On April 16, 2019, the Delaware Supreme Court issued an en banc opinion in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.,¹ reversing the Delaware Court of Chancery’s decision regarding the fair value of Aruba Networks in connection with its acquisition by Hewlett-Packard Company (HP). The Court of Chancery based its assessment on the unaffected trading price of Aruba Networks’ shares leading up to the transaction. The Delaware Supreme Court remanded the decision for entry of a final judgment for the petitioners in the amount of $19.10 per share—representing the $24.67 per share merger price less synergies—plus any interest to which the petitioners were entitled. The case is substantively important and reflects the ongoing activity in Delaware relating to appraisal actions in which stockholders seek an adjudication of the “fair value” of their shares.

In a February 2018 post-trial opinion, Vice Chancellor J. Travis Laster of the Court of Chancery found that the fair value of Aruba Networks, a publicly traded company, was $17.13 per share—about 31 percent below the deal price—based on the average trading price of Aruba Networks’ shares during the 30 days before news of the merger with HP emerged. The trial court had considered two other valuation methods—the parties’ competing discounted cash flow analyses and the merger price less synergies—but determined that neither provided persuasive evidence of fair value. The court found that the latter method was unreliable because synergies identified by the parties and evidenced in the record did not account for additional, potential amounts related to certain “agency costs.”

On appeal, the Delaware Supreme Court held that the Court of Chancery’s decision to rely solely on Aruba Networks’ market price was erroneous because it departed from long-standing appraisal precedent valuing companies as a “going concern” at the time of closing, and extracting any applicable synergies from those valuations. The Supreme Court explained that while its recent decisions in Dell and DFC reiterated a “long history” of Delaware decisions “giving important weight to market-tested deal prices,” and showed that market prices are “informative of fundamental value,” the Court of Chancery wrongly suggested that such precedent signaled that market prices should be viewed as “exclusive indicators of fair value.” The Supreme Court concluded that, in this case, the merger price (as compared to the market price) better reflected Aruba Networks’ going-concern value because (i) the unaffected market price used by the Court of Chancery improperly valued the company as of a date that preceded closing by three to four months, and during which time material information relevant to the company’s future earnings became public and significantly boosted the company’s trading price; (ii) HP was incentivized to study Aruba Networks more closely than “ordinary traders”; and (iii) the merger price was based on material, non-public information possessed by HP that was not “baked into the public trading price.”

The Supreme Court also held that the Court of Chancery’s “agency costs” approach was not supported by the record because the underlying premise—that a target company would receive value from a merger because a dispersed group of owners would be replaced with a concentrated group of owners—did not apply to HP’s acquisition of Aruba Networks, where one set of public stockholders was swapped out for another. Additionally, the Supreme Court opined that HP’s synergy case likely priced in any agency costs, and in any event, Aruba Networks never argued that its merger price less synergies model did not fully account for all agency cost reductions it anticipated from the deal.

The Delaware Supreme Court concluded that Aruba Networks’ $19.10 per share estimate of the merger price less synergies was reliable and corroborated by HP’s and Aruba Networks’ “real-time considerations,” as well as Aruba Networks’ discounted cash flow, comparable companies, and comparable transactions analyses.

There are several notable takeaways from this decision:

• If there were any lingering questions following Dell and DFC, the Delaware Supreme Court in this case made clear that, in arm’s-length transactions involving publicly traded companies, the Court of Chancery must give substantial weight to the merger price less synergies when determining a company’s fair value in an appraisal proceeding.
• This decision also emphasized that appraisal valuations should be conducted as of the closing of the merger in question. Although the Delaware Supreme Court indicated that market prices could be considered in an appraisal, because those prices precede the closing date, it is unclear how much weight a Delaware court will give them, potentially making market prices of limited utility.
• To the extent parties choose to rely on market prices as evidence of fair value in future cases, this decision signaled that the market price theory must be subjected to the “crucible of pretrial discovery”—including expert depositions, cross-expert rebuttal, expert testimony at trial, and cross examination at trial.
• Lastly, but perhaps most significantly, even though the Supreme Court reversed the trial court’s determination of fair value, the $19.10 per share price still represents a steep 23 percent discount to the merger price and can hardly be viewed as a desirable outcome for the appraisal petitioners here. As a result, we believe the case serves as yet another reminder that appraisal petitioners will be hard-pressed to rely on statutory appraisal in public company M&A deals, especially where there is no basis to challenge the transaction process.