Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.
State Court (Atlantic Reporter)4/16/2019
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IN THE SUPREME COURT OF THE STATE OF DELAWARE
VERITION PARTNERS MASTER §
FUND LTD. and VERITION MULTI- § No. 368, 2018
STRATEGY MASTER FUND LTD., §
§
Petitioners Below, § Court Below: Court of Chancery
Appellants, § of the State of Delaware
§
v. § C.A. No. 11448-VCL
§
ARUBA NETWORKS, INC., §
§
Respondent Below, §
Appellee. §
Submitted: March 27, 2019
Decided: April 16, 2019
Before STRINE, Chief Justice; VALIHURA, VAUGHN, SEITZ, and
TRAYNOR, Justices; constituting the Court en Banc.
Upon appeal from the Court of Chancery. REVERSED and REMANDED.
Michael J. Barry, Esquire, Christine M. Mackintosh, Esquire (Argued), Michael T.
Manuel, Esquire, Rebecca A. Musarra, Esquire, GRANT & EISENHOFER P.A.,
Wilmington, Delaware, for Appellants, Verition Partners Master Fund Ltd. and
Verition Multi-Strategy Master Fund Ltd.
Michael P. Kelly, Esquire (Argued), Steven P. Wood, Esquire, Daniel J. Brown,
Esquire, MCCARTER & ENGLISH, LLP, Wilmington, Delaware; Marc J.
Sonnenfeld, Esquire, Karen Pieslak Pohlmann, Esquire, Laura Hughes McNally,
Esquire, MORGAN, LEWIS & BOCKIUS LLP, Philadelphia, Pennsylvania, for
Appellee, Aruba Networks, Inc.
Ned Weinberger, Esquire, Derrick Farrell, Esquire, Thomas Curry, Esquire,
LABATON SUCHAROW LLP, Wilmington, Delaware, for Amici Curiae
Professors Audra Boone, Brian Broughman, Albert Choi, Jesse Fried, Mira Ganor,
Antonio Macias, and Noah Stoffman in Support of Appellant and Reversal.
Gregory P. Williams, Esquire, RICHARDS, LAYTON & FINGER, P.A.,
Wilmington, Delaware, for Professors William J. Carney and Keith Sharfman as
Amici Curiae in Support of Appellee and Affirmance.
PER CURIAM:
In this statutory appraisal case, the Court of Chancery found that the fair value
of Aruba Networks, Inc., as defined by 8 Del. C. § 262, was $17.13 per share, which
was the thirty-day average market price at which its shares traded before the media
reported news of the transaction that gave rise to the appellants’ appraisal rights.1 In
its post-trial opinion, the Court of Chancery engaged in a wide-ranging discussion
of its view on the evolution of our State’s appraisal law and how certain recent
decisions have affected the relevance of market-based evidence to determining fair
value.2 For purposes of this appeal, we need not respond in full to the dicta and
instead focus on the key issue before us: whether the Court of Chancery abused its
discretion, based on this record, in arriving at Aruba’s thirty-day average unaffected
market price as the fair value of the appellants’ shares. Because the Court of
Chancery’s decision to use Aruba’s stock price instead of the deal price minus
synergies was rooted in an erroneous factual finding that lacked record support, we
answer that in the positive and reverse the Court of Chancery’s judgment. On
remand, the Court of Chancery shall enter a final judgment for the petitioners
awarding them $19.10 per share, which reflects the deal price minus the portion of
synergies left with the seller as estimated by the respondent in this case, Aruba.
1
Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 WL 922139, at *55 (Del. Ch.
Feb. 15, 2018).
2
See, e.g., id. at *24–33.
I.
In August 2014, Hewlett-Packard Company (“HP”), a publicly traded
company, approached Aruba, another publicly traded company, about a potential
combination. Aruba hired professionals and, in addition to negotiating with HP,
began to shop the deal. Five other logical strategic bidders were approached, but
none of them showed any interest.3 The petitioners did not argue below that private
equity bidders could compete given the synergies a combination with HP or another
strategic buyer could garner.4
After several months of negotiations between the two companies, the Aruba
board decided to accept HP’s offer of $24.67 per share. News of the deal leaked to
the press about two weeks later, causing Aruba’s stock price to jump from $18.37 to
$22.24. The next day, after the market closed, Aruba released its quarterly results,
which beat analyst expectations. Aruba’s stock price rose by 9.7% the following
day on the strength of its earnings to close at $24.81 per share, just above the deal
price.5
3
Id. at *10. The board believed that “private equity firms would not be competitive in their
potential valuations” given Aruba’s “volatile revenues and unpredictable cash flows and the
potential for synergies between Aruba’s business with a strategic acquirer.” Id. (internal quotation
marks omitted).
4
See, e.g., App. to Answering Br. at B27 (Petitioners’ Pretrial Br.).
5
Aruba, 2018 WL 922139 at *20, 27.
2
Not long after the deal leaked, both companies’ boards approved the
transaction, and Aruba and HP formally announced the merger at a price of $24.67
per share. The final merger agreement allowed for another passive market check.6
However, no superior bid emerged, and the deal closed on May 18, 2015.7
II.
On August 28, 2015, the appellants and petitioners below, Verition Partners
Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. (collectively,
“Verition”), filed this appraisal proceeding in the Court of Chancery, asking the
court to appraise the “fair value” of their shares under § 262.8 The respondent was
Aruba, albeit an Aruba now 100% controlled by HP. In its pretrial and initial post-
trial briefing, Verition maintained that Aruba’s fair value was $32.57 per share,9 and
Aruba contended that its fair value was either $19.45 per share (before trial) or
$19.75 per share (after trial).10 In its post-trial answering brief, Aruba contended
that its “deal price less synergies” value was $19.10 per share. 11 Neither party
6
Id. at *21.
7
Id. at *22.
8
Id.; 8 Del. C. § 262(a), (h).
