Discounted Cash Flow Analysis

Vice Chancellor Glasscock issued yesterday this AOL ruling on reconsideration, lowering his prior $48.70 determination to $47.08 — going farther below the $50 merger price — on the basis that he had overvalued one of AOL’s pending transactions in his DCF analysis.

The court prefaced its ruling by expressing its displeasure at both parties having moved for reargument, which the court found “rarely efficient or productive” and “encourages run-on litigation.”  Underscoring that point, the court found that “[u]nlike revenge, justice is a dish that is best served warm.”

The court otherwise declined to revisit its prior determination on the other pending transaction and declined to decrease to 3.25% its prior use of a 3.5% perpetuity growth rate: “I may have gotten it wrong, but that is a matter for appeal, not reargument.”

The Delaware Court of Chancery just issued two new appraisal rulings:

  1. Solera (C. Bouchard): the Court awarded merger price less synergies, which comes out to 3.4% below deal price; we have previously reported on the Solera case here; and
  2. Norcraft (V.C. Slights): the Court awarded a premium of 2.5% above deal price, relying on a DCF analysis and expressly rejecting a valuation based on merger price less synergies.

Both opinions adhered to the Supreme Court’s Dell and DFC rulings, although Norcraft held that despite those decisions, a merger price ruling was not warranted on the facts of that case.  Also, both cases rejected unaffected stock price as a measure of fair value based on their respective records.  The Solera opinion can be found here, and the Norcraft opinion can be found here.

**This firm is one of the counsel of record for petitioners in Solera.

On April 23, 2018, the Delaware Supreme Court affirmed last July’s Chancery court ruling in the Clearwire case.  This decision ends the appeal by Clearwire shareholders looking to overturn the lower court decision finding that Clearwire was worth $2.13 per share, below the $5 merger price. When the Supreme Court, or any appellate court, affirms without discussion or opinion, it provides little guidance for litigants going forward. Here, Clearwire had unique facts – covered in our original post – that set it apart from many other appraisal cases.

 

In this article, Fried Frank LLP attorneys discuss the three appraisal decisions since the Delaware Supreme Court’s decision in Dell Aruba, AOL and SWS. The article notes that while the Supreme Court in Dell directed the Chancery Court to consider the deal price and accord it appropriate weight, these three decisions assigned no weight to the deal price in setting fair value below the deal price.  Given the inconsistency with Dell, the authors suggest that other Chancery cases may not follow the same approach.  Taking a more future-orientation, the authors also predict that appraisal results below the deal price will continue in arms-length mergers without a seriously flawed sales process, but may be above or even significantly above the deal price if the process is seriously flawed.  These predictions have become more common, as authors and academics looking at appraisal have increasingly come to suggest that Dell (and its progeny to come) may be moving appraisal more towards the realm of fiduciary duty litigation than before.

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. 

The Delaware Supreme Court issued its highly-anticipated ruling today in the Dell appraisal case, reversing and remanding the trial court’s 28% premium awarded to the stockholders.  In sum, the court held that where a company is sold in a pristine M&A auction process, the chancery court must give the merger price “heavy weight” in its ruling, leaving it to the trial court to decide just how much weight that should be in this case.   The Supreme Court also ruled on a cross-appeal challenging how the trial court assessed expenses across the appraisal class.

For further coverage of the Dell decision, see the links below.

Appraisal Apprisal: Dell v. Magnetar, Eric Talley & Jeffrey Gordon, CLS Blue Sky Blog

Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price, Shearman & Sterling

Dell Ruling Bridges Philosophical Gap In Del. Appraisal Law, Law360 [$$]

Appraisal Litigation Update, Cadwalader, HLS Forum on Corporate Governance and Financial Regulation

Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies, Lawrence Hamermesh & Michael L. Wachter, HLS Forum on Corporate Governance and Financial Regulation

Delaware Supreme Court Reaffirms Importance of Deal Price in Dell Appraisal Reversal, White & Case

Delaware Supreme Court Further Clarifies Appraisal Principles Applicable To Public Company Buy-Outs, Clifford Chance

**This firm is a counsel of record in the Dell case.

On Monday, Law360 [$$] reported that the stockholders in the Clearwire appraisal action filed their opening brief in support of their appeal of the Chancery Court’s ruling, which found the fair value of Clearwire Corp. to be $2.13 per share, well below the $5 per share deal price paid by Sprint Nextel Corp.  As reported in the article, on appeal, the stockholders argue that the “staggering discount” awarded by the Chancery Court is “virtually unprecedented.”  We have previously posted on the Chancery decision here.  We will continue to monitor the appeal and post on new developments as they arise.

The Delaware Supreme Court made its ruling this week in the ISN Software appraisal case.  A three-judge panel (not the full bench) affirmed the Chancery Court’s decision awarding a premium that was more than 2.5 times the merger price, as reported in Law360 [$$].  The Supreme Court affirmed without rendering its own opinion, relying instead on the trial court’s reasoning.  ISN Software was a privately held software company, with the appraisal case stemming from the controlling stockholder’s cash-out of some of the minority shares.

We have previously posted on the Chancery decision here, and have posted on the Supreme Court oral argument here.

As reported in Law360 [$$], on October 11, 2017 the Delaware Supreme Court heard argument appealing the Chancery Court’s ruling in the ISN Software appraisal case.  We have previously posted on the trial court’s decision here, in which Vice Chancellor Glasscock awarded a premium to the merger price.  The Supreme Court did not rule and did not indicate when it would do so.  You can see the complete oral argument here (under the October 11, 2017, listing; ISN Software v. Ad-Venture Capital).  Unlike the Dell and DFC Global arguments, the Supreme Court did not convene en banc – that is, with a full five-justice proceeding – and instead conducted argument by a three-justice panel, which did not include the Chief Justice.

We will continue to monitor the docket and post when the ruling is issued.