ulterior motives, like a job offer. The remedy in that case should IMO be a fiduciary duty claim against the people who acted contrary to the corporation's interests, not extra money to only some shareholders via the appraisal route.
Posted by: Frank Snyder | Feb 18, 2018 11:02:36 AM