9
App. to Answering Br. at B53 (Petitioners’ Pretrial Br.); App. to Opening Br. at A532
(Petitioners’ Post-Trial Opening Br.); id. at A696 (Petitioners’ Post-Trial Reply Br.).
10
App. to Opening Br. at A148 (Respondent’s Pretrial Br.); id. at A652 (Respondent’s Post-Trial
Answering Br.); id. at A707 (Respondent’s Post-Trial Sur-Reply Br.).
11
Id. at A630 (Respondent’s Post-Trial Answering Br.).
3
claimed that Aruba’s preannouncement stock price was the best measure of fair
value at the time of the merger.
Post-trial argument was scheduled for May 17, 2017, but the Court of
Chancery postponed the hearing “once it became clear that the Delaware Supreme
Court’s forthcoming decision in DFC [Global Corp. v. Muirfield Value Partners,
L.P.12] likely would have a significant effect on the legal landscape.” 13 After this
Court issued its opinion in DFC, the Court of Chancery allowed the parties to submit
supplemental briefing on the opinion’s implications, and the parties submitted
simultaneous briefs on September 15, 2017. Both parties continued to argue for their
preferred fair value calculation, and neither party advocated for the adoption of the
stock price, though Aruba did contend that the stock price was now “informative”
of fair value and lent support to its argument that fair value as of the time of the
merger was in the $19 to $20 per share range.14 And the parties hewed to these
positions during post-trial oral argument.
On December 14, 2017, this Court issued its opinion in Dell, Inc. v. Magnetar
Global Event Driven Master Fund Ltd,15 reversing the Court of Chancery’s appraisal
decision in that case. Six days later, the Vice Chancellor in this case—who was also
12
172 A.3d 346 (Del. 2017).
13
Aruba, 2018 WL 922139, at *23.
14
App. to Answering Br. at B59–60 (Respondent’s Supplemental Post-Trial Br. on DFC).
15
177 A.3d 1 (Del. 2017).
4
the trial judge in Dell—sent the parties a letter on his own motion. In the letter, the
Vice Chancellor requested supplemental briefing on “the market attributes of
Aruba’s stock” in part because he “learned how many errors [he] made in the Dell
matter.”16
The parties submitted simultaneous briefs in response to the Vice
Chancellor’s sua sponte request on January 26, 2018. In its brief, Aruba abandoned
deal price minus synergies as its main benchmark and argued for the first time that
its preannouncement stock price was “the single most important mark of its fair
value.”17 Accordingly, Aruba asked the Court of Chancery to award the thirty-day
unaffected market price of $17.13 per share.18 Aruba’s brief focused mainly on how
the market for its stock was efficient.
On February 15, 2018, the Court of Chancery issued its post-trial opinion
finding that the fair value under § 262 was $17.13 per share.19 In its opinion, the
Court of Chancery considered three different valuation measures: first, the
“unaffected market price” of Aruba’s stock before news of the merger leaked;
second, the deal price minus the portion of synergies left with the seller; and third,
16
App. to Answering Br. at B74–75 (Letter from the Court of Chancery to the Parties).
17
App. to Opening Br. at A1014 (Respondent’s Supplemental Post-Trial Br. on Dell).
18
Id. at A1027.
19
Aruba, 2018 WL 922139, at *1–2.
5
the two expert witnesses’ valuations, which were based primarily on discounted cash
flow (“DCF”) models.20
In weighing the valuation methodologies, the Court of Chancery gave no
weight to the parties’ DCF models. The Court of Chancery also determined, based
on its own analysis, that the appropriate deal price minus synergies value was
$18.20. In reaching that conclusion, the Court of Chancery started with an estimate
of the total amount of synergies HP expected to realize. To determine how much of
those synergies Aruba’s stockholders received in the deal price, the Court of
Chancery took the midpoint of a study suggesting that “on average, sellers collect
31% of the capitalized value of synergies, with the seller’s share varying widely
from 6% to 51%.”21 This resulted in a deal price minus synergies value of $18.20
per share, $0.90 lower than Aruba’s own estimate of deal price minus synergies.
And although the Vice Chancellor was “inclined to think that Aruba’s
representatives bargained less effectively than they might have,” “indicat[ing] that
[Aruba] obtained fewer synergies than the midpoint range and imply[ing] value
north of $18.20 per share,”22 he failed to explain why his estimate of $18.20 per
share was more reliable than Aruba’s own estimate of $19.10 per share.
20
See id. at *24–51.
21
Id. at *45.
22
Id. (emphasis added)
6
However, the Vice Chancellor did not adopt his deal price minus synergies
value, in part because he believed that his “deal-price-less-synergies figure continues
to incorporate an element of value resulting from the merger” in the form of “reduced
agency costs that result from unitary (or controlling) ownership.” 23 To remedy this,
the Vice Chancellor elected to rely exclusively on the stock price because he thought
he would need to estimate and back out these theoretical “reduced agency costs”
from the deal price to arrive at a figure that reflected Aruba’s value as a going
concern. According to the Court of Chancery, using the “unaffected market price”
of Aruba’s publicly traded shares “provide[d] a direct estimate” of that endpoint,
which led him to find the sole indicator of fair value to be that “unaffected market
price” of $17.13 per share.24 Although § 262 requires the Court of Chancery to
assess Aruba’s fair value as of “the effective date of the merger,”25 the Court of
Chancery arrived at the unaffected market price by averaging the trading price of
Aruba’s stock during the thirty days before news of the merger leaked, which was
three to four months prior to closing.
23
Id. at *54. The Vice Chancellor also cited the potential that he may have made errors in “backing
out synergies” from the deal price as a reason for rejecting that figure. Id. at *53.
24
Id. at *54. After the Court of Chancery issued its post-trial opinion, Verition moved for
reargument, which the trial court denied. The court then entered a final judgment setting the fair
value of Verition’s shares at $17.13 per share, and this appeal followed.
