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Appraisal Rights Litigation Blog

Chancery Court Selects Lead Counsel, Will Clarify Rules for Non-Lead Attorneys**

Posted in Lead Counsel

As reported in today’s Law360 [$$], the Delaware Chancery Court chose lead counsel and consolidated several petitions in the Stillwater Mining appraisal case.  As reported in the article, Vice Chancellor Laster stated during yesterday’s hearing that “he would clarify rules for keeping non-lead attorneys in the loop on key documents and proposals,” and that his ruling reflected “an evolving court position on balancing the rights and responsibilities of law firms collaborating in class appraisal proceedings.”

** This law firm is counsel of record in the Stillwater Mining appraisal litigation.

Insurance and Appraisal

Posted in Appraisal Conditions, No Proof of Wrongdoing Needed

In a recent article on PolicyHolder Pulse attorneys from Pillsbury explore whether Directors and Officers (“D&O”) insurance covers, or could be considered to cover, Delaware appraisal claims.  Critical to this analysis is whether an appraisal case raises issues of “Wrongful Acts” by the Board – including, for example, collusive behavior, or other process defects.  The Pillsbury authors note that appraisal claims are often (though not always) coupled with breach of fiduciary duty claims (something that occurred in Dole), which involve claims of wrongdoing.  Of course no proof of wrongdoing, or even of defective process, is necessary for a successful appraisal action.  They also suggest Securities Claim coverage may be available, depending on the terms of the specific policy.  D&O Diary, after discussing the arguments made, summarizes the article as finding that there “may be substantial grounds” for arguments in favor of coverage.

Breaking Down the Delaware Supreme Court’s DFC Global Decision**

Posted in Fair Value, Merger Price, Perpetuity Growth Rate, Supreme Court

As we have posted before, the Delaware Supreme Court rendered its much-awaited ruling in the DFC Global case on August 1. Here’s a more detailed breakdown of the key elements of that ruling.

I. No Judicial Presumption Imposing Mandatory Merger Price Ruling

The Court started off its opinion by rejecting DFC Global’s request to establish “by judicial gloss” a presumption that fair value would be tethered to merger price in certain cases involving an arm’s-length M&A transaction. The Court said that it would “decline to engage in that act of creation, which in our view has no basis in the statutory text, which gives the Court of Chancery in the first instance the discretion to ‘determine the fair value of the shares’ by taking into account ‘all relevant factors.’” The Court adhered to its 2010 ruling in Golden Telecom in finding the statute’s “all relevant factors” inquiry to be broad, and reaffirmed the chancery court’s discretion to undertake that inquiry until such time as the Delaware legislature may choose to revise the statute in this regard (we are not aware of any such legislative activity currently underway).

The Court said it lacked the ability to craft, on a general basis, the precise preconditions that would be necessary to invoke a merger price presumption. Moreover, the Court found it had little need to do so, given the “proven record” of the chancery courts in exercising their discretion to give the deal price predominant – and at times, even exclusive – weight in those circumstances when they determine that merger price is the “most reliable evidence” of fair value.

II. The Supreme Court Directed Chancery to Reconsider the One-Third Weighting It Gave to Deal Price Given the Apparent Lack of a Conflicted or Management Buyout Here

In its valuation decision, the chancery court examined three metrics – deal price, comparable companies, and a discounted cash flow analysis – and gave equal one-third weight to each of those inputs. In resolving the “record-specific argument” about the role of the deal price in this case, the Supreme Court directed the chancery court to reconsider its approach and disagreed with chancery that regulatory headwinds facing DFC Global undermined the reliability of market prices in this case. In addition, the Supreme Court disagreed with chancery that a financial buyer – such as Lone Star, the private equity buyer here – would perform a valuation analysis that was necessarily lower than that done by a strategic buyer.

