Today the Harvard Law School Forum on Corporate Governance and Financial Regulation posted this piece by Matthew Schoenfeld, The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up, which studies the recent reduction in appraisal claims and the decline in M&A deal premia.
As reported in today’s Law360 [$$], the Delaware Chancery Court chose lead counsel and consolidated several petitions in the Stillwater Mining appraisal case. As reported in the article, Vice Chancellor Laster stated during yesterday’s hearing that “he would clarify rules for keeping non-lead attorneys in the loop on key documents and proposals,” and that his ruling reflected “an evolving court position on balancing the rights and responsibilities of law firms collaborating in class appraisal proceedings.”
** This law firm is counsel of record in the Stillwater Mining appraisal litigation.
In a recent article on PolicyHolder Pulse attorneys from Pillsbury explore whether Directors and Officers (“D&O”) insurance covers, or could be considered to cover, Delaware appraisal claims. Critical to this analysis is whether an appraisal case raises issues of “Wrongful Acts” by the Board – including, for example, collusive behavior, or other process defects. The Pillsbury authors note that appraisal claims are often (though not always) coupled with breach of fiduciary duty claims (something that occurred in Dole), which involve claims of wrongdoing. Of course no proof of wrongdoing, or even of defective process, is necessary for a successful appraisal action. They also suggest Securities Claim coverage may be available, depending on the terms of the specific policy. D&O Diary, after discussing the arguments made, summarizes the article as finding that there “may be substantial grounds” for arguments in favor of coverage.
As we have posted before, the Delaware Supreme Court rendered its much-awaited ruling in the DFC Global case on August 1. Here’s a more detailed breakdown of the key elements of that ruling.
I. No Judicial Presumption Imposing Mandatory Merger Price Ruling
The Court started off its opinion by rejecting DFC Global’s request to establish “by judicial gloss” a presumption that fair value would be tethered to merger price in certain cases involving an arm’s-length M&A transaction. The Court said that it would “decline to engage in that act of creation, which in our view has no basis in the statutory text, which gives the Court of Chancery in the first instance the discretion to ‘determine the fair value of the shares’ by taking into account ‘all relevant factors.’” The Court adhered to its 2010 ruling in Golden Telecom in finding the statute’s “all relevant factors” inquiry to be broad, and reaffirmed the chancery court’s discretion to undertake that inquiry until such time as the Delaware legislature may choose to revise the statute in this regard (we are not aware of any such legislative activity currently underway).
Continue Reading Breaking Down the Delaware Supreme Court’s DFC Global Decision**
Law360 [$$] recently carried an analysis by a trio of Delaware attorneys regarding the impact of 2016’s prepayment amendment to Delaware appraisal law. Part of the August 2016 amendments allowed M&A targets to prepay dissenting shareholders an amount of their choosing, thereby stopping the accrual of interest on that portion of the merger price/amount at issue. At the time of the amendments, there was meaningful debate whether the new rules – including the prepayment option – would curtail appraisal filings, with some commentators suggesting that they may in fact increase appraisal filings, focusing on the prepayment option.
This more recent analysis considers the last year of appraisal, and while the authors note that a year of data is insufficient to “draw any firm conclusions,” their analysis shows that “in the year following the Aug. 1, 2016, effective date of the amendment, appraisal filings have continued to increase.” Echoing the pre-amendment analysis that the amendments may increase appraisal activity, the authors make note of the fact that as “appraisal litigation continues its upward trend despite the recent overall decline in M&A activity, this trend may suggest that, as discussed below, the prospect of prepayment is contributing to its continued rise.”
As previous analysis discussed, while prepayment may save on interest for a respondent company subject to appraisal, it otherwise frees up capital for investors to redeploy elsewhere – instead of having that capital ‘locked up’ in the appraisal action. Prepayment introduces additional strategic considerations in appraisal for both investors and respondent companies.
