On Friday, Vice Chancellor Glasscock issued his ruling in the AOL appraisal case. The court first set out to determine whether the merger transaction was “Dell Compliant,” which the Court defined to be “[w]here information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation.” Where those factors are present, “the trial court in its determination of fair value must take into consideration the transaction price as set by the market.” The Court then concluded, however, that the deal process in AOL was not “Dell Compliant” and relied entirely on a discounted cash flow analysis to award petitioners $48.70, or 2.6% below merger price.
We’ve written before about how appraisal-style valuation methodology–with direct reference to Delaware appraisal cases–is sometimes used in non-appraisal cases. In December 2017, Vice Chancellor Glasscock, of the Delaware Chancery court, handed down Wright v. Phillips, No. CV 11536-VCG, 2017 WL 6539383, at *1 (Del. Ch. Dec. 21, 2017), a case involving the valuation of business entities not in an appraisal context but rather as the result of a business (and marital) divorce.
Wright concerned a recycling and shredding business composed of three business entities originally 50 percent owned by each of a husband and wife duo. With the parties divorcing in 2013, the business continued until 2015, when the parties reached an impasse and a corporate deadlock ensued. After some litigation, the parties agreed that one would buy out the other; but perhaps unable or unwilling to trust each other’s valuations, the chancery was required to set the value.
Vice Chancellor Glasscock first observed that the business was a going concern, and thus a fair value analysis–the kind invoked by Section 262 of Delaware’s appraisal law–was required. The experts in the case used an “income approach analysis,” which the court accepted and discussed. The Vice Chancellor relied on one of the expert reports as an initial number, and then applied (1) an addition for the tax value of one of the entities tax status as an S corporation rather than as a C corporation; (2) applied a 10 percent marketability discount; and (3) required removal from the valuation any calculation of additional income attributable to discharging the non-continuing partner (what the court referred to as “synergies”).
Tax implications, discounts for lack of marketability, and valuations not including synergies are all issues found in appraisal; little wonder then that the Vice Chancellor cited an appraisal case, SWS, as part of his analysis in this non-appraisal matter. The corpus of appraisal law is likely to continue to provide guidance to Delaware courts–and non-Delaware courts–on valuation issues.
We’ve written before about the SWS appraisal case, decided in mid 2017. After the ruling, petitioners appealed to the Delaware Supreme Court. On Wednesday, February 21, the Delaware Supreme Court held oral argument (which you can watch on this site). Part of the argument focused on the concept of size premium – a primer on which is available here – and which is being contested in the SWS appeal. For more on the SWS oral argument, see Law360 [$$$].
The Harvard Business Law Review (whose articles we’ve covered before) has published a piece concerning Delaware allowing blockchain to be used for company stock ledgers. While we have written about blockchain repeatedly, the new HBLR article examines how blockchain-based securities could fundamentally change corporate governance. Using Dell and Dole as examples, the author discusses how blockchain can solve delayed settlement and unrecorded transfers issues – issues that can be critical when it comes to determining the entitlement to appraise.
The author notes that blockchain implementation may create value for the economy as a whole but would not necessarily distribute the gains evenly. This issue–effectively a tragedy of the commons–could be resolved through government action. But markets may also play a role. As readers of this blog know, the majority of large U.S. companies are incorporated in Delaware, a state with less than 1 percent of the U.S. population. Part of the reason for that is a market for legal rules–Delaware law, and the Delaware courts, are a more hospitable environment for incorporation than other places. Likewise with blockchain. If early adopters find distributed ledgers result in lower transaction costs – and thus additional investors, more liquidity, easier (and cheaper governance) or similar – this may encourage regulatory reform in states looking to compete with Delaware. Regulatory reform may, in turn, beget further adopters.
We expect continuing developments with blockchain, and its use with securities, in the future.
Today Vice Chancellor Laster issued his ruling in the Aruba Networks appraisal case. The award set the stock’s fair value at Aruba’s thirty-day average unaffected market price, which was $17.13 per share, well below the merger price of $24.67.
Cooley LLP provided a recap of 2017 M&A, along with an outlook for 2018 for Lexology, which includes a discussion of appraisal conditions in private M&A deals. We have blogged previously about the possibility of acquirers including appraisal conditions in public deals.
