Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Del. Apr. 17, 2019).
In a closely-followed appeal from the Court of Chancery’s appraisal decision in the Aruba Networks case, the Delaware Supreme Court reversed the trial court’s fair value award of $17.13 per share and directed that the court-below enter judgment at the deal-price-less-synergies value of $19.10 per share. The Supreme Court found that the lower court abused its discretion when, because of the difficulty of estimating the amount of the buyer’s synergy value in the $24.67 deal price, it determined that Aruba’s pre-announcement, “unaffected” stock price was the best evidence of fair value. In so ruling, the Supreme Court provides important guidance about how to account for synergies arising from the expectation of the merger when determining the “fair value” of a going concern under Delaware’s appraisal statute in Section 262 of the DGCL.
The Delaware Supreme Court’s recent decisions in DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017) emphasized reliance on market evidence in a deal-price-less-synergies approach to fair value for arms-length, robustly marketed transactions. Since then, attention has focused on how to measure the synergy deduction. Aruba makes clear that simply relying on the pre-announcement, “unaffected” market price of the seller’s stock as a proxy for fair value and a corresponding assumption that the whole deal premium represents synergy value, will not support a reliable fair value determination. Several holdings are notable.
First, the Supreme Court rejected the premise that the deal-price-less synergies figure failed to incorporate an element of value arising from the merger in the form of reduced agency costs resulting from the buyer obtaining controlling ownership. If such value accrued to the buyer in the merger, the Supreme Court found no evidence or reason to believe that it was not included in the deal price or that it needed to be accounted for separately.
Second, the Supreme Court affirmed its recent holdings in DFC Global and Dell about the important evidentiary weight given to market-tested deal prices in assessing fair value. But it rejected the notion that those cases: (i) supported the view that stock trading prices alone provide a reliable proxy for a company’s fair value, or (ii) that the entire deal premium above the unaffected market price of the seller’s stock needs to be excluded as synergy value to the buyer arising from the expectation of the merger.
Here, according to the Supreme Court, the deal price could be seen as reflecting a better assessment of Aruba’s going-concern value than the stock price. For instance, the date relied upon by the lower court for the unaffected stock price preceded the closing of the deal by four months; the price did not incorporate material, nonpublic information exchanged in due diligence, and it was approximately $7 less than the negotiated deal price. The Supreme Court, therefore, deducted the buyer’s own estimate of synergies included in the deal price, which resulted in a fair value award of $19.10 per share.
Aruba affirms that an arms-length deal price negotiated in a robust, efficient market does not represent the floor in a fair value analysis. Rather it might represent the ceiling, from which the synergy value arising from the expectation of the merger must be deducted to determine fair value for the appraisal claimant. How much of the deal premium represents excluded synergies remains an important evidentiary issue of proof.