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27 March 2019
Two Delaware appraisal decisions issued in 2018 illustrate that, following the Delaware Supreme Court's decisions in Dell and DFC, the Delaware courts remain willing to give substantial evidentiary weight to a deal price as an indicator of fair value where the underlying transaction is the product of an open process characterised by the objective indicia of reliability. Conversely, the Delaware courts may place lower evidentiary weight on a deal price where the transaction appears not to have resulted from a process subject to a full market review.
In his 30 July 2018 decision for In re Appraisal of Solera Holdings, Inc,(1) Chancellor Bouchard of the Delaware Court of Chancery applied the market efficiency principles endorsed by Dell and DFC in holding that the fair value of the petitioners' shares was the deal price of $55.85 per share less $1.90 per share of estimated merger synergies. Solera, a global leader in the data and software industry, was acquired by an affiliate of Vista Equity Partners for $55.85 per share in cash. The merger was the product of a two-month outreach to potential financial buyers, a six-week auction conducted by an independent and fully empowered special committee and ongoing public disclosures relating to the sale process. In addition, the merger agreement permitted a 28-day go-shop period, which afforded favourable terms to allow a key potential buyer (and competitor) of Solera to bid for the company.
Bouchard found that the Solera merger resulted from a transaction process that had the requisite objective indicia of reliability emphasised by DFC and Dell, including:
Therefore, the chancellor concluded that the deal price, minus synergies, was the best evidence of fair value and deserved dispositive weight in the appraisal valuation.
That same week, on 27 July 2018, the Delaware Court of Chancery issued its post-trial opinion in Blueblade Capital Opportunities LLC v Norcraft Companies, Inc,(2) an appraisal litigation concerning the May 2015 acquisition of Norcraft, a cabinet manufacturer and retailer for new home construction and existing home remodelling markets, by Fortune Brands Home & Security, Inc for $25.50 per share in cash. In the decision, Vice Chancellor Slights found that the single-bidder pre-signing process did not provide a pre-signing market check. He also concluded that some of the deal protection measures negotiated in the transaction would not support reliance on the transaction price as the best measure of Norcraft's fair value. In addition, given the relative absence of record evidence regarding the efficiency of the market for Norcraft's common stock, the court was unwilling to adopt the pre-merger trading price of the company's stock as a reliable indicator of fair value.
Given those findings, Vice Chancellor Slights conducted an independent discounted cash flow (DCF) analysis, which was based on the company's base case projections and which adopted certain assumptions and inputs reflected by the parties' respective expert witnesses. Relying on that DCF analysis, while considering the variance of the result from the merger price as a "reality check", the vice chancellor concluded that the fair value of Norcraft's stock was $26.16 per share. This was a slight premium to the transaction price of $25.50, but materially below the $34.78 per share valuation suggested by the petitioners.
Importantly, the courts in both Solera and Norcraft expressed their displeasure with what they perceived to be the practice of parties in appraisal actions offering expert valuations that appeared to be results-oriented because they skewed heavily towards the parties' respective legal positions. In particular, Bouchard's decision in Solera emphasised that a DCF that produces a valuation that is drastically different from the transaction price may lack credibility. Vice Chancellor Slights also critiqued the parties' respective valuation experts for making choices in their DCF analyses that were not supported, in the court's view, by the evidence or accepted financial principles.
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