Delaware Supreme Court Underscores Trial Court’s Wide Latitude in Determining Fair Value
July 13, 2020
Types : Alerts
On July 9, 2020, the Delaware Supreme Court issued a noteworthy opinion in Fir Tree Value Master Fund LP v. Jarden Corp., C.A. No. 12456, clarifying its recent precedent on statutory appraisals. In doing so, it affirmed the Chancery Court’s valuation of Jarden Corp. stock at $48.31 per share based on the unaffected market price, notwithstanding a deal price of $59.12 per share and a flawed negotiation process. The en Banc opinion, authored by Chief Justice Seitz, approved of the Chancery Court’s reasoning and rejected two arguments on appeal that attempted to apply recent Delaware Supreme Court precedent as rigid valuation rules.
First, the Supreme Court rejected the shareholders’ contention that its 2019 decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., foreclosed as a matter of law the use of the unaffected market price in determining enterprise value. In doing so, the Supreme Court clarified the effect of its holdings in several recent cases: “In DFC, Dell, and Aruba we did not, as a matter of law, rule out any recognized financial measurement of fair value. Instead, we remained true to the appraisal statute’s command that the court consider ‘all relevant factors’ in its fair value determination…. The Vice Chancellor got the ‘takeaway’ exactly right from our recent appraisal decisions: ‘what is necessary in any particular appraisal case is for the Court of Chancery to explain its fair value calculus in a manner that is grounded in the record before it.’”
Second, the Supreme Court rejected the shareholders’ contention that the deal price should have acted as a floor for the fair value of Jarden Corp.’s stock. The Chancery Court had found flaws in the negotiation process, undermining the reliability of the deal price. Based on that finding, the shareholders argued on appeal that because (1) “DFC, Dell, and Aruba require that the court give heavy weight to the deal price,” (2) better process would have resulted in a higher deal price, and (3) Jarden Corp. failed to prove synergies, the deal price is the logical minimum fair value.
The Supreme Court acknowledged the argument had “some appeal.” “It makes sense that if a deal negotiation process is flawed, and the seller’s negotiator capped the value under what might be achieved in true arm’s length negotiations, the deal price might act as a fair value floor in the absence of synergies,” and moreover, “when the deal price is unreliable, the existence and allocation of synergies are likely more difficult to determine.”
However, by examining the record, the Supreme Court rejected the shareholder’s third premise, finding sufficient evidence of synergies and reaffirming its observation in Dell that “the court should exclude any synergies or other value expected from the merger giving rise to the appraisal proceeding itself.” Here, because the deal price was unreliable and synergies existed, the Chancery Court did not error in refusing to use the deal price as the floor for its fair value determination.
Jarden Corp. therefore makes clear that under recent Delaware Supreme Court precedent there is no bright-line prohibition against relying on the unaffected market price in determining fair value. On the contrary, the Court of Chancery has considerable latitude in selecting and weighing the methods and inputs for its calculus, so long as they are firmly supported by the record. Jarden Corp. also clarifies that, notwithstanding the heavy weight generally accorded to the deal price under recent precedent, it does not furnish a presumptive valuation floor, at least where the process was flawed but synergies were achieved. The opinion may be accessed here.