To the first point, the Court accepted the “case-specific issues” that DFC Global raised concerning the role that deal price should have in this case. The Court traced the history of the Delaware appraisal statute and the case law arising from it, finding that in 1989, the Supreme Court rejected a reading of the appraisal statute that would measure fair value by the price of stock trading in the public market as of the merger date; as the Court put it, the appraisal definition of “fair value” was more jurisprudential than economic. That definition required a valuation of the petitioners’ shares based on the “going concern” value of the stock, and that notion also disregarded any minority discount that would inhere in a stock-market price. Likewise, this definition of “fair value” as applied by the courts requires the exclusion of any value attributable to expected post-merger synergies to be achieved by the merged entity.

The Court proceeded with a lengthy survey of economics literature confirming the reliability of market pricing when such pricing accurately reflected what a willing buyer and willing seller would agree to without having any compulsion to buy. The Court found that market prices may generally be superior to other valuation techniques where they reflect the collective judgment of many persons who were incorporating publicly available information, as opposed to a single person’s performing his own valuation model, such as a discounted cash flow analysis. The Court thus observed that while chancery has broad discretion to make findings of fact, those findings of fact must be grounded in the record and consistent with principles of corporate finance and economics. With this background in mind, the Court did not believe that there was an adequate record basis in this case to support chancery’s decision to ascribe to deal price one-third of its valuation determination. More specifically, the Court disagreed with the chancellor’s finding that deal price was unreliable because DFC Global was in a trough, given the regulatory uncertainties surrounding its future performance. The Court said that it could not uphold that ruling, given the lack of any evidence in the record suggesting that the markets themselves were incapable of pricing such regulatory risk.

The Supreme Court noted that the chancery court decision observed, “importantly,” that there were no conflicts of interest in this transaction. Indeed, the Supreme Court stated that appraisal actions had the most utility when private companies were being acquired, or where public companies were being sold in a conflicted buyout, in which case market prices would be either unavailable or unreliable.

The Supreme Court thus quoted on two occasions the Chancellor’s finding that the deal here “did not involve the potential conflicts of interest inherent in a management buyout or negotiations to retain existing management.” Rather, in this case, where the company was not shown to have any conflicts relating to the transaction, and because it also had a “deep base of public shareholders” and “highly active trading,” the Supreme Court found that the price at which DFC Global’s shares traded was informative of fair value.  The Court thus found that DFC Global’s public shareholders, other buyers in the sales process and even participants in the market for DFC Global’s debt were capable of evaluating the regulatory risk that DFC Global faced, and there was no record evidence to the contrary.

III. The Supreme Court Rejected the Perpetuity Growth Rate Component of the Chancery Court’s Valuation Analysis

Turning to DFC Global’s next case-specific argument, the Court found that the chancery court erred when it increased the perpetuity growth rate it had initially used – from 3.1% to 4.0%, a 29% increase in the growth rate – after acknowledging in a post-trial reargument that it had made a clerical error, using lower working capital numbers in its model than it meant to. The Court found that instead of simply correcting the clerical error that was brought to its attention on reargument, the chancery court revised sharply upward its estimate of the perpetuity growth rate in response to a separate argument. The Supreme Court agreed with DFC Global in ruling that the record evidence did not rationally support the Chancellor’s decision to increase his original discounted cash flow model from an original perpetuity growth rate that was just below the ceiling that the chancery court had previously identified – namely, the risk-free rate for a stable-state company – to a much higher perpetuity growth rate.

The Court concluded its opinion by walking through its several reasons for finding that the trial record in this case did not support the 29% increase in the perpetuity growth rate that the chancery court had made upon reargument. The Court found that the original perpetuity growth rate was already bullish, being near the risk-free rate as it was, and that adding another 0.9% to that figure assumed, without accompanying record support, that another period of robust, above-market growth was on the way. The Supreme Court noted the lack of any evidence to that effect in the record, such as testimony by an industry expert or by management, or even any analysts’ commentary suggesting that the substantial growth of the payday lending industry implied by the Chancellor’s increased perpetuity growth rate was warranted.

