Delaware law firm Morris James has put out a list of the “Top Ten” 2018 developments in Delaware corporate law, and lists two appraisal cases, Aruba, and Dr. Pepper as #10 and #1, respectively. As with many 2018 appraisal retrospectives, Morris James sees further developments still to come in 2019, in particular important appeals to the Delaware Supreme Court and further clarification of some key holdings from the past couple years.
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.
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 .
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.
On Dec. 14, 2017, the Delaware Supreme Court handed down the Dell decision. We covered the decision previously.
In the month that has followed, coverage of the Dell decision has been intense. Numerous news outlets, blogs, corporate governance authors, and law firms have provided their own take on the Dell decision. We have collected some of that commentary, with illustrative quotations reflecting the breadth of that coverage, as follows.
Appraisal is the New Fiduciary Duty, Business Law Prof Blog. “The substitution of appraisal litigation for fiduciary litigation is near complete: improving upon deal price in the context of appraisal may be impossible unless something went wrong in the sales process (at least for the sale of a public company without a controlling stockholder).”
Appraisal Apprisal: Dell v. Magnetar, Eric Talley & Jeffrey Gordon, CLS Blue Sky Blog. “After Dell, one can safely assume that courts will focus even more intently on whether the merger price emerged from a robust and value-maximizing deal process.”
Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies; Lawrence Hamermesh and Michael L. Wachter, HLS Forum on Corporate Governance and Financial Regulation. “Facilitated largely by ‘appraisal arbitrage’ — the practice of purchasing shares of stock after announcement of a merger, with a view to exercising the statutory right to an award of ‘fair value’ in lieu of the merger price — the once-discredited appraisal remedy has become a significant phenomenon in shareholder litigation.”
Guest Post: From Corwin to Dell: Implications for Investors and Corporate Acquirers, the D&O Diary. “In sum, the arc of Delaware law from Corwin to Dell may result in under-enforcement of fiduciary duties through representative litigation, and may unintentionally entice increasingly aggressive breaches of fiduciary duties.”
In re Appraisal of Dell Inc.: The Continuing Relevance of Deal Price in Delaware Appraisal Proceedings, Business Law Today. “Dell does, however, indicate that MBO transactions will be subject to more rigorous scrutiny in the context of appraisal proceedings and, given certain inherent realities, may be less likely to be found to have produced a price equal to fair value. Even so, Dell does not foreclose a finding that the deal price in an MBO transaction equals fair value.”
Implications of the Recent Dell Appraisal Decision, Paul Weiss. “To reduce the risk of a large appraisal award, target boards may wish to make a record of their focus on the company’s intrinsic value, as opposed to the premium to market represented by the transaction price.”
Delaware Supreme Court Reverses And Remands Dell MBO Appraisal Decision, Finding The Trial Court Erroneously Disregarded The Deal Price, Shearman & Sterling. “The Court thus reversed and remanded with instructions to give such weight to the deal price, and explain the weight given to each factor considered, or — at the Court of Chancery’s discretion — to enter judgment at the deal price without further proceedings.”
Dell Ruling Bridges Philosophical Gap In Del. Appraisal Law, Law360 [$$]. “You can’t look at the Dell opinion and say the court was going to take just any old deal,” Hamermesh said. “It was a — show me your process is reasonable. There may be almost a presumption, but it’s rebuttable.”
Appraisal Litigation Update, Cadwalader, HLS Forum on Corporate Governance and Financial Regulation. “A Well-Executed Sales Process is Instrumental in Determining the Weight to be Ascribed to Deal Price in an Appraisal Analysis.”
Delaware Supreme Court Reaffirms Importance of Deal Price in Dell Appraisal Reversal, White & Case. “To prevent creating a bright-line rule, the Supreme Court was careful to note that it was not holding that ‘the market is always the best indicator of value, or that it should always be granted some weight.’ Rather, the Supreme Court noted that the record contained compelling evidence reflecting ‘market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance for any topping bidder to have the support of Mr. Dell’s own votes … .’”
Delaware Supreme Court Further Clarifies Appraisal Principles Applicable to Public Company Buy-Outs, Clifford Chance. “[Dell], and the Court’s earlier DFC decision, have reshaped the law governing exercises of statutory appraisal rights in public company buy-outs.”
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 [$$]. The Supreme Court affirmed without rendering its own opinion, relying instead on the trial court’s reasoning. ISN Software was a privately held software company, with the appraisal case stemming from the controlling stockholder’s cash-out of some of the minority shares.
As reported in Law360 [$$], 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.
As reported today in Law360 [$$], the Delaware Supreme Court heard argument yesterday on the chancery court’s ruling in the Dell appraisal case. The court did not render its decision and did not indicate when it would do so. We’ll continue to monitor the docket and post when the ruling comes down.
** Note: this law firm is one of the counsel of record in the Dell case.