The Deal Price and Synergies

A bungled sales process, dumping a board member from a key investor, faulty methodologies, and lack of quantification of synergies? These all occurred in one case! In Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC,¹ the largest investor in FairXchange, Hyde Park, filed suit as a dissenting shareholder when it disagreed with the value given in FairXchange’s merger with Coinbase. Vice Chancellor Laster, of the Chancery Court of Delaware, issued the opinion in the case.  

Laster was not satisfied with the methodologies both parties used in determining the value of FairXchange for purposes of the valuation in the lawsuit. As such, in accordance with Delaware (case?) law, Laster determined the value. Noting that neither party provided an adequate methodology for determining the value, Laster fell back on the deal price of $330 million. Neither party had argued for this value, but increasingly the Chancery Court has fallen back on the deal price after two opinions at the Delaware Supreme Court adopting this position. The most notable of these opinions is In re Appraisal of Regal Entertainment Group.² Noting issues such as a faulty sales process, lack of sufficient methodologies argued by the parties, and the problems involved in valuing a startup company, Laster relied on case law and the deal price.

The Delaware Supreme Court has also determined that the deal price may be reduced by synergies in order to arrive at the fair value. That means that the dissenting shareholders generally are starting off behind when filing a shareholder dissenter suit because, all else being equal, they could receive less than the deal price. But here neither party argued for the deal price as the value and neither party presented any evidence as to the amount of the synergies. The selling shareholders, who were the de facto defendants in this case because they had indemnified the purchaser, had the burden of proving the amount of synergies. Since they did not, the Chancery Court determined the value to be the deal price. That price might have been reduced from $330 million to $310.4 million, the reduction in market value of the purchaser, Coinbase, between the merger agreement date and the closing. But, once again, the selling shareholders made no argument in that regard.

This case highlights the need to present a complete case and get it on the record.

• It is imperative to present evidence that might be probative for a decision. In this case, even though neither party considered the deal price, both parties should have presented evidence related to the deal price. This includes the quantification of synergies and the reduction of the merger consideration between the merger date and the closing date.
• The expert in a dissenter case should work with the attorney to determine the possibilities the court might consider, especially in a case like this where it is the purview of the judge and not the “experts” to determine a final value.  

Both parties were, in my opinion, vulnerable in many issues in this case. While it might not be normal procedure to present evidence in multiple scenarios, this is a case where that was clearly a possibility. The attorney and expert need to work together to present the best possible outcome for the client.

¹  Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC, 2024 Del. Ch. LEXIS 270; 2024 WL 3579932 (July 30, 2024).

² In re Appraisal of Regal Entertainment Group, 2021 Del. Ch. LEXIS 93; 2021 WL 1916364 (May 13, 2021).