In remanding – or, sending back – the case to the chancery court, the Supreme Court provided guidance to the Chancellor that if he were to rely upon a discounted cash flow analysis that generated a value higher than his original model after it was adjusted to use the correct working capital figures, he needed to point to specific bases in the record to validate the assumption that the company would continue to grow at a rate above the risk-free rate going forward into the future, beyond 2018.

IV. The Supreme Court Rejected the Cross-Appeal and Refused to Disregard the Comparable Companies Analysis

Finally, the Court addressed petitioners’ cross-appeal, in which they argued that the chancery court abused its discretion by giving any weight to its comparable companies analysis, and that the DCF model should have been given most, if not all, of the weight in the Court’s valuation analysis. The Supreme Court said that there was no basis to suggest in this case that market-based insights into value, such as a comparable companies analysis, somehow became inherently unreliable in downturns or in the face of regulatory changes that DFC Global faced in this case. Accordingly, the Court said it was not an abuse of discretion for the Chancellor to refuse to rely exclusively on a DCF model, and that his use of other factors, such as the comparable companies analysis, was not an abuse of discretion. To state it in the affirmative, the Supreme Court said the Chancellor was within his discretion in using the comparable companies analysis, as nothing indicated such a market-based metric was unreliable in this case.

V. Conclusion

Based on these holdings, the Supreme Court decided that it did not need to reach the larger issue of whether the Chancellor was correct in giving equal weight to the three valuation metrics that he used: the deal price, a comparable companies analysis and a DCF model. The Court refused to establish a blanket presumption in favor of tying fair value to merger price in all appropriate cases, and it concluded that the chancery court should continue to exercise its considerable discretion to determine fair value, but while doing so it should also explain why it was according a certain weight to a certain indicator of value. The Supreme Court did not find support in the record for the equal one-third weighting of each metric applied here, and so it directed the chancery court to reconsider its prior conclusions and determine what weighting it should give to each of the relevant factors here based on the guidance provided in this ruling and the specific evidence in the record in this case.

We will continue to monitor this case and post again regarding future developments, including the remand proceedings in the chancery court.

** As previously noted, this law firm was counsel of record to one of the amici briefs filed in this case.

Update: Read DFC analysis from Wachtell Lipton posted on the HLS Forum here.

Law360 Analysis: One Year After Prepayment Amendment

Posted in August 2016 Amendments, Interest on Appraised Value, Prepayment of Merger Consideration

Law360 [$$] recently carried an analysis by a trio of Delaware attorneys regarding the impact of 2016’s prepayment amendment to Delaware appraisal law.  Part of the August 2016 amendments allowed M&A targets to prepay dissenting shareholders an amount of their choosing, thereby stopping the accrual of interest on that portion of the merger price/amount at issue.  At the time of the amendments, there was meaningful debate whether the new rules – including the prepayment option – would curtail appraisal filings, with some commentators suggesting that they may in fact increase appraisal filings, focusing on the prepayment option.

This more recent analysis considers the last year of appraisal, and while the authors note that a year of data is insufficient to “draw any firm conclusions,” their analysis shows that “in the year following the Aug. 1, 2016, effective date of the amendment, appraisal filings have continued to increase.”  Echoing the pre-amendment analysis that the amendments may increase appraisal activity, the authors make note of the fact that as “appraisal litigation continues its upward trend despite the recent overall decline in M&A activity, this trend may suggest that, as discussed below, the prospect of prepayment is contributing to its continued rise.”

As previous analysis discussed, while prepayment may save on interest for a respondent company subject to appraisal, it otherwise frees up capital for investors to redeploy elsewhere – instead of having that capital ‘locked up’ in the appraisal action. Prepayment introduces additional strategic considerations in appraisal for both investors and respondent companies.

