In an April 16, 2019 rejection of the trial court’s analysis in Aruba Networks, the Delaware Supreme Court further clarified its recent pronouncements regarding the use of deal pricing as a measure of fair value in statutory appraisals under section 262 of the Delaware General Corporation Law.^[1] When a tender offer is made for a target company’s stock, section 262 provides a mechanism for dissenting stockholders to seek judicial appraisal of their stock rather than accepting the deal pricing. The court is charged with valuing the target company as an ongoing business at the time of the transaction, without regard to post-transaction events or any other business combination. In short, a section 262 appraisal should value the target company as a going concern and not as would be valued by a third party in an acquisition.

The trial court in Aruba Networks took a circuitous route before ultimately concluding that the fair value of the company’s stock was reflected by the 30-day average market price at which its shares traded just prior to media reporting of the subject transaction, which was $17.13 per share. The bidder had offered $24.67 per share. Aruba Networks initially asserted that its fair value was the deal price minus transaction synergies, which was $19.10 per share. The dissenting stockholders maintained that Aruba Networks’ fair value was $32.57 per share based primarily on its expert’s discounted cash flow analysis. As this debate over valuation progressed, the Delaware Supreme Court issued its DFC^[2] and Dell^[3] decisions — both touching upon the implication of deal price in a section 262 appraisal analysis.

In reaction to DFC and Dell, the trial court raised on its own initiative whether the market attributes of Aruba Networks’ stock should be considered in the appraisal analysis. The trial court believed that besides reducing the deal price by the synergies of the transaction, an additional reduction was in order to account for agency costs arising from then unitary ownership of the previously publicly held Aruba Networks. The best indicator of that valuation was the unaffected market price of $17.13 per share – which is the conclusion the trial court believed was mandated by DFC and Dell.

On appeal, the Supreme Court found that the trial court’s conclusion that DFC and Dell compelled its decision “was not supported by any reasonable reading of those decisions or grounded in any direct citation to them.” The Supreme Court cited a litany of Delaware case law recognizing “that when a public company with a deep trading market is sold at a substantial premium to the preannouncement price, after a process in which interested buyers all had a fair opportunity to bid, the deal price is a strong indicator of fair value, as a matter of economic reality and theory.” In this regard, DFC and Dell “merely recognized that a buyer in possession of material nonpublic information about the seller is in a strong position (and is uniquely incentivized) to properly value the seller when agreeing to buy the company at a particular deal price, and that view of value should be given considerable weight … absent deficiencies in the deal process.” The Supreme Court accordingly clarified that where there is an informationally efficient market, the market price is likely to be more informative of value, but it should not necessarily be treated as an exclusive indicator of fair value.

It was therefore an abuse of discretion by the trial court to interpret DFC and Dell as justification for use of the unaffected market price without giving significant weight to the actual deal price. Rather, DFC and Dell instruct that where, as in Aruba Networks, there is an appropriate deal process, the deal price typically generates a fair value starting point. As a result, the Supreme Court entered judgment at Aruba Networks’ deal price less synergies figure of $19.10 per share.

It appears that the debate over appropriate valuation standards in statutory appraisal actions will continue, and that there is a split of opinion among the Chief Justice of the Delaware Supreme Court,  Vice Chancellor J. Travis Laster and perhaps others which will be highly dependent on the facts and circumstances of each case. Such decisions will turn largely on the deal process and the adequacy and efficiency of the trading market for the stock in question.

[1] Verition Partners Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. v. Aruba Networks, Inc., No. 368 (Del. Apr. 16, 2018).

[2] DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017).

[3] Dell, Inc. v. Magnetar Global Event Driven Master Fund, Ltd., 177 A.3d 1 (Del. 2017).