M&A Litigation Update: Standard of Deal Review, Appraisal Rights, D&O Fiduciary Duties Implications of Recent Delaware Case Law for Planning, Negotiating and Drafting Deal Documents Today’s faculty features: 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 1. THURSDAY, OCTOBER 18, 2018 Presenting a live 90-minute webinar with interactive Q&A Michael D. Allen, Director, Richards Layton & Finger, Wilmington, Del. Samuel T. Hirzel, Partner, Heyman Enerio Gattuso & Hirzel, Wilmington, Del. Ryan D. Stottmann, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del.
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M&A Litigation Update: Standard of Deal
Review, Appraisal Rights, D&O Fiduciary
DutiesImplications of Recent Delaware Case Law for Planning, Negotiating and Drafting Deal Documents
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 1.
THURSDAY, OCTOBER 18, 2018
Presenting a live 90-minute webinar with interactive Q&A
Michael D. Allen, Director, Richards Layton & Finger, Wilmington, Del.
Samuel T. Hirzel, Partner, Heyman Enerio Gattuso & Hirzel, Wilmington, Del.
Ryan D. Stottmann, Partner, Morris Nichols Arsht & Tunnell, Wilmington, Del.
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2018 M&A Litigation Update:Standard of Deal ReviewStrafford WebinarOctober 18, 2018
Michael D. Allen
▪ Standards of Review
- Limits of Corwin
- Controlling Stockholder Transactions
- When Is a Less than 50% Holder a Controlling Stockholder?—Bashoand Tesla
- MFW Update—Other Cases
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Overview of Discussion Topics
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Standards of Review: Limits of Corwin
▪ Corwin v. KKR Fin. Hldgs. LLC, 125 A.3d 304 (Del. 2015) – absent a controllingstockholder, the business judgment rule applies following informed stockholderapproval of a transaction.
▪ Singh v. Attenborough, 137 A.3d 151 (Del. 2016) – informed stockholder approvalin transactions that do not include a controlling stockholder “irrebuttably” invokesthe business judgment rule and precludes judicial review absent extremeallegations sufficient to state a claim for waste.
▪ Subsequent Court of Chancery decisions have characterized the standard ofreview under Singh as the “irrebuttable business judgment rule.” See, e.g., City ofMiami Gen. Emps.’ v. Comstock, 2016 WL 4464156 (Del. Ch. Aug. 24, 2016).
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Limits of Corwin
▪ Corwin will not apply where stockholders are improperly coerced.
‐ In re Saba Software, Inc. Stockholder Litigation, 2017 WL 1201108 (Del. Ch.Mar. 31, 2017) – Court of Chancery declines to apply Corwin wherestockholders were coerced due to de-registration of stock and due tomaterial non-disclosures.
‐ Sciabacucchi v. Liberty Broadband Corp., 2017 WL 2352152 (Del. Ch. May 31,2017) – Court of Chancery declines to apply Corwin where stockholderswere coerced into voting to approve a stock issuance in connection with amerger because the stockholder approval of this matter was a condition toconsummation of beneficial merger transaction.
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Standards of Review: Limits of Corwin - Coercion
▪ In addition to alleging “voter coercion” in certain cases, plaintiffs have begunbringing post-closing disclosure claims in an attempt to prevent the application ofCorwin and subject change of control transactions to enhanced scrutiny.
▪ In order to do so, “a plaintiff . . . must first identify a deficiency in the operativedisclosure document, at which point the burden would fall to defendants toestablish that the alleged deficiency fails as a matter of law in order to secure thecleansing effect of the vote.” In re Solera Hldgs., Inc. S’holder Litig., 2017 WL57839, at *8 (Del. Ch. Jan. 5, 2017).
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Limits of Corwin - Disclosure
▪ In light of several recent decisions, practitioners should take care to provide fulldisclosure in proxy statements, 14D-9s and other solicitation materials.
• The failure to disclose the reasons that a company’s Chairman and founderabstained from voting in favor of a merger was found material where his basis fordoing so was his disappointment with the merger price (and with management fornot running the business in a manner that would have commanded a higher price)and his belief that it was an inopportune time to sell the company. Appel v.Berkman, 180 A.3d 1055 (Del. 2018).
• Corwin was found inapplicable where a 14D-9 failed to disclose whether conflictedofficers and directors who received post-transaction employment with theacquirer led key portions of merger negotiations. van der Fluit v. Yates, 2017 WL5953514 (Del. Ch. Nov. 30, 2017).