25
8 Del. C. § 262(h).
7
III.
We reverse the trial court’s fair value determination. Under Cavalier Oil
Corp. v. Hartnett, the Court of Chancery’s task in an appraisal case is “to value what
has been taken from the shareholder: ‘viz. his proportionate interest in a going
concern.’”26 That is, the court must value the company “as an operating entity . . .
but without regard to post-merger events or other possible business combinations.”27
Cavalier Oil draws this requirement from § 262’s command that the court determine
fair value “exclusive of any element of value arising from the accomplishment or
expectation of the merger or consolidation,”28 which this Court has interpreted as
ruling out consideration of not just the gains that the particular merger will produce,
but also the gains that might be obtained from any other merger.29 As a result, fair
value “is more properly described as the value of the company to the stockholder as
a going concern, rather than its value to a third party as an acquisition.”30 Under this
reading of § 262, the Court of Chancery must “exclude from any appraisal award the
26
564 A.2d 1137, 1144 (Del. 1989) (quoting Tri–Continental Corp. v. Battye, 74 A.2d 71, 72 (Del.
1950)).
27
Cavalier Oil, 564 A.2d at 1144; see also Dell, Inc. v. Magnetar Global Event Drive Master Fund
Ltd., 177 A.3d 1, 20–21 (Del. 2017); DFC Global Corp. v. Muirfield Value Partners, L.P., 172
A.3d 346, 367–68 (Del. 2017).
28
8 Del. C. § 262(h).
29
In re Appraisal of Solera Holdings, Inc., 2018 WL 3625644, at *1 (Del. Ch. July 30, 2018);
Highfields Capital, Ltd. v. AXA Financial, Inc., 939 A.2d 34, 60–64 (Del. Ch. 2007); Union Ill.
1995 Inv. Ltd. Partnership v. Union Fin. Grp., Ltd., 847 A.2d 340, 355–56 (Del. Ch. 2004).
30
M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).
8
amount of any value that the selling company’s shareholders would receive because
a buyer intends to operate the subject company, not as a stand-alone going concern,
but as a part of a larger enterprise, from which synergistic gains can be extracted.”31
For this reason, in cases where the Court of Chancery has used the price at which a
company is sold in a third-party transaction, it has excised a reasonable estimate of
whatever share of synergy or other value the buyer expects from changes it plans to
make to the company’s “going concern” business plan that has been included in the
purchase price as an inducement to the sale.32 No party in this proceeding argued to
us that the long-standing use of going-concern value, or its concomitant requirement
to excise synergy gains, should be revisited.
Applying the going-concern standard, we hold that the Court of Chancery
abused its discretion in using Aruba’s “unaffected market price” because it did so on
the inapt theory that it needed to make an additional deduction from the deal price
for unspecified “reduced agency costs.” It appears to us that the Court of Chancery
would have given weight to the deal price minus synergies absent its view that it also
had to deduct unspecified agency costs to adhere to Cavalier Oil’s going-concern
31
Union Ill., 874 A.2d at 356; see also Cavalier Oil, 564 A.2d at 1144–45; DFC, 172 A.3d at 368;
Dell, 177 A.3d at 21; Golden GT LP v. Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch. 2010),
aff’d, 11 A.3d 214 (Del. 2010); Highfields, 939 A.2d at 42.
32
See, e.g., Solera, 2018 WL 3625644, at *1; Union Ill., 847 A.2d at 343; Highfields, 939 A.2d at
59–61.
9
standard.33 As Verition points out, this aspect of the decision is not grounded in the
record. Judging by the law review articles cited by the Court of Chancery, the theory
underlying the court’s decision appears to be that the acquisition would reduce
agency costs essentially because the resulting consolidation of ownership and
control would align the interests of Aruba’s managers and its public stockholders.34
In other words, the theory goes, replacing a dispersed group of owners with a
concentrated group of owners can be expected to add value because the new owners
are more capable of making sure management isn’t shirking or diverting the
company’s profits, and that added value must be excluded under § 262 as “arising
from the accomplishment or expectation of the merger or consolidation.”35
However, unlike a private equity deal, the merger at issue in this case would not
replace Aruba’s public stockholders with a concentrated group of owners; rather, it
would swap out one set of public stockholders for another: HP’s.
Indeed, neither party presented any evidence to suggest that any part of the
deal price paid by HP, a strategic buyer, involved the potential for agency cost
reductions that were not already captured by its synergies estimate. Synergies do
33
The Court of Chancery identified the unspecified agency costs as one of “two significant sources
of uncertainty,” Aruba, 2018 WL 922139, at *53, the other being the imprecision of synergies
estimates.
34
Cf. Lawrence A. Hamermesh & Michael L. Wachter, The Short and Puzzling Life of the “Implicit
Minority Discount” in Delaware Appraisal Law, 156 U. PA. L. REV. 1, 33–36 (2007).
35
8 Del. C. § 262(h).
10
not just involve the benefits when, for example, two symbiotic product lines can be
sold together. They also classically involve cost reductions that arise because, for
example, a strategic buyer believes it can produce the same or greater profits with
fewer employees36—in English terms, rendering some of the existing employees
“redundant.” Private equity firms often expect to improve performance and squeeze
costs too, including by reducing “agency costs.”37 Here, the Court of Chancery’s
belief that it had to deduct for agency costs ignores the reality that HP’s synergies
case likely already priced any agency cost reductions it may have expected. In short,
the Court of Chancery acknowledged that there were estimates of the synergies
expected by HP, and the record provides no reason to believe that those estimates
omitted any other added value HP thought it could achieve because of the
combination. For this reason, Aruba itself presented a deal price minus synergies
value of $19.10 per share as one of its suggested outcomes.
