Del. Sup. Ct: Should merger price always establish fair value?

You may recall Global GT LP v Golden Telecom, Inc, in which—among many important conclusions—the Delaware Chancery Court declined to adopt an Ibbotson’s historic equity risk premium (ERP) in favor of one closer to supply-side ERP. (For a recap of Roger Grabowski’s comments on the case, see BVWire #96-3.) Based on all the evidence and facts of the case, the Chancery Court ultimately decided that Golden Telecom’s $105 merger price fell short of its statutory fair value by more than $25, and the company appealed, claiming that in an efficient market, the court should have deferred exclusively to the merger price.

But, “there is no basis for a court, in a statutory appraisal proceeding, to conclusively, or even presumptively, defer to a merger price as indicative of ‘fair value,’” the Delaware Supreme Court held. The appraisal process is flexible, and Delaware statutes specifically require courts to consider “all relevant factors” when determining fair value. Setting the merger price as conclusive (or presumptive) evidence of fair value—even in the face of a “pristine” merger process and “wildly divergent” expert opinions—would contravene the statute and the “reasoned holdings” of precedent, the court said. It would also inappropriately shift the responsibility of determining fair value from the courts to the parties.

The court used much the same rationale to reject any “bright line” rule requiring companies to use the same transactional data during a merger process and in any subsequent appraisal proceeding. Such a rule would pay short shrift to the “fair price” valuation at the tender offer stage—which often involves synergies, the court noted, and the statutory appraisal stage—which seeks going concern “fair value.” Finally, it confirmed the Delaware Chancery’s independent valuation in all respects, finding the Vice Chancellor followed an “orderly and logical deductive process.” Read the entire case digest of Golden Telecom, Inc. v. Global GT LP, 2010 WL 5387589 (Dec. 29, 2010) in the March 2011 Business Valuation Update. The court’s opinion will be available soon at BVLaw.