Court of Chancery favors unaffected market price over other fair value indicators (Part 1)

BVWireIssue #202-4
July 31, 2019

shareholder dissent/oppression
expert testimony, discounted cash flow (DCF), event study, merger price, statutory appraisal, multiple, synergy, market value, comparable companies method, efficient market, unaffected market price

In a freshly minted ruling, the Delaware Court of Chancery said the unaffected market price was the most reliable indicator of fair value in a big statutory appraisal case. This “unfortunately long” decision (court’s words) followed the state Supreme Court’s recent Aruba Networks decision in which the high court rebuked the trial court for basing fair value on the market price.

The impetus for the instant shareholder action was the acquisition of Jarden Corp. by Newell Rubbermaid for cash and stock yielding a merger price of $59.21 per share. There was no auction, and the company did not reach out to other potential strategic buyers or financial sponsors. The petitioners’ trial expert found $71.35 per share was the fair value; Jarden’s (respondents’) expert said it was $48.01 per share. The unaffected market price was $48.31 per share. The court noted the valuation of the petitioners’ expert “implies that the market mispriced Jarden by over $5 billion.”

Early in his analysis, Vice Chancellor Slights noted that his “takeaway” from the high court’s recent rulings was that the trial court needed to explain its fair value determination “in a manner that is grounded in the record before it.” The court said the parties “reveled” in the requirement of the appraisal statute that the court consider “all relevant factors” and presented to the court all possible indicators of fair value, including (besides the unaffected market price) the deal-price-minus-synergies, internal company value determinations, and expert valuations based on traditional valuation methodologies (discounted cash flow and comparable companies analyses). The court felt compelled “to traverse every road the parties waived me down right to the bitter end, even if that road did not lead to the desired fair value destination.

‘Helpful’ market analysis: In support of Jarden’s argument that the unaffected stock trading price was a strong indicator of fair value, Jarden’s expert, in a “helpful chart” (court’s words), showed that the company operated in an efficient market (i.e., the company’s stock price quickly reflected publicly available information about the company). “When the market is efficient, the trading price of a company’s stock can be a proxy for fair value,” the court said. Jarden’s expert noted the stock traded on the New York Stock Exchange (NYSE), at a high volume, and had high market capitalization, leading to greater “interest in the security being analyzed.” The company had no controlling shareholder and had a high public float, meaning many stockholders were not insiders with access to nonpublic information. There was a greater likelihood the market would require information be released for public consumption.

In addition, Jarden’s expert prepared an event study that showed how the company’s stock in the two years before the merger had responded “quickly and appropriately” to earnings and other performance-related announcements. The court found the petitioners’ expert did not “persuasively rebut” Jarden’s market evidence.

The court gave little weight to the deal-price-minus-synergies, noting the sales process had serious flaws and there were unanswerable questions as to the value of synergies and which party took that value.

Stay tuned for more reporting on the court’s response to the trial experts’ traditional valuation analyses.

A digest of In re Appraisal of Jarden Corp., 2019 Del. Ch. LEXIS 271 (July 19, 2019), and the court’s opinion, will be available soon at BVLaw.

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