Delaware Supreme Court Reemphasizes Importance of Deal Price in Reversing Aruba ‎Appraisal Decision

On April 16, 2019, the Delaware Supreme Court, in a per curiam decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.,[1] reversed the Court of Chancery’s determination that the fair value of Aruba’s stock for appraisal purposes was its unaffected average share price ($17.13 per share) during the 30 days of trading before announcement of its acquisition by Hewlett Packard (H-P).  Instead, the Supreme Court held that the fair value in these circumstances was the deal price less the portion of the merger synergies included in the deal price ($19.10 per share).  In doing so, the Supreme Court reemphasized the importance of the deal price in determining fair value for appraisal purposes in an arm’s-length transaction that involved a sound process, as it recognized in 2017 in its DFC Global[2]and Dell decisions.[3]  While the Supreme Court did not dismiss the relevance of unaffected market price when there is an efficient market, it ruled that the Court of Chancery’s reason for using that approach rather than the deal price due to what it saw as uncertainties associated with determining the amount of synergies to deduct, including so-called “agency costs” that the Supreme Court rejected as a separate deduction, was unjustified based on the record before it.

The Aruba decision is best understood as part of the effort of the Delaware courts to deal with the explosion in recent years of merger-related litigation, including appraisal claims by arbitrageurs and others, that have had an adverse effect on both strategic and financial buyers of public companies and values they are willing to pay.  The Delaware courts have responded to this development by shifting standards of review of breach of fiduciary duty claims so that the business judgment standard applies in certain situations, cracking down on disclosure-only claims settlements and, as shown by the Aruba decision, discouraging appraisal arbitrage through the approach to determining fair value in appraisal proceedings.  These judicial efforts should be taken into account by deal participants as they continue to adjust their strategies to address appraisal costs and other potential merger claims as part of structuring merger transactions.

The transaction that resulted in the exercise by Verition Partners of appraisal rights was Aruba’s merger with the larger H-P.  After H-P approached Aruba about a combination, Aruba hired advisers and, in addition to negotiating with H-P, approached five other potential strategic buyers, none of which showed interest.  Aruba determined not to seek out financial buyers based on its belief that they could not be competitive given the synergies a strategic buyer could realize and the unpredictability of Aruba’s revenue stream.  A deal was reached at a premium to the market price ($24.67 per share) and, following leaks, to which the market reacted favorably, was publicly announced and subsequently consummated.  The merger agreement contained a typical no shop and fiduciary-out provision, so that there was a post-signing passive market check.  The Supreme Court found that this merger process was sufficient to be entitled to respect even though there were no competing bids because there was an opportunity for others to bid.

In addition to reaffirming the significance of the deal price in appropriate circumstances, the Supreme Court’s Aruba decision seeks to place fair value determinations in appraisal proceedings on a solid basis.  The Court cites its 1989 Cavalier Oil[4] decision as standing for the proposition that §262 of the Delaware General Corporation Law entitles a dissenting stockholder to obtain the value of what has been taken from him, which translates to his receiving his proportionate share of the corporation’s value as a going concern, but without regard to post-merger events or the merger’s value to an acquirer (i.e., the synergistic gains a buyer can extract, which requires deducting a reasonable estimate of whatever share of synergy value has been included in the deal price).  The Court, citing Weinberger v. UOP, Inc.,[5] which recognized use of corporate finance principles to value companies in appraisal proceedings, does not rule out use of market value, nor indeed when necessary discounted cash flow, but rather recognizes that an acquirer in possession of material nonpublic information about the target is in a strong position to properly value that target, at least absent deficiencies in the deal process.

The Delaware Supreme Court’s reaffirmation of the deal price less synergies as a basis for appraisal valuation when there is a merger process entitled to respect should reduce the incentives for appraisal arbitrage and thus increase certainty in deal valuations and respect for the integrity of these transactions.

[1] No. 368, 2018 (April 16, 2019).

[2] DCF 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).

[4] Cavalier Oil Corp. v. Hartnett, 564 A. 2d 1137 (Del. 1989).

[5] 457 A. 2d 701 (Del. 1983).

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