As to this issue, Aruba never argued that its deal price minus synergies case
did not fully account for all the “agency cost” reductions it expected, and the Court
of Chancery’s view that some measure of agency costs had to be accounted for finds
no basis in the record. Nor does it find any basis in the corporate finance literature;
36
See ROBERT W. HOLTHAUSEN & MARK E. ZMIJEWSKI, CORPORATE VALUATION: THEORY,
EVIDENCE & PRACTICE 681 (2014).
37
See, e.g., Solera, 2018 WL 3625644, at *28; HOLTHAUSEN & ZMIJEWSKI, supra, at 612–13.
11
given that all the cost reductions HP expected as a widely held, strategic buyer were
likely to be fully accounted for by its expected synergies.38 Theory here tracks the
facts, and there was no reasonable basis to infer that Aruba was cheating itself out
of extra agency cost reductions by using only the cost reductions that were
anticipated in commercial reality. However, instead of at least awarding Verition
the deal price minus HP’s estimate of its expected synergies left with the seller,
which generated a value that was corroborated by the standalone DCF models used
by Aruba’s and HP’s boards in agreeing to the transaction,39 the Court of Chancery
gave exclusive weight to the thirty-day average unaffected market price of $17.13
per share.
In addition to believing that it had to account for unspecified agency costs, the
Court of Chancery also seemed to suggest that rote reliance on market prices was
compelled based on its reading of DFC and Dell.40 Like any human perspective, the
trial judge’s broader reading of Dell and DFC is arguable, but the trial judge’s sense
38
Compare HOLTHAUSEN & ZMIJEWSKI, supra, at 612–13 (explaining agency cost reductions as a
possible motivation for leveraged buyouts), with id. at 677–78, 681–82 (explaining value creation
in strategic M&A deals primarily in terms of synergies). See also Michael C. Jensen & William
H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,
3 J. FIN. ECON. 305, 308–10, 312–19 (1976).
39
See App. to Answering Br. at B237 (Project Aspen Preliminary Valuation Materials (Jan. 26,
2015)) (presenting a DCF valuation range for Aruba of $17.47 to $22.61, with a midpoint of
$20.04); App. to Opening Br. at A1962 (Presentation to HP’s IRB (Feb. 28, 2015)) (presenting a
standalone DCF valuation for Aruba of $19.10); Aruba, 2018 WL 922139, at *17 (noting Aruba’s
bankers estimated a DCF valuation ranging from $17.58 to $27.76, with the weighted average cost
of capital and perpetuity growth rate midpoints indicating $21.60).
40
See Aruba, 2018 WL 922139, at *51–55.
12
that those decisions somehow compelled him to make the decision he did was not
supported by any reasonable reading of those decisions or grounded in any direct
citation to them. Among other things, the trial judge seemed to find it novel that
DFC and Dell recognized that when a public company with a deep trading market is
sold at a substantial premium to the preannouncement price, after a process in which
interested buyers all had a fair and viable opportunity to bid, the deal price is a strong
indicator of fair value, as a matter of economic reality and theory. The apparent
novelty the trial judge perceived is surprising, given the long history of giving
important weight to market-tested deal prices in the Court of Chancery and this
Court, a history that long predated the trial judge’s contrary determination in Dell.41
41
See, e.g., M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999) (“A merger price
resulting from arm’s-length negotiations where there are no claims of collusion is a very strong
indication of fair value.”); Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807, at *9, 13 (Del.
Ch. Nov. 1, 2013), aff’d, 2015 WL 631586 (Del. Feb. 12, 2015) (noting the Court of Chancery has
previously relied “on the merger price itself as evidence of fair value, so long as the process leading
to the transaction is a reliable indicator of value and merger-specific value is excluded,” and
concluding that “the merger price is the most reliable indicator of value” in that case) (internal
quotation marks omitted)); Merion Capital LP v. BMC Software, Inc., 2015 WL 6164771, at *1
(Del. Ch. Oct. 21, 2015) (“I find it appropriate to look to the price generated by the market through
a thorough and vigorous sales process as the best indication of fair value under the specific facts
presented here.”); Merlin Partners LP v. AutoInfo, Inc., 2015 WL 2069417, at *17–18 (Del. Ch.
Apr. 30, 2015) (“Where, as here, the market prices a company as the result of a competitive and
fair auction, the use of alternative valuation techniques like a DCF analysis is necessarily a second-
best method to derive value.” (internal quotation marks omitted)); In re Appraisal of Ancestry.com,
Inc., 2015 WL 399726, at *23 (Del. Ch. Jan. 30, 2015) (“I find that the merger price of $32 is the
best indicator of Ancestry’s fair value as of the Merger Date.”); Highfields Capital, Ltd. v. AXA
Fin., 939 A.2d 34, 59 (Del. Ch. 2007) (“[A] court may derive fair value in a Delaware appraisal
action if the sale of the company in question resulted from an arm’s-length bargaining process
where no structural impediments existed that might prevent a topping bid.”), Montgomery Cellular
Holding Co. v. Dobler, 880 A.2d 206, 220 (Del. 2005) (“In performing its valuation, the Court of
Chancery is free to consider the price actually derived from the sale of the company being valued
13
For example, the Court of Chancery equated the view that the deal price can
serve as reliable evidence of fair value when a buyer pays the highest price, after
other logical buyers have been given access to confidential information and a fair
chance to present a superior offer, with being one that “discount[s] the importance
of competition.”42 Of course, when there is an open opportunity for many buyers to
buy and only a few bid (or even just one bids), that does not necessarily mean that
there is a failure of competition; it may just mean that the target’s value is not
sufficiently enticing to buyers to engender a bidding war above the winning price.43
. . . .”), Union Ill. 1995 Inv. Partnership v. Union Fin. Grp., Ltd., 847 A.2d 340, 364 (Del. Ch.
