December 18, 2017
The Delaware Supreme Court’s recent decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. represents the latest significant opinion from Delaware courts that has contributed to the reduction in M&A litigation by underscoring that, in an efficient market, the deal price should be accorded significant—if not complete—deference in determining fair value in appraisal actions.
The Dell case stems from the 2013 buyout of Dell by a private equity firm with the support of Dell’s eponymous founder, who owned approximately 15% of the outstanding shares. After a full appraisal trial, the Court of Chancery concluded that the deal price should not be afforded any weight because it was “not the best evidence of [Dell’s] fair value.” Instead, the Court of Chancery applied its own discounted cash flow analysis, which valued Dell’s shares at approximately 30% higher than the merger consideration. The Delaware Supreme Court took issue with each of the three factors that caused the Court of Chancery to choose not to take the deal price into account:
In light of the foregoing, the Delaware Supreme Court concluded that the Court of Chancery had erred in not assigning any mathematical weight to the deal price and found that the record suggested that the deal price deserved heavy, if not dispositive, weight.
The Delaware Supreme Court’s decision in the Dell case, combined with its consistent pronouncement in the recent DFC opinion, do not represent the death knell of M&A appraisal litigation. However, we expect these cases will further temper the escalation of appraisal litigation from arbitrageurs that acquire shares after the announcement of an M&A transaction with no interest other than the speculative value of an appraisal proceeding.
The Dell and DFC decisions should also impact the manner in which appraisal proceedings are presented and tried in Delaware courts. Companies in appraisal cases should appropriately rely on market indicators (pre-transaction share price and deal price) that were unencumbered by abnormalities as the strongest indicia of fair value. In addition, companies may want to argue more aggressively that, in determining fair value, the deal price should be discounted to reflect the fact that the deal price incorporates the expectation that certain synergies will be realized—a deal-specific consideration that Delaware law excludes from the process of determining fair value. Finally, in light of the complexities of applying the methods of valuation science, judges may rely on court-appointed experts to assist the court in determining fair value where they do not otherwise defer to market indicators.
Most importantly, Dell and DFC send an unequivocal message that, in appraisal cases, Delaware courts must act consistently with the tenets of the efficient market hypothesis, and that, absent clear departures from fair play and process, the deal price should be the absolute cap in the determination of fair value.
The following Gibson Dunn lawyers assisted in preparing this client update: Barbara Becker, Meryl Young, Eduardo Gallardo, Brian Lutz, Joshua Lipshutz, Colin Davis, Daniel Alterbaum and Andrew Kaplan.
Gibson Dunn’s lawyers are available to assist with any questions you may have regarding these issues. For further information, please contact the Gibson Dunn lawyer with whom you usually work, the authors, or any of the following leaders and members of the firm’s Mergers and Acquisitions practice group:
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Michael M. Farhang – Los Angeles (+1 213-229-7005, firstname.lastname@example.org)
Joshua S. Lipshutz – Washington, D.C. (+1 202-955-8217, email@example.com)
Adam H. Offenhartz – New York (+1 212-351-3808, firstname.lastname@example.org)
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