Delaware Chancery delves into M&A price adjustment claims

BVWireIssue #142-1
July 9, 2014

At the recent NACVA conference in Las Vegas, Roger Grabowski (Duff & Phelps) urged attendees to read the Delaware Court of Chancery's opinions. Reason: They provide comprehensive discussions of BV-related technical and legal issues. Here’s the latest example:

Cost savings—a synergistic value? Readers may remember the Huff Fund case involving a dissenting shareholder and a company that owned unique entertainment assets, including the rights to “American Idol.” The Chancery rejected the appraisal experts’ reliance on discounted cash flow, guideline company, and guideline transaction analyses. Instead, it determined the fair value based on the actual merger price. That price, it said, resulted from “an arm’s-length, disinterested transaction after an adequate market canvas and auction.”

At the time, Vice Chancellor Glasscock acknowledged that certain adjustments might be necessary to reflect the value of the company as a going concern. Recently, in the same case, the court ruled on the parties' arguments for adjustments related to synergies and business opportunities not reflected in the merger price. The company claimed the price should be lowered from $5.50 per share to $5.21 per share because it contained “synergistic elements of value.” Specifically, prior to the merger, the acquirer identified some $4.6 million in cost savings it hoped to realize by converting the subject from a publicly held corporation to a privately held firm. The court declined to answer the “theoretical” question as to when, if ever, cost savings might represent excludable synergies. Instead, it found that in this case there was no evidence that the acquirer arrived at its bid based on cost savings that the subject might not have realized if it had continued as a going concern.

The petitioners wanted an upward adjustment to account for the value resulting from a post-merger acquisition and “unexploited revenue opportunities,” which, they claimed, were part of the subject’s “operative reality” at the time of the merger but whose value was not captured in the merger price.

No adjustment: According to the court, since a market-derived sales price was the method of valuation in this case, the issue was whether market participants were aware of the opportunities the acquirer and the company identified such that the merger price reflected the value of these opportunities. What was available to the acquirer was available to the market at large, the court said. Consequently, it declined to make any adjustments to the $5.50-per-share merger price.

A detailed discussion of Huff Fund Inv. P’ship v. CKx, Inc. (Huff Fund II), 2014 Del. Ch. LEXIS 82 (May 19, 2014), will appear in the August edition of Business Valuation Update; the court's opinion will be available soon at BVLaw. The earlier decision, Huff Fund Investment Partnership v. CKx, Inc., 2013 Del. Ch. LEXIS 262 (Oct. 31, 2013), is available at BVLaw.

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