Tag: Firm valuation


Delaware Court Awards Damages to Option Holders

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Peter J. Rooney. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On July 28, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it criticized in particularly strong terms the analysis performed by a financial firm that was retained to value companies that were being sold to a third party or spun off to stockholders (the “valuation firm”). See Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del Ch. July 28, 2015)CDX is just the latest decision in which the Chancery Court has awarded damages and/or ordered injunctive relief based in part on a financial firm’s failure to discharge its role appropriately. Calling the valuation firm’s work “a new low,” Vice Chancellor Laster’s opinion is another chapter in this cautionary tale that lays bare how financial firms can be exposed not only to potential monetary liability but, as importantly, significant reputational harm from flawed sell side work on M&A transactions.

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Appraisal Arbitrage—Is There a Delaware Advantage?

Gaurav Jetley is a Managing Principal and Xinyu Ji is a Vice President at Analysis Group, Inc. This post is based on a recent article authored by Mr. Jetley and Mr. Ji. The complete publication, including footnotes, is available here. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Market observers have devoted a fair amount of attention to possible reasons underlying the recent increase in appraisal rights actions filed in the Delaware Chancery Court. A number of commentators have connected such an increase to recent rulings reaffirming appraisal rights of shares bought by appraisal arbitrageurs after the record date of the relevant transactions. Other reasons posited for the current increase in appraisal activity include the relatively high interest rate on the appraisal award and a belief that the Delaware Chancery Court may feel more comfortable finding fair values in excess of, rather than below, the transaction price.

In our paper Appraisal Arbitrage—Is There a Delaware Advantage?, we examine the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years, which may help explain the increase in appraisal activity. We investigate three specific issues.

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Angels and Venture Capitalists: A Match Made in Heaven?

Thomas Hellmann is Professor of Entrepreneurship and Innovation at Oxford University. This post is based on two recent articles authored by Mr. Hellmann, Veikko Thiel, Assistant Professor of Business Economics at Queen’s University; Paul Schure, Associate Professor of Economics at the University of Victoria; and Dan Vo, Research Fellow at the University of British Columbia. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here) and Delaware Law as Lingua Franca: Evidence from VC-Backed Startups, by Jesse FriedBrian Broughman, and Darian Ibrahim (discussed on the Forum here).

Are angel investors and venture capitalists friends or foes? Are they synergistic partners in the process of funding entrepreneurial value creation? Or are they distinct funding mechanisms where entrepreneurs have to decide which camp they want to be part of? In a series of two recent papers (Friends or Foes? The Interrelationship between Angel and Venture Capital Markets; and Angels and Venture Capitalists: Substitutes or Complements?), we examine these questions both from a theoretical [1] and an empirical [2] perspective.

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Delaware Court Relies Exclusively on Merger Price in Appraisal Action

Toby Myerson is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Global Mergers and Acquisitions Group. The following post is based on a Paul Weiss memorandum authored by Matthew W. Abbott, Angelo Bonvino, Justin G. Hamill, and Jeffrey D. Marell. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In a recent appraisal proceeding, the Delaware Court of Chancery concluded that the company had engaged in a thorough sales process, and therefore found that it was appropriate to determine fair value of the company’s stock by relying exclusively on the merger price less net synergies. The court found that a discounted cash flow (or “DCF”) analysis was an inappropriate method to value the company’s stock in this instance, as the DCF analyses relied upon by the parties were derived from unreliable management projections.

In Longpath Capital, LLC v. Ramtron International Corporation, Cypress Semiconductor Corporation (“Cypress”) issued a bear hug letter to acquire all of the shares of Ramtron International Corporation (“Ramtron”), a semiconductor company, for $2.48 per share. After the Ramtron board rejected this offer as inadequate, Cypress initiated a tender offer for Ramtron’s shares at $2.68 per share (which it later raised to $2.88 per share). During the time that Cypress pursued its tender offer, Ramtron authorized its financial advisor to market the company. The advisor contacted twenty-four potential buyers and Ramtron executed nondisclosure agreements with six of those potential buyers. Ultimately, however, none of the potential buyers made a firm bid for Ramtron. Eventually, Ramtron and Cypress engaged in active negotiations, which resulted in Cypress raising its offer price twice before the parties settled on a final transaction price of $3.10 per share. Approximately two months following the signing of the merger agreement, the merger was approved by a vote of Ramtron’s stockholders. Longpath Capital, LLC (“Longpath”), a Ramtron stockholder, properly demanded appraisal of the fair value of its Ramtron stock under Section 262 of the General Corporation Law of the State of Delaware and filed an appraisal action in the Court of Chancery against Ramtron.

