This Fried Frank memo reviews recent Delaware appraisal decisions and identifies situations in which Delaware courts are likely to make awards that are lower than the deal price – as well as those in which it isn’t. The memo points out that in recent decisions, the statutory mandate to exclude value arising from the merger itself has strongly influenced the approach to valuation. However, this excerpt points out that the statutory mandate notwithstanding, there are still circumstances in which a Delaware court is likely to make an appraisal award that exceeds the deal price:
Given the new emphasis by practitioners and the Court of Chancery on the statutory mandate to exclude value arising from the merger itself, we expect that, absent legislative change with respect to the mandate or clarification by the Supreme Court, below-the-deal-price results will continue to be seen in arm’s-length merger cases—whether the court (a) views the sale process as having been robust (and thus relies on the deal price-less-synergies) (or even if the court relies on the unaffected market price) or (b) views the sale process as not having been robust (and thus relies on a DCF analysis).
We note, however, that the a below-the-deal-price result in the case of (b) is potentially “incongruous” (as Vice Chancellor Glasscock characterized the result in AOL)—because, intuitively, an appraisal result should be higher than a deal price that resulted from a deficient sale process. For this reason, when the court relies on a DCF analysis due to the sale process for an arm’s-length merger having been less than fully robust (not seriously flawed), we expect that the result typically will be reasonably close to the deal price (as it was in AOL). However, we expect that, when the court views the sale process as having been seriously flawed, the appraisal result may well be above (even significantly above) the deal price.
Because DCF analysis can produce a very wide range of results depending on the inputs selected, the memo points out that it should result in a premium to the deal price if the amount by which the price undervalues the company exceeds the value of merger synergies excluded in the DCF analysis. For that same reason, the memo says that appraisal results in non-arm’s-length merger cases generally will continue to be above the deal price.
– John Jenkins