DealLawyers.com Blog

February 4, 2022

Appraisal: Chancery Addresses Fair Value Change Between Signing & Closing

Delaware law requires a court dealing with an appraisal action to determine the fair value of a share as of the effective time of a merger. In BCIM Strategic Value Master Fund LP v. HFF, Inc., (Del. Ch.; 2/22), Vice Chancellor Laster focused on how to adjust for an increase in the target’s value between signing and closing that resulted from improved performance when the deal price effectively capped the market’s reaction to that improvement.

After an extended discussion of the background of the transaction and the process by which it was approved, the Vice Chancellor held that the adjusted deal price (i.e., deal price minus synergies) was the appropriate reference point for determining the fair value of the deal at signing. However, he concluded that the improvement in the target’s performance as evidenced by, among other things, a surprisingly positive earnings announcement between signing and closing, increased its value.

Because the upside market price of the target’s shares between signing and closing was limited by the price specified in the merger agreement, the Vice Chancellor could not look directly at a metric like the target’s unadjusted trading price. Instead, he applied an “earnings surprise regression analysis” suggested by the parties’ experts to assess the impact that the target’s improved performance would have had on the unadjusted trading price of its stock in order to generate an implied stock price on the closing date. In adopting this approach, Vice Chancellor Laster acknowledged that it was imperfect:

For one thing, it only provides an indication of the change in the Company’s value as of the Earnings Beat on April 24, 2019. The Merger closed on July 1, 2019. Using the Company’s value as of the Earnings Beat gets closer to the closing date, but does not reflect a value as of the closing date. It is nevertheless a closer measure than the adjusted deal price at signing. It is also likely to be conservative, as the Company’s operating performance continued to improve during 2019. The method is not perfect, but the perfect should not be the enemy of the good.

The court’s approach also includes an element of mixing and matching. To derive the indication of fair value at the time of signing, the court is using the adjusted deal price. To derive a measure of the post-signing change in fair value between signing and closing, the court is using metrics derived from trading prices.

There haven’t been many cases addressing changes in value between signing and closing (I blogged about one last year), but if you read this decision, I think you’re likely to agree that attempting to do that will often be a challenging and messy process.

John Jenkins