Delaware Supreme Court Decides DFC Global Appeal**

Posted in Fair Value, Merger Price, Perpetuity Growth Rate, Supreme Court

Today the Delaware Supreme Court reversed and remanded the appraisal decision of the Chancery Court in the highly watched DFC Global case.  A more detailed post will follow, but we wanted to flag the ruling in the meantime.

The court declined DFC Global’s request to impose a presumption by “judicial gloss” that would peg fair value at the merger price in cases involving arm’s-length mergers.  The court found that such an approach would have no basis in the statutory text, which gives the Chancery Court discretion to determine fair value by taking into account “all relevant factors.”

The court did accept two other “case-specific” arguments by DFC Global.  First, the Supreme Court directed that on remand (i.e., when the trial court gets the case back from the Supreme Court), the Chancery Court — which in its valuation analysis had given equal weight to each of (i) the deal price, (ii) its DFC analysis, and (iii) a comparable companies analysis — should reconsider the weight it gave to the deal price in finding fair value based on certain factors in this case.  Second, the Supreme Court found that there was not adequate basis in the record in this case to support the Chancery Court’s increase in the perpetuity growth rate it assumed for DFC Global from 3.1% to 4.0% when it corrected an error that had been raised during reargument.

In addition, the Supreme Court denied the cross-appeal, by which the stockholders argued that the DCF analysis be given primary, if not sole, weight in the valuation analysis. The court found that giving weight to the comparable companies analysis in this case was within the Chancellor’s discretion.

We will continue to monitor the proceedings to follow in the Chancery Court.

**As previously noted, this law firm was counsel of record on one of the amici briefs filed in this case.

Breaking Down The Clearwire-Sprint Appraisal Ruling

Posted in Discounted Cash Flow Analysis, Distinct from Fiduciary Duty Claims, Fair Value, Merger Price, Perpetuity Growth Rate, Synergies

As we previously posted, the Chancery Court appraised the fair value of Clearwire Corp. to be $2.13 per share, substantially below the $5 per share merger price paid by Sprint Nextel Corp in July 2013.  This post will provide a more detailed breakdown of the ruling and the bases for Vice Chancellor Laster’s opinion.

I. The M&A Transaction(s)

The court examined not only the underlying acquisition of Clearwire by Sprint, but also the related transaction by which Softbank Corp. — Japan’s largest telecom company — planned to acquire Sprint, immediately upon Sprint’s acquisition of Clearwire.  The sale process in effect proceeded in two stages, the first leg of which culminated in December 2012, with Sprint agreeing to pay $2.97 per share for Clearwire.  But shareholder reaction to that initial deal was extremely negative and drew active opposition.  At the same time, DISH, Sprint’s competitor, proposed a tender offer at $3.30 per share, along with other financing terms as well as demands regarding board appointments and other governance rights.  This intervention by DISH disrupted the sale process, which thus entered into a new phase that ultimately culminated in Sprint paying $5 per share in June 2013.  In particular, DISH and Sprint engaged in a bidding war starting in April that involved Sprint raising its $2.97 offer to $3.40, DISH topping that offer at $4.40 per share, and Sprint again increasing its bid to $5 per share in June 2013.

II. The Court Found the Clearwire-Sprint Transaction to Be Entirely Fair

Before reaching the appraisal issue, the court analyzed whether a breach of fiduciary duty had occurred and whether the transaction was entirely fair to overcome any claim of breach.  Because the transaction involved self-dealing by a controlling shareholder — Sprint owned just over 50 percent of Clearwire heading into the negotiations — the applicable standard of judicial review was entire fairness, with Clearwire bearing the burden of persuasion of proving that the transaction was entirely fair.

The court was persuaded that Sprint and Softbank actually did engage in a series of acts that constituted unfair dealing.  However, the court was not persuaded that any of that unfair dealing had any impact on the ultimate $5 merger price that was reached in June 2013.  Indeed, once DISH intervened in the process, the court found that the landscape had changed “so substantially as to render immaterial the instances of unfair dealing that took place during the first phase” of the sale process.  Opinion, at 50.  The court thus found that despite Sprint and Softbank’s unfair dealing during the first phase of the transaction, the eventual $5 merger price and the process that culminated in it were entirely fair.

