DealLawyers.com Blog

On Monday, the Delaware Chancery Court issued a post-trial decision in HBK Master Fund LP v. Pivotal Software, Inc., an appraisal action brought by the former Class A common stockholders of Pivotal following a squeeze-out merger with VMware, Pivotal’s controlling stockholder. After admitting that “broad discretion afforded the court in these proceedings can seem perilous for a trial judge,” Chancellor McCormick took the stockholders’ comparable companies analysis and Pivotal’s DCF analysis – rejecting the three other valuation methodologies – made adjustments to both and split them down the middle. The opinion summarizes her reasons for rejecting certain valuation methodologies and accepting others:

The structure of this decision follows this hierarchy ascribed to valuation methodologies by the Delaware Supreme Court. The court first evaluates whether the deal price is necessarily a cap on fair value. After concluding that it is not, the court addresses Respondent’s argument based on the unaffected stock price of $8.30. Respondent relies on the $8.30 figure in a limited way—as context for its DCF analysis. The court gives it equally short shift, concluding that informational inefficiencies and the controller dynamic render the unaffected trading price no more than a point of reference. The court next turns to Respondent’s DCF analysis. With adjustments, that analysis results in a fair value of $14.91 per share. The court last addresses Petitioners’ comparable companies and comparable transactions analyses, concluding that the latter is unreliable but that the former is reliable with some adjustment. With adjustments, that analysis results in a fair value of $14.75 per share. Ascribing equal weight to the DCF and comparable companies analysis, the court calculates a fair value of $14.83 per share.

Concerning the claim that the fair value was capped at the deal price, Pivotal argued that because it structured the squeeze-out in conformity with the conditions laid out in MFW, the deal price should be given deference in determining fair value. Based on fact patterns from recent cases, Chancellor McCormick cited the following non-exhaustive list of objective criteria that weigh in favor of deferring to a deal price:

– whether the buyer “was an unaffiliated third party”
– whether the “seller’s board labored under any conflicts of interest”
– “the existence of robust public information” about a company’s value
– “whether the bidder conducted diligence to obtain nonpublic information about the company’s value”
– “whether the parties engaged in negotiations over the price”
– “whether the merger agreement was sufficiently open to permit bidders to emerge during the post-signing phase”

However, the opinion doesn’t address each of these in turn because:

As Petitioners rightly observe, this non-exhaustive list of objective criteria does not map neatly onto a controller squeeze-out. That is because the central justification for basing fair value on deal price under Delaware law is that the process is subject to competitive market forces. The Delaware Supreme Court decisions adopting deal price as a valuation metric involved a third-party deal subject to some “unhindered, informed, and competitive market” valuation. Unsurprisingly, no appraisal decision of a Delaware court has given weight to deal price when determining fair value in the context of a controller squeeze-out, which lack the competitive dynamics that render deal price reliable.

She further notes that, in MFW, Chancellor Strine had “identified appraisal as a safety valve to protect minority stockholders from any mischief that might result from applying the business judgment rule to controller squeeze-outs,” and appraisal rights would no longer serve that function if the court were to accept Pivotal’s MFW argument. While following MFW protections may mean a deal price is more likely to be consistent with fair value, the court must look to other valuation methods for appraisals in this context.

– Meredith Ervine