On October 18, 2018, Stafford Publishing is offering a webinar covering developments in Delaware law, including appraisal. 2017 saw numerous appraisal decisions (many of which we have covered) and movement in both the strategy and practice of appraisal. With a panel of Delaware attorneys well versed in appraisal as well as fiduciary duty litigation, the webinar will cover developments in Delaware law affecting mergers.
In appraisal, across the majority of states–and those countries we have reviewed–the main question is the “fair value” of a petitioner’s shares. Some courts and commentators have mixed “fair value” with a similar but economically distinct term: “fair market value.” But even if everyone agrees on what fair value means, that does not mean the law is uniform as to when fair value is being calculated. Consider: Delaware law tasks the court with determining the fair value of the shares as of the merger date. At the other end of the spectrum, California law requires a court to determine the fair value of shares immediately prior to the announcement of the merger. Two states’ laws thus deal with certain eventualities in very different ways. What if the deal takes a long time to close? For California, this makes no difference; the “interim events” between announcement and closing do not come into the analysis. But for Delaware, interim events can have great significance–just because management has struck a deal (including a price) months, sometimes many months, before closing does not mean that that price reflects the value of the company at closing. As an example, imagine an early-stage biotech company or a speculative gold miner. Deal price may be set and a shareholder vote taken; then the company receives FDA approval or a claim pans out, and at closing, the buyer receives the benefit of the increased value while shareholders do not. In larger deals, where numerous regulatory hurdles need to be cleared, the difference in the date of the fair value measure can mean the difference in measuring during a positive or a negative business cycle. So in any appraisal action, the “when” of fair value matters.
The Delaware Court of Chancery just issued two new appraisal rulings:
- 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
- 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.
In the wake of the Dr Pepper decision that a reverse triangular merger does not carry appraisal rights and considering corporate counsel’s growing concern over appraisal petitions, one might wonder whether we will see a rush of reverse triangular mergers in order to try and thwart investor’s appraisal rights. Lawyers from Fried Frank say no in this Law360 piece [$$$]. At its core, the authors focus on the Chancery Court’s own, footnoted view that a rush to reverse triangular mergers is an “overstated” risk, because the structure has been known and employed before. The authors agree that there will not be a move toward this contorted merger structure (with a major caveat, covered below), writing this:
In our view, it is unlikely that the structure would be broadly used solely for the purpose of avoiding appraisal rights. We note that the structure involves the disadvantages of complexity (making it potentially impractical in any competitive bidding situation) and leaving an equity stub in the hands of the target public stockholders (a result that acquirers typically disfavor). Moreover, generally, with an exception possibly in the case of conflicted controller transactions, it would be inadvisable to structure a transaction based primarily on avoiding appraisal rights–given that appraisal claims are made only in a relatively low (and recently declining) percentage of transactions, that appraisal awards significantly above the deal price are made only rarely (recently, even more rarely), and that appraisal awards at (or even below) the deal price have been increasingly prevalent recently.
This is a notable analysis. The authors contend that the structure may be impractical when there are competitive bids (i.e., when appraisal is not particularly favored to begin with) and then draw an exception for conflicted-controller transactions (when appraisal would be favored because of issues with the deal process. Put another way, the reverse triangular merger structure may not be used when appraisal isn’t viewed as much of a threat to begin with. But does Dr Pepper open the door to using this anti-appraisal structure in the exact kind of deal where a significant appraisal uplift is possible, such as conflicted-controller transactions? The authors seem to acknowledge as much.
As appraisal risk continues to be meaningful in conflicted-controller transactions, the Dr Pepper structure might be attractive in these situations if the controller is prepared to leave some of the equity of the target company with the sellers. We note that the public equity stub could be eliminated through a reverse stock split following completion of the merger; however, there would be an issue whether that additional step might (1) convince the court to view the structure as an impermissible contrivance to avoid appraisal (thus leading to a different result than in Dr Pepper) and/or (2) raise fiduciary issues and affect the court’s review of the transaction under the “entire fairness” standard. … There are other, less complex structures that could be considered and that could render appraisal rights inapplicable, although, of course, any novel structure could raise business and practical issues and prompt legal challenges.
Like with the appraisal amendments and differing predictions of how those would affect appraisal filings, the impact of Dr Pepper on choice of deal structure remains to be seen.
