Appraisal Update: Unaffected Market Price Makes a Comeback

Roger A. Cooper and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

After the Delaware Supreme Court’s recent Aruba decision, [1] many commentators predicted that, going forward, the Court of Chancery would not rely on the target’s unaffected market trading price to determine fair value in appraisal cases, other than as a “check” on other valuation methodologies. It may therefore come as a surprise that in a decision issued last Friday, the Court of Chancery determined fair value to be equal to the target’s unaffected trading price. See In re: Appraisal of Jarden Corporation, Consolidated C.A. No. 12456-VCS (Del. Ch. July 19, 2019). Although still subject to appeal, this decision is also notable because the fair value determination came out 18% below the deal price despite the petitioners having some success in attacking the target board’s sale process, which involved no pre- or post-signing market check.

The Decision

This case involves the acquisition of Jarden Corporation (“Jarden”), a consumer products company holding a diversified portfolio of over 120 brands, by Newell Rubbermaid, Inc. (“Newell”) on April 15, 2016. At closing, the non-dissenting stockholders of Jarden received cash and Newell stock worth $59.21. Petitioners, who acquired almost 2.5 million shares of Jarden stock after the deal was announced, instead elected to seek statutory appraisal of their shares.

In his post-trial opinion, Vice Chancellor Slights noted that the Supreme Court’s recent Aruba decision had reversed the trial court for its reliance on the unaffected market price and directed that judgment be entered using the deal-price-less-synergies approach instead. However, Vice Chancellor Slights emphasized that the appraisal statute’s guidance to consider “all relevant factors” means each case is decided on its own record, comprised of the evidence (and financial expert testimony) presented by the parties, and not based on the record (or rulings) of prior appraisal cases.

On the facts of this case, the Court was not convinced that the deal-price-less-synergies approach was reliable for two reasons. First, the Court found “flaws” in the Jarden board’s sale process that arguably may have impacted the reliability of the deal price as an indicator of fair value. Although the Court acknowledged “there was no need for a full-blown auction of Jarden,” it noted there was no pre- or post-closing market check, and there was evidence that Jarden’s executive chairman, who negotiated the deal in large part without the involvement of the full board, “may well have set an artificial ceiling on what Newell was willing to pay.” [2] Second, although the Court found credible evidence that the parties anticipated substantial synergies in connection with the merger, there was conflicting evidence on the more difficult question of how much of the value of those synergies was ceded by the buyer to the target stockholders in the deal price. The Court determined that this evidence was in “equipoise” and raised more questions than it answered.

In contrast, and again unlike in Aruba, the Court found the unaffected market price to be a reliable indicator of fair value on the facts of this case. The Court first found that the market for Jarden’s stock was efficient based on testimony by the company’s expert, who looked at factors such as Jarden’s market capitalization, trading volume, bid-ask spread, number of analysts, and event studies. The Court rejected the petitioners’ argument that the unaffected market price was unreliable because the market was unaware of material facts about Jarden’s standalone prospects. Notably, the Court dismissed the materiality of the projections Jarden’s management prepared in connection with the merger, which were not disclosed until after the deal was announced (in Jarden’s proxy), largely based on an event study by the company’s expert showing that the buyer’s stock declined when such projections were disclosed (noting it should have climbed if the market believed those projections showed Jarden had previously been undervalued, as petitioners claimed). And although there was a gap between the date on which the unaffected price was calculated and the closing (which is the valuation date for purposes of a statutory appraisal), the Court found that, if anything, Jarden’s fair value was declining in that period.

Finally, the Court considered the parties’ experts’ competing DCF analyses, which the Court noted produced valuations that were “solar systems apart.” [3] The Court painstakingly went through the experts’ opinions on each input and calculated its own independent DCF analysis that came to $48.13 per share, which the Court found corroborated the reliability of the unaffected market price as the best evidence of fair value.

Key Takeaways

  • Unaffected market price is not dead. Whatever practitioners may have believed after the Supreme Court’s Aruba decision, Jarden demonstrates that the unaffected market price remains a viable valuation approach in appraisal cases, at least pending an appeal in this case. But, as Vice Chancellor Slights emphasized, the reliability of that approach is highly dependent on the facts of each case.
  • The deal-price-less-synergies approach presents difficult issues. Despite the Supreme Court’s express endorsement of the deal-price-less-synergies approach in Aruba, the Court in this case struggled with determining how much of the value of expected synergies was included in the deal price, if any. But, again, this is a case-specific inquiry, and the facts (and expert testimony) of other cases may be more clear.
  • Every appraisal case is different. The Court notably downplayed the view that the Delaware Supreme Court had, through its recent decisions in Dell, DFC, and Aruba, imposed a particular valuation approach to be applied in future appraisal cases. Rather, Vice Chancellor Slights said his “takeaway” from those decisions was that the Court of Chancery must “explain” its fair value calculation “in a manner that is grounded in the record before it” (and not based on the record of other cases). [4] That being said, the Court acknowledged the Supreme Court had mandated a “frame of reference” for such cases that requires the Court to at least consider market evidence, such as the deal price or unaffected market price, before considering other valuation methodologies like a DCF or comparable companies analysis. [5]
  • Buyers of public companies face reduced appraisal risk. Although Dell and DFC emphasized the importance of having a robust sale process for reducing appraisal risk, as we have previously discussed on this blog (here), Jarden shows that, even without a market check and an arguably “flaw[ed]” sale process by the target board, fair value of a public target may still be materially below the deal price. That is particularly true for deals involving a substantial premium above the unaffected price (and substantial expected synergies).

Endnotes

1Verition P’rs Master Fund Ltd. v. Aruba Networks, Inc., 2019 WL 1614026 (Del. Apr. 16, 2019).(go back)

2Aruba, slip op. at 64-65.(go back)

3Aruba, slip op. at 8. The Court said it would unseal the expert reports at the close of the case, noting “[p]erhaps the legal and business academies will find interesting, and worthy of study and classroom discussion, how two such well-credentialed experts in their fields reached such wildly divergent conclusions regarding the fair value of the same company as of the same date.” Id. at 60 n.286. Interestingly, 87% of the difference between the two experts’ DCF analyses was attributable to just one input—the assumed investment rate in the terminal period. The Court also considered but placed no weight on the petitioners’ expert’s comparable companies approach because the expert failed to show the purported peer companies were true peers.(go back)

4Id. at 4.(go back)

5Id. at 3-4.(go back)

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