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.