This 2018 M&A Outlook is a good reminder of the role that appraisal plays in mergers of non-public companies. As Cooley observes: “While the inclusion of any appraisal rights condition remains uncommon in public deals, we commonly negotiate these conditions in private sales of venture-backed companies. Commonly accepted conditions take one of two forms: the absence of available appraisal rights altogether or appraisal rights not having been exercised by a certain percentage of shares.” The piece further suggests the legality of any such advance waivers of appraisal rights “has not been resolved by the courts.”
As reported by Pensions & Investments, the Arkansas Teachers Retirement System has committed $30 million to an alternative asset manager specializing in appraisal opportunities. Further highlighting the focus on appraisal, the Fund committed an additional $30 million to a different fund, but agreed to expand that fund to include appraisal.
As we’ve blogged about before, appraisal can be both a critical investor protection and a viable way for investors to increase returns in M&A deals. The past several years have seen more institutional investors getting involved in appraisal – something some have suggested is part of the duties they have to their beneficiaries.
We’ve posted before about the availability of appraisal rights in the Cayman Islands. In this post, we focus on a specific merger involving a Cayman Islands company to highlight some of the important considerations in Cayman appraisal.*
A number of Cayman companies are listed in the United States, a subset of which are companies with their headquarters in the People’s Republic of China. Chinese companies may use the Cayman Islands as a “bridge” between mainland rules and listing rules, taking advantage of certain legal structures, such as variable-interest entities (VIEs) or similar, in order to comply with their legal obligations in China and in whatever market they list in–such as the New York Stock Exchange or London Stock Exchange.
For our example today, we focus on just one way Chinese-qua-Cayman companies may operate: issuing American depository shares, or ADS. ADS are not, per se, shares of the Cayman company itself–even if, by contract, an ADS holder receives the economic benefits of share ownership. Rather, ADS are issued by depository institutions (such as U.S. banks), in U.S. dollars. In turn, the depository institution has a contractual arrangement with the Cayman company, whereby the depository institution itself holds the Cayman company shares.
While this arrangement may seem confusing, it actually is not all that different from the share ownership arrangements in the United States, which involve the Deposit Trust Clearing Corp., its nominee Cede & Co., and a network of brokers (depository institutions) who hold stock in “street name.”
For our example, the merger at issue contained the following announcement**:
Critically, the Cayman company tells ADS holders–effectively any U.S. shareholder–that in order to perfect their appraisal rights in the Caymans, they will need to execute a few steps. In particular, they will need to surrender their ADS to the depository institution, convert the ADS into company stock (i.e., Cayman stock), register the Cayman stock, pay a fee to the depository institution, and then certify its instructions (or lack thereof). And that’s just the procedure to get to a point where investors can potentially exercise their rights!
While this may seem like a tall order, these steps are fundamentally ministerial–but this can take a very long time.***
Nonetheless, after conversion, a dissenter does have Cayman appraisal rights, something the announcement confirms:
Like in Delaware, merger dissenters in Cayman can seek appraisal of their shares. It just may take a few additional steps–and more time–to get there.
* Lowenstein Sandler LLP does not practice law in the Cayman Islands and does not advise on issues of Cayman law. This blog post is for informational purposes only, summarizes an existing, publicly available merger announcement, and should not be taken as legal advice as to the specifics of Cayman law.
** All images herein are taken from the publicly filed merger announcement of JA Solar Holdings Inc. For a fuller statement of the ADS portion of this announcement, see here.
*** We thank Ben Hobden of ConyersDill for his input.
2017 was an active year in appraisal, with a number of anticipated decisions – including the recent Dell, DFC Global, and PetSmart opinions. 2018 looks to be filled with further developments. A trio of Law360 articles have highlighted the robust appraisal activity of 2017 – and suggested some cases to watch in 2018. Contributors from Morris Nichols noted the increased activity in appraisal in 2017 in a piece titled “Delaware Litigation 2017: Assessing Trends At Year-End” [$$]. Writers at Law360 also highlighted the Solera appraisal case as one to watch [$$]. Summing up 2017 in review, and perhaps predicting a still-evolving landscape, the authors of “3 Things For M&A Attys To Know About Delaware Law In 2018” [$$] pointed out that “The main takeaway from the numerous appraisal decisions seems to be that there is still no definitive guide to knowing exactly how the Delaware courts will determine fair value for a given deal, as it all depends on the specific circumstances.” As courts wrestle with the specific circumstances of each case, we expect a busy 2018 in appraisal.