Last week we published the first of three installments of our Delaware Appraiser Series. We reviewed the fair value standard and some notable differences between the fair value standard used in the Delaware Chancery Court and fair market value defined in Revenue Ruling 59-60 of the Internal Revenue Code.
There have been some recent developments in the Delaware Chancery Court providing further guidance on fair value. A number of these cases focus on the process used in “shopping” the subject company for sale; particularly when one side is seeking value in excess of an actual transaction. The Court has highly scrutinized or ignored the transactional value, depending on the sale process relied upon in their analysis. We leave the formal “briefing” to you, but we wanted to identify those cases that we think will be of interest.
DELL INC V. MAGNETAR GLOBAL EVENT DRIVEN MASTER FUND LTD ET AL
On appeal, the Delaware Chancery Court revised its opinion as to whether Silver Like Partners had perfected their appraisal rights. Silver Like Partners claimed Dell’s shares were worth more than the management buy-out price of $13.75 per share, a 37% premium to the Company’s ninety-day average unaffected stock price. The Court found that market pricings of Dell’s shares should not have been ignored and were relevant. In its original determination, the Court used a discounted cash flow method only, because the market was determined to be “inefficient.”
A key finding in this appeal is summarized below:
“The issue in an appraisal is not whether a negotiator has extracted the highest possible bid. Rather, the key inquiry is whether the dissenters got fair value and were not exploited.”
IN RE SOLERA HOLDINGS INC
Vista Equity Partner’s acquisition price of $55.85 per share, 53% above the unaffected traded price, was disputed. Although the bidding process resulted in higher bids, the board went forward with Vista’s offer. The Court dismissed the Complaint, finding that shareholders received adequate disclosure.
A going private merger offering an $83.00 cash value per share was disputed valuing the shares at $128.78 per share, based upon inflated projections prepared by management. Prior to the transaction, Petsmart was shopped in a bidding process. The court found that the bidding process satisfied the fair value requirements of a “fair sales process and a well-functioning market.” Petsmart’s shares had never traded above the offer price of $83 given that an auction was performed. The Court ruled that the transactional value was sufficient evidence of fair value.
IN RE APPRAISAL OF AOL INC
The Court determined the value of AOL at $48.70 per share, approximately 14% above the unaffected trading price of $42.59 and 3% below the deal price of $50.00 offered by Verizon. The focal point in their finding was the way AOL was marketed for sale as a compliance test via the Dell Case. The compliance test is defined by the court as where: (i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself.
In holding that the AOL deal did not meet the criteria, the Court performed its own valuation based upon a discounted cash flow method with adjustments.
VERITION PARTNERS MASTER FUND LTD ET AL V. ARUBA NETWORKS
Appraisal rights were perfected and Hewlett-Parkard’s $24.67 per share acquisition of Aruba Networks, Inc. was litigated. The transaction price included a 44% premium above Aruba’s thirty-day average unaffected market price of $17.13 per share. Here, the Court concluded a value of $18.20 per share by deducting synergies from the deal price. The Court found that that the shareholders were “not exploited” as referenced from the Dell decision.
IN RE APPRAISAL OF AOL INC
The Court re-issues an opinion regarding its previous finding that it ignored the transactional value as evidence of fair value and based upon its assessment of a discounted cash flow method value. Originally, the Court concluded a value of $48.70, but revised it to a lower value of $47.08 based upon a revised projection incorporating a different time frame for a deal that was in process at the time of the merger.
Please feel free to contact us if you have any matters requiring appraisal or valuation issues. In the interim, look for Part 3 of 3 of this email series where we discuss other issues involving Delaware valuation cases.