By Scott E. Waxman and Pouya Ahmadi
In In Re: Appraisal of Stillwater Mining Company, Consol. C.A. No. 2017-0385-JTL (Del. Ch. Aug 21, 2019), the Delaware Court of Chancery (the “Court”) held that the fair value of Stillwater Mining Company (“Stillwater”) at the time of its acquisition through a reverse triangular merger with Sibanye Gold Limited (“Sibanye”) was $18 per share, equal to the merger consideration.
At the time of its reverse triangular merger with Sibanye in 2017, Stillwater was engaged in the business of extracting, developing, smelting, processing, and refining of platinum group metals (“PGMs”) such as palladium, platinum, and rhodium. In addition to its only asset in the western United States, an orebody known as the J-M Reef, Stillwater’s other principal sources of PGMs were located in South Africa, Russia, and Zimbabwe. This made Stillwater’s stock price, which traded on the New York Stock Exchange under the symbol “SWC,” highly sensitive to the commodity price of PGMs.
Back in December 2016, Stillwater and Sibanye had negotiated an agreement and plan of merger pursuant to which each share of Stillwater common stock was converted to a right to receive $18. Petitioners in the matter argued that the sale process was insufficient and that Stillwater’s fair value was $25.91 per share. They supported this proposition with the opinion of an expert who utilized a discounted cash flow model (“DCF”) to value Stillwater.
Sibanye, on the other hand, argued that the fair value of Stillwater was $17.63 per share, a price the buyer supported by relying upon the adjusted deal price and an expert valuation that also relied upon a DCF model.
Rejecting the DCF valuations of both expert witnesses, the Court argued that neither side proved that its valuation provided a persuasive indicator of fair value. The experts disagreed over too many inputs, including: which set of commodity price forecasts to use to generate cash flows, whether to apply a small-company risk premium, the size of the equity risk premium, the value of inventory, the value of a copper-gold-porphyry deposits in Argentina, the treatment of Stillwater’s exploration area, how to account for the resources in mine-adjacent areas, and the amount of excess cash. According to the Court, these disagreements over inputs resulted in valuation swings that were too great for this decision to be able to rely on.
The Court found that the sale process bore “objective indicia of fairness” that rendered the deal price a reliable indicator of fair market value. According to the Court, the fact that (1) the merger was an arm’s-length transaction with an unaffiliated acquirer with no prior ownership interest, (2) the board did not have any conflicts of interest and had the authority to say “no” to any merger, (3) Sibanye conducted due diligence and received confidential information about Stillwater’s value, (4) Stillwater negotiated with Sibanye and extracted multiple price increases, and (5) the board conducted a reasonably sufficient post-signing market check with a reasonable termination fee all contributed to making the deal price fair and reliable. Also significant to the determination of the $18 per share price as fair was the fact that no third party bid was received during the post-signing period.
The Court declined to make any adjustments to the deal price based on synergies or changes in value between signing and closing. According to the Vice Chancellor, Sibanye failed to prove that any synergies were captured in the deal price because not only did it tell their stockholders that the price did not account for synergies, but Sibanye’s own valuation expert also testified that the evidence did not reflect any “quantifiable synergies” included in the price. The Court also declined to make any adjustments for increases in value between signing and closing because Stillwater never made the argument that the deal price should be adjusted on that basis. The Court recognized that precedent exists for adjusting the deal price based on changes in value between signing and closing but held that the proponent of the adjustment must prove that an adjustment is warranted, which they did not do here.
In conclusion, the Court held that while the sale process was not perfect, “Sibanye proved by a preponderance of the evidence that the sale process, as a whole, made the deal price a persuasive indicator of fair value.” Accordingly, the Court found that the $18 per share price paid for Stillwater was in fact the fair value of the business.