Delaware Supreme Court Clarifies the Role of Market Price in Appraisal Litigation
By Emily V. Burton, Young Conaway Stargatt & Taylor, LLP
Over the past year, multiple decisions from Delaware courts have considered the proper role for deal price to play in appraisal litigation. In re PetSmart, Inc., 2017 WL 2303599 (Del. Ch. May 26, 2017), began by holding that the merger price was the best indication of fair value where it resulted from a fair auction, and the company did not regularly prepare projections that could support a Discounted Cash Flow (DCF) analysis. In re Appraisal of SWS Grp., Inc., 2017 WL 2334852 (Del. Ch. May 30, 2017) responded four days later, rejecting the merger price as the most reliable indicia of fair value where the acquirer had a partial veto right that potentially skewed the auction process. When the Delaware Supreme Court weighed in the first time, in DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d. 346 (Del. Aug. 1, 2017), it refused to establish a presumption that the merger price was the best indication of fair value.
Closing out the year, on December 14, the Delaware Supreme Court revisited the question of the role of merger price in a statutory appraisal through its opinion in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., et al., No. 565, 2016 (Del. Dec. 14, 2017). In Dell, the court of chancery considered the market data surrounding the transaction, but elected to give it no weight in its appraisal because the court found the market to be inefficient with respect to the corporation’s stock. The supreme court reversed the court of chancery’s determination. The Delaware Supreme Court disagreed with the court of chancery’s conclusion that the market was inefficient. But the primary reason for the supreme court’s determination was that “even if it were not possible to determine the precise amount of that market data’s imperfection, as the Court of Chancery concluded,” the court of chancery should not have wholly disregarded the merger price in favor of its own DCF analysis in light of the general accuracy of the efficient market hypothesis. Thus, the supreme court remanded the case to the court of chancery with guidance to give greater consideration to the market price. Practitioners facing such issues in appraisal litigation should be keenly aware of these recent developments.