When minority stockholders feel as if they have not received fair value as the price in a "cash-out merger" transaction, they often consider seeking appraisal rights for their stock. In a recent decision, Highfields Capital, Ltd., Highfields Capital I, L.P. and Highfields Capital II, L.P. v. AXA Financial, Inc., Del. Ch. August 17, 2007, reaffirms many of the tenants of Delaware law with respect to appraisal rights and indicates that the appraisal process in Delaware remains a long and uncertain process.
In the case, Highfields sought appraisal rights with respect to the July 8, 2004 acquisition of The MONY Group, Inc. by AXA pursuant to a cash-out merger at $31 per share. After more than three years of appraisal proceedings, Vice-Chancellor Lamb, concluded that "the fair value of [Highfield's] stock on the date of the merger was $24.97 per share" (plus 6.2% interest from July 8, 2004).
The Chancery Court highlighted that, under Delaware law, the determination of value in an appraisal proceeding requires:
- An examination of all factors and elements that reasonably might enter into fixing of value, "including market value, asset value, earning prospects and the nature of the enterprise that are known or susceptible of proof on the date of the merger." (Emphasis added.)
- The exclusion of anticipated synergies and other speculative elements of value arising from the transaction's consummation.
- The exclusion of any discounts for lack of marketability or illiquidity.
- The Chancery Court indicated that, in an arms-length negotiated transaction where no structural impediments existed that might have prevented a topping bid, a court may look to the transaction price (excluding any potential synergies included in that price). Chancellor Lamb arrived at fair value by giving a 75% weighting of value to the transaction price less synergies and a 25% weighting to a sum-of-the-parts analysis (which was based on a combination of discounted cash flows and comparable companies analyses).
The lessons to be learned from Highfields are that a Delaware appraisal proceeding may take a substantial amount of time and that, in the end, the results are unpredictable. One thing that can be predicted, however, is that in the case of an arms-length negotiated transaction with low barriers to competing bids and/or a sale conducted by a fair action process, the transaction price will likely be accorded some deference (and anticipated synergies or so-called "pro forma" results will be disregarded lightly). Therefore, we would recommend that minority investors who feel they are being denied fair value in a transaction take action prior to the consummation of such transaction (such as by opposing the transaction and/or proposing superior alternatives). An investor should not assume full redress will be available in, and should not place heavy reliance on, a potentially costly and cumbersome appraisal proceeding.
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