2004) (“I will award the value of the Merger Price net of synergies.”); Cooper v. Pabst Brewing
Co., 1993 WL 208763, at *9 (Del. Ch. June 8, 1993) (“[U]nder conventional principles of
economics, the results of the auction for Pabst might be expected to provide a reasonable indication
of Pabst’s value that this Court can consider in light of the parties’ failure to satisfactorily provide
a persuasive measure of value using other techniques.”); Van de Walle v. Unimation, Inc., 1991
WL 29303, at *17 (Del. Ch. Mar.7, 1991) (“The most persuasive evidence of the fairness of the
. . . merger price is that it was the result of arm’s-length negotiations between two independent
parties, where the seller . . . was motivated to seek the highest available price, and a diligent and
extensive canvass of the market had confirmed that no better price was available.”); Barry M.
Wertheimer, The Shareholders’ Appraisal Remedy and How Courts Determine Fair Value, 47
DUKE L. J. 613, 655 (1998) (“The best evidence of value, if available, is third-party sales value. If
such evidence is not available, there is no choice but to resort to less precise valuation
techniques.”). And our historic reliance on the deal price as a market indicator of fair value in
appraisal cases conforms to our use of market-tested prices in other analogous areas. See, e.g.,
Applebaum v. Avaya, Inc., 812 A.2d 880, 889–90 (Del. 2002) (“[O]ur jurisprudence recognizes
that in many circumstances a property interest is best valued by the amount a buyer will pay for
it.”); Poole v. N. V. Deli Maatschappij, 243 A.2d 67, 70 n.1 (Del. 1968) (defining “[f]air market
value . . . as the price which would be agreed upon by a willing seller and a willing buyer under
usual and ordinary circumstances, after consideration of all available uses and purposes, without
any compulsion upon the seller to sell or upon the buyer to buy”); State ex rel. Smith v. 0.15 Acres
of Land, More or Less, in New Castle Hundred, New Castle Cty., 169 A.2d 256, 258 (Del. 1961)
(same); Wilmington Housing Auth. v. Harris, 93 A.2d 518, 521 (Del. 1952) (same).
42
Aruba, 2018 WL 922139, at *40.
43
See Dell, 177 A.3d at 32 (discussing the winner’s curse).
14
In this case, for instance, Aruba approached other logical strategic buyers prior to
signing the deal with HP, and none of those potential buyers were interested. Then,
after signing and the announcement of the deal, still no other buyer emerged even
though the merger agreement allowed for superior bids. It cannot be that an open
chance for buyers to bid signals a market failure simply because buyers do not
believe the asset on sale is sufficiently valuable for them to engage in a bidding
contest against each other. If that were the jurisprudential conclusion, then the
judiciary would itself infuse assets with extra value by virtue of the fact that no actual
market participants saw enough value to pay a higher price. That sort of alchemy
has no rational basis in economics.
In fact, encouraged by Weinberger v. UOP, Inc.,44 our courts have for years
applied corporate finance principles such as the capital asset pricing model to value
companies in appraisal proceedings in ways that depend on market efficiency. The
reliable application of valuation methods used in appraisal proceedings, such as DCF
and comparable companies analysis, often depends on market data and the efficiency
of the markets from which that data is derived. For example, it is difficult to come
up with a reliable beta if the subject company’s shares do not trade in an efficient
44
457 A.2d 701 (Del. 1983).
15
market,45 and the reliability of a comparable companies or transactions analysis
depends on the underlying efficiency of the markets from which the multiples used
in the analysis are derived.46
Even before this Court’s seminal opinion in Weinberger, the old Delaware
“block” method used market prices in one of its three prongs.47 In forsaking the
Delaware block method as a rigid basis to determine fair value, Weinberger did not
hold that market value was no longer relevant; in fact, Weinberger explicitly
condoned its use.48 Extending this basic point, DFC and Dell merely recognized
that a buyer in possession of material nonpublic information about the seller is in a
strong position (and is uniquely incentivized) to properly value the seller when
agreeing to buy the company at a particular deal price, and that view of value should
be given considerable weight by the Court of Chancery absent deficiencies in the
deal process.49
45
See, e.g., In re Appraisal of Dell Inc., 2016 WL 3186538, at *49 (Del. Ch. May 31, 2016), aff’d
in part, rev’d in part on other grounds sub nom. Dell, Inc. v. Magnetar Global Event Drive Master
Fund Ltd., 177 A.3d 1, 35 (Del. 2017); HOLTHAUSEN & ZMIJEWSKI, supra, at 293–308.
46
See, e.g., Taylor v. Am. Specialty Retailing Grp., Inc., 2003 WL 21753752, at *7 (Del. Ch. July
25, 2003); Gentile v. SinglePoint Fin., Inc., 2003 WL 1240504, at *6–7 (Del. Ch. Mar. 5, 2003);
HOLTHAUSEN & ZMIJEWSKI, supra, at 552; BRADFORD CORNELL, CORPORATE VALUATION 87
(1993).
47
See, e.g., In re General Realty & Utils. Corp., 52 A.2d 6, 15–16 (Del. Ch. 1947).
48
Weinberger, 457 A.2d at 713 (observing that “market value” is “not only pertinent to an inquiry
as to the value of the dissenting stockholders’ interest, but must be considered by the agency fixing
the value”).
49
See Dell, 177 A.3d at 35; DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346,
367 (Del. 2017).
16
Likewise, assuming an efficient market, the unaffected market price and that
price as adjusted upward by a competitive bidding process leading to a sale of the
entire company was likely to be strong evidence of fair value. By asserting that Dell
and DFC “indicate[] that Aruba’s unaffected market price is entitled to substantial
weight,”50 the Vice Chancellor seemed to suggest that this Court signaled in both
cases that trading prices should be treated as exclusive indicators of fair value.
