Problematic process causes Chancery to use DCF as fair value indicator

BVWireIssue #186-4
March 28, 2018

dissenting shareholder
fair value, discounted cash flow (DCF), statutory appraisal, synergy

The discounted cash flow analysis is not dead yet in the Delaware Court of Chancery. Although recent high court rulings in DFC Global and Dell have directed the Court of Chancery to give great or even exclusive weight to market evidence in a statutory appraisal proceeding, the Court of Chancery recently relied on the DCF to determine fair value in the merger between Verizon and AOL. Questions about the sales process made it impossible to assign the transaction price any value, the court emphasized.

Not ‘Dell compliant’: AOL and Verizon began to discuss a deal in mid-2014. As rumors began to circulate about a possible transaction involving AOL, the company’s stock price rose and various third parties expressed interest in acquiring all or part of AOL. AOL’s board decided not to hold an auction, but the company engaged with potential bidders individually. After further negotiations with Verizon, the parties agreed to a deal at $50.00 per share in cash. The day the merger was announced, AOL’s CEO, Tim Armstrong, was asked in a TV interview why AOL did not conduct an auction. “You didn’t shop this to anyone else?” Armstrong replied: “No, I’m committed to doing the deal with Verizon.”

In adjudicating the dissenting shareholders’ appraisal petition, the Court of Chancery first asked “whether the sales process here is Dell Compliant.” To be “Dell compliant” meant potential bidders had sufficient information so that an informed sale could take place and there were no undue impediments due to the deal structure.

The Court of Chancery found that, while the market likely understood that AOL was in play, Armstrong’s professed commitment to doing a deal with Verizon in combination with certain deal protections could have turned off other potential bidders. Therefore, the court could not say that the deal price was the “best evidence of fair value.” Further, it was difficult to ascribe a non-Dell-compliant sales price any particular weight “on non-arbitrary grounds.”

In agreeing with the parties’ trial experts, the court found the DCF was the best way to value the company on the merger date.

This case presents yet another instance in which the court’s value determination came in below the deal price. The court arrived at $48.70 per share. The deal price was $50.00 per share.

A digest of In re AOL Inc., 2018 Del. Ch. LEXIS 63 (Feb. 23, 2018), and the court’s opinion will be available soon at BVLaw.

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