In City of North Miami Beach General Employees’ Retirement Plan, et al. v. Dr Pepper Snapple Group, Inc., et al., (C.A. No. 2018-0227-AGB (Del. Ch. June 1, 2018)), the Court of Chancery held that the term “constituent corporation” as used in Section 262 of the Delaware General Corporation Law means only an entity that actually is being merged or combined with another entity in a merger or consolidation and does not include a parent of such entities. Thus, the Court ruled that the Dr Pepper stockholder plaintiffs are not entitled to appraisal rights because Dr Pepper is not a constituent corporation, but rather the parent of one of two corporations to be merged in connection with the proposed transaction.
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 In re Appraisal of GoodCents Holdings, Inc., C.A. No. 11723-VCMR, Vice-Chancellor Montgomery-Reeves held that, following a merger, a provision in the target company’s certificate of incorporation only provided preferred stockholders a voting right, not an entitlement to a liquidation preference.
In In re United Capital Corp., Stockholders Litigation, C.A. No. 11619-VCMR (Del. Ch. Jan. 4, 2017), the Delaware Court of Chancery dismissed a suit brought by plaintiff minority stockholders (“Plaintiff”) that sought a quasi-appraisal to remedy alleged breaches of the duty of disclosure in connection with the acquisition of United Capital Corp. (“United Capital” or “Company”) via short-form merger. The Court concluded that Plaintiff had not adequately alleged that any omitted information was material to the decision to seek appraisal and that the duty of disclosure was not violated.
In In Re Appraisal of Dell, C.A. No. 9322-VCL (Del. Ch. October 17, 2016), previously discussed here, the law firm representing Dell Inc.’s stockholders in appraisal proceedings challenging the valuation of shares in connection with Dell’s 2013 “go-private” merger was awarded approximately $4 million in advanced expenses and $4 million in attorneys’ fees. The Delaware Court of Chancery held that the amounts were reasonable and that the expenses and fees should be allocated pro rata among the appraisal class. Since this was a case where counsel had incurred significant out-of-pocket expenses, the court held that the approach that best balanced the interests of the attorneys and the class was to deduct reimbursable expenses first, then award a fee based on the net benefit achieved.
In determining the fair value of stock of a privately held corporation at the time of a cash-out merger in connection with an appraisal action by minority stockholders—where one of the minority stockholders’ experts proffered a fair value greater than eight times that provided by the company’s expert—the Delaware Court of Chancery found that the valuation method used by the company’s expert was unreliable. The Court held that in this case the discounted cash flow analysis is the most reliable indicator of fair value because (1) the company’s stock is not publicly traded, (2) historical sales of stock are not reliable indicators of fair value, and (3) no comparable company valuation exists.
On July 8, 2016, Chancellor Bouchard issued a memorandum opinion in In re Appraisal of DFC Global Corp., C.A. No. 10107-CB (Del. Ch. July 8, 2016), finding that shares held by former stockholders of DFC Global Corporation (“DFC”) sold to Lone Star Fund VIII (U.S.), L.P. (“Lone Star”), a private equity buyer, for $9.50 per share were undervalued. Chancellor Bouchard determined this through an examination of multiple valuation methods — comparable company and transaction analyses, discounted cash flow analyses, and the transaction price — and ultimately concluded that an equal blend of the three was the most reliable determinate of the shares’ fair value. In doing so, Chancellor Bouchard calculated that the fair market value of the DFC shares was $10.21 per share.
In In re Appraisal of Dell Inc., C.A. No. 9322-VCL, (Del. Ch. May 11, 2016), the Delaware Court of Chancery held that the shares held by fourteen mutual funds through a sponsor or institutions that relied on such parties to direct the voting of their shares (collectively, the “Petitioners”) did not qualify for appraisal in connection with Dell Inc.’s go-private merger because the dissenter requirement under the Delaware General Corporation Law (“DGCL”) was not met as the shares were voted in favor of the merger.
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.
On July 13, 2015, Vice Chancellor J. Travis Laster issued his Memorandum Opinion in In re Appraisal of Dell Inc. in which he granted Dell’s motion for summary judgment against five institutions which owned Dell common stock and sought appraisal in connection with a going-private merger of the Company which closed in October 2013. Though Vice Chancellor Laster acknowledged that Dell’s motion “must be granted” based on existing Delaware precedent interpreting the requirement that a stockholder who wishes to pursue appraisal “continuously hold such shares through the effective date of the merger,” the Vice Chancellor advocated for and urged the Delaware Supreme Court to adopt the federal law approach which, if applied, would allow the petitioners’ appraisal challenge to proceed.
In February 2013, Dell agreed to a merger in which each publicly held share of Dell common stock would be converted into the right to receive $13.75 in cash, subject to the right of stockholders to seek appraisal under Section 262 of the Delaware General Corporation Law (“DGCL”). In July 2013, prior to the vote on the merger, five institutions who owned approximately 922,975 shares of Dell common stock (the “Petitioners” or “Funds”) in street name through their custodial banks caused Cede & Co. (“Cede”), the nominee of the Depository Trust Company (“DTC”) and the entity in whose name the shares were registered, to demand appraisal rights on their behalf .
Merlin Partners LP v. AutoInfo, Inc., C.A. No. 8509-VCN (Del. Ch. April 30, 2015) (Noble, V.C.) concerns an appraisal proceeding under Section 262 of the Delaware General Corporation Law in which the Chancery Court found that, where there was a strong sale and negotiation process, and there were no reliable cash flow projections from which to make a discounted cash flow analysis and there were no sales of comparably sized companies in the same business, the price received in the merger was the best indication of fair value at the time of the merger.
Petitioners were former common stockholders of Respondent, AutoInfo, Inc. (“AutoInfo”) who exercised their appraisal rights in connection with AutoInfo’s merger with Comvest Partners (“Comvest”) at a price of $1.05 per AutoInfo share. AutoInfo was struggling financially and had begun a sale process in 2011 using an investment bank, Stephens Inc. (“Stephens”), which had long experience in the applicable industry, transportation. As part of the process, Stephens asked AutoInfo’s management to prepare five year financial projections that were “optimistic” to be used to market AutoInfo. Management had never prepared similar projections before and was doubtful of the validity of the results.
By Michelle Repp and Marisa DiLemme
Halpin v. Riverstone National, Inc. concerns a group of minority stockholders seeking appraisal despite a “drag-along” provision in a Stockholders Agreement. The Chancery Court found that the “drag-along” provision was not enforceable in this merger situation because the stockholders received notice of the merger only after the transaction had been consummated and the Stockholders Agreement only gave a prospective “drag-along” right, not retrospective.
In Halpin, five minority common stockholders (the “Minority Stockholders”) of Riverstone National, Inc., a Delaware corporation (“Riverstone”), sought appraisal of their shares after a June 2014 merger of Riverstone with a third party. The merger was approved by the written consent of Riverstone’s 91% controlling stockholder, CAS Capital Limited (“CAS”), on May 29, 2014. Riverstone counterclaimed against the Minority Stockholders and sought summary judgment in its favor on the appraisal claims based on a stockholders agreement (the “Stockholders Agreement”) between Riverstone and the Minority Stockholders entered into in 2009 that included a drag-along obligation of the Minority Stockholders. The Chancery Court, ruling on the parties’ cross-motions for summary judgment, granted the Minority Stockholders’ motion and denied Riverstone’s motion.