Given this distinction between the two phases of the sale process, the court reviewed a series of missteps that would otherwise have rendered the transaction unfair, but because the deal price ultimately did not remain at $2.97 and increased to the revised $5 price, that any incidents that would have tainted the first phase of the transaction ultimately lost their relevance once Sprint increased the merger consideration to $5.

As the court summarized:

In a hypothetical world in which the Clearwire-Sprint merger closed at $2.97 per share, Sprint and Softbank’s interference with the stockholder vote on the Clearwire-Sprint merger would have warranted a finding of unfairness and an award of a fairer price.  Under those circumstances, the resulting award would not have approached $5.00 per share.  It likely would have anchored off of the Special Committee’s consistent demand of $3.15 per share, thereby giving credit to the contemporaneous judgment of Clearwire’s informed, independent fiduciaries. . . .  At $5.00 per share, the consideration received by the minority stockholders exceeded anything this court would have awarded as a remedy for unfair dealing.

Opinion, at 65.

III. The Court Disregarded the Merger Price That Followed a Bidding War and Included Massive Synergies

A. The Court Was Within Its Discretion to Select One Party’s Valuation Work

Having found the transaction to be entirely fair, the court then examined what the stock’s fair value should be to resolve the appraisal case.  The court relied on Delaware precedent providing a judge with discretion to select one of the party’s valuation models as its general framework, citing MG Bancorporation, Inc. v. LeBeau, 737 A.2d 513, 525-26 (Del. 1999).

The court found that with neither party having argued in favor of deal price, and with the record containing other reliable evidence of fair value, it did not consider at all the deal price but relied exclusively instead on a DCF analysis.  In doing its DCF analysis, the court found that the heart of the dispute — i.e., 90% of the difference in valuations as between the two sides — arose from the difference in the projections that each side’s valuation expert used.

B. The Court Found Projections Prepared by Clearwire Management in the Ordinary Course to Be the Most (and Only) Reliable Projections

The petitioners’ expert, Professor Gregg Jarrell, used the so-called Full Build Projections that were prepared by Sprint, while the respondent’s expert, Professor Bradford Cornell, used the so-called Single Customer Case projections that had been prepared by Clearwire’s management.  The court expressed a clear preference for the Single Customer Case projections, because they were prepared by the seller’s own management, and were done in the ordinary course of business.  The court found that the Single Customer Case projections accurately reflected Clearwire’s operative reality as of the merger date.  In contrast, the court held that the Full Build Projections were created by Sprint’s management team — not Clearwire’s — in order to convince Softbank to increase its offer and thereby top DISH’s offer price.  Accordingly, not only were the Full Build Projections created by someone other than management of the seller, but they were created by the buyer with the motivation of showing greater value in Clearwire in order to induce Softbank to bid higher.  Moreover, in examining the various assumptions underlying the Full Build Projections, the court found them to be without basis in the record and dependent on aggressive, “herculean” assumptions about future business with, and prices charged by, Clearwater, which were simply not a part of Clearwire’s operative reality.

In contrast, the court found that respondent’s use of Clearwire’s own Single Customer Case, which was prepared by Clearwire management in the ordinary course of business, was the more, and indeed only, reliable set of projections, as Clearwire’s management had significant experience in preparing long-term financial projections, and they regularly updated the Single Customer case, and even did so as recently as May 2013, within a month of the merger agreement.  While those projections did contemplate a significant increase in Sprint’s wholesale payments to Clearwire, the assumptions did not reflect the astronomical increases that the court found petitioners’ projections to rely on.  And in all events, the court found that Clearwire had tried for years to obtain additional customers, without success, and that there was no reason to believe that it would have had greater success in obtaining any additional customers in the years going forward.  Given its finding that the Single Customer Case was the most reliable set of projections reflecting Clearwire’s operative reality as of the merger date, the court adapted wholesale the respondent’s expert’s use of those projections in his DCF.

