Topic: Valuation

Chancery Court Cites Flawed Process in its Resort to Traditional Valuation Methodology and Reliance on All Relevant Factors in a Recent Appraisal Action

By Jill B. Louis and Rashida Stevens

The Delaware Court of Chancery determined that a flawed deal process kept the merger price from being a reliable indication of value in the Blueblade Capital Opportunities LLC and Blueblade Capital Opportunities CI LLC (collectively, “Blueblade”) v. Norcraft Companies, Inc. (“Norcraft”) (C.A. No. 11184-VCS (Del. Ch. July 27, 2018)), appraisal action.

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CHANCERY COURT SETS FAIR VALUE IN APPRAISAL ACTION AT DEAL PRICE LESS SYNERGIES

By: Annette Becker and Caitlin Velasco

In In re Appraisal of Solera Holdings, Inc., C.A. No. 12080-CB (Del. Ch. July 30, 2018), the Delaware Court of Chancery, applying an adjusted deal price analysis in a statutory appraisal proceeding, determined that the fair value of the stock of Solera Holdings, Inc. (“Solera” or the “Company”) at the time of its March 2016 going-private merger transaction was $53.95 per share–the deal price less estimated synergies. The Court reached this conclusion after thoroughly examining and ultimately rejecting the use of (a) the discounted cash flow (“DCF”) analysis, proposed by seven investment funds that were former stockholders of Solera (the “Petitioners”) and the (b) the unaffected market price analysis, proposed by Solera in supplemental briefing in response to the use of such analysis in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. May 21, 2018). Read More

MEMBER ENTITLED TO FAIR VALUE OF INTEREST UPON FORCED WITHDRAWAL

By Scott E. Waxman and Annamarie C. Larson

In Domain Associates, L.L.C. et al. v. Nimesh S. Shah (C.A. No. 12921-VCL), Vice Chancellor Lastor held that, in the absence of clear language in the limited liability company agreement, a withdrawn member of a venture capital fund’s management company is entitled to the fair value of his or her member interest, not simply the amount of the member’s capital account.

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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.

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CHANCERY COURT NULLIFIES DISSOLUTION OF LIMITED LIABILITY COMPANIES FOR FAILURE TO SET ASIDE A RESERVE TO SATISFY KNOWN CLAIMS

By: Scott E. Waxman and Calvin D. Kennedy

In Kevin Capone and Steven Scheinman v. LDH Management Holdings LLC, et al., C.A. No. 11687-VCG (Del. Ch. April 25, 2018), the plaintiffs, Kevin Capone (“Capone”) and Steven Scheinman (“Scheinman”), and the defendants, LDH Management Holdings LLC (“Management Holdings”), LDHMH MM, LLC (together with Management Holdings, the “LLCs”), Castleton Commodities International LLC (f/k/a Louis Dreyfus Highbridge Energy LLC (“LDH”)) and certain members of the Board of Directors of LDH, each moved for summary judgment regarding the plaintiffs’ claim that the defendants violated Delaware law by cancelling the LLCs without setting aside a reserve for the plaintiffs’ breach of contract claims.  The court granted the plaintiffs’ motion for summary judgment and held that the defendants were aware of the plaintiffs’ non-frivolous claims for breach of contract against the LLCs and, therefore, the defendants acted in violation of Delaware law when they failed to create a reserve to cover the plaintiffs’ claims when the LLCs were dissolved.

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Chancery Court Limits Access to Books and Records Based on Stockholder’s Failure to State Purpose in Section 220 Demand

By: James S. Bruce and Taylor B. Bartholomew

In KT4 Partners LLC v. Palantir Technologies, Inc., C.A. No. 2017-0177-JRS (Del. Ch. Feb. 22, 2018), in a post-trial ruling, the Delaware Court of Chancery granted a stockholder limited rights to inspect a corporation’s books and records related to the stated purpose of investigating possible wrongdoing, but the Court denied the stockholder’s request to obtain other books and records related to the purpose of valuing its shares because its initial demand did not explicitly state a valuation purpose.

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IN STATUTORY MERGER APPRAISAL PROCEEDING, CHANCERY COURT DECLINES USE OF THE DISCOUNTED CASH FLOW ANALYSIS TO DETERMINE FAIR VALUE AND UPHOLDS DEAL PRICE AS BEST INDICATOR OF FAIR VALUE

By Annette Becker and Rikiya Thomas

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”).

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Chancery Court Dismisses Minority Stockholders’ Action Seeking Quasi-Appraisal in United Capital Corp. Buyout

By: Shoshannah Katz and Andrew Gahan

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.

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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.

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Directors’ Failure to Consider Speculative Projections in Recommending Tender Offer to Stockholders Insufficient to Plead a Claim for Breach of the Duty of Loyalty Based on Bad Faith

By: Michelle McCreery Repp and Benjamin Kendall

In In re Chelsea Therapeutics International Ltd. Stockholders Litigation, Consol. C.A. No. 9640-VCG (Del. Ch. May 20, 2016), the Delaware Chancery Court held that Plaintiffs, who alleged bad faith on the part of corporate directors based on a failure to adequately take into account speculative financial projections in evaluating the adequateness of an acquisition offer, had failed to state a claim on which relief could be granted.

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Dell Inc. Fails to Persuade Court That Merger Price was Best Evidence of its Fair Value

By: Naomi R. Ogan and Stephanie S. Liu

In In Re Appraisal of Dell, C.A. No. 9322-VCL, (Del. Ch. May 31, 2016), stockholders of Dell Inc. (“Dell”) sought appraisal of their shares in connection with Dell’s 2013 “go-private” merger. Vice Chancellor Laster of the Delaware Court of Chancery held that the fair value of the Dell’s common stock at the effective time of the merger was $17.62, approximately a 28% premium over the final merger consideration of $13.75 per share. In making its determination, the court rejected Dell’s contention that the negotiated merger consideration was the best evidence of Dell’s fair value and held that the Dell was sold for too little and that the concept of fair value under Delaware law is not equivalent to the economic concept of fair market value.

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Chancery Court Confirms Delaware’s Merger Statutes Inapplicable to Options

By Lisa Stark and Eric Jay

In Kurt Fox v. CDX Holdings, Inc. (f/k/a Caris Life Sciences, Inc.), C.A. No. 8031-VCL (Del. Ch. July 28, 2015), the Delaware Court of Chancery confirmed that Delaware’s merger statutes do not effect a statutory conversion of options at the effective time of a merger. Rather, the treatment of stock options in a merger is governed by the underlying stock option plan, which must be amended in connection with a merger if the treatment of options in the merger differs from the treatment contemplated by the plan. The Court also confirmed that a standard qualification in stock option plans, requiring a corporation’s board of directors to determine the fair market value of the option for purposes of cashing out the options, could not be satisfied by informal board action or a delegation to management or a third party.

This class action arose from a 2011 spin-off/merger transaction pursuant to which Miraca Holdings, Inc. (“Miraca”) acquired CDX Holdings, Inc. (formerly known as Caris Life Sciences, Inc.) (“Caris”) for $725 million (the “Merger”). Immediately prior to the Merger, Caris spun off two of its three subsidiaries to its stockholders (the “Spin-Off”). In the Merger, each share of Caris stock was converted into the right to receive $4.46 in cash. Each option was terminated with the right to receive the difference between $5.07 per share and the exercise price of the option, minus 8% of the total option proceeds, which were held back to fund an escrow account from which Miraca could satisfy indemnification claims brought post-closing.

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