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The Chancery Salvo - Friday, December 16, 2016

Vice Chancellor Laster Examines Recent Appraisal Rulings Finding Transaction Price Did and Did Not Represent Fair Value

Merion Capital, LP, et al. v. Lender Processing Services, Inc., C.A. No. 9320-VCL, memo. op. (Del. Ch. Dec. 16, 2016)

The Chancery Daily observes that post-trial opinions in Delaware statutory appraisal proceedings are often highly technical, focused on (at times) decimal point distinctions in competing experts' proposed case-specific numerical values for corporate finance acronym and Greek letter inputs into the discounted cash flow formula, with "legal analysis" more resembling financial analysis, and often -- and necessarily -- offering few generalizable principles of Delaware appraisal law likely to find application in another matter, involving another company, under other financial circumstances. Vice Chancellor Laster's post-trial decision in this appraisal action is not one of them.
The Vice Chancellor here determines that the fair value of respondent Company’s stock is $37.14 per share -- equal to the per-share consideration provided stockholders under the disputed merger agreement. Notably, the Vice Chancellor rejects a higher per share value that he found supported by a discounted cash flow analysis:

". . . [T]the figure of $38.67 per share is my best estimate of the fair value of the Company based on the DCF method.
. . .  As noted, a DCF analysis depends heavily on assumptions. Under the circumstances, as in [Merlin Partners, LP, et al. v. AutoInfo, Inc., C.A. No. 8509-VCN, memo. op. (Del. Ch. Apr. 30, 2015),] and [Merion Capital, LP, et al. v. BMC Software, Inc., C.A. No. 8900-VCG, memo. op. (Del. Ch. Oct. 21, 2015)], I give 100% weight to the transaction price."

Subscribers may be well-familiar with the above-referenced AutoInfo and BMC rulings, which, in succession with three other recent appraisal opinions (LongPath Capital, LLC v. Ramtron International Corp., C.A. No. 8094-VCP, memo. op (Del. Ch. June 30, 2015); In re Appraisal of, Inc., C.A. No. 8173-VCG (consol.), memo. op. (Del. Ch. Jan. 30, 2015); and Huff Fund Investment Partnership, et al. v. CKx, Inc., C.A. No. 6844-VCG, memo. op. (Del. Ch. Nov. 1, 2013)), found deal price the most reliable indication of fair value -- leading some to view Delaware appraisal law as having shifted in favor of deference to deal price. Rulings following BMC, however, have not deferred to deal price, and have concluded that per-share prices greater than the deal price represented fair value. See In re Appraisal of Dell, Inc., C.A. No. 9322-VCL (consol.), memo. op. (Del. Ch. May 31, 2016); In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (consol.), memo. op. (Del. Ch. July 8, 2016) (and In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (consol.), order (Del. Ch. Sept. 14, 2016)); In re ISN Software Corp. Appraisal Litigation, C.A. No. 8388-VCG (consol.), letter op. (Del. Ch. Aug. 11, 2016); and John Douglas Dunmire, et al. v. Farmers & Merchants Bancorp of Western Pennsylvania, Inc., C.A. No. 10589-CB, memo. op. (Del. Ch. Nov. 10, 2016).
While the present opinion does tussle, as it must, with the beta and the WACC, at pages 58-65, a significant part of its legal analysis discusses the underlying notion of "fair value" under the Delaware appraisal statute; case law addressing the relevance of transaction price to the determination of fair value and the distinction between fair value and the fiduciary concept of "fair price;" and, at pages 65-73, a discussion examining the weight placed on transaction price versus other factors in the above-referenced rulings that found the transaction price represented fair value and those that found transaction price did not represent fair value.
TCD also points out what it considers an incredibly important, and, per the Vice Chancellor's description, underappreciated fact bearing on judicial determinations of fair value:

"Evaluating the reliability and persuasiveness of the deal price for purposes of establishing fair value in an appraisal proceeding is a multifaceted, fact-specific inquiry. The relevant factors can vary from case to case depending on the nature of the company, the overarching market dynamics, and the areas on which the parties focus. The last is perhaps an underappreciated aspect of appraisal jurisprudence. Because an appraisal decision results from litigation in which adversarial parties advance arguments and present evidence, the issues that the court considers and the outcome that it reaches depend in large part on the arguments that the advocates make and the evidence they present. An argument may carry the day in a particular case if counsel advance it skillfully and present persuasive evidence to support it. The same argument may not prevail in another case if the proponents fail to generate a similarly persuasive level of probative evidence or if the opponents respond effectively."
A careful reading of Merion Capital, LP, et al. v. 3M Cogent, LLC, C.A. No. 6247-VCP, memo. op. (Del. Ch. July 8, 2013), or In re Trados Inc. Shareholder Litigation, C.A. No. 1512-VCL (consol.), opinion (Del. Ch. Aug. 16, 2013), to choose two examples that readily come to mind from among several others that could be cited, may leave a discerning reader with the distinct impression that the determinations in those matters turned on expert presentations at trial. Even the CKx opinion -- the first in the string of 2013-2015 rulings finding that transaction price represented fair value -- emphasized that: "Because neither party has presented a reasonable alternative valuation method, and because I find the sales price here a reliable indicator of value, I find that a use of the merger price to determine fair value is appropriate in this matter." Accordingly, TCD reads the Vice Chancellor's comments in this regard providing explicit guidance on what has
inferably amounted to a critical failure of evidence in past appraisal actions.
Lastly, suggestive of the significance within the community of interest of some of the issues discussed above, TCD notes that this opinion comes one day after friend of TCD Allison Frankel wrote describing appellant in the DFC Global matter's argument to the Supreme Court to hold "that when buyers have conducted an arm’s-length, conflict-free sale to a disinterested buyer after a robust auction process, the transaction price is, by law, the most reliable measure of value." Gibson Dunn to Delaware Supreme Court: Fix arbitrary, imprecise appraisal rulings.