United States: The Growing Power Of Fair Price And Process In Delaware Appraisal Actions

Last Updated: November 4 2015
Article by Jason M. Halper and Gregory Beaman

​On October 21, 2015, the Delaware Court of Chancery issued a post-trial opinion in an appraisal action in which it yet again found that the merger price was the most reliable indicator of fair value. Vice Chancellor Glasscock's opinion in Merion Capital LP v. BMC Software, Inc., No. 8900-VCG (Del. Ch. Oct. 21, 2015), underscores, yet again, the critical importance of merger price and process in Delaware appraisal actions.   In fact, as we have previously discussed, Merion is just the latest of several decisions by the Delaware Chancery Court over the past six months finding that merger price (following an arm's length, thorough and informed sales process) represented the most reliable indicator of fair value in the context of an appraisal proceeding.  See also LongPath Capital, LLC v. Ramtron Int'l Corp., No. 8094-VCP (Del. Ch. June 30, 2015) Merlin Partners LP v. AutoInfo, Inc., No. 8509-VCN (Del. Ch. Apr. 30, 2015).


In September 2013, BMC Software, Inc., then a global firm specializing in software for IT management, was taken private by a group of investment firms led by Bain Capital, LLC, at a price of $46.25/share.  Around the time of the merger, BMC's business was "stable" but confronting a number of challenges, including shrinking margins and stagnant growth in its Mainframe Service Management business as customers shifted away from mainframe computers and "high levels of competition" in its Enterprise Service Management business.  In the ordinary course of business, in or around October 2012, BMC began to create an "annual plan"—financial projections for the upcoming fiscal year that were "limited to internal use and represented optimistic goals that set a high bar for future performance."  Around the same time each year, BMC would begin to prepare "high-level three-year projections that were not as detailed as the one-year annual plan."  Consistent with management's typical approach, the projections represented optimistic forecasts that also assumed, among other things, the company would continue its pattern of making several smaller (below $300 million) acquisitions each year as a principal way to "grow and compete."  The projections also included stock based compensation expense because such compensation was "an integral part of BMC's business" and essential to retain talent

In early 2013, following disappointing quarterly financial results, the company determined to conduct a sales process and solicited bids from potential buyers.  This process culminated in BMC entering into a merger agreement on May 6, 2013 with a buyer group led by Bain Capital.  The transaction closed September 10.

At trial of the appraisal action brought by dissenting stockholders, the parties offered competing expert testimony on fair value.  The stockholders' expert relied exclusively on a DCF analysis and determined that fair value was $67.08/share, i.e., 145% of the merger price.  BMC's expert relied on a DCF analysis supported by a "reality check" reference to Wall Street analyst reports and a comparable companies analysis, ultimately concluding that fair value was $37.88/share.  The court conducted its own DCF analysis, which led it to arrive at a fair value of $48/share.  Nonetheless, taking into account "all relevant factors," as mandated by the appraisal statute, the court held that the merger price of $46.25/share was the most "persuasive indication of fair value."

Takeaways and Analysis

A court may decide not to credit an expert's modification to management projections, even where the projections admittedly are prepared on an optimistic basis, unless the expert provides reasonable grounds for the proposed adjustments.

BMC's expert, who the court ultimately found to be generally "more credible" than the stockholders' expert, reduced management's revenue projections by 5% for purposes of his DCF analysis to account for BMC having "historically fallen short of its projected revenues."  He arrived at the 5% figure by calculating the average amount by which the company failed to meet projections.  Testimony from BMC's executives confirmed that management's projections were "optimistic."  Nonetheless, the court found the expert's approach "too speculative to accurately account for that bias."  As a result, for its own DCF analysis, the court used management's "optimistic" projections without a 5% reduction.

On the other hand, the court agreed with BMC's expert's assumption that the company at some point would repatriate, and thus be taxed on, off-shore cash even though the company's Form 10-K stated "its intent to maintain cash balances overseas indefinitely."

The court reasoned that the overseas cash "represent[s] opportunity for the Company either in terms of investment or in repatriating those funds for use in the United States, which would likely trigger a taxable event."  Arguably, the court's determination on this point is inconsistent with other aspects of its approach to a DCF analysis.  It utilized management's "optimistic" revenue projections because the suggested alternative 5% reduction was too speculative, and it agreed that future M&A and stock-based compensation expenses should be deducted from free cash flow in the DCF analysis because of the company's history of incurring such costs and the likelihood it would do so in the future.  But, without suggesting an evidentiary basis to so conclude, the court determined that the company's intent regarding repatriating overseas cash would at some point change from the view expressed in the company's 10-K. 

