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Merger consideration, including synergies, confirmed as basis for fair value in appraisal proceeding

Merger consideration, including synergies, confirmed as basis for fair value in appraisal proceeding
Apr
2019

This paper discusses the Delaware Supreme Court’s reversal in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. in a statutory appraisal proceeding. The court reinforced its recognition of merger consideration, including synergies anticipated by the parties, as strong evidence of fair value in statutory appraisal actions.

The authors note that because agreed-upon merger consideration will continue to be considered in a company’s fair value, appraisal arbitrage will remain at reduced levels in Delaware courts.

Based on the Delaware Supreme Court’s decision, the authors identified six takeaways for practitioners to reference when considering appraisal arbitrage issues during the M&A process.

Transaction consideration can be strong evidence of fair value even in the absence of multiple bids for the target:

The authors found that courts are unlikely to question the deal price, even if there is only one bidder. This case demonstrated the court’s deference to market determinations by the parties rather than inserting the court as a secondary appraiser.

Bidders access to non-public information regarding the target supports the reliability of merger considerations as evidence of fair value:

The court reaffirmed its acceptance of the efficient capital markets hypothesis, according to the authors' interpretation of the ruling. When the market price is informed by the efforts of arms’-length buyers through the due diligence process, the court will likely defer to those valuations.

Due process and fairness concerns:

The authors noted that the lower court’s decision to use the unaffected stock price as an appropriate measure of fair value implicated due process and fairness concerns. Primarily, such valuation practices prevented the parties from researching whether the stock price was reliable evidence of fair value in an M&A deal context.

Litigants need to carefully consider which arguments to raise regarding appropriate evidence of fair value before trial or risk abandoning them:

The authors advised litigants and practitioners to consider the potential loss of credibility from arguing in favor of relying on evidence that is questionable under the circumstances. Pre-trial arguments should be carefully crafted to avoid abandonment that can be construed as a “pivot.”

Agency costs are encompassed by a calculation of synergies when two public companies merge:

In this case, Aruba did not separate its agency costs and therefore any costs were subsumed by its synergies calculation. According to the authors, dealmakers should be certain to make agency costs specific and separate from synergies.

Appraisal arbitrage in Delaware is likely to remain at reduced levels:

The Delaware Supreme Court’s decision, according to the author’s conclusion, provides a strong deterrent to commencing appraisal arbitrage proceedings. Unless there are strong persuasive reasons to doubt a merger’s consideration as not reliable evidence of value, the Court will continue to defer to the arm’s-length valuation in M&A transactions.

Full article
Delaware Supreme Court Appraised Fair Value Appraisal Opinion M&A Litigation Delaware Court of Chancery Fair Market Value Fairness Opinion Synergies
By Ellen Holloman

Ellen Holloman is a Partner in Cadwalader’s Global Litigation Group. She focuses her practice on representing financial institutions, corporations and individuals in regulatory enforcement proceedings, corporate internal investigations and related civil litigation.

 

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By Jason M. Halper

Jason Halper is a Partner at Cadwalader and Co-Chair of the firm’s Global Litigation Group. He is a recognized leader in the fields of financial services and securities law and corporate governance/M&A. 

 

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By Joshua Apfelroth

Joshua Apfelroth is a Partner in Cadwalader’s Corporate Group. His practice involves counseling clients in a broad range of complex transactional matters, including public and private mergers, acquisitions, divestitures, proxy contests, tender offers, exchange offers, spinoffs and joint ventures.

 

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By Richard M. Brand

Richard Brand is a Partner at Cadwalader and Co-Chairman of the firm's Corporate Group and a Member of the Management Committee. He is widely recognized as a leading advisor to public companies, hedge funds, private equity firms and investment banks. His experience includes M&A, takeover preparedness and defense, shareholder activism and defense, general corporate advisory work and securities offerings. 

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By Nathan Bull

Nathan Bull is a Partner at Cadwalader. He concentrates his practice on complex securities and commercial litigation in state and federal court, including many matters defending directors and officers and numerous representations involving complex financial instruments and structured products. In particular, Nathan has substantial experience representing clients in complex contractual disputes, merger litigations and bankruptcy-related proceedings, as well as class action, shareholder derivative and RICO litigations. 

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By William P. Mills

William Mills is a Partner at Cadwalader. He is Co-Chair of the firm’s Corporate Group, Co-Chair of the Health Care Industry Team and a Member of the Management Committee. ​

 

 

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About Cadwalader, Wickersham & Taft

Cadwalader, Wickersham & Taft LLP, a global law firm established in 1792, serves a diverse client base, including many of the world's leading financial institutions and corporations in more than 50 countries. The firm has earned a reputation for crafting innovative business and financial solutions and developing precedent-setting legal strategies to achieve their clients' goals. 

 

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