Chancery Court Determines that Merger Price is Fair Value in an Appraisal Proceeding as a Result of a Properly Conducted Sales Process
By: Annette Becker and Makda Goitom
In Merion Capital L.P. v. Lender Processing Services, Inc., No. 9320-VCL (Del. Ch. Dec. 16, 2016), the petitioners, Merion Capital L.P. and Merion Capital II L.P. (together, “Merion” or “Petitioners”), issued a post-trial opinion in an appraisal proceeding arising from the acquisition by merger (the “Merger”) of Lender Processing Services, Inc. (the “Company” or “Respondent”) by Fidelity National Financial, Inc. (“Fidelity”). After a four-day trial, the Chancery Court concluded that the fair value of the Company’s stock at the effective time of the Merger was the merger price as a result of a properly conducted sale process.
At the time of the Merger, the Company provided integrated technology products, data, and services to the mortgage lending industry, and was a market leader in mortgage processing in the United States. In 2008 the Company was spun off by Fidelity as a separate public company. Although the Company’s spinoff coincided with the Great Recession of 2008, the financial crisis was a boon to the Company because loan defaults drove key segments of its business. However, the Company was involved in problematic loan practices (“robo-signing”) and was under criminal and civil investigation by the United States Department of Justice, the Federal Bureau of Investigation, and attorneys general from all fifty states.
In April 2010, Fidelity, Thomas H. Lee Partners (“THL”), and Blackstone Group (“Blackstone”) or the “consortium” made an unsolicited offer to buy the Company. The Company’s board of directors (the “Board) retained the Goldman Sachs Group, Inc. (“Goldman”) as its financial advisor. Over the next few years, the Company received various offers of acquisition: In February 2012, THL offered to buy the Company for $26.50 per share; in April 2012, THL, Blackstone, and Fidelity increased their offer to $28.00 per share comprising of $26.00 in cash and $2.00 in Fidelity stock; in May 2012, THL, Blackstone, and Fidelity increased their offer to $29 per share, payable entirely in cash or in a combination of $27.00 in cash and $2.00 in Fidelity stock. By this time, the country was emerging from the Great Recession and the Company’s management was concerned that the Company’s performance would deteriorate. Still, the Board insisted that the consideration should be raised to a price in the $30 range.
On June 8, 2012, THL told the Company that the consortium would not offer more than $29.00 per share. The Board rejected THL’s offer, but decided to negotiate the terms of the transaction documents in case the consortium changed its collective mind and offered $30.00 per share. The Board and the consortium thus negotiated a draft merger agreement, including a go-shop provision. Neither party would budge on price. The parties were also divided as to the extent of the Company’s legal risk due to the pending investigations and stockholder lawsuits.
In October 2012 the Board hired Boston Consulting Group (“BCG”) to evaluate the Company and its strategic alternatives. On January 31, 2013, the Company announced that it had entered into a settlement agreement with the attorneys general from 46 states and the District of Columbia for $127 million, entered into a non-prosecution agreement with the Department of Justice for $35 million, and settled outstanding stockholder litigation for $14 million. The Company’s shares rose 7.5% to $24.08 on the day of the announcement. After the announcement (in early 2013), the Company received six unsolicited expressions of interest, including an expression of interest from Fidelity and THL who made a joint proposal to acquire the Company for $30.00 per share through a combination of cash and stock, and Altisource Portfolio Solutions S.A. (“Altisource”) who proposed to acquire the Company in a transaction valued at $31.00 per share, through a combination of cash and stock. The Board told Fidelity and Altisource that their offers undervalued the Company and that the Company was not interested. As a result of the increased interest in acquiring the Company, the Board engaged Credit Suisse Securities (USA) LLC (“Credit Suisse”) as a second financial advisor. The Board deferred considering the offers until BCG completed its strategic review of the Company. On March 21, 2013, the Board met to consider the Company’s alternatives. The meeting began with a presentation from BCG and the two financial advisers, at the end of which the Board concluded that the Company should solicit and evaluate offers for the sale of the Company.
On May 27, 2013, the Company entered into a merger agreement with Fidelity for consideration of $33.25 per share, paid 50% in cash and 50% in Fidelity stock. On December 19, 2013, 78.6% of the outstanding shares voted in favor of the deal and, of the shares that voted, 98.4% voted in favor of the Merger. On January 2, 2014, the Merger closed. Fidelity’s stock price had increased in the interim, resulting in an increase in the merger consideration. Fidelity elected twice to increase the cash component, which ended up at $28.10 per share. The collar yielded a stock component valued at $9.04 per share. The aggregate merger consideration received by the Company’s stockholders at closing was $37.14 per share (the “Final Merger Consideration”). The equity value of the final deal was $3.4 billion, an increase of approximately $500 million over the value at signing. Merion purchased 5,682,276 shares after the announcement of the Merger, but before the stockholder vote. Merion demanded appraisal, did not withdraw its demand or vote in favor of the Merger, and eschewed the Final Merger Consideration. Merion pursued this appraisal action to obtain a judicial determination of the fair value of its shares.
