Delaware Court of Chancery Holds Controller Transaction Satisfies Entire Fairness and Issues Appraisal Award Below Deal Price

William Savitt and Ryan A. McLeod are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt and Mr. McLeod. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently issued a post-trial opinion holding that a controller cash-out merger was “entirely fair” and appraised for a value less than half of the deal price. ACP Master, Ltd. v. Sprint Corp. C.A. No. 8508-VCL (Del. Ch. Jul. 21, 2017).

The case concerns the 2013 buyout of Clearwire by its majority stockholder, Sprint. The acquisition was part of a larger effort by Softbank to enter the U.S. cellular market, and it occurred in tandem with Softbank’s acquisition of majority control of Sprint. Sprint and Clearwire initially agreed to a buyout price of $2.97 per share, but stockholders reacted negatively to the announcement and a third party proposed a series of increasing topping bids. The bidding war concluded when Sprint agreed to raise its offer to $5.00 per share and the Clearwire committee agreed to terminate discussions with the third party. A hedge fund took a position in the stock and filed suit, alleging that the deal was the product of fiduciary breaches and arguing that the stock was worth over $16.00 per share.

In a thorough and thoughtful decision following a ten-day trial, Vice Chancellor Laster ruled in favor of defendants. Even though he found substantial fault with aspects of Sprint and Softbank’s conduct in promoting the deal as originally struck at $2.97 per share, these “blemishes” and “flaws” did not prevent the conclusion that the outcome satisfied even the rigorous test of “entire fairness,” because the transaction delivered to stockholders “substantially more in value than what they had before.” The Court rejected the hedge fund’s arguments for an appraised fair value of over three times the deal price, holding that the experts’ work underlying that claim was “starkly divorced from the market evidence.” Instead, noting that “the transaction generated considerable synergies,” the Vice Chancellor adopted the company’s discounted cash flow analysis and ruled that the fair value of the stock was just $2.13 per share—Chancery’s second recent ruling finding appraisal value below deal price.

The Sprint decision reconfirms that the Delaware courts take sophisticated note of market reality in adjudicating fiduciary and appraisal disputes. Transactions can satisfy entire fairness review even when “the deal process was far from perfect,” and appraisal petitioners have meaningful risk of receiving fair value judgments well below the deal price in synergies-driven mergers.

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