Chancery Finds Fair Value To Be Less Than Half Merger Price

In a decision issued on Friday [July 21, 2017] that will likely slow the recent spike in appraisal suits, the Delaware Court of Chancery held that the fair value of Clearwire Corp. was $2.13 per share—less than half the merger price of $5 per share. See ACP Master, Ltd. et al. v. Sprint Corp., et al., C.A. No. 8508-VCL (Del. Ch. July 21, 2017) (“Clearwire”). The decision by Vice Chancellor Laster also found that Sprint Nextel Corp. (“Sprint”), which owned slightly more than 50% of Clearwire’s voting stock at the time of the merger, did not breach its fiduciary duties in acquiring the Clearwire shares it did not already own because the merger was entirely fair to Clearwire’s minority stockholders.

Clearwire is the second appraisal opinion this year—after In re Appraisal of SWS Group, Inc., C.A. No. 10554-VCG, 2017 WL 2334852 (Del. Ch. May 30, 2017)—to determine that the subject corporation’s fair value was materially below the merger price. Although much attention and debate has focused on a series of recent appraisal opinions that have relied on merger price to determine fair value, [1] decisions like Clearwire and SWS may have an even greater impact on appraisal litigation, given the risk they pose to stockholders considering whether to seek appraisal. At least in the context of mergers involving significant synergies (as was the case in both Clearwire and SWS), the days when appraisal was a heads-I-win, tails-you-lose scenario for petitioners—i.e., receive an award above deal consideration or take the merger price—may be over, particularly in light of recent legislation permitting companies to cut off the accrual of interest by prepaying all or a portion of the deal price to the petitioner. [2]

The Clearwire case involved a July 2013 merger in which Sprint paid $5.00 per share to acquire the 49.8% stake in Clearwire that it did not already own. Sprint had initially offered to pay $2.97 per share, but a subsequent bidding war with DISH Network Corp. (“DISH”) pushed Sprint to raise its offer. Following the merger, Aurelius Capital Management, LP and certain affiliates sought appraisal of their Clearwire shares and, in addition, filed a plenary action claiming that Sprint breached its fiduciary duties as a controlling stockholder by forcing the board and minority stockholders into accepting the transaction at a price that undervalued Clearwire.

In its July 21, 2017 post-trial decision, the court first addressed the fiduciary duty claims. Assuming that the entire fairness standard of review applied because Sprint was a controlling stockholder, the Vice Chancellor found that Sprint engaged in “multiple instances of unfair dealing” in the first phase of the merger process—i.e., before DISH intervened. [3] These included:

• Cutting off Clearwire’s business opportunities, including by telling potential customers of Clearwire not to engage with Clearwire until after the merger, thereby depressing the value of Clearwire;
• Failing to inform Clearwire’s minority stockholders that the vote of another major Clearwire stockholder had been “bought” with the promise of a broader commercial relationship, while at the same time touting such stockholder’s support for the deal; and
• Making retributive threats, including that absent a merger Sprint would take steps that would result in “substantial dilution” to the minority stockholders. [4]

Despite these and other instances of unfair dealing, Vice Chancellor Laster found that the unusual circumstances of DISH’s intervention, and the subsequent bidding war, “changed the landscape so substantially as to render [the prior instances of unfair dealing] immaterial.” [5] As a result, the court found that Sprint had carried its burden to show that the merger was entirely fair. Notably, in this respect, the court rejected the plaintiffs’ claim that it was unfair for the special committee to accept Sprint’s demand that it stop negotiating with DISH as a condition of Sprint’s $5 offer, especially in light of a lawsuit filed by Sprint against Clearwire and DISH seeking to enforce its rights under a shareholder agreement, which made DISH’s ability to acquire Clearwire uncertain. [6]

Vice Chancellor Laster noted in dicta that, had the transaction closed at $2.97 per share, he would have found that Sprint’s unfair dealing entitled Clearwire’s minority stockholders to a “fairer” price [7]—even though that price exceeded the “fair value” for purposes of appraisal ($2.13 per share) by almost 40%. The court cited cases holding that where a controller engages in unfair dealing, even if the deal price falls within a range of fair prices, the minority stockholders may be entitled to a “fairer” price or rescissory damages. [8] This signals that a minimally “fair” price will not always result in a controller who engages in unfair dealing escaping liability.