The Court concluded that the fair value of the Company was the Final Merger Consideration and explained that the Board’s sale process led to a merger price that was reliable evidence of the Company’s fair value. In its analysis, the Court considered the existence of meaningful competition among multiple bidders during the pre-signing phase. The Court concluded that, if bidders perceive a sale process to be relatively open, then a credible threat of competition can be as effective as actual competition. During the pre-signing phase, Fidelity and THL did not know that Altisource had dropped out. The Board’s track record of saying “no” also gave Fidelity/THL a credible reason to believe that the Board would not sell below its internal reserve price thus reinforcing the threat of competition.
The Court also considered that adequate and reliable information about the Company was available to all participants, which contributed to the existence of meaningful competition. All bidders received equal access to information about the Company and all had the opportunity to conduct due diligence before submitting their bids, and several did so. The Petitioners argued that because of the legal uncertainty that surrounded the Company and the proximity of the sale process to the settlements in January 2013, the stockholders did not sufficiently understand the Company’s significant value once its legal risk had been addressed. The Court concluded that the weight of the evidence at trial indicated that the settlements made the Company’s value easier to understand, and the Company’s stock price increased substantially following the announcement of the settlements.
Finally, the Court considered the absence of any collusion, whether among bidders or between the seller and a particular bidder. Under Delaware law, only “an arms-length merger price resulting from an effective market check [is] entitled to great weight in an appraisal.” Glob. GT LP v. Golden Telecom, Inc. (Golden Telecom I), 993 A.2d 497, 508-09 (Del. Ch. 2010) (Strine, V.C.), aff’d, 11 A.3d 214 (Del. 2010). The Merger was not a management buyout. To the contrary, the management team had a powerful personal incentive not to favor Fidelity because the Company’s management team believed that Fidelity would not retain them if it acquired the Company. This gave the management team an additional incentive to seek out other bidders and create competition for Fidelity. The Petitioners have pointed to ties among Fidelity, THL, and members of the Board which they say undermined the sale process in general and the price negotiation in particular. It is true that there were relationships among Fidelity, THL, and members of the Board, in large part because of the Company’s history. The Court explained that these relationships warranted close examination, but they did not compromise the sale process. When appropriate, individuals with a conflict of interest recused themselves from deliberating as directors during the 2013 sale process or participated only after the Board determined that no conflict existed.
Over seven months elapsed between the signing of the Merger Agreement on May 27, 2013, and the closing of the merger on January 2, 2014. If the value of the corporation changes between the signing of the merger and the closing, the Court is required to measure the fair value determination by the “operative reality” of the corporation at the effective time of merger. The Court ultimately concluded that the evidence at trial established that the Final Merger Consideration was a reliable indicator of fair value as of the closing of the Merger and that, because of synergies and a post-signing decline in the Company’s performance, the fair value of the Company as of the closing date did not exceed the Final Merger Consideration.
Both the Petitioners and the Company submitted valuation opinions from distinguished experts. The Petitioners’ expert used a DCF analysis to opine that the Company’s fair value at closing was $50.46 per share. The Respondent’s expert used a DCF analysis to opine that the Company’s fair value at closing was $33.57 per share. The Final Merger Consideration was $37.14 per share. The experts chiefly disagreed over the beta amount. “[T]he DCF . . . methodology has featured prominently in this Court because it is the approach that merits the greatest confidence within the financial community.” Owen v. Cannon, 2015 WL 3819204, at *16 (Del. Ch. June 17, 2015) (quotation marks omitted). The Court concluded that the figure of $38.67 per share was the best estimate of the fair value of the Company based on the DCF method. When presented with multiple indicators of fair value, the Court must determine how to weigh them. “In discharging its statutory mandate, the Court of Chancery has discretion to select one of the parties’ valuation models as its general framework or to fashion its own.” M.G. Bancorporation, 737 A.2d at 525-26. The Court’s best effort to resolve the differences between the experts resulted in a DCF valuation that is within 3% of the Final Merger Consideration. Under the circumstances, the Court gave 100% weight to the transaction price.
Merion Capital L.P. v. Lender Processing Services, Inc., No. 9320-VCL