Deal Price In Arm’s-length Squeeze-out Merger Not Entitled to Deference In Appraisal Action

Deal Price In Arm’s-length Squeeze-out Merger Not Entitled to Deference In Appraisal Action

In the event of a merger, dissident shareholders are sometimes entitled to judicial appraisal of the fair value of their shares. Appraisal rights are commonly exercised by minority shareholders when they believe that the fair value of their shares exceeds the deal price.

The exercise of appraisal rights is, however, full of procedural and substantive pitfalls. As a result of a complex procedure and onerous conditions, many shareholders are unable or ineligible to exercise the right.

Moreover, even if a shareholder manages to meet the statutory requirements, proving in court that the fair value of the shares exceeds the deal price is no small feat. Even under so-called squeeze-out mergers—were a controlling majority stockholder drives the merger against a dissident minority—petitioners in an appraisal action face an uphill climb if it can be proven that an arms-length process was carried out from the start, as a recent case out of the Delaware Court of Chancery shows.

VMware, Inc. acquired Pivotal Software, Inc. for $15 per share. Former stockholders of Pivotal filed an appraisal action shortly thereafter. Relying on a comparable companies analysis and a comparable transactions analysis, the petitioners argued that the fair value of Pivotal stock at the time of the merger was $20 per share.

On the other hand, the company argued that the fair value of its shares was $12.17, based primarily on a discounted cash flow analysis. It further argued that the deal price of $15 per share provided a cap on fair value because the transaction was carried out from the start with protections to ensure an arm’s-length negotiation and process (so-called “MFW protections”). The company also pointed to the unaffected stock price of $8.30 per share to support the argument that the deal price exceeded fair value.

In what is a very interesting and informative opinion, the court found that the fair value of Pivotal’s stock was $14.83 per share, thus essentially finding that the deal price was very close to fair value.

The court reached this conclusion by ascribing equal weight to adjusted versions of the comparable companies analysis advanced by the petitioners and the DCF analysis advanced by the company. The court rejected the parties’ other valuation methodologies.

The court noted that the company’s argument concerning the deal price raised an interesting question about deal primacy under Delaware law—namely, whether the appraisal statute requires deference to the deal price in controller squeeze-outs conditioned on MFW protections. The court found that it did not. However, it noted that even though the court must measure going concern value, companies are incentivized to deploy strong procedural protections for minority stockholders, since high-value deals will be vindicated in appraisal actions, as happened in this case.