Turning to the appraisal claims, the court noted that both parties relied on valuation experts who ran discounted cash flow analyses to calculate Clearwire’s fair value. The court adopted Sprint’s expert’s DCF analysis in full, finding that petitioners’ expert, unlike Sprint’s expert, relied on unrealistic projections which were not prepared by Clearwire’s management in the ordinary course and that failed to reflect Clearwire’s “operative reality” as a standalone company. [9] Although the court’s fair value determination was thus based on a straightforward DCF analysis that did not involve a calculation of the amount of expected synergies, it is clear from the decision as a whole that the court considered that Clearwire stockholders were able to capture a large part of the “massive synergies” Sprint expected from the merger. [10] Such synergies, however, are excluded by statute from the calculation of fair value in an appraisal proceeding. [11]

As has been noted in previous posts to this blog, appraisal is no longer a “sleepy topic.” [12] Recent studies have shown that in light of the developments in Delaware merger litigation disfavoring disclosure-only settlements [13] and clarifying the standards for dismissal of complaints alleging breaches of fiduciary duties in connection with both arm’s length and controlling stockholder mergers, [14] the frequency and size of appraisal actions have grown dramatically. [15] We will see if that trend slows in response to Clearwire (and SWS), at least in the context of synergistic mergers.

The Delaware Supreme Court is poised to give guidance on the role of deal price in assessing fair value in the pending Dell and DFC Global appeals. [16] As such, we would also expect that the Delaware Supreme Court will soon address the question of how fair value should be calculated in mergers involving substantial expected synergies.

Endnotes:

1See, e.g., In re Appraisal of PetSmart, Inc., C.A. No. 10782-VCS, 2017 WL 2303599 (Del. Ch. May 26, 2017); see also Merion Capital L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *30-31 (Del. Ch. Dec. 16, 2016) (collecting recent cases relying on the deal price).(go back)

2See A Sleepy Topic: The Return of Appraisal Rights at 5, The M&A Journal, available at http://www.clearymawatch.com/2017/05/sleepy-topic-return-appraisal-rights/; see also 8 Del. C. § 262(h).(go back)

3Clearwire, slip op. at 50, 72.(go back)

4See id. at 51-52, 59-63. The court rejected the argument that Sprint was obligated to disclose its own internal projections to Clearwire’s special committee during price negotiations. See id. at 57-58.(go back)

5Id. at 50, 72 (the bidding war “freshened the atmosphere and created a competitive dynamic”).(go back)

6See id. at 66-67. The court also noted that DISH was free to top Sprint’s $5 bid, but declined to do so. Id.(go back)

7Id. at 50.(go back)

8See id. at 49.(go back)

9See id. at 84.(go back)

10See id. at 70.(go back)

11Id. at 74; see also 8 Del. C. § 262(h).(go back)

12A Sleepy Topic: The Return of Appraisal Rights, The M&A Journal, available at http://www.clearymawatch.com/2017/05/sleepy-topic-return-appraisal-rights/.(go back)

13In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016).(go back)

14Corwin v. KKR Financial Holdings, 125 A.3d 304 (Del. 2015); Kahn v. M&F Worldwide Corp., 88 A.D.3d 635 (Del. 2014).(go back)

15Matthew D. Cain, et al., The Shifting Tides of Merger Litigation, at 5-6, 18 (Mar. 13, 2017); https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2922121, discussed on the Forum here.(go back)

16In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (argued June 7, 2017); In re Appraisal of Dell Inc., C.A. No. 9322-VCL (argument scheduled for September 27, 2017).(go back)