In April 2018, shareholders of Dr. Pepper filed a lawsuit challenging a merger with Keurig – a deal they called convoluted and which was allegedly designed to deny them appraisal rights. One particular branch of that challenge, that the deal itself actually should have carried appraisal rights, was decided in June 2018 against the shareholders. Dr. Pepper shareholders will not have appraisal rights in this reverse triangular merger because, as the Delaware Chancery Court found, Dr. Pepper is merely the parent of the subsidiary merging with Keurig and not the “constituent corporation” the statute requires. A constituent corporation, the Court wrote, is one that is actually “being” merged or combined. Here, while Dr. Pepper’s original shareholders will end up as 13 percent minority shareholders in the combined entity, with Keurig shareholders owning the rest, the formalities of the merger are such that only a Dr. Pepper subsidiary is “being merged” – hence, no appraisal rights.
Further, the Court found that since an original Dr. Pepper shareholder would still be a Dr. Pepper shareholder (albeit, significantly diluted) after the ‘merger’ – the shareholder is not giving up their Dr. Pepper holdings, and thus, no appraisal rights.
Might this be a template for those seeking to avoid appraisal rights in the future? Perhaps. Though the Delaware court seemed concerned with the opposite effect: that applying appraisal rights in this instance may change the meaning of the appraisal statute for a relatively rare merger structure and specific set of facts. But with appraisal prominent in corporate counsel’s minds, perhaps a rare deal structure will become more common.
As shown in a presentation to the Association of Corporate Counsel, despite predictions (and calls) for the death of appraisal, it remains prominent in discussions of M&A trends. In the May 10, 2018 presentation, attorneys from Cadwalader discuss their view of “Dell-Compliance” – noting a series of factors that would make a deal more likely or less likely to reflect fair value. For example (in this instance, using AOL as an example), a company that was approached by “other logical buyers” with a good merger process and without a prohibitive breakup fee is, according to the authors, more likely to be Dell-compliant than a deal where a buyer had an informational advantage, there was a no shop provision, and the existence of public statements by management all augured against Dell-compliance.
In its recent blog post, VentureCaseLaw covers a 2015 Delaware decision and how Delaware law deals with appraisal in instances where a Company has drag-along rights. In summary:
Venture-backed companies should not assume an implied waiver of minority appraisal rights in a merger that utilizes a voting agreement’s drag-along rights if procedural requirements are not followed. When a waiver of appraisal rights has procedural requirements, they need to be followed or eliminated via an amendment. Alternatively, the drag-along can require minority stockholders to explicitly approve the sale, instead of having the sale be de facto valid without their signatures given the drag-along.
CLS BlueSky Blog has published a post discussing the current state of Delaware appraisal law and fitting appraisal developments into the broader context of M&A rules and corporate governance. The post covers recent appraisal decisions, with the authors concluding that: “in our view, generally, the court is more likely to continue to reach above-the-deal-price results in non-arm’s-length merger cases (such as controller transactions, squeeze-outs, and certain MBOs-unless the transaction complies with the MFW prerequisites), and may also do so in arm’s-length merger cases involving a seriously flawed sale process.” This view fits with the trend of academics and attorneys focusing on both the sales process and then the valuation as part of appraisal. The authors also cover the 2018 proposed amendments, which we discussed here.
Professor Robert Reder and Vanderbilt JD candidate Blake Woodward have published a piece in the Vanderbilt Law Review En Banc reviewing the Delaware Supreme Court’s DFC decision and the intricacies of Chancellor Strine’s 85 page opinion. We’ve posted extensively about DFC throughout its history. The authors of the current piece point out that DFC can be partially read as a requirement for clearer explanations by the trial court of their reasoning with respect to valuation. The authors summarize DFC’s import when it comes to encouraging explanation by lower courts as: “when the Chancery Court is faced with a choice between the deal price and a discounted cash flow analysis as the basis for a fair value determination, a sliding metric balancing the quality of the sales process with the reliability of the projections utilized in the discounted cash flow analysis ought to be employed.”
This sliding mechanism – involving a review of the sales process that then feeds into how much weight the court gives the deal price – fits well with recent research that shows appraisal is “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” – i.e., the kind of cases where the ‘slide’ is against a reasonably fair process.
Authors from Potter Anderson write in the spring 2018 edition of Delaware Laws Governing Business Entities [$$] that recent developments in appraisal have restored ‘balance’ to the remedy. Citing case law where courts have deferred to deal price, amendments to the appraisal statute, and the statutory authorization of distributed ledger (i.e., blockchain) technology for corporations, the authors posit that some kind of ‘balance’ is being restored to what they propose was an otherwise unbalanced remedy.
History may not be so linear. Appraisal, as the authors acknowledge, has over a century of history in Delaware alone. The appraisal remedy was, for a long time, relatively unused. It has become far more utilized in recent years, and new developments, including technological change, may well alter the appraisal space in new and unforeseen ways going forward.