This Morris James blog identifies 7 key takeaways from 2020 Delaware appraisal decisions. The most significant of these relate to the guidance these decisions provide concerning the weight courts might assign to different valuation methodologies.
While courts typically look first to the deal price as the most reliable indicator of value, other methodologies, including unaffected market price and discounted cash flow, have also been used to determine fair value in recent decisions. This excerpt discusses the circumstances in which a court will look beyond the deal price and consider other market-based valuation approaches:
In the context of a flawed deal process for a public company, a court might assign weight to other market- based indicators, including unaffected market price and pricing from recent stock buybacks. In Fir Tree Value Master Fund LP v. Jarden Corp., the deal price was an unreliable indicator of fair value due to flaws in the deal process: A conflicted CEO had dominated the process, the board had little oversight, and there had been no presigning or post-signing market check.
In the absence of a reliable process, the Delaware Supreme Court affirmed the Court of Chancery’s use of unaffected market price to determine fair value, based on an event study as persuasive evidence that the unaffected market price had reflected all material nonpublic information.
The Supreme Court found additional support in the company’s recent stock buybacks at similar prices, rejecting the petitioner’s argument that buybacks inherently mean the company believes its stock is undervalued. The Fir Tree reasoning provides reassurance to practitioners and litigants that a flawed deal process need not render irrelevant all market-based indicators.
In addition to valuation-related topics, the blog discusses the potential unavailability of D&O insurance for appraisal claims, and the downside of a decision to prepay consideration in order to avoid pre-judgment interest.
– John Jenkins