Jonathan R. Macey & Joshua Mitts, Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets, SSRN (2018)

We contend that courts should look at the market price of the securities of a target company whose shares are being valued, unadjusted for the news of the merger, rather than at the deal price that was reached by the parties in the transaction.

Unadjusted market price has two distinct advantages over deal price. First, the unadjusted market price automatically subtracts the target firm’s share of the synergy gains and agency cost reductions impounded in the deal price. This is appropriate to do because dissenting shareholders in appraisal proceedings are not entitled to these increments of value which are supplied by the bidder. Second, the unadjusted market price is unaffected by any flaws in the deal process that led to the ultimate merger agreement. Recently, commentators have contended that deal prices in merger transactions should be ignored in appraisal cases where there are flaws in the process that led to the sale.

In RE Appraisal Of AOL Inc.

This is an important case for its comments on the Dell decision of the Delaware Supreme Court. The Court declined to use the deal price as evidence of the fair value despite the favorable comments on the use of deal price in Dell. Hence, this may mean that some commentators are wrong in their views that deal price is conclusive in valuation cases in the Delaware courts. Note, however, that again the fair value determined by the Court is less than the deal price, a loss for petitioners.

The decision is also important for its review of when the “operative reality” of a company includes the value of a new deal not yet concluded but sufficiently certain that its value needs to be part of the fair value of the company.

via Morris James

Verition Partners Master Fund Ltd. v. Aruba Networks Inc.

 株式買取請求権で市場価格を用いた例。

The forceful discussion of the efficient capital markets hypothesis in Dell and DFC indicates that Aruba’s unaffected market price is entitled to substantial weight.

[C]orporate finance theory reflects a belief that if an asset-such as the value of a company as reflected in the trading value of its stock-can be subject to close examination and bidding by many humans with an incentive to estimate its future cash flows value, the resulting collective judgment as to value is likely to be highly informative . . . .

“Market prices are typically viewed superior to other valuation techniques because, unlike, e.g., a single person’s discounted cash flow model, the market price should distill the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.” “[I]n many circumstances a property interest is best valued by the amount a buyer will pay for it” and “a well-informed, liquid trading market will provide a measure of fair value superior to any estimate the court could impose.”

In this case, because Aruba’s shares “were widely traded on a public market based upon a rich information basis,” the fair value of the petitioners’ shares “would, to an economist, likely be best reflected by the prices at which their shares were trading as of the merger.” Aruba had “a deep base of public shareholders” and “highly active trading,” so “the price at which its shares trade is informative of fair value.” The unaffected thirty- day average market price of Aruba’s stock was $17.13 per share.

Dell and DFC teach that the deal price is also entitled to substantial weight. “In economics, the value of something is what it will fetch in the market. That is true of corporations, just as it is true of gold.” For a court to give weight to the deal price, it need not be the most reliable evidence of the Company’s value as a going concern.472 This court has authority “to determine, in its discretion, that the deal price is the most reliable evidence of fair value … , and that’s especially so in cases … where things like synergy gains or minority stockholder discounts are not contested.”

The deal price in this case resulted from an arm’s-length transaction involving a publicly traded company without a controlling stockholder. The deal price in this case contained synergies, so it logically exceeded fair value. There is also the fact that the petitioners failed to identify a bidder who would pay more than HP. “Fair value entails at minimum a price some buyer is willing to pay ….” Taken together, these propositions indicate that the deal price in this case operates as a ceiling for fair value.

The Dell and DFC decisions recognize that a deal price may include synergies and endorse deriving an indication of fair value from the deal price by deducting synergies. In this case, the evidence shows that the deal generated significant synergies. Using the low-end synergy range implies a standalone value of $21.08 per share. Using the high-end synergy range implies a standalone value of $15.32 per share. This decision has adopted the midpoint of $18.20 per share as its deal-price-less-synergies value.

This decision does not give any weight to the discounted cash flow analyses. As in Dell, “this appraisal case does not present the classic scenario in which there is reason to suspect that market forces cannot be relied upon to ensure fair treatment of the minority.” Discounted cash flow models are “often used in appraisal proceedings when the respondent company was not public or was not sold in an open market check.”

The reason for that is not that an economist wouldn’t consider the best estimate of a private company’s value to be the price it sold at in an open sale process of which all logical buyers were given full information and an equal opportunity to compete. Rather, the reason is that if such a process did not occur, corporate finance instructs that the value of the company to potential buyers should be reflected in its ability to generate future cash flows.

“But, a single person’s own estimate of the cash flows are just that, a good faith estimate by a single, reasonably informed person to predict the future. Thus, a singular discounted cash flow model is often most helpful when there isn’t an observable market price.” When market evidence is available, “the Court of Chancery should be chary about imposing the hazards that always come when a law-trained judge is forced to make a point estimate of fair value based on widely divergent partisan expert testimony.”

The unaffected market price provides direct evidence of the collective view of market participants as to Aruba’s fair value as a going concern during the period before the announcement of the transaction, which could be different than Aruba’s fair value as of closing. The same disconnect exists for the deal price, which provides evidence of how the parties to the merger agreement valued Aruba during the price negotiations, which could be different than Aruba’s fair value as of closing. Addressing a similar issue in the Union Illinois case, Chief Justice Strine described the temporal gap as a “quibble” and “not a forceful objection,” noting that “[t]he negotiation of merger terms always and necessarily precedes consummation.”484 Observing that “[n]othing in the record persuades me that [the company] was more valuable by [closing] than it was when the Merger terms were set,” he continued to use the deal price as an indicator of value.485 Similarly in this case, neither side proved that Aruba’s value had changed materially by closing, so this decision sticks with the unaffected market price and the deal price less synergies.