• The Delaware Supreme Court overturned a Court of Chancery dismissal underCorwin, finding that disclosure deficiencies related to, among other things, thefounder’s potential unwillingness to partner with other potential acquirers duringthe auction process prevented the stockholder vote from being fully informedunder Corwin. Morrison v. Berry, 2018 WL 3339992 (Del. 2018)
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Limits of Corwin - Disclosure
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▪ In Lavin v. West Corp., 2017 WL 6728702 (Del. Ch. Dec. 29, 2017), in holding that astockholder-plaintiff had established a valid primary purpose in its demand to inspectthe books and records related to the acquisition of West Corporation (“West”) byApollo Global Management, the Court of Chancery rejected West’s argument thatCorwin precluded a Section 220 demand because any possible breaches of fiduciaryduties that plaintiff sought to investigate were cleansed by stockholder approval of theacquisition.
▪ West contended that the inspection demand was invalid because the West stockholdersapproved the transaction and, accordingly, any lawsuit for alleged breach of fiduciaryduties (other than one for waste) would lack merit.
▪ The Court rejected West’s use of Corwin in the context of Section 220, stressing that amerit-based defense was improper and noting that Delaware courts had rejectedsimilar attempts to invoke merit-based defenses. The Court explained that astockholder “need not prove that wrongdoing or mismanagement actually occurred.”That is, the viability of a demand does not turn on the ultimate likelihood a claim willsucceed.
Limits of Corwin – Section 220
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Standards of Review: Controlling Stockholder TransactionsWhen Is a Less than 50% Holder a Controlling Stockholder?—Basho
and Tesla
▪ Stockholders owning more than 50% of a Delaware corporation’s voting stock orotherwise exercising control over the corporation owe fiduciary duties of loyalty,care, and disclosure to the corporation and its minority stockholders, and indealing with the corporation must act in good faith and in a manner that does notoppress the corporation and its minority stockholders.
▪ Where a stockholder is not a majority stockholder, plaintiffs must either show thatthe minority stockholder actually dominated and controlled the corporation, itsboard or the deciding committee with respect to the challenged transaction orthat the minority stockholder actually dominated and controlled the majority ofthe board generally.
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Controlling Stockholder Transactions—When Is a Less than 50% Holder a Controlling Stockholder?—Basho and Tesla
▪ In Basho Techs. Holdco B, LLC v. Georgetown Basho Inv’rs, LLC, 2018 WL 3326693 (Del.Ch. July 6, 2018), holders of junior series of preferred stock and common stock of BashoTechnologies, Inc. (the “Company”) brought breach of fiduciary duty claims againstGeorgetown Basho Investors, LLC (“Georgetown”), a significant senior preferredstockholder, and certain directors in connection with a Series G financing round (the“Series G Financing”) and certain subsequent transactions.
▪ The Court found that Georgetown exercised effective control over the decision by theCompany to consummate the Series G Financing due to the confluence of:
• Use of its contractual rights to cut off access to sources of financing other thanGeorgetown;
• Efforts taken to spread misinformation regarding Georgetown’s intentions and thestatus of negotiations;
• Interference with the CEO and other members of management;• Influence over the Company’s financial advisor; and• Insistence on the Series G Financing, unwillingness to negotiate and use of
threats.
▪ Accordingly, the Court found that the entire fairness standard of review applied to theSeries G Financing. 15
▪ Applying the entire fairness standard of review, the Court held that Georgetown and itsdirector designees had failed to prove that the Series G Financing was entirely fair.
▪ The Court also rejected defendants’ equitable defense that one of the plaintiffs hadacquiesced to the Series G Financing because he had voted in favor of it as a director.
• The Court noted the director’s numerous objections to the Series G Financing(which objections he submitted in writing for inclusion in the minutes), as well asGeorgetown’s conduct that resulted in the directors being forced into a choicebetween approving an unfair offer or destroying the Company.
▪ The Court also applied the entire fairness standard of review to the post-financingtransactions, which transactions the Court found were more likely than not to havecontributed to the Company’s failure.
• The Court characterized the post-financing transactions as having been motivatedby Georgetown’s desire to pursue a near-term sale and extract value for itselfthrough its senior securities at the expense of the Company’s long-termprospects.
▪ As to remedies, the Court held that Georgetown and its director designees were jointlyand severally liable for $17,490,650 plus pre- and post-judgment interest for the SeriesG Financing.
• The award was calculated based on the difference in value between the plaintiffs’equity before and after the Series G Financing, using the Section 409(a) valuationsas a guidepost (including certain discounts, such as a 20% discount in recognitionof the onerous terms of the Series G Financing).
▪ With respect to the post-Series G Financing transactions, the Court held thatGeorgetown and its director designees were jointly and severally liable for $2,778,228plus post-judgment interest.
• The award was calculated based on the diminution in value of the plaintiffs’shares from the time of the Series G Financing to the date of judgment; the Courtnoted that the award was warranted by the egregious manner in whichGeorgetown operated the Company after obtaining control.
