12 October 2020

Delaware Supreme Court Reaffirms Import of Deal Value in Resolving Appraisal Petitions

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The Delaware Supreme Court recently reaffirmed that, absent significant market or process concerns, deal price should be a significant (if not outcome-determinative) factor in the appraisal of Delaware corporations.

In 2017, Sibayne Gold, Ltd. (Sibayne) acquired Stillwater Mining Co. (Stillwater) in a reverse triangular merger that entitled the holder of each Stillwater share to $18 of merger consideration at closing. Petitioners, former Stillwater stockholders, perfected their appraisal rights — a judicial determination of the “fair value” of their holdings — and argued that a flawed deal process made the $18 per share deal price unreliable. This included an increase in commodity prices between signing and closing that increased Stillwater’s value by nine percent.

In resolving an appraisal petition, the Court of Chancery must determine the “fair value” of the petitioner’s stock (i.e., their pro rata share of the value of the company as a going concern), exclusive of any benefit that arises from the merger (e.g., synergies). A rare feature of appraisal proceedings is that the Court has discretion to fashion the appropriate remedy based on the parties’ presentations; neither party bears the burden of proof.

In a series of relatively recent decisions (e.g., DFC, Dell, and Aruba Networks), the Delaware Supreme Court has sharpened the appraisal lens to focus on deal price, absent circumstances suggesting the process leading to that price was undeserving of that deference. Otherwise stated, recent decisions have indicated that if a deal reflects “objective indicia of reliability,” the deal price will deserve “heavy” if not “dispositive” weight. Here, the Supreme Court affirmed the trial court’s finding that the deal price reflected fair value due to five factors:  (i) the transaction was at arm’s length with a third party; (ii) the board of directors was not subject to any meaningful conflicts; (iii) the buyer completed a diligence process; (iv) the target negotiated multiple deal price increases; and (v) no bidders emerged post-signing.

The Stillwater decision provides added comfort for buyers considering the potential for post-closing appraisal claims. But that comfort comes with a caveat:  buyers do not have real-time, first-hand knowledge of the target’s deal processes, thus do not have perfect vision into potential appraisal exposure. But this spate of recent decisions suggests “deal price” will be strongly indicative of fair value in many third-party, public company transactions absent transaction process flaws.