Two Delaware Decisions Make Statutory Appraisal a Less Attractive Remedy
During the past several weeks, the Delaware Supreme Court and the Delaware Court of Chancery have issued two opinions, ACP Master, Ltd. v. Clearwire Corporation and DFC Global Corporation v. Muirfield Value Partners, L.P., relating to statutory appraisal rights under the General Corporation Law of the State of Delaware (the “DGCL”). In addition, the Delaware courts are currently considering a number of other appraisal proceedings that should, in the coming months, further clarify the status of appraisal rights in Delaware.
In recent years, the Delaware courts have focused significant attention on clarifying the fiduciary duties of directors and controlling stockholders in merger transactions. As such cases have made the rules more clear-cut, prospective plaintiff-stockholders have turned their attention to appraisal actions instead of bringing claims for breaches of fiduciary duties. The Clearwire and DFC Global cases, however, are expected to dampen the enthusiasm of dissident stockholders and appraisal arbitrageurs for bringing such actions.
Appraisal Rights Generally
Section 262 of the DGCL provides that, in the event of a merger, stockholders who have not voted in favor of such merger may be entitled to an appraisal of their shares by the Court of Chancery. Although appraisal rights are not available in every instance, appraisal rights serve as a statutory remedy to minority stockholders who believe that the consideration they received for their shares in connection with a merger was inadequate.
Where such stockholders follow the statutory requirements, the Court of Chancery “shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger, together with interest, if any, to be paid upon the amount determined to be the fair value.” Stated differently, Section 262 requires that the Court of Chancery exclude any synergies that may arise in connection with the deal when determining the fair value of the merged corporation as a going-concern.
In determining such fair value, the Court of Chancery will take into account all relevant factors. Over the years, Delaware courts have frequently wrestled with the factors that are relevant when determining fair value, as well as which methodologies for determining fair value are appropriate.
Perhaps the most significant risk for a stockholder considering making an appraisal demand, however, is that the Court of Chancery can – and occasionally will – find that the deal price was greater than the fair value of the stockholder’s shares. In such instance, the surviving corporation is only required to pay the dissident stockholder the lesser, appraised amount for such stockholder’s shares, and not the higher amount paid to the other stockholders. This risk should make stockholders less interested in bringing appraisal claims as the likelihood that the Delaware courts will determine the fair value of such merged corporation to be equal to or less than the deal price increases.
ACP Master, Ltd. v. Clearwire Corporation
On July 21, 2017, the Court of Chancery issued its opinion in Clearwire. This appraisal proceeding, which was consolidated with a related case, ACP Master, Ltd. v. Sprint Corporation, dealt with the 2013 merger of Clearwire Corporation (“Clearwire”) with Sprint Nextel Corporation (“Sprint”). Pursuant to the merger, Sprint acquired the 49.8% of Clearwire that it did not already own, paying $5.00 per share. Aurelius Capital Management, LP (“Aurelius”) filed a lawsuit against Sprint alleging breaches of fiduciary duties by Sprint and sought an appraisal of its shares in connection with the merger.
After dispensing with certain fiduciary duty claims made by Aurelius against Sprint, the Vice Chancellor turned to the appraisal matter. Because Sprint was the controlling stockholder, the parties did not argue that the deal price should be given any particular weight in determining the fair value, as might be the case where parties negotiated the transaction at an arms’-length basis. In addition, the Vice Chancellor noted that a significant portion of the deal price related to the synergies (perhaps $1.95 to $2.60 per share), and would have to be excluded from any appraisal analysis based on such deal price.
Both Sprint and Aurelius submitted discounted cash flow (“DCF”) analyses – with Sprint’s DCF analysis showing the value of Clearwire as a going-concern at $2.13 per share and Aurelius showing such value at $16.08 per share. This wide disparity was driven almost entirely by differences in projections of future expected cash flow. The Court adopted the DCF analysis provided by Sprint in whole, finding that Aurelius’s discounted cash flow analysis relied on unrealistic projections that failed to reflect Clearwire’s “operative reality in the event that the Clearwire-Sprint Merger did not close.” In addition, the Court emphasized that Sprint’s DCF analysis was based on contemporaneous and routine projections made by Clearwire’s management team.
As such, the Court of Chancery adopted Sprint’s DCF analysis in full and appraised the shares at $2.13 per share. Thus, Aurelius was entitled to a payment for its shares at less than half of the price paid per share to the stockholders who accepted the initial deal price.
DFC Global Corporation v. Muirfield Value Partners, L.P.
On August 1, 2017, the Delaware Supreme Court reversed and remanded a decision by the Court of Chancery in DFC Global. In the underlying appraisal proceeding, the Court of Chancery had found that the fair value of shares of DFC Global Corporation (“DFC Global”) was approximately $10.30 per share – or 80 cents per share higher than the price a private equity firm had paid for such shares – despite a robust market search, a process with multiple bidders at arms’-length and no conflicts of interest. The Supreme Court held that the Court of Chancery had abused its discretion in according just one-third weight to the deal price in such instance (in addition, the Court of Chancery assigned one-third weight to each of a DCF analysis and a comparable company analysis).
In reversing the lower court’s decision, the Supreme Court refused to adopt a bright-line rule or a presumption that in appraisal proceedings concerning transactions consummated at an arms’-length basis, the deal price will be the best estimate of fair value. The Supreme Court noted that Section 262 expressly requires Delaware courts to “take in account all relevant factors.”
Despite the Supreme Court’s statements that it was not adopting such a presumption, the decision suggests that where a merger occurs after a thorough market search and is conflict-free, Delaware courts will be hesitant to assign significant weight – if any – to valuation methodologies other than deal price. In other words, in instances where the transaction follows the parameters set forth in DFC Global, Delaware courts are likely to find that the deal price was the fair value, reducing any incentives for dissident stockholders or appraisal arbitrageurs to bring such actions against the surviving corporations.
With several appraisal proceedings currently underway, the next few months will show whether Clearwire and DFC Global are the harbinger of fewer appraisal actions or have a more modest effect on the appraisal process.
For more information about these developments, please contact the authors or the attorney at the firm with whom you are regularly in contact.