▪ In addition to referencing examples of broader indicia of control, the Court alsoenumerated a non-exclusive list of examples of sources of influence that wouldcontribute to a finding of control over a particular transaction or decision including:
• Relationships with particular directors that compromise their disinterestedness orindependence;
• Relationships with key managers or advisors who play a critical role in presentingoptions, providing information and making recommendations;
• Exercise of contractual rights to channel the corporation to a particular outcome;
• Existence of commercial relationships that provide a stockholder with leverageover the corporation, such as status as a key customer or supplier; and
• Lending relationships in which a lender exercises outsized influence.
▪ The Court stressed that a finding of control depends upon the totality of the facts andcircumstances, considered in the aggregate and not on any one factor.
▪ In particular, the Court stated:
“Lest sensitive readers fear that this decision signals heightened risk for venturecapital firms who exercise their consent rights over equity financings, I reiteratethat a finding of control requires a fact-specific analysis of multiple factors. IfGeorgetown only had exercised its consent right, that fact alone would not havesupported a finding of control. The plaintiffs proved that Georgetown andDavenport did far more.”
▪ In In re Tesla Motors, Inc. S’holder Litig., 2018 WL 1560293 (Del. Ch. Mar. 28, 2018),appeal refused, 184 A.3d 1292 (Del. 2018), the Court held that the plaintiff-stockholderspled sufficient facts to show it was reasonably conceivable that Elon Musk acted as aconflicted controller with respect to the acquisition (the “Acquisition”) of SolarCityCorporation (“SolarCity”) by Tesla, Inc. (“Tesla”), and denied the defendant’s motion todismiss under Corwin.
▪ Musk owned 22.1% of Tesla’s stock at the time of the Acquisition and was Tesla’s largeststockholder. Musk also served as Chairman of the Tesla Board, CEO of Tesla, and ChiefProduct Architect of Tesla. Simultaneously, Musk was SolarCity’s largest stockholder(21.9%) and Chairman of SolarCity’s board.
▪ The Court held that despite Musk only owning a minority stake in the voting power ofTesla, the plaintiffs’ allegations supported a reasonable inference that Musk actuallydominated and controlled Tesla and Tesla’s Board with respect to the Acquisition.
• The Court determined that it need not express an opinion as to whether Muskacted as a controlling stockholder over Tesla and Tesla’s Board generally becauseenough allegations were pled to raise a reasonable doubt that Musk acted as acontrolling stockholder with respect to the Acquisition.
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Controlling Stockholder Transactions – Tesla Motors
▪ The Court found the following allegations, when considered together, supported areasonable inference that Musk was a controlling stockholder:
• Musk displayed an ability to influence the stockholder vote at Tesla.
₋ Particularly, Musk previously forced the founder and then-CEO out of Teslaand subsequently had himself appointed as CEO.
₋ Musk’s 22.1% block of Tesla’s stock positioned him as a potential roadblockfor Tesla to transact any significant business, as Tesla’s bylaws containedseveral supermajority voting requirements that required 66 2/3 percent oftotal voting power for approval.
• Tesla’s Board failed to implement safeguards to prevent Musk’s control over Tesla’sconsideration and negotiation of the Acquisition.
₋ Notably, although Musk recused himself from voting on the Acquisition,Musk brought the proposal to acquire SolarCity to Tesla’s Board three times,Musk led the Board’s discussion of the Acquisition, and Musk engaged thefinancial and legal advisers for the Acquisition.
₋ Tesla’s Board never considered forming a committee of disinterestedindependent directors to consider the Acquisition.
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Controlling Stockholder Transactions – Tesla Motors
• Musk had strong connections with the members of the Tesla Board and a majorityof Tesla’s Board was “interested” in the Acquisition.
▪ Two of the five directors who approved the Acquisition were notindependent directors based on Tesla’s public filings.
▪ A third director, Jurvetson, who approved the Acquisition was gifted the firstever Tesla Model S and the second ever Tesla Model X by Musk himself.Further, Jurvetson’s venture capital firm owned 3.3% of SolarCity’soutstanding common stock and Jurvetson personally owned 417,450 sharesof SolarCity common stock.
• Tesla acknowledged Musk’s significant influence at Tesla in Tesla’s public filings.
▪ Notably, one Tesla filing stated that Tesla is “highly dependent on theservices of Elon Musk,” and if Tesla were to lose his services, it could disruptTesla’s operations.
▪ Further, Musk had publicly stated that Tesla is “his company” and that Tesla,SolarCity, and SpaceX form a pyramid on top of which he sits.
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Controlling Stockholder Transactions – Tesla Motors
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Standards of Review: Controlling Stockholder TransactionsMFW Update—Other Cases
▪ The entire fairness test is the default standard of review for challenges toconflicted controlling stockholder transactions.