Today the Delaware Supreme Court reversed and remanded the appraisal decision of the Chancery Court in the highly watched DFC Global case. A more detailed post will follow, but we wanted to flag the ruling in the meantime.
The court declined DFC Global’s request to impose a presumption by “judicial gloss” that would peg fair value at the merger price in cases involving arm’s-length mergers. The court found that such an approach would have no basis in the statutory text, which gives the Chancery Court discretion to determine fair value by taking into account “all relevant factors.”
The court did accept two other “case-specific” arguments by DFC Global. First, the Supreme Court directed that on remand (i.e., when the trial court gets the case back from the Supreme Court), the Chancery Court — which in its valuation analysis had given equal weight to each of (i) the deal price, (ii) its DFC analysis, and (iii) a comparable companies analysis — should reconsider the weight it gave to the deal price in finding fair value based on certain factors in this case. Second, the Supreme Court found that there was not adequate basis in the record in this case to support the Chancery Court’s increase in the perpetuity growth rate it assumed for DFC Global from 3.1% to 4.0% when it corrected an error that had been raised during reargument.
In addition, the Supreme Court denied the cross-appeal, by which the stockholders argued that the DCF analysis be given primary, if not sole, weight in the valuation analysis. The court found that giving weight to the comparable companies analysis in this case was within the Chancellor’s discretion.
We will continue to monitor the proceedings to follow in the Chancery Court.
**As previously noted, this law firm was counsel of record on one of the amici briefs filed in this case.
As we previously posted, the Chancery Court appraised the fair value of Clearwire Corp. to be $2.13 per share, substantially below the $5 per share merger price paid by Sprint Nextel Corp in July 2013. This post will provide a more detailed breakdown of the ruling and the bases for Vice Chancellor Laster’s opinion.
Continue Reading Breaking Down The Clearwire-Sprint Appraisal Ruling
As we have previously covered, Delaware has been considering whether to allow Delaware corporations (with Delaware being the site of the vast majority of appraisal litigation) to use blockchain platforms to issue and trade shares. As of July 21, that has become the law with Delaware’s governor signing a bill allowing blockchain to be used for the maintenance of corporate records, including stock ledgers. Blockchain is a concept of distributed ledger, as opposed to the centralized ledger system of DTCC. From JD Supra: “One practical reason for using blockchain technology to track the transfer of corporate securities stems from a long-standing uncertainty surrounding the property rights of investors who ‘ultimately have no identifiable relationship with the corporate issuers of investment securities’ that they purportedly hold.”
Continue Reading Delaware Gov. Signs Blockchain Bill – Possible Impact on Appraisal
Professors Korsmo and Myers, whom we have blogged about before, have a new post on CLS Blue Sky Blog, titled “A Reality Check on the Appeals of the DFC Global Appraisal Case.” The Professors argue that the DFC Global appeal, which we’ve been covering, presents an attempt by deal advisors “to alter Delaware’s appraisal jurisprudence[,]” seeking to “undermine appraisal rights and shield opportunistic transactions from judicial scrutiny.” Urging the Supreme Court not to “tie the Court of Chancery’s hands in future cases” – the Professors cite recent research showing that appraisal petitions are “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.”
Today the Delaware Chancery Court issued its ruling in the Clearwire case, which included claims for breach of fiduciary duty as well as appraisal arising from its acquisition by Sprint. We’ll provide a more comprehensive breakdown of the decision in a later post.
In the meantime, as reported today by Reuters, Hedge fund stung by unusual ruling over Sprint-Clearwire deal, the ruling “stands out for a court that rarely finds fair value below deal price, let alone more than 50 percent below.”
Among other factors, the court found that neither side argued in favor of deal price, and so the court did not even consider it but looked only at the respective valuation analyses put forth by each side’s valuation expert. Given the considerable synergies in this transaction, the court held that the deal price provided an “exaggerated picture” of Clearwire’s value. The court also noted that the experts’ choice of projections drove 90% of the difference in their DCF valuations.