December 15, 2017
On December 14, 2017, the Delaware Supreme Court issued its much-anticipated decision in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., No. 565, 2016 (Del. Dec. 14, 2017), reversing and remanding the Delaware Court of Chancery’s post-trial decision finding that the “fair value” of Dell, Inc. was nearly $7 billion greater than the merger price that resulted from a comprehensive sale process. Dell is the second major appraisal decision this year by the Delaware Supreme Court, and joins the Court’s August 2017 decision in DFC Global Corp. v. Muirfield Value Partners, L.P., No. 518, 2016 (Del. Aug. 1, 2017), in again emphasizing that “market-based indicators of value”—both a target company’s stock price and the merger price—can “have substantial probative value” in determining “fair value” under Delaware’s appraisal statute.
In reversing the trial court’s decision, the Delaware Supreme Court rejected the trial court’s determination to accord no weight to the merger price, noting that “the record as distilled by the trial court suggests that the deal price deserved heavy, if not dispositive, weight.” First, the Court rejected the trial court’s conclusion that “a ‘valuation gap’ existed between Dell’s stock price and the Company’s intrinsic value” as contrary to the “efficient market hypothesis long endorsed by this Court.” Second, as it did in DFC, the Court “rejected th[e] view” that the merger price should be accorded no weight “due to financial sponsors’ focus on obtaining a desirable IRR,” finding “‘no rational connection’ between a buyer’s status as a financial sponsor and the question of whether the deal price is a fair price.” Third, the Court rejected the trial court’s concerns about “problems supposedly present in all MBOs” because “none of these theoretical characteristics detracts from the reliability of the deal price on the facts presented.”
While the Court was careful to state that it is “not saying that the market is always the best indicator of value, or that it should always be granted some weight,” it emphasized 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 [a significant stockholder’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.” Thus, “[w]hen . . . an appraisal is brought in cases . . . where a robust sale process . . . in fact occurred, the Court of Chancery should be chary about imposing the hazards that always come when a law-trained judge is forced to make a point estimate of fair value based on widely divergent partisan expert testimony.”
Dell and DFC reaffirm the importance of market-based evidence in appraisal proceedings. As stated by the Court, “‘fair value’ does not equal ‘best value.’” “Fair value entails at a minimum a price some buyer is willing to pay—not a price at which no class of buyers in the market would pay.” Together, Dell and DFC should give comfort to both strategic and financial buyers that Delaware courts will be reluctant, absent special circumstances, to second-guess that the price resulting from a competitive, arm’s-length sale process is the best evidence of “fair value.”
If you have any questions about this alert, please contact the authors: John Neuwirth, Evert Christensen, Matthew Connors and Elizabeth Kerwin-Miller. And as always, please feel free to contact Joseph Allerhand and John Neuwirth, the Co-Heads of Weil’s Securities Litigation practice, for more information.