Data Points from Recent Appraisal Decisions

As concerns over the potential exercise of appraisal rights are increasingly being factored into deal price, data points from recent Delaware appraisal decisions may help inform a party of its appraisal risks and, if an appraisal claim is filed, may also be useful in deciding whether to settle the claim or fight it. In many circumstances – particularly in light of recent amendments to Delaware’s appraisal statute that are intended to reduce the benefits of using appraisal as a form of interest-rate arbitrage – an appraisal will not likely result in added value to a petitioner (for example, when transactions are generally conducted at arms-length, management is not receiving disparate benefits and the sales process is vigorous and robust). On the other hand, as recent decisions demonstrate, if there are potential or actual conflicts of interest in the transaction (including, in the case of a typical VC-backed sale) or if the merger was negotiated during a period of regulatory uncertainty, an appraisal of the company’s going-concern value may diverge from the deal price, resulting in added and sometimes significant transaction costs.

In the Court of Chancery’s most recent appraisal ruling, Merion Capital v. Lender Processing Services (Del. Ch. December 16, 2016), Vice Chancellor J. Travis Laster used the deal price exclusively to determine the fair value of a stockholder’s shares in Lender Processing Services at the effective time of its merger with Fidelity National Financial, Inc. The decision is consistent with the Court’s recent appraisal rulings in which the Court used the deal price exclusively where the sale process generated a reliable fair value and where other valuation methods were less reliable. In this case, the Court found the deal price to be reliable because the target: (1) solicited a meaningful number of potential bidders in the process, (2) provided information equally to all of the potential bidders, (3) did not favor any particular bidder (such as in a management buyout) and (4) agreed to a deal price that was later validated by the absence of post-signing events (i.e. a topping bid). The Court’s DCF analysis generated a 4% higher valuation, however, the Court gave 100% weight to the deal price because the DCF analysis, by definition, depended heavily on assumptions.  In Lender Processing, the Court spent some time cataloguing the recent Delaware appraisal decisions in which it used the deal price exclusively and recent decisions in which the court rejected the deal price, observing that in all of the former cases, the deal price was chosen because the other methods (i.e. comparable companies analysis, DCF, etc.) were either not reliable or less reliable than the transaction price.

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Selected Appraisal Decisions Using Deal Price

Case name	Difference  from deal price (%)	Key characteristics of sale process	Court’s valuation method
Lender Processing Services (VC Laster – Del. Ch. 2016)	0	Auction, meaningful pre-signing market check, no management conflict of interest, at arms-length	Deal price exclusively; DCF yielded similar valuation but less reliable
BMC Software (VC Glasscock – Del. Ch. 2015)	0	Auction, “thorough and vigorous” pre-signing market check involving financial and strategic bidders, go-shop, arms-length	Deal price exclusively; DCF yielded similar valuation but less reliable
Ramtron (VC Parsons – Del. Ch. 2015)	-1%	Active pre-signing market check following unsolicited offer; multiple price increases extracted from bidder	Deal price exclusively; there were no comparable companies or transactions and management’s DCF was not reliable
AutoInfo (VC Noble – Del. Ch. 2015)	0	Active pre-signing market check and extensive sale process	Deal price exclusively; the comparable companies analysis and management’s DCF were not reliable. Court’s DCF yielded similar valuation but deal price was best estimate
Ancestry.com (VC Glasscock – Del. Ch. 2015)	0	Auction, pre-signing market canvass	Deal price exclusively; comparable companies analysis and management’s DCF not reliable. Court’s DCF yielded similar valuation.
CKx (VC Glasscock – Del. Ch. 2014)	0	Auction, full pre-signing market check, no management conflicts of interest	Deal price exclusively; comparable companies analysis and DCF not reliable

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Selected Decisions Rejecting Deal Price

Case name	Difference  from deal price (%)	Key characteristics of sale process	Court’s valuation method
Farmers & Merchants Bancorp (VC Bouchard – Del. Ch. 2016)	+11%	Deal conflicted – controller stood on both sides and process considerations were ineffective: no auction, no third parties were solicited, special committee was ineffective, not conditioned on a majority of the minority vote	Court’s discounted net income analysis; deal price and each expert’s DCF methodologies not reliable
DFC Global (VC Bouchard – Del. Ch. 2016)	+7.5%	Arms-length transaction but merger was negotiated during a period of significant company turmoil and regulatory uncertainty so market price was not reliable. Also, buyer used an LBO pricing model.	Court used the average of (1) deal price, (2) Court’s DCF and (3) respondent’s expert’s multiples-based comparable companies analysis; market price alone not reliable. Case on appeal.
Dell (VC Laster – Del. Ch. 2016)	+28%	Deal conflicted – transaction was an MBO, bidders used LBO pricing model, significant valuation gaps driven by market’s short-term focus, no meaningful pre-signing competition, structural impediments to go-shop	Court’s DCF; deal price not reliable. See our prior M&A blog post on the decision. Case on appeal.
3M Cogent (VC Parsons – Del. Ch. 2013)	+3.5%	Pre-signing market check and competition among strategic bidders	Court’s DCF. *In its discussion of this case in Lender Processing, the Court noted that the respondent did not argue that the deal price should have been used and that had the company used that tactic, the 3M Cogent Court could well have relied on deal price.
Orchard Enterprises (C. Strine – Del. Ch. 2012)	+128%	Going private sale of VC-backed company by affiliate of large stockholder who held preferred stock that had substantial liquidation preferences in the merger	Court’s DCF; deal price and comparable companies analysis not reliable. *Value of liquidation preferences, while triggered by the merger, should not be taken into account in an appraisal that requires valuation of the company as a going concern.

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