C. The Court Found Reasonable a Perpetuity Growth Rate Set at the Midpoint of Inflation and GDP

The only other significant differential in the parties’ DCF analysis was the perpetuity growth rate.  The court agreed with the respondent’s expert’s (Cornell’s) use of a perpetuity growth rate at 3.35%, which represented the midpoint of inflation and GDP growth. The petitioners’ expert (Jarrell) used a perpetuity growth rate of 4.5%, which represented expected GDP growth.  To the extent that Jarrell’s justification for his use of GDP growth was based on Clearwire’s expected performance under the Full Build Projections, the court rejected that rationale, having rejected the notion that the Full Build Projections reflected the realistic future performance of Clearwater for the projection period.  Indeed, the court found Cornell’s choice of the midpoint between inflation and GDP to be more realistic — if anything, more generous for Clearwire — given the likelihood that Clearwire would require ongoing financing from Sprint in order to remain solvent under the Single Customer Case.

The court proceeded to discuss minor differences in some of the components of the discount rate, as well as the parties’ dispute over the value that should be added to the DCF based on Clearwire’s unused spectrum.  Once again, the court generally rejected Jarrell’s assumptions in these areas, although none of these issues had a significant impact on the valuation analysis.

IV. Conclusion

Based on these factors, the court adapted Cornell’s DCF valuation in its entirety, and awarded the petitioners fair value at $2.13 per share, the value that Cornell had arrived at.  In so holding, the court repeatedly cited the recent PetSmart decision to underscore the principle that Delaware Chancery prefers that the projections used in a DCF be derived from contemporaneous management projections that are prepared in the ordinary course of business.  Such projections are generally deemed more reliable as they are prepared by management — who has the best first-hand knowledge of the company’s operations — and they are generally not influenced by transactional dynamics or tainted by hindsight-driven litigation considerations.  But unlike PetSmart, here the court did not peg fair value at merger price given that a case could be made that the previously agreed-to price of $2.97 itself reflected fair value, and that the $5 price that followed the bidding war with DISH was loaded with synergies and was not predicated on valuation fundamentals that were materially different from those used to support the initial $2.97 price.


Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal

Posted in Blockchain

As we have previously covered, Delaware has been considering whether to allow Delaware corporations (with Delaware being the site of the vast majority of appraisal litigation) to use blockchain platforms to issue and trade shares.  As of July 21, that has become the law with Delaware’s governor signing a bill allowing blockchain to be used for the maintenance of corporate records, including stock ledgers.  Blockchain is a concept of distributed ledger, as opposed to the centralized ledger system of DTCC.  From JD Supra: “One practical reason for using blockchain technology to track the transfer of corporate securities stems from a long-standing uncertainty surrounding the property rights of investors who ‘ultimately have no identifiable relationship with the corporate issuers of investment securities’ that they purportedly hold.”

Multiple decisions in the Dell case put the potential relevance of blockchain to appraisal in focus.  In July 2015, Vice Chancellor Laster reluctantly dismissed a subset of Dell shares seeking appraisal because, prior to the effective date, those stockholders’ stock certificates had been retitled.  As a brief recap, in that instance, DTCC (the holder of effectively all stock in the US) certificated shares into the name of its nominee, Cede & Co.  The petitioners’ custodians told DTCC to retitle the dissenting shares to the name of their own nominees – this retitling broke the record of ownership and thus denied these petitioners the right to appraisal.  Blockchain, which generally does involve “titling” in this sense, could avoid such a result.  The same is likely with regard to a second opinion, from May of 2016, involving the lead petitioner in Dell.  There, the lead petitioner instructed Cede (via its custodian) to vote in favor of the merger – but this was an error and the lead petitioner intended to vote against the merger.  While blockchain cannot protect against mistaken instructions, blockchain could reduce the number of steps between beneficial holder and the exercise of its vote.

