A Delaware Supreme Court ruling that only slightly raised the value of ArubaNetworks Inc. share price after it merged with Hewlett-Packard Co. raises new questions for shareholders about the profitability of appraisal cases in Delaware, court watchers say.
The ruling seems to indicate that appraisal arbitrage—investors suing for a better share price after a deal is done—is a “dead end” in arms’ length deals, said Lawrence Hamermesh, a law professor at Widener University.
The ultimate lesson is that “appraisal is going to be driven by market measures and not expert testimony,” he said April 17. In the past, shareholders have argued for higher share prices based on complex calculations rather than using just the market value of a stock.
In an opinion April 16, the Delaware Supreme Court reversed a decision by the Delaware Court of Chancery, which had determined the proper price of Aruba was $17.13 per share, the thirty-day average market price before the transaction was announced. Delaware’s highest court instead pegged the value at $19.10 per share, the deal price minus synergies.
Although the award was $2 more than what the Chancery Court decided, it was still lower than the deal price and far less than what shareholders had sought.
Hewlett Packard acquired Aruba on May 18, 2015 for an agreed upon price of $24.67 per share. Connecticut-based investment firm Verition Partners Master Fund Ltd. and an affiliate argued the fair value of the Aruba shares was really $32.57 and had asked the court for an appraisal under Delaware law.
The decision reinforces a trend in appraisal decisions that started with the Delaware Supreme Court’s Aug. 1, 2017 decision in DFC Global, and its Dec. 14, 2017 decision Dell, Inc. which both awarded lower appraisals than sought and emphasized the importance of market.
“With its holdings in DFC, Dell, and now Aruba, the court has shown itself to be ever more hostile to frivolous appraisal claims seeking awards in excess of the deal price,” said Keith Sharfman, professor of law at St. John’s University. “Going forward, the possibility of such an adverse outcome for dissenters should deter frivolous appraisal litigation in future cases.”
Importantly, the court explicitly agreed with the lower court that the deal price constitutes a “ceiling” on fair value for properly shopped deals negotiated at arms’ length and without conflicts or fraud, Sharfman added.
Yet the court’s decision, which narrowly applied to the facts in the Aruba case, raises questions because it doesn’t settle the dispute on how much weight to give the market price.
While the decision itself does not forbid the use of fair market prices, it raises questions about when and where to use them, or what kind of evidence is needed, Hamermesh said.
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