M&A Law
Delaware Court of Chancery Disregards Negotiated Deal Price Due to Flawed Sales Process
By Michael Caine
In a recent opinion, the Delaware Court of Chancery (the “Court”) chose not to rely on the negotiated deal price as an estimate of fair value of a target company’s shares, choosing instead to rely on its own discount flow analysis. BlueBlade Capital Opportunities LLC, stockholders of Norcraft Companies, Inc. (“Norcraft”), sought appraisal of their shares following an acquisition of Norcraft. The Court did not rely on a Delaware Supreme Court decision, which held deal price is the most reliable indicator of fair value. The Court reasoned there were significant flaws in the sales process, including a shortened go-shop period, and therefore, the negotiated deal price was “not a reliable indicator of Norcraft’s fair value” as of the merger date. As a result, the Court conducted its own discount flow analysis, finding that the value of Norcraft at the time of the merger was approximately 2.5% above the negotiation deal price. It should be noted, however, that a robust sales process alone may not provide the best indicator of fair value as it is unclear how transaction synergies may impact the Court’s calculation of fair value.
A Surviving Corporation Cannot Avoid a Contractual Claim Post Merger
By Michael Caine
The Delaware Chancery Court (the “Court”) ordered Allconnect Inc. (“Allconnect”) to pay $5,000,000 to QC Holdings Inc. (“QC”) in connection with a stock repurchase. Pursuant to a put agreement, QC exercised its right to cause Allconnect to repurchase shares of QC’s common stock. While QC awaited payment for the put shares, Allconnect participated in a merger transaction in which it was the surviving entity. According to Allconnect, the obligation to pay the put price was dependent on conditions that were not satisfied by the redemption date, prior to the merger, and therefore, the obligation to pay the put price extinguished. However, the Court disagreed, finding QC transferred the put shares to Allconnect before the merger, and from that point on, QC held a contractual redemption right that survived the merger. Relying on Section 259 of the Delaware General Corporate Law, the Court found that Allconnect remained bound by the put agreement post-merger because a contractual claim against a constituent corporation survives a merger as a claim against the surviving entity.
Sinclair and Tribune File Counter-Suits in Wake of Merger Fallout
By Cooper Overcash
On August 9th, Tribune Media (“Tribune”) announced that it is not only exercising its option to terminate its agreement to be acquired by Sinclair Broadcast Group (“Sinclair”), but that it is also suing Sinclair for breach of contract. Specifically, Tribune asserts that Sinclair failed to meet its contractual duty to make reasonable efforts to obtain the regulatory approval required for the transaction to be completed. Remarking on the break-up, Tribune’s CEO Peter Kern stated, “[u]nfortunately, Sinclair chose to follow a regulatory strategy reflecting its own self-interest, rather than its contractual obligations.” This break-up and lawsuit comes on the heels of a less than favorable ruling by the Federal Communications Commission (“FCC”). In July, the FCC (in light of concerns related to Sinclair’s conduct throughout the regulatory approval process) handed down a ruling requiring the potential acquisition to endure a “regulatory hearing”—effectively sentencing the deal to a life in administrative purgatory. Tribune is suing Sinclair for damages totaling $1 billion, which Tribune asserts is equal to the lost premium Tribune shareholders would have enjoyed had the transaction been completed.
Sinclair responded to Tribune’s lawsuit by filing a lawsuit of its own. On August 29th Sinclair filed a counter-lawsuit—asserting that Tribune, not Sinclair, was the delinquent party in under the now-terminated agreement. In its complaint, Sinclair claims that Tribune did not do everything in its power to ensure that the transaction was completed. Sinclair is suing Tribune for damages in an amount yet to be determined.
Delaware Court of Chancery Unclear Regarding Valuation of Synergies
By Cooper Overcash
On July 30th, The Delaware Court of Chancery (“Chancery Court”) re-addressed the issue of how to properly calculate the “fair value” of shares in the context of business transactions that involve synergies. Earlier this year, in February, the Chancery Court addressed this issue and held that the most appropriate and best measure of “fair value” when synergies are in question is to look at the pre-transaction trading price of the shares. See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. In Aruba, the Chancery Court concluded that one should not consider the price paid per share as part of the business transaction (“deal price”), as such price includes a premium for unquantifiable expected business synergies. In addition, the Chancery Court did not want to enter into the valuation business and attempt to place a dollar value on the expected business synergies with the hopes of using such price to “back-in to” an accurate pre-transaction price per share.
The valuation method laid out in Aruba did not last for long. In July, the Chancery Court changed course and assumed the previously abdicated responsibility of valuing synergies. In In Re Appraisal of Solera Holdings, Inc., the Chancery Court held that “fair value” should be measured as the deal price less the premium paid for expected synergies—a departure from their framework in Aruba. Citing convincing evidence presented by respondents (and not rebutted by petitioners) regarding the correct value of expected synergies, the Chancery Court was comfortable calculating fair value in this manner.
The Chancery Court has swayed from the objective to the subjective and in doing so, invited courtroom battles over the value of synergies. It is unclear when, if at all, the Delaware Supreme Court will address these seemingly divergent opinions and provide guidance as to how “fair value” should, and will be calculated when synergies are at issue.
Unknown Technical Defects Not Enough to Unwind $170 Million Merger
By Casey Kidwell
In an 83-page opinion, the Delaware Court of Chancery (the “Court”) rejected claims that a controlling shareholder (“Glenhill”) and its board of directors (the “Board”) pushed through a series of self-dealing transactions prior to a $170 million merger. Minority shareholders (“Plaintiffs”) of Design Within Reach Inc. (“DWR”) presented evidence of a number of defective corporate actions in their attempt to invalidate DWR’s merger with Herman Miller Inc. (“HM”). The Court ruled the defective corporate actions were not enough to invalidate the merger because the “defendants had nothing to gain but much to lose by the failures, and [HM] took action to fix the defective corporate acts promptly after they came to its attention. Plaintiffs, on the other hand, seek an inequitable windfall for technical defects that DWR, the Board, Glenhill, and [HM] had no idea occurred until after the [m]erger.”