▪ In Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), the DelawareSupreme Court held that the business judgment standard of review applies to atwo-sided controlling stockholder merger when it is conditioned, ab initio, on:
• Negotiation and approval by an independent, fully functioning and dulyempowered special committee that fulfills its duty of care; and
• The uncoerced, fully informed vote of a majority of the minoritystockholders.
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Controlling Stockholder Transactions – MFW Update
▪ Thus, under the MFW framework, in controlling stockholder buyouts, the businessjudgment standard of review will be applied if and only if:
• The controlling stockholder conditions the transaction on the approval ofboth a special committee and a majority of the minority stockholders fromthe outset;
• The special committee is independent;
• The special committee is empowered to freely select its own advisors and tosay no definitively;
• The special committee meets its duty of care in negotiating;
• The vote of the minority is fully informed; and
• There is no coercion of the minority.
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Controlling Stockholder Transactions – MFW Update
▪ In two recent cases, the Court of Chancery has held that the conditions for MFW weresatisfied where the initial overture by the controlling stockholder did not expresslycondition the transaction on a favorable recommendation from a special committeeand approval by the majority of the disinterested stockholders.
• In In re Synutra Int’l, Inc. S’holder Litig., 2018 WL 705702 (Del. Ch. Feb. 2, 2018)(ORDER), aff’d, __ A.3d __, 2018 WL 4869248 (Del. Oct. 9, 2018), the Court ofChancery held that MFW applied where the board considered a “preliminary non-binding proposal” that did not condition a potential transaction on both afavorable special committee recommendation and approval of the majority of theminority, because a follow-up letter, sent before the board had substantivelyevaluated the proposal, reaffirmed its initial offer and expressly conditioned thetransaction on the approval of the special committee and a majority of theminority stockholders.
• The Delaware Supreme Court, sitting en banc, affirmed the Court of Chancery’sholding in Synutra, concluding that the ab initio requirement of MFW is satisfiedwhen “the controller conditions its offer on the key protections [of MFW] at thegermination stage of the Special Committee process, when [the SpecialCommittee] is selecting its advisors, establishing its method of proceeding,beginning its due diligence, and has not commenced substantive economicnegotiations[.]” 26
• In a dissenting opinion in Synutra, Justice Valihura disagreed with the adoption ofa “when the negotiations begin” test by the Majority to determine when the abinitio requirement is satisfied. Instead, she suggested that the Court apply aclearer test by requiring the dual protections of MFW to be present in thecontroller’s initial formal written proposal.
• In Olenik v. Lodzinski, 2018 WL 3493092 (Del. Ch. July 20, 2018), the Court ofChancery explained that the MFW protections must be in place at the outset ofnegotiations (which typically begin when a proposal is made by one party that, ifaccepted, would constitute a binding agreement); however, such protections maybe agreed to after discussions between the parties that are merely “exploratory innature.”
• The Olenik case is still in the appeals process.
▪ In IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017),the court dismissed claims alleging that directors of NRG Yield, Inc. (“Yield”) breachedtheir fiduciary duties in connection with the approval of a reclassification of Yield’sshares that went into effect in May 2015.
▪ The court held that the recapitalization was a conflicted controller transaction thatwould be presumptively subject to the entire fairness standard of review(notwithstanding that it was nominally a pro rata transaction).
• Yield had two classes of voting stock, Class A and Class B, each of which wasentitled to one vote per share. NRG Energy, Inc. (“NRG”) initially heldapproximately 65% of Yield’s voting power through its ownership of all of Yield’sClass B Shares, which were never offered to the public, and public stockholdersinitially held approximately 35% of Yield’s voting power through their ownershipof Class A shares.
• In response to increasing dilution of its voting control as a result of Yield’sissuance of Class A shares to fund various acquisitions, NRG proposed arecapitalization pursuant to which Yield would issue non-voting common stock toClass A stockholders, on a pro rata basis, which could be used to fund futureacquisitions, thereby discontinuing dilution of NRG’s voting control.
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Controlling Stockholder Transactions – Crane
• Ultimately, the recapitalization resulted in an issuance of new classes of stock withvery limited voting rights to the holders of both Class A shares and Class B shares.
▪ The Court found that the defendants complied with the MFW framework, which shiftedthe standard of review from entire fairness to business judgment.
• NRG’s proposal was conditioned from the beginning on the approval of a majorityof the outstanding shares of Yield not affiliated with NRG (i.e., a majority of Yield’soutstanding Class A shares). Additionally, Yield’s board delegated to its standingconflicts committee the authority to evaluate and negotiate the proposal. Theindependence of the three members of the conflicts committee was neverchallenged.
▪ Because the court found that the defendants successfully implemented the MFWframework, the reclassification was subject to the business judgment rule. As theplaintiff had made no effort to plead facts sufficient to overcome the businessjudgment rule, the court granted the defendant’s motion to dismiss.
▪ Court distinguishes Williams v. Geier due to this transaction being before the court on amotion to dismiss and without discovery.
