Delaware Appraisal Litigation

In 2017, the Delaware Court of Chancery has appraised a number of different companies in connection with mergers. Many of the cases, which are summarized below, address what weight the deal price should be given in an appraisal proceeding.

  • On August 1, 2017, the Delaware Supreme Court reversed and remanded the Court of Chancery’s appraisal decision arising out of the 2014 acquisition of DFC Global by private equity firm Lone Star Funds, in which the Court of Chancery had determined that the “fair value” of DFC Global was $10.30 per share, $0.80 above the merger price. While the Supreme Court stopped short of accepting the petitioners’ argument that an appraisal court should give exclusive or presumptive weight to the deal price, the Court stated that economic principles suggest that the price achieved in a robust and unconflicted sale process is the best evidence of fair value. Further analysis can be found in S&C’s recent client memo.

  • On September 27, 2017, the Delaware Supreme Court heard oral arguments in the appeal from the Court of Chancery’s post-trial opinion in In re Appraisal of Dell Inc. in light of the DFC Global opinion. The Supreme Court considered whether the Court of Chancery’s decision to rely on its own valuation analysis and assign no weight to the final merger consideration in determining the “fair value” of the petitioners’ stock was supported by the record. As noted above, in DFC Global, the Supreme Court found under similar circumstances that the Court of Chancery’s decision was unsupported by the record.\

  • In contrast to the Court of Chancery’s decision in Dell in 2016, three recent cases (described below) found the targets’ fair value to be at or below the deal price.

    • On May 26, 2017, the Court of Chancery (VC Slights) appraised PetSmart following its merger at an $83 deal price, rejecting the petitioners’ proposed $128.78 fair value. The court found that the sale process had been robust and that the deal price was therefore a reliable indicator of fair value. The court found the shareholders’ discounted cash flow (“DCF”) analysis unreliable because the management projections undergirding the analysis were “saddled with … telltale indicators of unreliability.” It also rejected the petitioners’ contention that a leveraged buyout pricing model cannot be a reliable indicator of fair value because the model is driven by “a required internal rate of return that will always leave some portion of the company’s going concern value unrealized.

    • On May 31, 2017, in In Re Appraisal of SWS Group, the Court of Chancery (VC Glasscock) appraised the SWS Group merger using a DCF analysis and found the fair value of the target’s shares was less than the deal price. The court noted that, consistent with its recent PetSmart decision, the public sales process that develops market value is often the best evidence of statutory fair value; here, however, the court found that the SWS sale was made in market conditions that rendered the deal price unreliable. In fact, neither party had proposed deal price as an appropriate valuation method, but instead, using traditional valuation methodologies, had arrived at near-mirror image valuations 50% above and 50% below the deal price. VC Glasscock therefore did his own DCF calculation that resulted in a price below the deal price, which was “not surprising” given that it was a “synergies-driven transaction whereby the acquirer shared value arising from the merger with SWS.”

    • On July 21, 2017, the Court of Chancery (VC Laster) issued its ruling in Sprint v. Clearwire, appraising the fair value of Clearwire Corp. stock at nearly 60 percent below the Sprint Nextel Corp.’s buyout price of $5.00 per share. VC Laster found the fair value of Clearwire stock to be $2.13 per share, almost eight times lower than Aurelius Capital Management LP’s valuation of over $16 per share. In his analysis, VC Laster did not consider the deal price at all because neither side argued it was the fair value. VC Laster’s analysis also did not consider synergies, since the court is by statute not allowed to consider deal-specific factors. The court adopted Sprint’s analysis in total, stating that Aurelius “did not prove its more aggressive valuation contentions.”