While this market plumbing/market structure can seem esoteric, it can have real-world consequences.  In the recent Dole case, which concerned appraisal but was focused on breach of fiduciary duty claims, it ultimately turned out that millions of unexpected shares claimed on the settlement.  From JD Supra, regarding Dole: “The Chancery Court ruled that the additional merger considerations should be distributed to DTC, who would issue it to its over 800 participants, who would then issue it to the individual beneficial owners.  The Court warned that this process would likely result in incremental costs for beneficial owners, but noted that ‘these are [the] risks inherent in choosing to hold [equities] in street name.’”  At minimum, a blockchain ledger could have made administration easier than the Court’s selected remedy – kicking the issue back to DTCC

Blockchain may also present something of a victory for companies seeking to resist appraisal actions.  While appraisal arbitrage involves the idea of a “fungible bulk,” that may not rule the day with blockchain implementations.  With a distributed ledger, potentially, the shares of a beneficial holder could be traced to that holder in particular, instead of to a generalized mass of shares.

None of this is certain.  While the law allows for corporations to utilize blockchain, there is no guarantee they will necessarily do so [Law360 $$].  Developments in blockchain implementation in Delaware (and other places, such as Nevada and Arizona) may well turn out to be developments in appraisal rights as well.

Update:  the HLS Forum has covered blockchain and appraisal here.

CLS BlueSky: “Reality Check” on DFC Global By Profs. Korsmo and Myers

Posted in Appraisal Arbitrage, Fair Value, Merger Price, Supreme Court

Professors Korsmo and Myers, whom we have blogged about before, have a new post on CLS Blue Sky Blog, titled “A Reality Check on the Appeals of the DFC Global Appraisal Case.”  The Professors argue that the DFC Global appeal, which we’ve been covering, presents an attempt by deal advisors “to alter Delaware’s appraisal jurisprudence[,]” seeking to “undermine appraisal rights and shield opportunistic transactions from judicial scrutiny.”  Urging the Supreme Court not to “tie the Court of Chancery’s hands in future cases” – the Professors cite recent research showing that appraisal petitions are “more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism.”

In Transaction Involving “Massive” Synergies, Chancery Court Finds Fair Value at Over 50% below Merger Price

Posted in Discounted Cash Flow Analysis, Fair Value, Merger Price, Synergies

Today the Delaware Chancery Court issued its ruling in the Clearwire case, which included claims for breach of fiduciary duty as well as appraisal arising from its acquisition by Sprint.  We’ll provide a more comprehensive breakdown of the decision in a later post.

In the meantime, as reported today by Reuters, Hedge fund stung by unusual ruling over Sprint-Clearwire deal, the ruling “stands out for a court that rarely finds fair value below deal price, let alone more than 50 percent below.”

Among other factors, the court found that neither side argued in favor of deal price, and so the court did not even consider it but looked only at the respective valuation analyses put forth by each side’s valuation expert.  Given the considerable synergies in this transaction, the court held that the deal price provided an “exaggerated picture” of Clearwire’s value.  The court also noted that the experts’ choice of projections drove 90% of the difference in their DCF valuations.

Law360: “The Misconception About SWS Appraisal Decision”

Posted in Award Premium, Merger Price

Law360 [$$] recently covered appraisal rights, presenting an analysis by attorneys at Fried Frank [pdf] discussing the SWS appraisal decision.  In their article, the Fried Frank lawyers note their view that it is a “misconception” that SWS heralds a new likelihood of below-merger-price appraisal decisions.  Reviewing the SWS decision and the appraisal jurisprudence, the authors note that in only three cases (since 2010), of many more, have the Delaware courts found below merger price and that each such case involved “unusual facts” – and opine that while some commentators view SWS as making below-merger-price cases more likely, they do not share that view.  Later last month, Fried Frank also posted a primer on “Appraisal Practice Points Post-SWS” [pdf] – following up on their prior article.