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 Carr v. New Enterprise Associates, Inc., C.A. No. 20170381-AGB (Del. Ch. Mar. 26, 2018), the Delaware Court of Chancery, in denying in part and granting in part a motion to dismiss, reaffirmed the principle that a controlling stockholder, when acting outside its capacity as a stockholder, cannot use the corporation to advance the controlling stockholder’s self-interest at the expense of minority stockholders. In the context of defendants’ motion to dismiss, the court found that it was reasonably conceivable that the controlling stockholder of American Cardiac Therapeutics, Inc. (“ACT”) and its conflicted board of directors had breached their duty of loyalty to ACT’s minority stockholders by approving a sale of a warrant to a third party that included an option to acquire ACT, allegedly at an unfairly low price, in order to incentivize the third party to also acquire and invest in the controlling stockholder’s other portfolio companies.
In In Re Appraisal of PetSmart, Inc., C.A. No. 10782-VCS (Del. Ch. May 26, 2017), the Delaware Court of Chancery confirmed in a statutory appraisal proceeding that the fair value of the shares of common stock of PetSmart, Inc. (“PetSmart” or the “Respondent”) at the time of its going-private merger transaction was the deal price of $83 per share. The Court reached this conclusion after thoroughly examining and ultimately rejecting the use of the discounted cash flow (“DCF”) analysis to determine fair value as proposed by a group of plaintiff former stockholders of PetSmart (the “Petitioners”).
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.
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.
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.
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.
In response to demands for appraisal of Ancestry.com shares, the Chancery Court found that the agreed upon merger price, which was greater than the price determined by the Court’s discounted cash flow analysis, represented the fair value of the shares.
On January 30, 2015, the Delaware Chancery Court in In re: Appraisal of Ancestry.com, Inc., C.A. No. 8173-VCG (Del. Ch. January 30, 2015) (Glasscock, V.C.) issued its determination as to the fair value of shares held by petitioners at the time of Ancestry’s acquisition by Permira Advisors. Ancestry stockholders received merger consideration of $32 per share; petitioners in this case sought appraisal under Section 262 of the Delaware General Corporation Law.
In an appraisal proceeding, because neither the petitioner nor the respondent has a burden of proof, the burden falls on the Court to establish fair value. The Court said that the statute requires it to consider all relevant factors, and while the agreed upon price is one of the relevant factors, the Court must go beyond that.
With respect to sale itself, the Court found Ancestry’s auction process sufficiently robust to make the price it generated a reliable and relatively untainted indicator of value. However, it also made its own discounted cash flow analysis, after dissecting discounted cash flow analyses presented by petitioners’ and Ancestry’s experts, whose valuations differed significantly. Among other things, Vice Chancellor Glasscock found the experts’ analyses problematic because they were based on projections prepared by Ancestry’s management for the purpose of selling the company and for the purpose of making it possible to obtain a fairness opinion with regard to the price a buyer was likely to pay. In the end, Vice Chancellor Glasscock came up with a discounted cash value that was slightly below the agreed upon merger price. He then ruled that the sale price (i.e., the merger price) best represented the fair value, and said his discounted cash value analysis gave him comfort that no undetected factor skewed the sale process. It is noteworthy that if the Vice Chancellor had determined that the value of the Ancestry shares was the value yielded by his discounted cash flow analysis, the petitioners would have received less than the price paid in the merger.
On July 31, 2014, the Delaware Chancery Court issued its decision in Zutrau v. Jansing, C.A. No. 7457-VCP (Del. Ch. July 31, 2014) (Parsons, V.C.), requiring the parties to recalculate the payment to which the plaintiff was entitled because her 22% minority interest in a Delaware corporation was squeezed out through a reverse split that reduced her holding to less than one full share. The plaintiff in this case, a former employee of Ice Systems, Inc., brought a derivative suit in which she challenged numerous business decisions made by Ice Systems after her employment terminated and challenged compensation and expense reimbursement payments made to the CEO, who was also the 78% stockholder and the sole director. The plaintiff also (a) asked the Court to set aside the reverse split on the ground that it was made for the improper purpose of depriving her of the ability to bring a derivative suit, or alternatively (b) to increase the sum to which she was entitled as a result of the cancellation of her 22% interest through the reverse split.
The Court did not decide whether the plaintiff no longer had standing to sue derivatively because she was no longer a stockholder when she commenced the suit, because the defendant acknowledged that if Ice Systems would have been entitled to recover sums if the plaintiff had been able to sue derivatively, the corporation’s right to recover those sums would increase the amount to which the plaintiff is entitled because of the cancellation of her stock interest, and therefore, the outcome of her suit would be the same whether or not she was permitted to sue derivatively.
In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.
Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.
This is a dispute about whether attorney-client privilege applies to certain draft documents, and whether a waiver of privilege was made with respect to certain other communications, in connection with an appraisal action. The petitioners are a number of venture capital funds seeking a determination of the fair value of their shares in ISN Software Corp. (“ISN”) following a freeze-outmerger in early 2013.
The petitioners contend that ISN has improperly claimed attorney-client privilege over certain draft documents, including draft board minutes, created by management but sent to legal counsel for review. The draft minutes in question were authored by management for meetings that legal counsel did not attend. ISN claimed privilege over the draft minutes because they were forwarded to counsel for review prior to finalization and are, according to ISN, therefore per se not discoverable. Citing its decision in Jedwab v. MGM Grand Hotels, Inc., 1986 WL 3426 (Del. Ch. Mar. 20, 1986), the Court held that this was incorrect–where drafts were not prepared by a lawyer in a setting in which they were intended to remain confidential and where attorneys did not gather the information contained therein, work-product doctrine does not shield documents from production.
The petitioners also sought to compel the production of documents reflecting otherwise-privileged communications evidencing how the ISN board arrived at its merger price. The petitioners sought to rely on the “at-issue” exception to privilege–that is, that the privileged communications are required in order to arrive at the truthful resolution of an issue injected into the litigation by a party–contending that ISN placed the merger price “at issue.” However, the Court disagreed and noted that the petitioners had adequate information sources to establish whether the merger price was indicative of fair value (including depositions of ISN managers and directors, board resolutions approving the merger agreement, and a valuation opinion obtained by the ISN board).