May 21, 2021

Appraisal: Fair Value Adjusted for Post-Signing Developments

In Aruba Networks, the Delaware Supreme Court held that Section 262(h) of the DGCL calls for an appraisal proceeding to determine the fair value of a dissenting share as of the effective date of the merger. While the fair value of a share may often be the same between the signing date and the closing date, the Chancery Court’s decision in In re Appraisal of Regal Entertainment Group, (Del. Ch.; 5/21) shows that this isn’t always the case.

In early December 2017, Regal Entertainment agreed to merge with Cineworld. The purchase price for the transaction had been agreed to in early November.  In late December 2017, Congress passed the Tax Cut and Jobs Act, which favorably impacted Regal’s value. The parties to the appraisal proceeding agreed that the petitioners were entitled to the fair value of a Regal share as of the closing date, but they differed as to whether additional incremental value associated with the change in tax law should be added to the deal price.

Cineworld argued that the fair value adjustment should be minimal because no one bid for Regal during the deal’s “go-shop” phase. Vice Chancellor Laster did not find this persuasive, noting among other things the limited number of bidders who were in a position to compete for Regal. Cineworld also argued that the deal price already included a measure of value resulting from the expectation of a lower corporate tax rate, but the Vice Chancellor held that it failed to prove this contention.

The Vice Chancellor decided that most reliable metric for determining fair value was the the deal price minus synergies plus the change in value between signing and closing. This excerpt summarizes the Court’s approach to the fair value determination:

This decision has concluded that the deal price provided a reliable indicator of the fair value of Regal at signing. This decision has determined that the Merger price included $4.26 per share of operational synergies and $2.73 per share of financial savings, for total synergies value of $6.99 per share. This decision has concluded that Cineworld shared 54% of the synergies with Regal’s stockholders, necessitating a synergy deduction of $3.77 per share. After the deduction, the adjusted deal price points to a fair value at signing of $19.23 per share. Between signing and closing, Regal’s value increased by $4.37 per share. Adding the valuation increase to the adjusted deal price results in a fair value indicator as of closing of $23.60 per share.

The original deal price was $23.00 per share, so after all of these gyrations, the plaintiff ended up with roughly 2.6% more than it would’ve gotten had it signed on for the original deal three and a half years ago.

John Jenkins