This presentation and the material contained herein are provided as general informationand should not be construed as legal advice on any specific matter or as creating anattorney-client relationship. Before relying on general legal information or deciding on legalaction, request a consultation or information from a Richards, Layton & Finger attorney onspecific legal needs.
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Samuel T. Hirzel, Esq. Heyman Enerio Gattuso & Hirzel LLP
8 Del. C. Section 262 provides the statutory process for a judicial determination of the fair value of the shares of a Delaware corporation that is a party to certain types of M&A transactions. AKA “dissenters rights.”
8 Del. C. Section 262 has two main components: (1)Perfection of Appraisal Rights, and (2) Valuation.
33
Stockholder does not vote in favor of the merger, continues to hold stock through closing, and demands appraisal. See In re Appraisal of Dell Inc., 143 A.3d 20 (Del. Ch. May 11, 2016) (finding that 83% of shares that pursued appraisal through trial were not entitled to appraisal based on inadvertent failures in the “Byzantine” system of “daisy chain” authorizations in connection with voting beneficially owned shares)
Stockholder may withdraw demand and receive the merger consideration for 60 days after the effective date of the merger if they have not commenced or joined an appraisal action.
Stockholder does not need to separately file a petition to become part of a quasi-class.
Typical course of litigation: fact discovery & expert discovery culminating in a “battle of the experts” (and their foundations) at trial.
Claims of breach of fiduciary duty in connection with the transaction giving rise to the appraisal may be pursued together with the appraisal. Entire fairness turns on fair process and fair price, creating significant overlap on the price component.
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The appraisal petitioner is entitled to a proportionate share of the “fair value in the going concern on the date of the merger” but is not entitled to elements of value “arising from the accomplishment or expectation of the merger,” e.g., synergies.
DGCL grants the Court significant discretion to determine the “fair value” of the shares and “take into account all relevant factors.” DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346, 364 (Del. 2017) (“Section 262(h) unambiguously calls upon the Court of Chancery to perform an independentevaluation of ‘fair value’ at the time of a transaction. It vests the Chancellor and Vice Chancellors with significant discretion to consider ‘all relevant factors’ and determine the going concern value of the underlying company.”)
35
Historical preference for discounted cash flow analysis (“DCF”) based valuations using contemporaneous management projections, but comparable transactions and comparable company analyses are also historically accepted approaches. In recent cases, the Court has let appraisal respondents walk away from projections that were prepared for the deal and not used in the ordinary course of business.
The Delaware Supreme Court historically rejected any presumption in favor of the negotiated deal consideration as evidence of “fair value” in an appraisal action even if it was the result of an arms’-length negotiation. Golden Telecom, Inc. v. Global FT Ltd., 11 A.3d 214 (Del. 2010) (“Requiring the Court of Chancery to defer—conclusively or presumptively—to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine ‘fair value’ from the court to the private parties. Also, while it is difficult for the Chancellor and Vice Chancellors to assess wildly divergent expert opinions regarding value, inflexible rules governing appraisal provide little additional benefit in determining ‘fair value’ because of the already high costs of appraisal actions.”). See also DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346, 364 (Del. 2017).
A number of recent cases, however, have given this data-point far greater weight absent evidence of a tainted process.
36
Costs—appraisals are expensive.
Fees—fee shifting is rarely granted. No corporate benefit or common fund doctrine. Petitioners fund their own case.
Time—it could take years for resolution.
Security – Petitioner is an unsecured creditor and bears the company’s credit risk.
Uncertainty—the appraised value could be higher or lower than the merger consideration.
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Trends
Observed trend of “event driven” funds buying into and filing appraisal actions. See Charles R. Korsmo & Minor Myers, Appraisal Arbitrage and the Future of Public Company M&A, 92 Wash U. L. Rev. 1551 at Figures 1 & 3 (2014-15) (see next two slides).
Observed increase in the number of appraisal petitions filed since 2012.
M&A and defense bar lobbies against appraisal arbitrage as “unseemly.”
Possible slow down in filing rate in 2017.
Transkaryotic decision
In re Appraisal of Transkaryotic Therapies, Inc., 2007 WL 1378345 (Del. Ch. May 2, 2007) (opening the door for investors to buy into an appraisal action by upholding appraisal rights for shareholders who acquired shares after the record date). Reaffirmed in Merion Capital LP v. BMC Software, Inc., 2015 WL 67586 (Del. Ch. Jan. 5, 2016) and In re Appraisal of Ancestry.com, Inc., 2015 WL 66825 (Del. Ch. Jan. 5, 2015).
