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05 December 2018
During the second quarter of 2018, the Delaware Supreme Court affirmed, without opinion, the Court of Chancery's decision in ACP Master, in which the Court of Chancery had appraised Clearwire's shares at a significant discount to the deal price. Unfortunately, the Delaware Supreme Court's affirmance without discussion or opinion provides dealmakers with little additional clarity on how to assess potential appraisal risk. Also, during the quarter, the Delaware Court of Chancery denied petitioners' motion for reargument in the Aruba Networks appraisal litigation. In denying the petitioners' motion for reargument, Vice Chancellor Laster thoroughly defended the reasoning of his earlier post-trial decision, in which he had adopted Aruba's unaffected (pre-announcement) market price as the "best evidence" of Aruba's fair value, and further explained his understanding of the Delaware Supreme Court's decisions in Dell and DFC Global.
On 23 April 2018 the Delaware Supreme Court affirmed, without opinion, the Court of Chancery's decision appraising the shares of Clearwire Corporation at $2.13 per share, which represented a significant discount to the deal price of $5.00 per share.(1)
The Court of Chancery found the merger between Sprint Nextel Corporation and Clearwire Corporation to be entirely fair, despite earlier instances of alleged unfair conduct by Sprint (the controlling stockholder) and Softbank Corp (the proposed acquirer of Sprint), which included alleged obstruction of material business opportunities, vote buying, making retributive threats to Clearwire's minority stockholders, and insisting on dilutive conversion pricing in bridge financing. Nonetheless, the court found that such instances of alleged unfair conduct "made little difference" after Clearwire's stockholders refused Sprint's initial $2.97 per share offer and an interloper, DISH, drove up the deal price in an arm's-length process, leading to an ultimate price of $5.00 per share, which the court found to be fair.
In the related appraisal finding, the court observed that there was no evidence that anyone at Sprint or Softbank believed that Clearwire was worth $5.00 per share on a standalone basis. If the court had relied on the deal price, it would have had to determine the value of synergies anticipated by Sprint and Softbank and back them out from the calculation of fair value. Because none of the parties argued in favour of the deal price, and because the record contained other reliable evidence of fair value, the trial court did not consider the deal price. Instead, in appraising Clearwire's shares at $2.13 per share, the court was persuaded by Sprint's expert's discounted cash flow analysis, which had relied on projections prepared by Clearwire's management team in the ordinary course of business.
On 21 May 2018 the court denied a motion for reargument filed by appraisal petitioners, who challenged the court's prior finding that the fair value of their shares was substantially below the merger price offered in the underlying transaction.(2)
The Aruba Networks appraisal litigation arose from Hewlett Packard Enterprise Company's acquisition of Aruba Networks for $24.67 per share in 2016. As discussed in a previous update (please see "Company's unaffected market price is best evidence of fair value for appraisal valuations"), the court concluded that the best evidence of Aruba's fair value was its 30-day average unaffected market price of $17.13 per share – more than 30% lower than the deal price. The February 2018 post-trial decision was the court's first appraisal ruling following the Delaware Supreme Court's decisions in Dell and DFC Global, which underscored the Supreme Court's willingness to give significant weight to the deal price as the best measure of fair value where the underlying transaction resulted from a third-party, arm's-length transaction.
In their motion for reargument, the petitioners raised numerous objections to the Court of Chancery's original decision, none of which Vice Chancellor Laster found persuasive. The petitioners contended that the court had fundamentally misapprehended Dell and DFC Global, and should not have considered Aruba's unaffected market price in determining fair value. The court rejected that argument, explaining its view that Dell and DFC Global endorsed the reliability of the unaffected market price as an indicator of fair value, and stating that "trial courts now can (and often should) place heavier reliance on the unaffected market price". The court also rejected the petitioners' request that they be allowed to submit supplemental evidence regarding whether Aruba's stock traded in an efficient market prior to the transaction, concluding that the evidence presented at trial showed that the Aruba stock possessed the relevant "indicia" of trading in an efficient market.
For further information on this topic please contact Lisa Bebchick or Martin Crisp at Ropes & Gray's New York office by telephone (+1 212 596 9000) or email (email@example.com or firstname.lastname@example.org). Alternatively, contact Michael DiMaio or Michael Connolly at Ropes & Gray's Boston office by telephone (+1 617 951 7000) or email (email@example.com or firstname.lastname@example.org). The Ropes & Gray website can be accessed at www.ropesgray.com.
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