Appraisal litigation in Delaware has been a wild ride in recent years, with approaches to valuation & decisions about “fair value” that often seem unpredictable. This Skadden memo reviews recent cases & tries to sort things out. It looks at decisions that used the merger price as the starting point, as well as those that used a DCF analysis – and identifies factors influencing the Chancery Court’s approach to value. Here are some of the key conclusions:
– Even a well-run sales process does not guarantee the use of the merger price as the basis for a determination of fair value.
– Certain transaction dynamics & structures, including LBO/MBO transactions such as in the Dell case, may involve particular risks in the appraisal context.
– If the court rejects the merger price in its determination of fair value, it likely will rely on a discounted cash flow and consider the projections and valuations used by the parties – including, for example, the internal rate of return calculations of an LBO sponsor or MBO group.
– A discounted cash flow valuation based on management projections may result in fair value determinations higher than the merger price.
– John Jenkins