United States: Appraisal Update: Unaffected Market Price Makes A Comeback

After the Delaware Supreme Court's recent Aruba decision,[1] many commentators predicted that, going forward, the Court of Chancery would not rely on the target's unaffected market trading price to determine fair value in appraisal cases, other than as a "check" on other valuation methodologies. It may therefore come as a surprise that in a decision issued last Friday, the Court of Chancery determined fair value to be equal to the target's unaffected trading price. See In re: Appraisal of Jarden Corporation, Consolidated C.A. No. 12456-VCS (Del. Ch. July 19, 2019). Although still subject to appeal, this decision is also notable because the fair value determination came out 18% below the deal price despite the petitioners having some success in attacking the target board's sale process, which involved no pre- or post-signing market check.

The Decision

This case involves the acquisition of Jarden Corporation ("Jarden"), a consumer products company holding a diversified portfolio of over 120 brands, by Newell Rubbermaid, Inc. ("Newell") on April 15, 2016. At closing, the non-dissenting stockholders of Jarden received cash and Newell stock worth $59.21. Petitioners, who acquired almost 2.5 million shares of Jarden stock after the deal was announced, instead elected to seek statutory appraisal of their shares.

In his post-trial opinion, Vice Chancellor Slights noted that the Supreme Court's recent Aruba decision had reversed the trial court for its reliance on the unaffected market price and directed that judgment be entered using the deal-price-less-synergies approach instead. However, Vice Chancellor Slights emphasized that the appraisal statute's guidance to consider "all relevant factors" means each case is decided on its own record, comprised of the evidence (and financial expert testimony) presented by the parties, and not based on the record (or rulings) of prior appraisal cases.

On the facts of this case, the Court was not convinced that the deal-price-less-synergies approach was reliable for two reasons. First, the Court found "flaws" in the Jarden board's sale process that arguably may have impacted the reliability of the deal price as an indicator of fair value. Although the Court acknowledged "there was no need for a full-blown auction of Jarden," it noted there was no pre- or post-closing market check, and there was evidence that Jarden's executive chairman, who negotiated the deal in large part without the involvement of the full board, "may well have set an artificial ceiling on what Newell was willing to pay."[2] Second, although the Court found credible evidence that the parties anticipated substantial synergies in connection with the merger, there was conflicting evidence on the more difficult question of how much of the value of those synergies was ceded by the buyer to the target stockholders in the deal price. The Court determined that this evidence was in "equipoise" and raised more questions than it answered.

In contrast, and again unlike in Aruba, the Court found the unaffected market price to be a reliable indicator of fair value on the facts of this case. The Court first found that the market for Jarden's stock was efficient based on testimony by the company's expert, who looked at factors such as Jarden's market capitalization, trading volume, bid-ask spread, number of analysts, and event studies. The Court rejected the petitioners' argument that the unaffected market price was unreliable because the market was unaware of material facts about Jarden's standalone prospects. Notably, the Court dismissed the materiality of the projections Jarden's management prepared in connection with the merger, which were not disclosed until after the deal was announced (in Jarden's proxy), largely based on an event study by the company's expert showing that the buyer's stock declined when such projections were disclosed (noting it should have climbed if the market believed those projections showed Jarden had previously been undervalued, as petitioners claimed). And although there was a gap between the date on which the unaffected price was calculated and the closing (which is the valuation date for purposes of a statutory appraisal), the Court found that, if anything, Jarden's fair value was declining in that period.

Finally, the Court considered the parties' experts' competing DCF analyses, which the Court noted produced valuations that were "solar systems apart."[3] The Court painstakingly went through the experts' opinions on each input and calculated its own independent DCF analysis that came to $48.13 per share, which the Court found corroborated the reliability of the unaffected market price as the best evidence of fair value.

Key Takeaways

  • Unaffected market price is not dead. Whatever practitioners may have believed after the Supreme Court's Aruba decision, Jarden demonstrates that the unaffected market price remains a viable valuation approach in appraisal cases, at least pending an appeal in this case. But, as Vice Chancellor Slights emphasized, the reliability of that approach is highly dependent on the facts of each case.
  • The deal-price-less-synergies approach presents difficult issues. Despite the Supreme Court's express endorsement of the deal-price-less-synergies approach in Aruba, the Court in this case struggled with determining how much of the value of expected synergies was included in the deal price, if any. But, again, this is a case-specific inquiry, and the facts (and expert testimony) of other cases may be more clear.
  • Every appraisal case is different. The Court notably downplayed the view that the Delaware Supreme Court had, through its recent decisions in Dell, DFC, and Aruba, imposed a particular valuation approach to be applied in future appraisal cases. Rather, Vice Chancellor Slights said his "takeaway" from those decisions was that the Court of Chancery must "explain" its fair value calculation "in a manner that is grounded in the record before it" (and not based on the record of other cases).[4] That being said, the Court acknowledged the Supreme Court had mandated a "frame of reference" for such cases that requires the Court to at least consider market evidence, such as the deal price or unaffected market price, before considering other valuation methodologies like a DCF or comparable companies analysis.[5]
  • Buyers of public companies face reduced appraisal risk. Although Dell and DFC emphasized the importance of having a robust sale process for reducing appraisal risk, as we have previously discussed on this blog ( here), Jarden shows that, even without a market check and an arguably "flaw[ed]" sale process by the target board, fair value of a public target may still be materially below the deal price. That is particularly true for deals involving a substantial premium above the unaffected price (and substantial expected synergies).

Footnotes

[1] Verition P'rs Master Fund Ltd. v. Aruba Networks, Inc., 2019 WL 1614026 (Del. Apr. 16, 2019).

[2] Aruba, slip op. at 64-65.

[3] Aruba, slip op. at 8. The Court said it would unseal the expert reports at the close of the case, noting "[p]erhaps the legal and business academies will find interesting, and worthy of study and classroom discussion, how two such well-credentialed experts in their fields reached such wildly divergent conclusions regarding the fair value of the same company as of the same date." Id. at 60 n.286. Interestingly, 87% of the difference between the two experts' DCF analyses was attributable to just one input—the assumed investment rate in the terminal period. The Court also considered but placed no weight on the petitioners' expert's comparable companies approach because the expert failed to show the purported peer companies were true peers.

[4] Id. at 4.

[5] Id. at 3-4.

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.

Authors
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
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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.

Disclaimer

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.

General

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