Chancery Court Holds That Merger Price That Resulted from a Thorough and Vigorous Sale Process Is the Best Indication of Fair Value in Appraisal Proceeding
By Susan Apel and Calvin Kennedy
Merion Capital LP and Merion Capital II LP v. BMC Software, Inc. concerns an appraisal proceeding under Section 262 of the Delaware General Corporation Law in which the Chancery Court found that the deal price generated by the market through a thorough and vigorous sales process was the best indication of fair value.
On September 13, 2013, the petitioners, Merion Capital LP and Merion Capital II LP (together, “Merion”), filed a Verified Petition for Appraisal of Stock pursuant to 8 Del. C. § 262 (the “Appraisal Statute”) against respondent, BMC Software, Inc. (“BMC”). The action stemmed from a merger pursuant to which BMC’s stockholders were cashed out at a price of $46.25 per share (the “Merger”). Merion (who the court noted are “arbitrageurs who bought, not into an ongoing concern, but instead into this lawsuit”) owned 7,629,100 shares of BMC common stock. The Court presided over a four day trial in this matter, at which Merion presented expert testimony claiming that the stock was undervalued and BMC presented expert testimony claiming that the Merger price actually exceeded fair value.
The Court began the analysis by noting that section (h) of the Appraisal Statute requires the Court to determine the fair value of the shares “exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation. . .” and that in determining fair value, the Court must take into account “all relevant factors.” Both Merion and BMC hired experts who proffered testimony on the fair value of BMC common stock using a discounted cash flow methodology (“DCF”). The Court continued its analysis by reviewing the assumptions underlying each expert’s DCF valuation. The Court then made its own assumptions, performed its own DCF valuation and arrived at a DCF valuation of $48.00 per share. Thereafter, the Court considered “other relevant factors” in determining fair value.
Because neither expert presented a valuation based on a comparable sales methodology, the Court turned to consideration of the Merger price, noting that “where the sales process is thorough, effective, and free from any spectre of self-interest or disloyalty, the deal price is a relevant measure of fair value.” Merion presented three arguments to challenge the effectiveness of BMC’s sale process. Merion first argued that BMC was pressured into a rushed and ineffective sale by a large stockholder. In dismissing the argument, the Court noted that BMC conducted two separate auctions, engaged multiple bidders and utilized its go-shop period. Merion’s second argument was that BMC’s financial advisors leaked confidential information which allowed the buyer to minimize its offer price. The Court dismissed the argument by noting that the buyer increased its bid twice after its initial submission despite the fact that it was the sole remaining bidder at that time. Lastly, Merion argued that BMC had entered into a “secret handshake agreement” with the buyer that BMC would not pursue any other potential bidders after receiving the buyer’s final offer of $46.25 per share. Again, the Court dismissed the argument by noting that there were no other bidders by that time and that no additional bids came in during the go-shop period.
The Court also addressed whether the Merger price was higher than fair value as a result of synergies realized from the deal. The Court performed a two-step analysis to determine if any synergies were realized from the deal and, if so, whether the synergies were included as part of the Merger price. Here, the Court determined that there was no evidence on the record of any such synergies.
The Court concluded that the Merger price of $46.25 per share is the most persuasive indication of fair value in this instance, noting uncertainties in the DCF analysis and “wildly-divergent DCF valuation of the experts.”