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10 April 2019
On 23 February 2018 the Delaware Court of Chancery issued its original opinion in a consolidated appraisal action arising out of Verizon Communications Inc's 2015 acquisition of AOL Inc.(1) In contrast to a recent string of Delaware appraisal decisions, the court determined that reliance on the $50 per share merger price for determining AOL's statutory fair value was not warranted, in light of deal protection devices contained in the merger agreement and the AOL chief executive officer's post-signing statements signalling to market participants that the transaction was a "done deal". Instead, the court utilised a discounted cash flow (DCF) analysis to conclude that fair value of an AOL share was $48.70 – a 2.6% discount to the deal price. That fair value determination included $2.57 per share that the court added to its DCF analysis, to account for pending AOL transactions not yet consummated as of the merger's closing. Both parties filed motions for reargument. AOL claimed that the accretive value of the potential transactions should have been lower; the plaintiffs argued that the value should have been higher and that the court should include the projected revenue of the pending transactions in the DCF analysis.
The court ruled on the motions for reargument on 15 August 2018, concluding that its previous determination of the accretive value of one of the pending transactions – the 'display deal' – was based on an error of fact. The court recalculated the present value of the display deal at $85.1 million and added that amount to its DCF valuation, to conclude that the fair value of AOL was $47.08 per share – $1.62 less than its original finding and nearly 6% below the deal price. The court observed that "[n]o DCF analysis… can be sufficiently rigorous that it will not permit a good-faith argument that the value should be otherwise". The decision nonetheless cautioned that the courts "must resist the desire to achieve the 'right' number in a financial analysis… by revisiting such discretionary decisions in a way that encourages run-on litigation".
The court's decision highlights the uncertainties inherent in DCF valuations and, while the court adjusted its initial valuation, it indicated that the Chancery Court should ordinarily be reluctant to revisit fair value determinations based on the parties' quibbles with underlying assumptions.
For further information on this topic please contact Anne Johnson Palmer at Ropes & Gray LLP's San Francisco office by telephone (+1 415 315 6300) or email (email@example.com). Alternatively, contact Christian Reigstad at Ropes & Gray LLP's New York office by telephone (+1 212 596 9000) or email ( firstname.lastname@example.org). The Ropes & Gray website can be accessed at www.ropesgray.com.
Margaret Hamlin Curtiss, associate, also assisted in the preparation of this article.
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