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.

Although Delaware dominates when it comes to appraisal (as a result of its outsize attractiveness to U.S. companies as a place of incorporation), appraisal is not limited to the First State. As we’ve previously discussed, appraisal regimes also exist in other states including Massachusetts, Arizona, and Nevada. What about the Hawkeye State?

As a threshold matter, Iowa appraisal is limited by the market-out exception, and Iowa appraisal rights are not available if the target is traded in an organized market and has at least 2,000 shares and a market value of $20 million. Iowa, however, follows the Revised Model Business Act’s exception to the market-out exception (this “exception to the exception” is a common feature of appraisal regimes), allowing for appraisal rights with respect to publicly traded targets in interested transactions. See Iowa Code § 490.1302.

Like in Delaware, the Iowa appraisal statute requires a court to determine “fair value” of the stockholder’s shares. In Rolfe State Bank v. Gunderson, 794 N.W.2d 561 (Iowa 2011), the Iowa Supreme Court considered the exercise of appraisal rights in Iowa. As a result of a reverse stock split, a state bank offered to pay its minority shareholders $2,000 per share of stock based on an independent valuation that applied a minority discount and a lack of marketability discount. The minority shareholders exercised their appraisal rights and demanded $2,700 per share plus interest. Pursuant to the Iowa appraisal statute, the bank paid the minority shareholders $2,000 per share plus interest and then filed a petition with the district court to determine the fair value of the shares. The Iowa Supreme Court first reviewed the need to determine fair value as part of appraisal and then dove into whether minority and lack of marketability discounts would apply, ultimately concluding they did not.

Rolfe confirms that Iowa appraisal remains available in select instances and that a merger involving a company incorporated in Iowa can trigger appraisal rights, but the market-out exception must be considered.

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.

 

CLS BlueSky Blog posts that the Delaware Supreme Court’s recent decision in Dell–and the Delaware appraisal decisions awarding below deal-price in certain appraisal actions–may give cover to Dell Technologies (the Dell of the Dell decision) in its potential rollup of VMware. Dell already owns 82% of VMware stock, according to the post, and may seek to cash out the remaining shareholders. The post expresses concern about the effect of recent Delaware precedent on public stockholders, especially those who face a transaction like VMware, where the only real remedy may be appraisal.

We note the comment of Tom Vos, research associate at the Jan Ronse Institute, who has less concern for public shareholders. Arguing that Dell did not concern a controlling shareholder (as Dell would be of VMware), Vos suggests that Delaware courts would be stricter toward the buyer when that buyer is basically the only bidder.

If the VMware deal comes to pass and there is an appraisal action, we may yet see how the Delaware courts will handle application of the Dell decision to the situation of a controlling shareholder.

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.

Gregory V. Varallo of Richards Layton & Finger, P.A. discusses takeaways from the “The Continuing Impact of Appraisal Rights” panel at the 30th annual Tulane Corporate Institute. At the two-day series of panels on Delaware corporate law and M&A deal making, which took place on March 15-16 in New Orleans, appraisal rights remained a hot topic.

In this post by Professor Afra Afsharipour of the UC Davis School of Law, she discussed what she identifies as the bidder overpayment problem, where bidders often pay more for publicly traded targets due to managerial agency costs and behavioral biases. The article notes that there are less monitoring mechanisms for bidder shareholders than there are for target shareholders to ensure a fair price. For instance, while target shareholders can bring appraisal proceedings in some transactions, bidder shareholders do not receive any appraisal rights even in transactions where they have the right to vote. The author ultimately argues for a “shareholder voice in situations of high importance to firm value and share price.”

 

The Harvard Law School Forum on Corporate Governance and Financial Regulation recently posted an analysis by Wachtell, Lipton, Rosen & Katz of the Delaware Supreme Court’s recent decision in SWS, summarily affirming the Delaware Chancery Court’s award of fair value at 7.8% below the merger price.  The authors observe that SWS is the first Delaware Supreme Court decision “in the era of ‘appraisal arbitrage’ to affirm an appraised valuation meaningfully below the deal price.”  For more on SWS, see our coverage here .

In the Columbia Pipeline Group appraisal case, as reported in Law360 [$$], Vice Chancellor Laster rejected the stockholders’ request to stay or, in the alternative, extend the fact discovery deadline for 2 months pending the appeal of the Aruba Networks ruling.  The court stated in its March 7 ruling that the shareholders should have known from the outset of the case that Columbia Pipeline’s market price “would be a factor” in the proceedings, and that the Aruba decision did not introduce anything new, “whether as a matter of doctrine or for purposes of the parties’ case strategy or trial tactics.”

The court also contrasted the stay request put before it to that in Aruba Networks, where the same judge did stay proceedings pending the Supreme Court’s decision in DFC Global.  The court’s rationale was that the Aruba proceedings had been nearly completed, and the DFC appeal had been argued, with a ruling expected within 90 days, thus warranting a stay.  In Columbia Pipeline, by contrast, the parties are in the midst of discovery, and the Aruba appeal has not yet even been taken given the pendency of a motion for re-argument before the trial court.