However, Dell and DFC did not imply that the market price of a stock was
necessarily the best estimate of the stock’s so-called fundamental value at any
particular time.51 Rather, they did recognize that when a market was informationally
efficient in the sense that “the market’s digestion and assessment of all publicly
available information concerning [the Company] [is] quickly impounded into the
Company’s stock price,” the market price is likely to be more informative of
fundamental value.52 In fact, Dell’s references to market efficiency focused on
informational efficiency—the idea that markets quickly reflect publicly available
50
Aruba, 2018 WL 922139, at *51.
51
See, e.g., Dell, 177 A.3d at 35 (“[W]e are not saying that the market is always the best indicator
of value, or that it should always be granted some weight.”).
52
Id. at 7; DFC, 172 A.3d at 349 (“Like any factor relevant to a company’s future performance,
the market’s collective judgment of the effect of regulatory risk may turn out to be wrong, but
established corporate finance theories suggest that the collective judgment of the many is more
likely to be accurate than any individual’s guess. When the collective judgment involved, as it did
here, not just the views of company stockholders, but also those of potential buyers of the entire
company and those of the company’s debtholders with a self-interest in evaluating the regulatory
risks facing the company, there is more, not less, reason to give weight to the market’s view of an
important factor.”).
17
information and can be a proxy for fair value—not the idea that an informationally
efficient market price invariably reflects the company’s fair value in an appraisal or
fundamental value in economic terms.53 Nonetheless, to the extent the Court of
Chancery read DFC and Dell as reaffirming the traditional Delaware view,54 which
is accepted in corporate finance, that the price a stock trades at in an efficient market
is an important indicator of its economic value that should be given weight, it was
correct.55 And to the extent that the Court of Chancery also read DFC and Dell as
reaffirming the view that when that market price is further informed by the efforts
53
Indeed, the key distinction between the semi-strong version of the efficient capital markets
hypothesis (ECMH), which both Dell and DFC embrace, Dell, 177 A.3d at 25; DFC, 172 A.2d at
373–74, and the strong version of the ECMH is that the semi-strong version assumes that markets
reflect only all publicly available information whereas the strong version assumes that markets
reflect all information, and are therefore, by extension, more likely to reflect fundamental value.
RICHARD A. BREALEY, STEWART C. MYERS & FRANKLIN ALLEN, PRINCIPLES OF CORPORATE
FINANCE 358–59 (9th ed. 2008).
54
See Dell, 177 A.3d at 24 (“Further, the Court of Chancery’s analysis ignored the efficient market
hypothesis long endorsed by this Court. It teaches that the price produced by an efficient market
is generally a more reliable assessment of fair value than the view of a single analyst, especially
an expert witness who caters her valuation to the litigation imperatives of a well-heeled client.”);
DFC Global Corp., 172 A.3d at 370 (“Indeed, the relationship between market valuation and
fundamental valuation has been strong historically. As one textbook puts it, ‘[i]n an efficient
market you can trust prices, for they impound all available information about the value of each
security.’ More pithily: ‘For many purposes no formal theory of value is needed. We can take the
market’s word for it.’”) (footnotes omitted); see also supra note 41.
55
See, e.g., Ronald J. Gilson & Reinier Kraakman, Market Efficiency after the Financial Crisis:
It’s Still a Matter of Information Costs, 100 VA. L. REV. 313, 317 (2014) (“Even if we cannot
observe fundamental efficiency, we can with confidence predict that making prices more
informationally efficient will move them in the direction of fundamental efficiency.”); CORNELL,
supra, at 47 (“The efficient market hypothesis has two important implications for appraisal
practice. First, and most importantly, it implies that in situations where the stock and debt
approach can be employed, it will produce the most reliable indicator of value . . . . [T]he EMH
states that the market assessment of value is more accurate, on average, than that of any individual,
including an appraiser.”).
18
of arm’s length buyers of the entire company to learn more through due diligence,
involving confidential non-public information, and with the keener incentives of
someone considering taking the non-diversifiable risk of buying the entire entity, the
price that results from that process is even more likely to be indicative of so-called
fundamental value, it was correct.56
Here, the price that HP paid could be seen as reflecting a better assessment of
Aruba’s going-concern value for reasons consistent with corporate finance theory.
For starters, the unaffected market price was a measurement from three to four
months prior to the valuation date, a time period during which it is possible for new,
material information relevant to a company’s future earnings to emerge. Even more
important, HP had more incentive to study Aruba closely than ordinary traders in
small blocks of Aruba shares, and also had material, nonpublic information that, by
definition, could not have been baked into the public trading price. For example, HP
56
Dell, 177 A.3d at 35 (“In so holding, we are not saying that the market is always the best indicator
of value, or that it should always be granted some weight. We only note that, when the evidence
of market efficiency, fair play, low barriers to entry, outreach to all logical buyers, and the chance
for any topping bidder to have the support of [the CEO’s] own votes is so compelling, then failure
to give the resulting price heavy weight because the trial judge believes there was mispricing
missed by all the Dell stockholders, analysts, and potential buyers abuses even the wide discretion
afforded the Court of Chancery in these difficult cases.”); DFC, 172 A.3d at 370 (“For these
reasons, corporate finance theory reflects a belief that if an asset—such as the value of a company
as reflected in the trading value of its stock—can be subject to close examination and bidding by
many humans with an incentive to estimate its future cash flows value, the resulting collective
judgment as to value is likely to be highly informative and that, all estimators having equal access
to information, the likelihood of outguessing the market over time and building a portfolio of
stocks beating it is slight.”).
19
knew about Aruba’s strong quarterly earnings before the market did, and likely took
that information into account when pricing the deal. Based on the record evidence,
the Court of Chancery could easily have found that HP and Aruba’s back and forth
over price, HP’s access to nonpublic information to supplement its consideration of
the public information available to stock market buyers, and the currency of the
information that they had at the time of striking a bargain had improved the parties’
ability to estimate Aruba’s going-concern value over that of the market as a whole.57
In particular, HP had better insight into Aruba’s future prospects than the market
because it was aware that Aruba expected its quarterly results to exceed analysts’
expectations.58 When those strong quarterly results were finally reported—after the
close of the period that the Court of Chancery used to measure the “unaffected
market price”—Aruba’s stock price jumped 9.7%. Indeed, after the market learned
57
See Aruba, 2018 WL 922139, at *21; Br. of Amici Curiae Professors in Support of Appellant
and Reversal at 4–6.
