April 17, 2019

Appraisal: Delaware Supreme Court Reverses Aruba Networks

Yesterday, in Verition Partners v. Aruba Networks (Del. 4/19), the Delaware Supreme Court reversed the Chancery Court’s ruling that the fair value of Aruba’s stock for appraisal purposes was its unaffected market price prior to its acquisition by Hewlett-Packard.

In an at times sharply worded per curiam opinion, the Court concluded that Vice Chancellor Laster abused his discretion by holding that the pre-deal market price of Aruba’s stock represented its fair value – a conclusion he reached despite the fact that neither of the parties argued for that approach, and even though it resulted in a appraised value that was lower than the price that Aruba itself advocated.  Here’s an excerpt:

Applying the going-concern standard, we hold that the Court of Chancery abused its discretion in using Aruba’s “unaffected market price” because it did so on the inapt theory that it needed to make an additional deduction from the deal price for unspecified “reduced agency costs.” It appears to us that the Court of Chancery would have given weight to the deal price minus synergies absent its view that it also had to deduct unspecified agency costs to adhere to Cavalier Oil’s going-concern standard. As Verition points out, this aspect of the decision is not grounded in the record.

Judging by the law review articles cited by the Court of Chancery, the theory underlying the court’s decision appears to be that the acquisition would reduce agency costs essentially because the resulting consolidation of ownership and control would align the interests of Aruba’s managers and its public stockholders. In other words, the theory goes, replacing a dispersed group of owners with a concentrated group of owners can be expected to add value because the new owners are more capable of making sure management isn’t shirking or diverting the company’s profits, and that added value must be excluded under § 262 as “arising from the accomplishment or expectation of the merger or consolidation.”

However, unlike a private equity deal, the merger at issue in this case would not replace Aruba’s public stockholders with a concentrated group of owners; rather, it would swap out one set of public stockholders for another: HP’s.

The price HP paid in the merger was $24.67 per share of Aruba stock. The Chancery Court’s approach resulted in a fair value of $17.13 per share.  Consistent with its rulings in Dell and DFC Global and Delaware’s general trend toward giving great weight to the deal price, the Supreme Court held that the fair value of Aruba’s stock for appraisal purposes was $19.10 per share, which reflected “the deal price minus the portion of synergies left with the seller,” as estimated by Aruba.

Vice Chancellor Laster’s market price  approach to Aruba’s valuation raised eyebrows at the time, with some suggesting that his opinion was motivated by frustration with the Delaware Supreme Court’s decision to overturn his ruling in the Dell case. The plaintiff specifically raised this concern in its motion for reconsideration – and VC Laster summarily rejected it.

This argument received a much more sympathetic hearing at the Supreme Court. The Court’s opinion pointed out that the Vice Chancellor sent a letter requested supplemental briefing on the market for Aruba’s stock “in part because he ‘learned how many errors [he] made in the Dell matter.'” The Court then dropped the hammer:

By relying exclusively on the thirty-day average market price, the Court of Chancery not only abused its discretion by double counting agency costs but also injected due process and fairness problems into the proceedings. As Verition argued, the Vice Chancellor’s desire not to award deal price minus synergies could be seen—in light of his letter to the parties and the overall tone of his opinion and reargument decision—as a results-oriented move to generate an odd result compelled by his personal frustration at being reversed in Dell.

The Court went on to say that while it took the Vice Chancellor at his word in the motion for reargument opinion when he denied this was the case, it was given pause by the “evident plausibility” of the plaintiff’s concerns & the procedural and substantive implications of his decision to raise the market price approach so late in the proceedings.

John Jenkins