By Gilbert E. Matthews, CFA
Sutter Securities Inc. (San Francisco, Calif., USA) Delaware appraisal decisions in recent years have effectively endorsed the concept that the price paid in an arm’s-length transaction is “fair value” when there has been a “robust” sales process. A series of decisions since 2013, shown in the exhibit, have arrived at appraisal values at or close to the deal price in such situations. The two 2016 Court of Chancery decisions that arrived at values above the deal price in arm’s-length transactions (Dell1 and DFC Global 2) were reversed and remanded.
In contrast, Vice Chancellor Travis Laster’s February 2018 Aruba Networks decision3 appraised the company at 69.4% of the transaction price. Given the substantial synergies that the buyer anticipated from the transaction, it was reasonable to conclude that fair value in this case was substantially lower than the negotiated price. However, it is troubling that the court based its appraisal solely on the unaffected market price:
In this case, the best evidence of Aruba’s fair value as a going concern, exclusive of any value derived from the merger, is its thirty-day average unaffected market price of $17.13 per share. I recognize that no one argued for this result. I also recognize that the resulting award is lower than Aruba’s proposed figure of $19.75 per share. That figure relied on its expert’s discounted cash flow analysis, which this decision has found unpersuasive.
The court based its valuation on the average price during the 30 days prior to a Bloomberg News article on Feb. 25, 2015, that disclosed the pending transaction.