After the Supreme Court’s decision in Aruba Networks, most lawyers probably thought that Vice Chancellor Laster’s “unaffected market price” approach to appraisal valuation was dead & buried. Last week, Vice Chancellor Slights issued a 144-page opinion in In re: Appraisal of Jarden Corporation, (Del. Ch.; 7/19) that says the doctrine still has some life left in it.
The Jarden decision is intriguing in many respects. Not only did the Vice Chancellor reject the valuation approach that the Delaware Supreme Court so recently endorsed & adopt the exact approach that it strongly rejected, but he also waded into the subjective mire of DCF analysis to an extent that most post-Dell opinions have tried to avoid.
First, VC Slights decided that the deal price minus synergies approach endorsed in Aruba Networks was inappropriate due to flaws in the sale process that may have put an artificial cap on the price & significant uncertainties regarding the value of anticipated synergies. Instead, as this Cleary Gottlieb blog notes, the Vice Chancellor returned to the unaffected market price approach rejected by the Supreme Court:
The Court first found that the market for Jarden’s stock was efficient based on testimony by the company’s expert, who looked at factors such as Jarden’s market capitalization, trading volume, bid-ask spread, number of analysts, and event studies. The Court rejected the petitioners’ argument that the unaffected market price was unreliable because the market was unaware of material facts about Jarden’s standalone prospects.
Notably, the Court dismissed the materiality of the projections Jarden’s management prepared in connection with the merger, which were not disclosed until after the deal was announced (in Jarden’s proxy), largely based on an event study by the company’s expert showing that the buyer’s stock declined when such projections were disclosed (noting it should have climbed if the market believed those projections showed Jarden had previously been undervalued, as petitioners claimed).
And although there was a gap between the date on which the unaffected price was calculated and the closing (which is the valuation date for purposes of a statutory appraisal), the Court found that, if anything, Jarden’s fair value was declining in that period.
What about discounted cash flow analysis? Well, VC Slights took a deep dive into that valuation approach as well. Not surprisingly, the competing DCF analyses put forward by the plaintiff & defendant were “fantastically divergent,” so the Vice Chancellor conducted his own DCF analysis that supported a conclusion that the unaffected market price of Jarden’s stock represented its “fair value.”
So, for now at least, it looks like reports of the demise of the unaffected market price approach to valuation are greatly exaggerated. Over the longer term, it will be up to the Delaware Supreme Court to determine whether it’s actually alive – or just a dead man walking.
– John Jenkins