2007 statutory amendment fixes interest at 5% + Federal Reserve discount rate
38
The Union Illinois 1995 Inv. Lim. P’ship v. Union Fin. Grp., Ltd., 847 A.2d 340 (Del. Ch. 2004) (Then Vice Chancellor Strine appraising company at merger price less synergies, noting: As I perceive [my discretion under Section 262], I am free to consider all non-speculative elements of value, provided that I honor the fair value definition articulated by the Delaware Supreme Court…. that evidence may include facts bearing on the market value of the subject company. This includes the transaction that gives rise to the right of appraisal, so long as the process leading to the transaction is a reliable indicator of value and merger-specific value is excluded. More generally, our case law recognizes that when there is an open opportunity to buy a company, the resulting market price is reliable evidence of fair value. Or, as then-Vice Chancellor, now Justice Jacobs, aptly put it: ‘The fact that a transaction price was forged in the crucible of objective market reality (as distinguished from the unavoidably subjective thought process of a valuation expert) is viewed as strong evidence that the price is fair.’”)
Highfields Capital, Ltd. V. AXA Fin., Inc., 939 A.2d 34 (Del. Ch. Aug. 17, 2007) (finding fair value, in part, based on merger price less synergies, noting: “Typically, Delaware courts tend to favor a DCF model over other available methodologies in an appraisal proceeding.However, that metric has much less utility in cases where the transaction giving rise to appraisal was an arm's-length merger…” and “a court may derive fair value in a Delaware appraisal action if the sale of the company in question resulted from an arm's-length bargaining process where no structural impediments existed that might prevent a topping bid.”)
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Global GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507-08 (Del. Ch. Apr. 23, 2010)(then VC Strine rejects deal price as evidence of fair value, and enters an appraisal in excess of deal price, but notes: “It is, of course, true that an arms-length merger price resulting from an effective market check is entitled to great weight in an appraisal” citing Union Ill. 1995 Inv. Ltd. P'ship v. Union Fin. Group”)).
Golden Telecom, Inc. v. Global GT LLP, 11 A.3d 214 (Del. 2010) (affirms Chancery opinion above holding that the statutory mandate requires the Court of Chancery to perform an independent evaluation of fair value and grants the court with significant discretion to consider “all relevant factors” and noting that “Requiring the Court of Chancery to defer—conclusively or presumptively—to the merger price, even in the face of a pristine, unchallenged transactional process, would contravene the unambiguous language of the statute and the reasoned holdings of our precedent. It would inappropriately shift the responsibility to determine “fair value” from the court to the private parties.”)
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Huff Fund Investment P’ship v. CKx, Inc., 2013 WL 5878807 (Del. Ch. Nov. 1, 2013) aff’d 2015 WL 631586 (Del. Feb. 12, 2015) (VC Glasscock using deal price as a “reliable indicator of value” where “neither party has presented as reasonable valuation method” due to the “unpredictable nature of the income stream from the Company’s primary asset.”).
In re Appraisal of Ancestry.com, Inc., 2015 WL 399726 (Del. Ch. Jan. 30, 2015) (VC Glasscock deferring to the deal price after conducting DCF analysis and finding a valuation close to the deal price).
Merlin Partners LP v. AutoInfo, Inc., 2015 WL 2069417 (Del. Ch. Apr. 30, 2015) (VC Noble rejecting DCF based on management projections that were not used in the ordinary course of business, but that were prepared for the investment bankers in favor of the negotiated merger price).
LongPath Capital, LLC v. Ramtron Int'l Corp., 2015 WL 4540443 (Del. Ch. June 30, 2015) (VC Parsons relying on the deal price after finding projections unreliable and concluding fair value was below deal price due to synergies not available to an appraisal petitioner).
Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771 (Del. Ch. Oct. 21, 2015) (VC Glasscock relying on deal price generated in the market after a “vigorous” sales process as evidence of fair value after the Court conducted its own DCF analysis and lamented wildly divergent expert opinions).
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In re ISN Software Corp. Appraisal Litig., 2016 WL 4275388 (Del. Ch. Aug. 11, 2016) (VC Glasscock awarded 2.5 x deal price paid in a cash out merger using DCF in connection with the appraisal of a privately held software company following a merger approved without the benefit of a financial advisor or fairness opinion. Although the company did not have long-term management projections used in the ordinary course of business, the Court found the projections relied on by respondent’s expert, subject to corrections to certain assumptions, to be reliable given the subscription based business model, customer retention, and inelastic demand for the company’s product.)
Dunmire v. Farmers & Merchants Bancorp of W. Pennsylvania, Inc., 2016 WL 6651411 (Del. Ch. Nov. 10, 2016) (C Bouchard rejected market price absent an auction, absent majority of the minority approval, where buyer and seller were controlled by the same family, rejected “wildly divergent” expert valuations, and conducted its own independent discounted net income valuation to arrive at an appraised value of 11% over the deal price in connection with the appraisal of a closely held community bank).
