CHANCERY COURT SETS FAIR VALUE IN APPRAISAL ACTION BELOW THE VALUATIONS SUGGESTED BY THE PARTIES
By: Scott Waxman and Benjamin Kendall
In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. May 21, 2018), the Delaware Court of Chancery denied a motion for reargument of its earlier decision setting the appraisal value of the shares of Aruba Networks, Inc. (“Aruba” or the “Company”) at the time of its acquisition by Hewlett-Packard Company (“HP”). Although the merger agreement offered $24.67 per share of the Company, and the Company ultimately suggested that the fair value of the Company’s shares was $19.75, the Court of Chancery set the fair value of the Company’s shares at $17.13. In denying the motion for reargument, the Court of Chancery reiterated its position that the trial court must independently determine the fair value of the shares in an appraisal proceeding and that the market price of a publicly traded firm can itself be an accurate measurement of fair value.
In May 2015, HP acquired Aruba, a publicly traded company, by merger. Pursuant to the merger agreement, each share of Aruba’s common stock was converted into the right to receive consideration worth $24.67. Rather than accept the consideration offered pursuant to the merger agreement, Verition Partners Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. (“Petitioners”), elected to exercise their statutory right to seek appraisal. At trial, the Company and Petitioners provided a wide range of valuations as to the fair value of the Company’s stock, with the Company ultimately suggesting $19.75 per share and Petitioners suggesting $32.57 per share based on a discounted cash flow analysis. However, in a post-trial memorandum opinion, the Court of Chancery gave no weight to the valuations of the parties’ experts. Instead, the Court of Chancery determined that the most persuasive valuation was the 30-day average of the unaffected market price for the period leading up to the announcement of the proposed merger (January to February 2015), which was $17.13 per share. In reaching its decision, the Court of Chancery relied heavily on existing Delaware Supreme Court precedent. The Court of Chancery interpreted this precedent to endorse using the market price of widely traded firm as well as the deal price in a third-party, arm’s-length transaction (after deducting synergies from the deal price) as indicators of fair value. Further, the Court of Chancery interpreted the precedent as cautioning against relying on discounted cash flow analyses prepared by adversarial experts when reliable market indicators are available.
Following the issuance of the Court of Chancery’s post-trial opinion, Petitioners filed a motion for reargument identifying eight grounds for reargument, which the Court of Chancery grouped and characterized as 1) an objection to the application of the legal framework, 2) objections to the interpretation of the Supreme Court precedent, and 3) objections to the Court of Chancery’s good faith in rendering its decision. As the movants, Petitioners bore the burden of demonstrating that the Court of Chancery overlooked a decision or principle of law that would be controlling or misapprehended the law or facts such that the outcome of the decision would be affected.
First, the Court of Chancery rejected Petitioners’ claims that its use of a 30-day average to determine the unaffected market price was arbitrary and capricious on the grounds that this argument was not previously raised by Petitioners and that authority was available suggesting that a 30-day average was a reasonable method for measuring the unaffected market price. Further, the Court of Chancery rejected Petitioners’ claims that it was error to use the average stock price for a period several months prior to closing because neither party had proved that Aruba’s value had changed materially by the time of the closing of the merger.
Second, the Court of Chancery rejected Petitioners’ claims that it misapprehended the relevant Supreme Court precedent, by clarifying its position that while the precedent did not require the trial court to give any weight to the unaffected market price, it endorsed the reliability of the unaffected market price as an indicator of value, at least for a widely traded company without a controlling stockholder, and where the market for its shares has attributes consistent with the efficient capital markets hypothesis. The Court of Chancery explained that in light of these decisions, trial courts can and should place heavier reliance on unaffected market price. Additionally, the Court of Chancery explained that in some cases, a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort the best estimate. Finally, the Court of Chancery justified its decision to set fair value at a price below the values suggested by both parties because the trial court is required to make its own, independent valuation determination, and the Court of Chancery did not want to incentivize parties to adopt extreme valuation positions to maximize the field in which a trial court could exercise its discretion.
Finally, the Court of Chancery rejected Petitioners’ claims that its earlier decision was an act of political theater or that the Vice Chancellor’s decision violated his oath as a judge by reviewing his methodology.
Verition Partners Master Fund Ltd. etc. v. Aruba Networks Inc. memoran.._