Delaware Supreme Court Continues Recent Spate of Decisions Appraising Fair Value of a Company’s Stock Below Deal Price
Delaware litigation seeking statutory appraisal of a target company’s value for purposes of determining the fair value of dissenting stockholders’ shares has virtually become the norm following a merger transaction. Such litigation has been viewed as a no-lose proposition for the dissenting stockholders and their counsel because the court frequently awarded at a minimum the deal price as the correct measure of fair value, and in many cases, awarded such dissenting stockholders a premium over the deal price. However, this outcome appears less certain following several recent decisions which found that the fair value of a target company was less than the deal price, thereby resulting in the dissenting stockholders receiving less than they would have received simply by accepting the merger consideration provided for in the applicable merger agreement.
The most recent bellwether of the trend toward lower valuations came via the Delaware Supreme Court’s April 23, 2018 affirmance of the ACP Master, Ltd. v. Sprint Corporation decision by the Court of Chancery. The ACP decision addressed post-transaction challenges by minority stockholders seeking statutory appraisal of their share value following Sprint’s acquisition of the 49.8% interest in Clearwire Corporation that it did not previously own. The Chancery Court determined that the fair value of Clearwire was $2.13 per share, far below the $5.00 per share deal price.
The ACP affirmance continues a spate of recent decisions that appraise fair value of a company at less than the deal price. For example, in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., decided February 15, 2018, the Court of Chancery valued the target company at about 31% less than the deal price. On February 23, 2018, the Court of Chancery valued AOL, Inc. at a 2% discount to the merger consideration paid by Verizon. That same day, the Delaware Supreme Court affirmed the Court of Chancery’s decision in Merlin Partners, LP v. SWS Group, Inc., where the target’s value was appraised at 8% below the deal price.
Coupled with the recent amendment to Section 262(h) of the Delaware General Corporation Law permitting companies, at any time during a statutory appraisal action, to cut off the accrual of interest by prepaying all or a portion of the deal price to the dissenting stockholder, these decisions should cause dissenting stockholders to carefully consider the transaction consideration before launching a potentially expensive and time consuming statutory appraisal action. At a minimum, companies should take comfort in the fact that statutory appraisal is no longer a no-lose proposition for dissenting stockholders. However, only time will reflect the true influence of these developments on the frequency of statutory appraisal actions.
If you have questions or would like additional information, please contact Marc Casarino (firstname.lastname@example.org; 302.467.4520), Lori Smith (email@example.com; 212.714.3075) or another member of the Corporate and Securities Group.