March 1, 2018

Appraisal: Score One for DCF Analysis

Delaware courts have repeatedly stressed the fact-specific nature of appraisal proceedings, and they’ve just provided another example of that.  Shortly after Vice Chancellor Laster went all-in on the target’s “unaffected market price” as the proper measure of fair value in Aruba Networks, Vice Chancellor Glasscock addressed the fair value issue in In re Appraisal of AOL Inc.  (Del. Ch.; 2/18).

As this recent blog from Steve Hecht & Jonathan Kass notes, in contrast to other recent decisions, Vice Chancellor Glasscock decided that the much-abused discounted cash flow analysis produced the best measure of AOL’s fair value:

On Friday, Vice Chancellor Glasscock issued his ruling in the AOL appraisal case. The court first set out to determine whether the merger transaction was “Dell Compliant,” which the Court defined to be “[w]here information necessary for participants in the market to make a bid is widely disseminated, and where the terms of the transaction are not structurally prohibitive or unduly limiting to such market participation.”

Where those factors are present, “the trial court in its determination of fair value must take into consideration the transaction price as set by the market.”  The Court then concluded, however, that the deal process in AOL was not “Dell Compliant” and relied entirely on a discounted cash flow analysis to award petitioners $48.70, or 2.6% below merger price.

So, congrats to DCF on the big win – for the time being, it looks like you’ve avoided being appraisal’s answer to my Cleveland Browns.

It’s been an active couple of weeks in Delaware appraisal cases, with three decisions – including a summary order from the Delaware Supreme Court – signing off on different valuation approaches that pegged fair value below the merger price.  Check out this Wachtell Lipton memo for an overview of recent case law and what those decisions may mean for appraisal going forward.

John Jenkins