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E-MailEdward D. Herlihy and David E. Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Herlihy and Mr. Shapiro, and is part of the Delaware law series; links to other posts in the series are available here.
The Delaware Supreme Court in a two-page order summarily affirmed an important appraisal decision, upholding the Delaware Court of Chancery finding that the fair value of SWS Group, Inc. was $6.38 per share—a valuation 19% below the merger price at announcement and 7.8% below the merger price at closing (see our memo of May 31, 2017). This represents the first Delaware Supreme Court decision in the era of “appraisal arbitrage” to affirm an appraised valuation meaningfully below the deal price.
As we previously described, the case arose from Hilltop Holdings’ 2014 acquisition of SWS, a Dallas-based regional bank and broker/dealer. Due to anticipated synergies and cost savings from the transaction, Hilltop paid a premium to SWS’s pre-offer share price of $6.06, agreeing to a mix of cash and stock worth $7.88 per share when the deal was announced on March 31, 2014 and $6.92 per share when the merger closed on January 1, 2015. After the merger was announced, arbitrageurs raised funds solely to finance an appraisal action, wooing investors with assurances that the Delaware courts were extremely unlikely to assign fair value below deal price. After raising tens of millions of dollars on that basis, the arbitrageurs acquired 7.4 million shares after the deal announcement and before the merger closing—approximately 15% of total shares outstanding—over a period in which SWS traded at an average share price of $7.22. Had the arbitrageurs simply voted for the merger, their investors would have received merger consideration now worth $8.18 per share.
Hilltop, chaired by legendary financial services investor Gerald Ford, believed that the merger price was full and fair and was unwilling to accept an unfair settlement. Instead, believing in the fairness of its position, Hilltop took the case to trial and defended it on appeal. The correctness of that decision has now been validated by the Delaware Supreme Court. This decision reaffirms the value of principled opposition to unfounded stockholder litigation.