Merion Capital L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170 (Del. Ch. Dec. 16, 2016) (VC Laster found no reason to depart from merger price following a reliable sale process and reliable projections. The court’s own DCF valuation came out 4% above the merger price and gave the court comfort as to the reliability of merger price. The court also rejected the respondent’s synergies argument as unsupported by any evidence).
In re PetSmart, Inc., 2017 WL 2303599 (Del. Ch. May 26, 2017) (VC Slights recognized that the Court’s statutory obligation to consider “all relevant factors” did not end with its finding that the merger price was a reliable indicator of fair value and needed to consider the reliability of a DCF or any other valuation method it could use to reach its final determination of fair value. The court found that a DCF valuation would not be reliable because management had not historically created long-term projections and the projections that were created for the sales process were too aggressive to be reasonable and reverted to deal price).
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DFC Glob. Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. Aug. 1, 2017)
Delaware Supreme Court again refused to establish a presumption in favor of tying fair value to deal price.
The Chancery Court should continue to exercise its discretion to determine fair value, but while doing so it should also explain why it was accorded a certain weight to its indicators of value, including the deal price.
Found that the Court of Chancery’s decision to afford only one-third weight to the deal price was “not rationally supported by the record” explaining: “Although there is no presumption in favor of the deal price . . . 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.”
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In re Appraisal of Dell, Inc., 2015 WL 4313206 (Del. Ch. July 30, 2015)
VCL concluded that the deal price resulting from the MBO was a relevant factor but that respondent failed to show that it was the best evidence of the company’s fair value.
The Court found that the MBO process would not subject directors to liability, but suffered multiple imperfections as a “price discovery tool.”
Vice Chancellor Laster appraised Dell at 28% over the deal price exclusively using a traditional DCF.
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Dell, Inc. v. Magnetar Global Event Driven Master Fund LTD, 177 A.3d 1 (Del. Dec. 14, 2017)
Delaware Supreme Court reverses and remands on the ground that the Court of Chancery failed to give adequate consideration to the deal price – effectively requiring the lower court to explain away deal price when departing from deal price in appraisal actions.
Delaware has “long endorsed” the “efficient market hypothesis” which “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 well-heeled client.”
On remand, the Court of Chancery is empowered to find fair value equal to deal price without further proceedings, but is not required to do so, so long as the court “explain[s] that weighting based on reasoning that is consistent with the record and with relevant, accepted financial principles.”
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In re Appraisal of AOL Inc., 2018 WL 1037450 (Del. Ch. Feb. 23, 2018)
VC Glasscock reads DFC and Dell to mean “in distilled form, provide that the statute requires that, where a petitioner is entitled to a determination of the fair value of her stock, the trial judge must consider ‘all relevant factors,’ and that no presumption in favor of transaction price obtains.”
“Where, however, transaction price represents an unhindered, informed, and competitive market valuation, the trial judge must give particular and serious consideration to transaction price as evidence of fair value. Where information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation, the trial court in its determination of fair value must take into consideration the transaction price as set by the market.”
“In sum, while no presumption in favor of transaction price obtains, a transaction that demonstrates an unhindered, informed, and competitive market value is at least first among equals of valuation methodologies in deciding fair value.”
The Court found that it was a “close question” whether the transaction was “Dell Compliant” but that process deficiencies required the Court to reject the $50 per share deal price as the sole determinate of value. The Court also found that there was and no non-arbitrary way to assign weight to the deal price in the Court’s fair value determination.
Notwithstanding the decisions in DFC and Dell, both parties continued to advocate for the use of financial metrics rather than transaction price, and the Court ascribed full weight to the DCF valuation of $48.70 per share and used the $50 per share transaction price as a reality check – about a 2.6% haircut to the appraisal petitioners.
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Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 WL 922139 (Del. Ch. Feb. 15, 2018).
Applying Dell and DFC, and the Delaware Supreme court’s endorsement of market evidence, VC Laster uses 30 day average unaffected stock price of $17.13 in the face of a merger price of $24.67 as “a possible proxy for fair value.”
VC Laster rejects DCF analyses based on the guidance of DFC and Dell.
VC Laster rejects the transaction price because the synergies analysis “requires exercises of human judgment analogous to those involved in crafting a discounted cash flow valuation.”
“Fortunately for a trial judge, once Delaware law has embraced a traditional formulation of the efficient capital markets hypothesis, the unaffected market price provides a direct route to the same endpoint, at least for a company that is widely traded and lacks a controlling stockholder.”