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Merger Price and Process Win the Day Yet Again In Delaware Appraisal Action

Jason M. Halper is partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On June 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it yet again rejected a dissenting shareholder’s attempt to extract consideration for its shares above the merger price through appraisal rights. See LongPath Capital, LLC v. Ramtron Int’l Corp., Slip. Op. June 30, 2015, C.A. No. 8094-VCP (Del. Ch. June 30, 2015). LongPath is just the latest decision in which the Chancery Court has upheld merger price as the most reliable indicator of fair value where it was the result of a fair and adequate process. Vice Chancellor Parsons’ opinion reaffirms the importance of merger price and process in Delaware appraisal actions, and offers helpful guidance to companies, directors and their counsel in defending against claims that the company was sold at too low a price.

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Brain Drain or Brain Gain? Evidence from Corporate Boards

Mariassunta Giannetti is Professor of Economics at the Stockholm School of Economics. This post is based on an article by Professor Giannetti; Guanmin Liao, Associate Professor of Accounting at the School of Accountancy, Central University of Finance and Economics; and Xiaoyun Yu, Associate Professor of Finance at Indiana University, Bloomington.

Development economists have long warned about the costs for developing countries of the emigration of the best and brightest that decamp to universities and businesses in the developed world (Bhagwati, 1976). While this brain drain has attracted a considerable amount of economic research, more recently, arguments have been raised that the emigration of the brightest may actually benefit developing countries, because emigrants may eventually return with more knowledge and organizational skills. (See The Economist, May 26, 2011.) Thus, the brain drain may actually become a brain gain.

In our paper, Brain Drain or Brain Gain? Evidence from Corporate Boards, forthcoming in the Journal of Finance, we demonstrate a specific channel through which the brain gain arising from return migration to emerging markets may benefit the overall economy: the brain gain in the corporate boards of publicly listed companies. Specifically, we highlight the effects of individuals with foreign experience joining the boards of directors on firms’ performance and corporate policies in China.

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The Importance of Merger Price and Process in Delaware Appraisal Actions

Jason M. Halper is partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights. See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015). Vice Chancellor Noble’s decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price. AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.

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More than 300 Research Papers Have Applied the Entrenchment Index of Bebchuk, Cohen and Ferrell (2009)

This post relates to an article by Lucian Bebchuk, Alma Cohen and Allen Ferrel, What Matters in Corporate Governance, available here and discussed on the Forum here. Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Alma Cohen is Professor of Empirical Practice, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School.

As of May 2015, more than 300 research studies have applied the Entrenchment Index put forward in a study published by Lucian Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance. The papers using the Entrenchment Index, including many papers in leading journals in law, economics and finance, are listed here.

The Bebchuk-Cohen-Ferrell paper, first circulated in 2004 and published in 2009 in the Review of Financial Studies, identified six corporate governance provisions as especially important, demonstrated empirically the significance of these provisions for firm valuation and put forward a governance index, commonly referred to as the “Entrenchment Index,” based on these six provisions. The paper has been cited by more than 650 research studies, and more than 300 of these studies made use of the index in their own empirical analysis.

The Bebchuk-Cohen-Ferrell paper putting forward the Entrenchment Index is available for download here.

Over-Reaction to Use of Merger Price to Determine Fair Value

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Steven Epstein, John E. Sorkin, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Chancery Court has used the merger price in the underlying transaction as the primary or sole factor in determining the “fair value” of dissenting shares in two recent appraisal cases. The Delaware Supreme Court recently upheld one of those decisions. However, the court’s use of the merger price in both cases was based on the same limited fact situation, suggesting that—contrary to much of the recent commentary—the merger price will not frequently be used as a key factor in determining fair value in appraisal cases.

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Crossing State Lines Again—Appraisal Rights Outside of Delaware

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Matthew Solum, David B. Feirstein, and Laura A. Sullivan. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Even as the Delaware appraisal rights landscape continues to evolve, dealmakers should not assume that the issues and outcomes will be the same in transactions involving companies incorporated in other states. Although once an afterthought on the M&A landscape, in recent years appraisal rights have become a prominent topic of discussion among dealmakers. In an earlier M&A Update (discussed on the Forum here) we discussed a number of factors driving the recent uptick in shareholders exercising statutory appraisal remedies available in cash-out mergers. With the recent Delaware Supreme Court decision in CKx and Chancery Court opinion in Ancestry.com, both determining that the deal price was the best measure of fair price for appraisal purposes, and the upcoming appraisal trials for the Dell and Dole going-private transactions, the contours of the modern appraisal remedy, and the future prospects of the appraisal arbitrage strategy, are being decided in real-time. These and almost all of the other recent high-profile appraisal claims have one thing in common—the targets in question were all Delaware corporations and the parties have the benefit of a well-known statutory scheme and experienced judges relying on extensive (but evolving) case law. But, what if the target is not in Delaware?

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