Court Rulings Have Big Impact on Fair Value
BCIM Strategic Value Master Fund, LP, v HFF, Inc. and In Re Appraisal of Regal Entertainment Group
The Court of Chancery in Delaware, in two cases in 2021 and 2022, has increased the deal-price-less-synergies valuation due to a change in the value between the signing and closing. Both cases relied on expert testimony to assist in determining the fair values. A handful of prior cases have generally declined to adjust for this issue.
In 2021, In re Appraisal of Regal Entertainment Group,1 the court determined the deal price ($23.00) less synergies for a fair value of $19.23. Experts for both parties agreed that the reduction in corporate tax rates called for an increase in the deal price. The court added $4.37 to the fair value for a final fair value of $23.60.
In 2022, the Chancery waded into this process in another case, BCIM Strategic Value Master Fund, LP v. HFF, Inc.2 In this case, it adjusted the deal price less synergies of $44.29 by adding $2.30 to reflect the unexpected increase in performance between the transaction date and the closing date. This was partly a result of the corporation’s financial advisor not incorporating the value of the company’s pipeline, which suggested that the company would perform better than budgeted.
The court noted that “the Delaware Supreme Court's recent appraisal jurisprudence treats the adjusted deal price methodology as first among equals, so long as the transaction process exhibits sufficient objective indicia of reliability.” The court in BCIM agrees with that but notes that the court must determine the fair value of the company at the time of closing and indications are that the value increased by the time of closing.
As for the Regal Case, the adjustment of the tax rates was a reasonable and justifiable adjustment. However, in the BCIM case, the adjustment relates to what the court believes will happen in future operations of the company. The Chancery Court Chancellor3 (Judge) correctly notes that the court must determine the value as of the “time of closing.” While expert testimony helped to determine the value at the date of the transaction, the closing value is left to the subjective determination of the chancellor.
It appears that these new cases have added to the complexity that both sides face when a shareholder dissent suit is filed. From the standpoint of the petitioners, they run the risk of receiving a value that is less than the deal price, especially since the Delaware Supreme Court allows the reduction of the deal price by synergies. From the standpoint of the respondents, these new cases, especially the facts in BCIM, allow for an increase (and, to be fair, a decrease) in the value between the deal price and the closing value.
To sue or not to sue, that is the question! Of course the respondent is an innocent bystander in this decision, but the petitioners have a decision to make given the risks of the litigation. Stay tuned!