The U.S. Supreme Court is set to hear Goldman Sachs v. Arkansas next month (oral argument is scheduled for March 29). The questions presented in the case are:
(1) Whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson, 485 U.S. 224 (1988), by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality.
(2) Whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.
In many respects, the case presented a worst case scenario – it involved a minority squeeze-out of a private company at a price of approximately \$0.43 per share with no market check or competitive sales process. Both parties pointed to valuation analyses prepared by their competing experts, which resulted in wildly divergent valuations. The petitioner’s expert opined that each Synapse share was worth \$4.1876 at the time of transaction, while Synapse’s expert provided a valuation range of \$0.06 to \$0.11 per share. Vice Chancellor Slights acknowledged that this left him in a bind:
… As a result, with the exception of relatively minor adjustments to Synapse’s expert’s conclusions about the amount of its debt and available cash, the Vice Chancellor adopted that expert’s approach to the DCF analysis and concluded that the fair market value of the company’s shares was approximately \$0.23 per share – nearly 50% below the purchase price.
Fir Tree Value Master Fund, LP v. Jarden Corp., 2020 WL 3885166, 2020 Del. LEXIS 237 (Del. July 9, 2020)
On appeal, the petitioners argue the Court of Chancery erred as a matter of law when it adopted Jarden’s unaffected market price as fair value because it ignored what petitioners claim is a “long-recognized principle of Delaware law” that a corporation’s stock price does not equal its fair value. They also claim that the court abused its discretion by refusing to give greater weight to a discounted cash flow analysis populated with data selected by petitioners, ignoring market-based evidence of a higher value, and refusing to use the deal price as a “floor” for fair value.
We affirm the Court of Chancery’s judgment finding $48.31 as the fair value of each share of Jarden stock as of the date of the merger. There is no “long-recognized principle” that a corporation’s unaffected stock price cannot equate to fair value. Although it is not often that a corporation’s unaffected market price alone could support fair value, the court here did consider alternative measures of fair value—a comparable companies analysis, market-based evidence, and discounted cash flow models—but ultimately explained its reasons for not relying on that evidence. Finally, Jarden’s sale price does not act as a valuation floor when the petitioners successfully convinced the court that the deal price resulted from a flawed sale process, and the court found Jarden probably captured substantial synergies in the sale price.
When a market is informationally efficient in the sense that the market’s digestion and assessment of all publicly available information concerning a company is quickly impounded into the company’s stock price, the market price is likely to be more informative of fundamental value. And how informative of fundamental value an informationally efficient market is depends, at least in part, on the extent of material nonpublic information. It is a traditional Delaware view that in some cases the price a stock trades at in an efficient market is an important indicator of its economic value and should be given weight.
In the highly anticipated decision of Salzberg v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), the Delaware Supreme Court, reversing the Delaware Court of Chancery’s decision, confirmed the facial validity of provisions in the certificates of incorporation of Blue Apron Holdings, Inc., Stitch Fix, Inc., and Roku, Inc. requiring all claims under the Securities Act of 1933 (the “’33 Act”) to be brought in federal courts (“Federal Forum Provisions”). Similar provisions have been adopted by dozens of Delaware corporations and are intended to address the inefficiencies of multi-jurisdictional ’33 Act litigation in light of the increasing number of ’33 Act claims filed in state, rather than federal, courts.
The U.S. Supreme Court has agreed to take up a case that will address a recurring issue that has arisen in the securities class action litigation arena – that is, whether or not the alleged failure to make a disclosure required by Item 303 of Reg. S-K is an actionable omission under Section 10(b) and Rule 10b-5.
The Supreme Court agreed to hear another securities case this week. Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. … Leido , a securities class action based on Exchange Act Section 10(b) and Rule 10b-5 thereunder, presents the following question, according to the Petition for a Writ of Certiorari: “Whether the Second Circuit erred in holding – in direct conflict with the decisions of the Third and Ninth Circuits – that Item 303 of SEC Regulation S-K creates a duty to disclose that is actionable under the Section 10(b) . . .” of the Exchange Act.
In the last couple of years, at the Chancery Court, chancellors have started moving away from the view that the court will determine fair value without regard to the merger price. Now, in certain circumstances (where the deal price is a product of a competitive or robust sales price) chancellors may consider merger price as one of the relevant factors for purposes of determining fair value.
Now this question has found its way to the Delaware Supreme Court and the parties are lining up on both sides. There are even amici! Two sets of amici have rolled up: on the one side there are law professors arguing that the court should be able to presumptively rely on merger price to determine fair value in an appraisal proceeding unless that price does not result from arm’s length bargaining (DFC Holdings – Bainbridge, et al). On the other are law professors arguing requiring a court to rely on merger price to determine fair value would run counter to the language of the statutory appraisal remedy and also not always reflect fair value (DFC Holdings – Talley, et al.
Appellant urges the Court to adopt a rule of law in appraisal proceedings that presumptively requires the Court of Chancery to defer exclusively to the transaction price unless that price does not result from an arm’s-length process. Amici disagree: Doing so would be a trifecta of bad law, bad economics, and bad policy.