For Aruba, using its unaffected market price provides the more straightforward and reliable method for estimating the value of the entity as a going concern. I could strive to reach the same endpoint by backing out shared synergies and a share of value for reduced agency costs, but both steps are messy and provide ample opportunities for error. For Aruba, the unaffected market price provides a direct estimate of the same endpoint. Rather than representing my own fallible determination, it distills “the collective judgment of the many based on all the publicly available information about a given company and the value of its shares.” “[T]he price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst,” particularly when a trial judge is playing the analyst’s role.

This approach does not elevate “market value” to the governing standard under the appraisal statute. The governing standard for fair value under the appraisal statute remains the entity’s value as a going concern. For Aruba, the unaffected public market price provides the best evidence of its value as a going concern.

In this case, the best evidence of Aruba’s fair value as a going concern, exclusive of any value derived from the merger, is its thirty-day average unaffected market price of $17.13 per share. I recognize that no one argued for this result. I also recognize that the resulting award is lower than Aruba’s proposed figure of $19.75 per share. That figure relied on its expert’s discounted cash flow analysis, which this decision has found unpersuasive.

“When … none of the parties establishes a value that is persuasive, the Court must make a determination based on its own analysis.” The appraisal statute requires that “the Court shall determine the fair value of the shares.” This means that I must reach my own, independent determination of fair value. That determination is $17.13 per share.

(footnotes omitted)

via Morris James

Fried Frank, The Appraisal Landscape: Key Points, Open Issues, and Practice Points

 2017年のデラウェア州最高裁による株式買取請求権に関する2つの事件(DFC GloblとDell)に関する法律事務所のメモランダムです。著者の一人であるScott Luftglass氏とは、Davis Polk時代に一緒に働いたことがあります。典型的な訴訟弁護士で、訴訟弁護士は、事務屋よりも緻密だと感じました。今回の記事もよく纏まっています。

via Harvard

Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 2017 Del. LEXIS 518 (Del. Dec. 14, 2017)

By instructing the court to “take into account all relevant factors” in determining fair value, the statute requires the Court of Chancery to give fair consideration to “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.” Given that “[e]very company is different; every merger is different,” the appraisal endeavor is “by design, a flexible process.”

This Court has relied on the statutory requirement that the Court of Chancery consider “all relevant factors” to reject requests for the adoption of a presumption that the deal price reflects fair value if certain preconditions are met, [*40] such as when the merger is the product of arm’s-length negotiation and a robust, non-conflicted market check, and where bidders had full information and few, if any, barriers to bid for the deal.

… Further, the Court of Chancery’s analysis ignored the efficient market hypothesis long endorsed by this Court. It teaches that the price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst, especially an expert witness who caters her valuation to the litigation imperatives of a wellheeled client.

… Fair value entails at minimum a price some buyer is willing to pay—not a price at which no class of buyers in the market would pay.

When an asset has few, or no, buyers at the price selected, that is not a sign that the asset is stronger than believed—it is a sign that it is weaker. This fact should give pause to law-trained judges who might attempt to outguess all of these interested economic players with an actual stake in a company’s future. This is especially so here, where the Company worked hard to tell its story over a long time and was the opposite of a standoffish, defensively entrenched target as it approached the sale process free of many deal-protection devices that may prevent selling companies [*73] from attracting the highest bid. Dell was a willing seller, ready to pay for credible buyers to do due diligence, and had a CEO and founder who offered his voting power freely to any topping bidder.

(footnotes omitted)

via Wachtell Lipton

DFC Global Decided

The respondent argues that we should establish, by judicial gloss, a presumption that in certain cases involving arm’s-length mergers, the price of the transaction giving rise to appraisal rights is the best estimate of fair value. We 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.”

… [W]e do not share DFC’s confidence in our ability to craft, on a general basis, the precise pre-conditions that would be necessary to invoke a presumption of that kind. We also see little need to do so, given the proven record of our Court of Chancery in exercising its discretion to give the deal price predominant, and indeed exclusive weight, when it determines, based on the precise facts before it that led to the transaction, that the deal price is the most reliable evidence of fair value. …

… Although there is no presumption in favor of the deal price, under the conditions found by the Court of Chancery, economic principles suggest that the best evidence of fair value was the deal price, as it resulted from an open process, informed by robust public information, and easy access to deeper, non-public information, in which many parties with an incentive to make a profit had a chance to bid. . .

Morris James on In re Appraisal of SWS Group Inc.

Recent criticism of appraisal arbitrage argues that it comes without real risk to the petitioners. This appraisal decision, which values the company below the deal price based on a discounted cash flow analysis, should be part of any reform discussion. The petitioners in SWS Group suffered a sizable loss after refusing to accept the deal price. SWS Group also comes right on the heels of the PetSmart decision, which found the deal price represented the company’s fair value. Hence, petitioners again lost, given all the expense involved in an appraisal proceeding. In short, appraisal litigation is not for the weak at heart. The key to this decision is the Court’s finding that synergies for the buyer drove the merger price past fair value. Of course, while based on precedent, a finding of synergies is always controversial. To petitioners, those possible benefits are what made the company worth buying and are thus part of its inherent appeal.