The Situation: Stockholders sought appraisal—judicial determination of the "fair value" of their stock—in connection with a merger. The Delaware Court of Chancery found that the fair value was equal to the company's unaffected market price, which was less than the deal price. The Delaware Supreme Court affirmed. Fir Tree Value Master Fund, LP v. Jarden Corp., 2020 WL 3885166 (Del. July 8, 2020).
The Result: The unaffected market price may be the most reliable indicator of fair value where a public company's stock trades in an informationally efficient market.
Looking Ahead: Jarden makes clear the deal price does not operate as a valuation floor. Because stockholders seeking appraisal agree to accept the judicially determined value of their shares, they risk that the court may determine that fair value is below the deal price—and perhaps substantially so.
Unaffected Market Price as Fair Value
This statutory appraisal action arose out of the acquisition of Jarden by Newell, both large consumer products companies, for $59.21 per share. Certain of Jarden's large stockholders refused to accept the deal price, asserting that it undervalued Jarden. They sought appraisal and, in so doing, agreed to accept the judicially determined "fair value" of their shares, whether the court found that to be higher than, equal to, or lower than the deal price itself.
The stockholders offered competing valuation methods and related expert testimony. The Court of Chancery ultimately determined that Jarden's fair value was equal to its unaffected market price of $48.31—that is, the market price on the last day Jarden's stock traded without being affected by news of the merger negotiations, which leaked about a week before the deal was announced.
The court found that it was reasonable to rely exclusively on Jarden's unaffected market price because Jarden's stock traded in a semi-strong efficient market, which quickly integrated all publicly available information into Jarden's stock price. The court also concluded, based on an event study performed by Jarden's expert, that the stockholders had failed to prove that the market lacked material, nonpublic information about Jarden's financial prospects.
On appeal, the Delaware Supreme Court affirmed the Court of Chancery's decision and its findings. The stockholders argued that, under the Supreme Court's earlier Aruba decision, the fair value of a corporation's stock is not its market price. The Supreme Court rejected this argument, noting that the Aruba court recognized that the market price of a stock trading in an efficient market should be given weight because it "is an important indicator of its economic value." The Court also made clear that Aruba and its other recent appraisal decisions did not rule out any recognized valuation method to support the fair value determination in a statutory appraisal action, including the unaffected market price, as long as the valuation method was supported by evidence in the record.
Effect of Jarden
To the extent there was lingering uncertainty after Aruba, the Delaware Supreme Court's Jarden decision makes clear that unaffected market price may be used as the primary indicator of fair value in statutory appraisal actions where the stock trades in an informationally efficient market.
The Supreme Court acknowledged that the unaffected market price is not always a better indicator of fair value than the deal price because, during deal negotiations, a buyer typically has an informational advantage over third parties. Nor does the deal price set a valuation "floor" where it results from a flawed sales process. The Supreme Court rejected the argument that Jarden would have received a higher deal price but for flaws in the sales process relating to Jarden's negotiation of the merger, and thus declined to find error in the Court of Chancery's determination that fair value was below the deal price, which reflected significant synergies.
The Jarden decision thus increases the risk for stockholders seeking appraisal, as they may ultimately be awarded a fair value for their shares that is well below the deal price.
Jones Day represented Newell in its acquisition of Jarden.
Three Key Takeaways
- Unaffected market price may be used to determine the fair value of a corporation's stock where the stock trades in an informationally efficient market.
- Deal price does not act as a floor for fair value in statutory appraisal actions where synergies would be realized in the deal and were captured in the deal price, and the deal price-minus-synergies can be used to corroborate the unaffected market price.
- The Delaware Supreme Court has not ruled out using any recognized valuation method to support fair value in its recent appraisal decisions.
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