June 5, 2017

Appraisal: Solid Process & Dicey DCF = Merger Price

There have been some interesting developments in Delaware appraisal actions over the past few weeks. In addition to the SWS Group case that I blogged about on Friday, in In re Appraisal of PetSmart (Del. Ch.; 5/17), Vice Chancellor Slights rejected claims that the “fair value” of the dissenters’ shares should be determined by reference to the results of their expert’s discounted cash flow analysis. Instead, he concluded that the merger price represented fair value.

In reaching this conclusion, the Vice Chancellor said that the PetSmart’s sale process was “reasonably designed and properly implemented,” & that the projections underlying the plaintiffs’ DCF analysis were “fanciful.”

This Fried Frank memo says that Slights’ approach represents a trend in recent Delaware appraisals – and may have important implications for future cases:

The decision reaffirms the court’s recent trend of increased reliance on the merger price to determine appraised “fair value” when the sales process involved “meaningful competition” and the target company projections available for a discounted cash flow analysis were unreliable.

Moreover, in our view, commentary in the opinion suggests that the court may be more likely than in the past to rely on the merger price where there has been a sales process involving “meaningful competition,” even if the company projections available for a DCF analysis were reliable.

Of course, looming over all Delaware appraisal actions is the potential outcome of the DFC Global appeal.  This blog from Lowenstein’s Steve Hecht speculates that the SWS Group & PetSmart decisions could influence the Delaware Supreme Court’s assessment of that case:

These decisions might factor into the Supreme Court’s approach to the DFC Global appeal and the upcoming argument in that case on June 7, as the trial judges have again proven that they are ready and willing to peg their fair value award at — or even below — the merger price, without a mandatory Supreme Court rule that might require a merger-price determination result if the sale process proved to be sufficiently robust.

John Jenkins