58
Aruba, 2018 WL 922139, at *11–13. The trial judge’s focus on the unaffected trading price
seems inspired by his view of Dell and in particular his view that its reference to that sort of pricing
as relevant to fair value was novel. See id. at *24–34. That is strange because the unaffected
trading price has often formed a foundational element of many forms of valuation used in our
courts, and was even a part of the Delaware block method. See, e.g., General Realty, 52 A.2d at
15–16. The trial judge’s decision to use the trading price as his sole basis for determining fair
value was his alone, and in no way dictated by a rational reading of Dell. Before the trial judge
fixated on this measure as his own focus, Aruba at most argued that it was informative of fair value
and one component for coming to a final estimate. Notably, nothing in Dell suggested that the
unaffected trading price should be used solely, especially when a bidder like HP had material
nonpublic information, and when the company itself had important earnings information it had not
released. The decision to give exclusive weight to the unaffected trading price on a record that did
not allow the ordinary adversarial process for testing the relevant factors was that of the trial court
alone.
20
about the strong quarter and the likelihood of a strategic deal with HP, Aruba’s stock
traded at $24.81, $0.14 away from the actual price HP paid. Of course, despite
expressing concern about the fact that no other bidder emerged to compete with HP
at the $24-plus price range, the Court of Chancery then awarded Verition $7.54 per
share less than the $24.67 deal price.
By relying exclusively on the thirty-day average market price, the Court of
Chancery not only abused its discretion by double counting agency costs but also
injected due process and fairness problems into the proceedings. As Verition argued,
the Vice Chancellor’s desire not to award deal price minus synergies could be seen—
in light of his letter to the parties and the overall tone of his opinion and reargument
decision—as a results-oriented move to generate an odd result compelled by his
personal frustration at being reversed in Dell. Indeed, the idea of awarding the stock
price came into the proceedings from the Vice Chancellor himself after requesting
supplemental post-trial briefing on the matter.59 Prior to that point, neither party
argued for that figure as the fair value under § 262. Because the Vice Chancellor
59
Based on our reading of the record, neither party requested supplemental briefing after our
opinion in Dell issued. And neither party asked the Court of Chancery to set fair value at the
unaffected market price until long after trial, when the Vice Chancellor sent a letter to the parties
requesting supplemental submissions to address the implications of this Court’s decision in Dell.
App. to Answering Br. at B74–75 (Letter from the Court of Chancery to the Parties). After that
letter explicitly requested information about the market attributes of Aruba’s stock, Aruba pivoted
from its previous reliance on its expert’s discounted cash-flow model and the deal price minus
synergies to ask for the first time that the court set fair value at the unaffected thirty-day average
market price of $17.13 per share. See App. to Opening Br. at A1014 (Respondent’s Supplemental
Post-Trial Br. on Dell).
21
introduced this issue late in the proceedings, the extent to which the market price
approximated fair value was never subjected to the crucible of pretrial discovery,
expert depositions, cross-expert rebuttal, expert testimony at trial, and cross
examination at trial. Instead, the Vice Chancellor surfaced Aruba’s stock price as
an appropriate measure of fair value in a way that is antithetical to the traditional
hallmarks of a Court of Chancery appraisal proceeding. The lack of a developed
record on whether the stock price was an adequate proxy for fair value buttresses
our holding that the Court of Chancery abused its discretion by awarding the thirty-
day average unaffected market price of $17.13 per share.
These procedural issues relate to substance in an important way. The reason
for pretrial discovery and trial is for parties to have a chance to test each other’s
evidence and to give the fact-finder a reliable basis to make an ultimate
determination after each side has a fair chance to develop a record and to comment
upon it. The lack of that process here as to the Vice Chancellor’s ultimate remedy
is troubling. The Vice Chancellor slighted several important factors in choosing to
give exclusive weight to the unaffected market price. Under the semi-strong form
of the efficient capital markets hypothesis, the unaffected market price is not
assumed to factor in nonpublic information. In this case, however, HP had signed a
confidentiality agreement, done exclusive due diligence, gotten access to material
nonpublic information, and had a much sharper incentive to engage in price
22
discovery than an ordinary trader because it was seeking to acquire all shares.
Moreover, its information base was more current as of the time of the deal than the
trading price used by the Vice Chancellor. Compounding these issues was the reality
that Aruba was set to release strong earnings that HP knew about in the final
negotiations, but that the market did not. As previously noted, Aruba’s stock price
jumped 9.7% once those earnings were finally reported to the public. None of these
issues were illuminated in the traditional way, and none of them were discussed by
the Court of Chancery in a reasoned way in giving exclusive weight to a prior trading
price that was $7.54 below what HP agreed to pay, and well below what Aruba had
previously argued was fair value.
This multitude of concerns gives us pause, as does the evident plausibility of
Verition’s concern that the trial judge was bent on using the thirty-day average
market price as a personal reaction to being reversed in a different case. In a
reargument decision addressing the petitioner’s argument to this effect, the Vice
Chancellor denied that this was the case.60 We take him at his word. However, so
too do we take him at his word that he viewed an estimate of deal price minus
synergies as compelling evidence of fair value on this record but that he could not
60
Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. (Decision on Petitioner’s Motion
for Reargument), 2018 WL 2315943, at *17 (Del. Ch. May 21, 2018) (“I personally do not believe
that I issued the Post–Trial Ruling out of frustration. To the contrary, I personally believe that I
engaged in a lengthy, laborious (in both senses), and reasoned effort to implement Delaware
Supreme Court precedent.”).