Verition Partners Master Fund Ltd. V. Aruba Networks, Inc., 2018 WL 2315943 (Del. Ch. May 21, 2018) (denying reargument and noting “I perceived that Dell and DFC endorsed the reliability of the unaffected market price as an indicator of value, at least for a widely traded company, without a controlling stockholder, where the market for its shares has attributes consistent with the assumptions underlying the efficient capital markets hypothesis. As a result, I believe that trial courts now can (and often should) place heavier reliance on the unaffected market price. From my standpoint, this aspect of the Dell and DFC decisions represented a change in direction for Delaware appraisal law. Before Dell and DFC, my conceptual framework for approaching the determination of fair value called for regarding the trading price with skepticism, while having relatively greater confidence in the contemporaneous views of management and other sophisticated parties and placing relatively greater reliance on management projections prepared in the ordinary course of business. This skeptical approach to market prices did not flow from any personalvalue judgment on my part, but rather from how Delaware Supreme Court decisions had treated the unaffected trading price as avaluation indicator.”
Oral Argument has not yet been set in the Delaware Supreme Court, but this is one to watch.
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In re Appraisal of Solera Holdings, Inc., 12080-CB (Del. Ch. July 30, 2018)(Chancellor Bouchard awards deal price less synergies and appraises the company at 3.4% below deal price)
Norcraft Companies, Inc. v. Blueblade Capital Opportunities LLC, C.A. No. 11184-VCS (Del. Ch. July 27, 2018) (VC Slights awards a premium of 2.5% above deal price relying on a DCF and rejecting merger price less synergies where there was no pre-signing market check, Seller fixated on one buyer, lead negotiator was conflicted, and deal protection measures undermined post-signing go-shop).
Both cases considered deal price under Dell and DFC, but found that it was not an appropriate valuation on the facts.
Both cases also rejected unaffected stock price and rejected it as not supported by the record.
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Deal price less synergies has been a risk since 2004.
Appraisal actions are still being filed -- rate remains relatively high through 2017 compared to historical levels.
While there is still no presumption, the writing is on the wall that the Delaware Supreme Court expects good reasons (like bad process) for departing from the deal price.
No longer just about different WACC or plugging more appropriate projections than those used by financial advisors.
We may see less appraisal in arm’s length public company deals without viable (or close to viable fiduciary duty claims).
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Remains viable for non-arms length deals (controlling stockholder, MBO, Squeeze outs). But note the impediments to stockholder litigation under MFW.
Changes from signing to close could still result in appraisal bumps.
Disclosure deficiencies identified in discovery could undermine process-based defenses.
Expansion of appraisal discovery.
Lack of fee shifting mechanisms available in fiduciary duty cases under common fund and corporate benefit doctrine.
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Owen v. Cannon, 2015 WL 3819204 (Del. Ch. June 17, 2015) (Chancellor Bouchard awarding a 60% premium over deal price and rejecting post-hocprojections in favor of contemporaneous management projections).
ACP Master, Ltd. v. Sprint Corp. (“Clearwire”), 2017 WL 3421142 (Del. Ch. July 21, 2017) (Court found the price paid in Sprint/Nextel’s 2013 acquisition of Clearwire to be entirely fair and that fair value was 50% below merger price because of “massive synergies” based on DCF analysis based on management projections prepared in the ordinary course of business and rejecting projections prepared by the buyer’s management in connection with competitive bidding).
In re Dole Food Co., Inc. S’holder Litig., 2015 WL 5052214 (Del. Ch. Aug. 27, 2015) (Court awarded a 20% premium based on strong findings of fraud by buyer / chairman and CEO. Court concluded that the decision likely renders the appraisal proceeding moot).
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Criticism of Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. Oct. 2, 2015) as based on untested hearsay proxy statements without the benefit of discovery.
Use of discovery obtained in appraisal actions to plead plenary breach of fiduciary duty claims appears to be a strategy that plaintiffs could pursue to avoid a pleading-stage dismissal under Corwin, before any discovery can be obtained.
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In July 2018, Dell announced that it is going public again. Although the transaction is complicated by Dell’s 2016 acquisition of EMC for $67B and the use of a tracking stock, it has been suggested that the $109 per share transaction signals that perhaps Vice Chancellor Laster’s original appraisal, and not the going private deal price, better reflects fair value with the benefit of hindsight.
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Schoenfeld, Matthew, From Corwin to Dell: The Cost of Delaware Turning a Blind Eye
The author, of Burford Capital, suggests that the ramifications of Delaware’s clampdown on shareholder litigation in Corwin and Dell is based on a fallacy that the practices being promoted are reflective of actual fair dealing and that these decisions will lead to lower deal premia and higher agency costs, CEO wage growth, greater industry specific concentration, declining competition, lower labor market mobility, wage stagnation and income inequality.
Available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=312251
This presentation was prepared solely for general informational and educational purposes. It does not create an attorney-client relationship with the author or Heyman Enerio Gattuso & Hirzel LLP. It should not be construed as legal advice or used as a substitute for legal counselling. This presentation reflects the personal views of the author and those views are not necessarily the views of Heyman Enerio Gattuso & Hirzel LLP or its clients.