A few months ago, in a statutory appraisal case, the Delaware Court of Chancery made news when it used the unaffected market price as the indicator of fair value. The petitioners immediately challenged the decision in a post-trial motion. In addressing the numerous attacks on its adjudication, the court explained how the decision made sense in light of the high court’s recent rulings in Dell and DFC Global, which “changed things.”
The instant dispute arose out of Hewlett-Packard’s acquisition of Aruba Networks Inc. that resulted in a deal price of $24.67 per share. As the petition for statutory appraisal progressed, the Delaware Supreme Court issued its groundbreaking decisions in Dell and DFC Global, making it clear that, when company stock is widely traded and investors have access to relevant company information, the market price is a more reliable indicator of fair value than the view of a single analyst.
‘Ridiculous’ and ‘absurd’: In adjudicating the instant case, Vice Chancellor Laster, who was the author of the original Dell decision, wrestled with the high court’s directives and found the two “most probative” indicators of fair value were the 30-day unaffected market price, which was $17.13 per share, and the deal-price-minus-synergies price, which the court determined to be $18.20. The court concluded the unaffected market price was more reliable because it was direct evidence of how the market valued Aruba as a going concern.
In their motion for reargument, the petitioners accused the vice chancellor of using their case to show “the absurdity of the literal application of certain pronouncements made by the Supreme Court in Dell and DFC to appraisal actions.” Moreover, neither Dell nor DFC Global “required the Court of Chancery to weight the supposedly ‘unaffected’ market trading price at all,” the petitioners stressed. Reliance on the unaffected market price was ‘ridiculous” and “absurd.”
“The main reason why the petitioners appear to denigrate my reliance on the unaffected market price is that it departs from this court’s traditional approach to determining fair value,” Vice Chancellor Laster noted. Typically, the court had relied on “multiple metrics, even when appraising a publicly traded company.” Indeed, the Court of Chancery used to be skeptical about the reliability of the market price as a fair value indicator, the vice chancellor said. However, in Dell and DFC Global, the Supreme Court endorsed the efficient capital markets hypothesis and its emphasis on market indicators. Judge Laster said that, if one abandons the idea that using the market price “just isn’t done, then it is hard to regard using the unaffected market price as ridiculous or absurd.” The court denied the petitioners’ motion. “At this point, the proper institutional remedy for correcting any errors lies with the senior tribunal on appeal.”
A digest of Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 Del. Ch. LEXIS 160 (May 21, 2018) (Aruba II), and the court’s opinion will be available soon at BVLaw. Subscribers may access the digest for Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 Del. Ch. LEXIS 52 (Feb. 15, 2018), and the court’s opinion now.