Appraisal is a limited statutory remedy that provides a Delaware general corporation’s stockholders, who dissent to the sufficiency of the merger price, with the right to have the Delaware Court of Chancery determine the “fair value” of their shares, 8 Del. C. Section 262. In determining fair value, the court must consider all relevant factors. While a single or multiple factors may be considered in the valuation, the court’s determination of the relevant factors must be grounded in the evidentiary record and “accepted financial principles.” In Dell and DFC, the Delaware Supreme Court declined to adopt a presumption that the merger price was reflective of fair value, but emphasized that the merger price was often a “strong indicator” of fair value, at least where the company is publicly traded and sold after a robust sales process, including a meaningful market check, unhampered by significant deal protection measures. Dell also counseled that the unaffected trading price produced by an efficient public market is often a more reliable indicator of fair value than a party’s valuation experts, who invariably tailor their valuation to client objectives in the appraisal. But if the sales process in a merger is flawed and the efficient capital markets hypothesis does not yield an unaffected trading price that is a reliable indicator of fair value, the Court of Chancery will turn to traditional valuation methodology, such as discounted cash flow, comparable companies, and comparable precedent transaction analyses, as the most reliable means to determine fair value.
In its recent decision, Blueblade Capital Opportunities v. Norcraft Companies, C.A. No. 11184-VCS (Del. Ch. July 27, 2018) (Slights, V.C.), the Court of Chancery held that there were significant flaws in the sales process leading to the merger that precluded reliance on the merger price as a reliable indicator of fair value and that the efficient markets hypothesis also did not yield an unaffected trading price reflective of fair value. In its analysis of the sales process, the court found that there was no pre-signing market check, the company was solely focused on one buyer and never expanded its market check to other potential buyers. Moreover, the company’s lead negotiator was conflicted, negotiating his future employment with the buyer and his own tax benefits in the merger while he simultaneously purported to seek the best merger price for the company and its stockholders. While the merger agreement contained a 35-day post-signing go-shop period, certain deal protection measures, such as the limited time period to value the company and make a topping bid, and unlimited buyer matching rights, rendered the sales process ineffective as a price discovery tool. Thus, the court accorded no weight to the merger price in its determination of fair value. Turning to the efficient markets hypothesis, the court noted that the company had recently completed an IPO and its stock was thinly traded because of the company’s niche market, and analyst coverage of the company’s stock was also limited. Thus, the court found that the efficient capital markets hypothesis did not yield an unaffected trading price that was a reliable indicator of fair value.
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