23
come up with a reliable estimate of his own because he wanted to double count
agency costs, and also lacked confidence in his underlying synergy deduction.61
Nevertheless, fixing the double counting problem and hewing to the record
developed by the parties themselves leaves a reliable estimate of deal price minus
synergies,62 which is the one that Aruba advanced until the Vice Chancellor himself
injected the thirty-day average market price as his own speculative idea. Of course,
estimating synergies and allocating a reasonable portion to the seller certainly
involves imprecision, but no more than other valuation methods, like a DCF analysis
that involves estimating (i) future free cash flows; (ii) the weighted average cost of
capital (including the stock’s beta); and (iii) the perpetuity growth rate. But here
there is no basis to think Aruba was being generous in its evaluation of deal price
61
Aruba, 2018 WL 922139, at *51–54.
62
The Vice Chancellor’s view that he had to further deduct additional agency costs is not only
flawed for the reason we mentioned, it was in tension with his own reasoning. The Vice Chancellor
believed that the negotiators for Aruba were not as skilled or as vigorous as he would have been
in risking getting no deal from a bidder that was bidding well above the company’s unaffected
market price and that was bidding well above a level of any interest to any other logical buyer, and
that Aruba therefore did not get as big a share of the synergies as he viewed possible. See Aruba,
2018 WL 922139, at *45 (opining that Aruba “obtained a relatively low share of the synergies
from HP” and therefore that the deal price minus synergies was “north of $18.20 per share,” yet
nevertheless concluding that the deal price minus synergies was $18.20 per share). See generally
Lawrence A. Hamermesh & Michael L. Wachter, Finding the Right Balance in Appraisal
Litigation: Deal Price, Deal Process, and Synergies, 73 BUS. LAW. 961, 1005–06 (2018) (“[A]
perception that bargaining was relatively weak may imply that the target’s stockholders received
a relatively smaller share of overall synergies, and vice versa.”). If this was so, we perceive no
rational basis in the record for his finding that Aruba’s own $19.10 per share estimate was too
high.
24
minus synergies. And, as any measure of value should be, Aruba’s $19.10 deal price
minus synergies value is corroborated by abundant record evidence.63
The Vice Chancellor himself concluded that because the HP–Aruba
transaction involved enormous synergies, “the deal price . . . operates as a ceiling
for fair value.”64 That conclusion was abundantly supported by the record. Aruba’s
estimate of $19.10 resulting from that method was corroborated by HP’s and
63
See supra note 39. Straining to justify a victory on a ground and at a value level it never sought
at trial, Aruba disavowed in oral argument the deal price minus synergies method. We chalk up
this about-face to a litigant receiving a more favorable outcome than they argued for and trying to
cement that unexpected victory on appeal. In the actual record of the case developed and
completed in full before the Vice Chancellor pressed an issue not raised by any party, Aruba’s
expert report contained an entire section on the deal price minus synergies method, its briefs
contained full sections arguing for the Court of Chancery to adopt it, and Verition was given a full
opportunity—which it took—to respond at length to these arguments. See App. to Opening Br. at
A121–29 (Respondent’s Pretrial Br.) (arguing that “the deal price minus synergies is a reliable
indication of fair value”); id. at A148 (“Aruba requests that the court . . . determin[e] that the fair
value of Aruba . . . is $19.45 per share—a number that is consistent with both Dages’ DCF
valuation and the deal price minus synergies . . . .”); id. at A1843–49 (Expert Report of Kevin
Dages) (offering the “Merger Price (Excluding Any Synergies)” as evidence of fair value and
identifying “fair value indications . . . of $19.93 per share based on the Barclay’s [sic] analysis and
$18.98 per share based on HP’s internal analysis”); Expert Rebuttal Report of Paul A. Marcus at
21–30 (Sept. 2, 2016) (criticizing Dages’s use of the merger price as an indicator of fair value); id.
at A325–26 (Direct Examination of Paul A. Marcus) (Verition’s expert testifying that he
considered the deal price in determining fair value and explaining why he chose not to rely on it);
id. at A347 (Cross-Examination of Paul A. Marcus) (Aruba’s counsel cross-examining Verition’s
expert about his decision not to rely on the deal price); id. at A378–79 (Direct Examination of
Daniel Warmenhoven) (Aruba’s lead independent director testifying about the existence of
revenue and cost synergies and stating those synergies were “[v]ery substantial”); id. at A418
(Direct Examination of Dominic Orr) (Aruba’s CEO testifying as to synergies); id. at A480
(Aruba’s industry expert testifying as to synergies); id. at A616–19 (Respondent’s Post-Trial
Answering Br.) (contending that “significant, measurable synergies were anticipated in the deal”);
id. at A622–30 (arguing that “the merger price less synergies approach is a reliable indicator of
fair value”); id. at A668–80 (Petitioners’ Post-Trial Reply Br.) (arguing that “fair value cannot be
determined via reference to ‘deal price minus synergies’”); id. at A708–23 (Respondent’s Post-
Trial Sur-Reply Br.) (responding to Verition’s arguments against relying on the deal price).
64
Aruba, 2018 WL 922139, at *52.
25
Aruba’s real-time considerations65 and Aruba’s DCF,66 comparable companies,67
and comparable transactions analyses.68
Rather than burden the parties with further proceedings, we order that a final
judgment be entered for the petitioners in the amount of $19.10 per share plus any
interest to which the petitioners are entitled.
65
See supra note 39.
66
Id. at A1880 (Expert Report of Kevin Dages (July 29, 2016)) (presenting a DCF value for Aruba
of $19.85).
67
Id. (presenting mid-point value based on Aruba’s 2016 EBITDA of $21.75).
68
Id. (presenting a mid-point value for the comparable transaction analysis at $17.94).
26