Even where the court conducts its own DCF analysis, it is likely to find that the merger price arrived at following an arm's length, fair process is the most reliable indicator of fair value.  The court ultimately settled on the merger price as the most reliable measure of fair value, explaining that its approach was supported "where the sales process is thorough, effective, and free from any specter of self-interest or disloyalty."  The court found that BMC's sales process was fair because, among other things:

  • BMC conducted an initial sales process in mid-2012.  In July 2012, BMC began exploring potential strategic transactions and, in August 2012, the board received two non-binding indications of interest from financial buyers—Bain Capital at $45-47/share and another potential buyer (the "Alternative Buyer") at $48/share.  No expressions of interest were received from strategic buyers.  After posting positive quarterly results, BMC rejected the proposals and stopped exploring a sale at that time.
  • BMC conducted a second public sales process in early 2013.  In January 2013, following a return to "poor financial results in the third quarter," it again decided to explore strategic options.  In connection with the 2013 sales efforts, which were covered in the media, BMC's financial advisor contacted potential financial buyers and received three expressions of interest: Bain Capital at $46-$47/share; the Alternative Buyer at $48/share; and one from a new financial buyer ("Buyer A") at $42-$44/share.  Buyer A refused to increase its bid and was not invited to conduct due diligence, and the Alternative Buyer requested a one-month extension of the deadline to make a bid, but indicated that any bid likely would be for an amount less than what Bain had offered.
  • BMC actively negotiated for better terms with the lone viable bidder.  After Bain submitted a post-due diligence offer of $45.25/share, BMC requested that Bain increase its bid to $48/share and include a 30-day go-shop period.  Bain countered at $45.75/share and agreed to the go-shop.  After "further pushback" from BMC, the buyers made their "final offer of $46.25/share."
  • The Go Shop Was Active But Unsuccessful.  The court observed that as part of the go-shop process, the company contacted seven financial and nine strategic potential buyers, but none made an offer.
  • The court had previously favorably assessed the sales process in approving a settlement in a related suit asserting breach of fiduciary duty claims.  After the merger agreement was signed, certain BMC stockholders brought Revlon-based fiduciary duty claims against the BMC board, which ultimately resulted in a court-approved settlement in April 2014.  In approving the settlement, Vice Chancellor Glasscock characterized the Revlon claims as "weak" and the sales process as "fair."

Absent direct evidence on the issue, supposed "synergistic payments" to the seller's stockholders do not necessarily need to be deducted from the merger price to arrive at fair value.

The court stated that the appraisal statute requires a determination of fair value "exclusive of any element of value arising from the accomplishment or expectation of the merger."  This provision, the court found, did not require deduction of synergies resulting from the transaction itself "where the synergies are simply those that typically accrue to a seller."  In effect, the court held, these types of synergies were reflective of the price at which the company could be sold, including "the portion of synergies that a synergistic buyer would leave with the subject company shareholders as a price for winning the deal."  Such synergies are "owned" by stockholders separate and apart from any particular transaction and should not be deducted from, and are not attributable to, the merger.  The court also recognized, however, that binding common law precedent requires that those synergies "which cannot be attributed to the corporation as a going concern" must be deducted in order to value the business as an "independent going concern."

As an example, the court posited a situation where a buyer holds a patent on a bow and then acquires the seller, which holds a patent on arrows.  The buyer's bow patent may make it value the seller more highly that the overall market, but that value "forms no part of the property held by the stockholders of [seller], pre-merger," and would have to be deducted from the deal price (if that were the measure of fair value) in order to establish statutory fair value.  On the other hand, according to the court, tax or other cost savings achievable by any acquirer taking the company private is not "value arising from the merger" and thus "logically" should not need to be deducted under the terms of the statute (although the court noted that under applicable case law, such a deduction may nonetheless be required).

In this case, the court refused to reduce the merger price because of a lack of evidence sufficient to show the portion of deal value attributable to synergies.  The court rejected BMC's argument, based on testimony from a Bain principal, that Bain would have been unwilling to offer the merger price had it not anticipated receiving tax and other cost savings by taking the company private.  Such evidence merely reflected Bain's internal analysis and did not purport, and therefore was insufficient, to establish BMC's fair value exclusive of deal-related synergies.  Presumably, such a showing could only be made by expert or other competent evidence establishing fair value excluding such efficiencies.

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.

Events from this Firm
21 Sep 2018, Conference, Florida, United States

Employment partner, Michael Weil will be participating in The Intellectual Property Law Institute’s 2018 Conference.

26 Sep 2018, Conference, New York, United States

Employment Partner, Mandy Perry and Chair of Orrick's Global Employment Law Practice, Mike Delikat will be participating in the Global Business Protections 2018: International Restrictive Covenants and Confidential Information Conference.

26 Sep 2018, Seminar, Tokyo, Japan

Orrick’s Global Japan Practice is hosting a series of “Orrick Library” seminars to explore legal issues in various fields in Japan as well as the United States, Asia and Europe

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
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
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions