Appraisal Unpredictability: Delaware Court Awards 31% Less Than Deal Price
By David Shine & Joseph Eno
Be careful what you wish for. The wisdom of this trope is starkly demonstrated by the recent Delaware Court of Chancery decision in Verition Partners v. Aruba Networks. That decision addresses appraisal claims brought by Aruba stockholders seeking the “fair value” of their shares in connection with the 2015 acquisition of Aruba by Hewlett-Packard. In that acquisition, Hewlett-Packard paid $24.67 per share for Aruba, which was a premium of 34% over Aruba’s market price before news of the potential transaction was first reported. Prior to entering into the transaction with Hewlett-Packard, Aruba’s investment bankers had, at the request of Aruba’s Board of Directors, done a “market check” with a dozen or so other possible strategic acquirers.
The Court of Chancery, citing the recent Delaware Supreme Court decisions in Dell v. Magnetar and in DFC v. Muirfield, was wary of relying on a discounted cash flow analysis to determine fair value because it believed that “reliable market indicators” of fair value existed. Reliable market indicators exist, according to the Court, where a transaction involves the sale of a publicly traded company in an open process. In such circumstances, the two best proxies for fair value are either deal price (less merger synergies and less reduced “agency costs” that result from unitary ownership) or unaffected trading price (assuming a sufficiently efficient trading market—shares are widely traded and there is no controlling stockholder). With respect to using deal price as a proxy for fair value, the Court in Aruba did not want to engage in the “exercises of human judgment” necessary to determine the value of merger synergies and reduced agency costs that would need to be deducted from the deal price in order to arrive at fair value. And so the Court instead used unaffected trading price (Aruba’s 30-day average unaffected market price of $17.31) as the best proxy for fair value. This resulted in the stockholders seeking appraisal being awarded about 31% less than the price they would have received had they accepted the deal price.
The Aruba decision is noteworthy in part because of the size of the discount to the deal price that the Court applied. But it is also noteworthy since it comes on the heels of the recent Dell and DFC decisions which have been widely read to stand for the proposition that when a company is sold in an “open process, informed by robust public information and easy access to deeper, non-public information,” the deal price will be the best evidence of fair value for purposes of appraisal.
Appraisal claims in Delaware have been growing in number and value, and show no signs of decreasing. In 2012, there were 16 appraisal claims brought with a value of approximately $129 million and in 2016, there were 62 appraisal claims brought with a value of approximately $1.9 billion. However, even though the Aruba decision is likely to be appealed, the decisions in Dell, DFC, and Aruba suggest that the risk to acquirers of adverse appraisal decisions may be decreasing, and the risk to stockholders/arbitragers seeking appraisal may be increasing.