United States: The Importance Of Merger Price And Process In Delaware Appraisal Actions

On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights.  See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015).  Vice Chancellor Noble's decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price.  AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.


AutoInfo, Inc. was a small transportation services company that provided nationwide brokerage and contract carrier services through a network of independent agents.  In August 2011, the board began shopping the Company to potential purchasers and retained Stephens Inc., an investment bank with expertise in the transportation industry, to serve as its financial advisor.  At Stephens' instruction, AutoInfo's management prepared an "aggressively optimistic" five-year financial forecast.  Preparing multi-year financial projections was a first for AutoInfo management, which "questioned how to go about a process it had never before attempted."  The Company's chief operating officer described the process as "a bit of a chuckle and a joke."

By October 2012, Comvest Partners emerged as the highest bidder at $1.26 per share.  During its due diligence, however, Comvest uncovered accounting irregularities, poor financial record keeping, and concerns over AutoInfo's ability to recruit new agents that would grow the Company's business.  As a result, Comvest lowered its offer to $0.96 per share.  After negotiations, the parties settled on a price of $1.05 per share.

Two of the Company's shareholders petitioned for an appraisal of their shares pursuant to 8 Del. C. § 262.  The petitioners' expert valued the Company at $2.60 per share based on a discounted cash flow analysis using management-prepared projections and two "comparable companies" analyses.  The Company's expert valued AutoInfo at $.0967 per share based on the $1.05 merger price and after deductions for certain merger-related savings.  The Court ultimately agreed with AutoInfo's expert that the $1.05 merger price was the best indicator of the Company's value at the time of the deal.

Takeaways and Analyses

  • The Court rejected the valuation arrived at by petitioners' expert for several reasons: (1) his DCF analysis was entitled to no weight because it relied on the highly optimistic management-prepared projections, which management acknowledged it had never done before and had no confidence in preparing; (2) the companies he used as purported "comparables" were "all significantly larger than AutoInfo," ranging "from more than twice, to more than 300 times, AutoInfo's size," notwithstanding that the increased risk associated with smaller companies contributed to AutoInfo trading well below its peers; and (3) he did not distinguish between companies using AutoInfo's agent-based business model and those using their own employees even though the market perceived the agent-based model as inferior.

    A valuation analysis is only as reliable as the inputs used.  Financial projections prepared solely for the purpose of pursuing strategic transactions are unlikely to be accorded the same weight as projections that are routinely prepared in the ordinary course of business.  In addition, companies that operate in the same industry may nonetheless be unreliable indicators of value if the market perceives them differently based on differences in business model, size or other relevant considerations.

  • The Court found that the $2.60 per share valuation offered by petitioners' expert did not accord with reality.  AutoInfo's stock had not reached as high as $1.00 in the prior two years, and the $1.05 merger price, which was the highest offer made by any bidder in the sales process, exceeded the highest price that AutoInfo's stock reached in the past five years.  The $2.60 value also failed to account for the serious issues with AutoInfo's accounting and internal controls.

    In determining fair value in appraisal proceedings, courts may test the reliability of the dissenting shareholder's claimed value by measuring it against real world factors such as the company's historical trading price, the bidding history for the company in the sales process, any deficiencies in the company's controls and processes, and the competitive realities of the industry in which the company operates.  Valuations that are meaningfully out of sync with these types of reality checks will be accorded little weight.

  • The Court seemed to have no issue with Stephens' decision, in issuing its fairness opinion, to use a multiple range below the median and mean of the range for its selected comparable companies.  While Delaware courts are typically skeptical of an expert who "chooses his own multiple in a directional variation from the median and mean that serves his client's cause," the Court recognized that AutoInfo's smaller size and riskier agent-based business model supported Stephens' decision to use a lower multiple than that applied to the Company's larger store-based peers, and, importantly, "Stephens's choice of a multiple was not a post hoc determination made during litigation, but a reasoned selection based on industry experience."

    Delaware courts have issued numerous decisions over the past few years critical of what they perceived as result-oriented financial analyses.  See In re: El Paso Pipeline Partners, L.P. Deriv. Litig., No. 7141-VCL (Del. Ch. Apr. 20, 2015); In re Rural/Metro Corp. S'holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S'holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014).  Here, although not formally opining on Stephens' fairness opinion, the Court at least suggested a situation where an advisor's discretionary decisions that skew in favor of its client's desired outcome nevertheless might be able to withstand scrutiny, namely, where the decision is supported by objective, verifiable justifications and the analysis is made outside of the litigation context.

  • The Court found that the $1.05 merger price was a reliable indicator of fair value because: (1) it was the product of an adequate process, as the board was considering a sale even before the Company's larger institutional shareholders began pressuring the board for improved performance, the Company was "'shopped quite a bit,'" and negotiations with Comvest were conducted at arm's length by an independent special committee; and (2) the "base case" DCF analysis performed by Stephens for its internal use in evaluating the deal, which was based on projections prepared by Stephens rather than the unreliable management-prepared projections, generally supported the merger price.

    "The dependability of a transaction price is only as strong as the process by which it was negotiated."  Where a dissenting shareholder has not offered any reliable analysis of comparable companies or cash flow projections, "the merger price [may be] the most reliable indicator of value," and the "Court may assign 100% weight to the negotiated price."  Directors should take care to ensure that a sales process is negotiated at arm's length, free of any self-interest or disloyalty.  A fair process will go a long way toward substantiating the reliability of the merger price as the indicator of fair value.

  • In any appraisal action, "the Court must value Petitioners' shares 'exclusive of any element of value arising from the accomplishment or expectation of the merger.'"  To that end, AutoInfo's expert adjusted his fair value opinion downward to account for "(i) public company costs that Comvest could eliminate once AutoInfo ceased trading as a public company, and (ii) executive compensation costs that Comvest planned to eliminate."  The Court declined to adjust the merger price downward to reflect this theorized cost savings because those figures were based on an internal Comvest analysis that was not subject to outside objective assessment.  The Court observed indicta that potential cost savings that an acquirer discovers in due diligence should not be subtracted from a merger price where the seller could have achieved those cost savings on its own as a stand-alone company.

    Just as dissenting shareholders are expected to come to the table with reliable fair value estimates in appraisal proceedings, any attempt by the company and its directors to obtain a downward adjustment to the appraisal value based on merger-specific value must be based on reliable analyses.  If the seller could have achieved the cost savings on its own, it does not matter that the potential for those savings were discovered by the acquirer in connection with the merger negotiations—no downward adjustment is warranted if cost savings could be achieved by the seller on its own.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.