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When is merger price the fair [value] price?

The Delaware Court of Chancery has once again upheld the Supreme Court of Delaware’s reasoning in DELL and DFC. The recent cases of Solera and Norcraft provide further guidance on when the merger price can be relied upon as a measure of fair value.

In Solera, Chancellor Bouchard determined the fair value of the shares to be the deal price less estimated synergies.  In reaching this conclusion Chancellor Bouchard took into account the sale process.  In particular, the:

  • length of the process and potential buyers contacted;
  • clear public disclosures to the market that Solera was for sale;
  • Special Committee did not accept underpriced bids on two occasions; and
  • 28 day go shop period.

Chancellor Bouchard also determined that throughout the sale process the stock was trading in “an efficient and well-functioning market”.

Ultimately it was found that “the sales process delivered for Solera stockholders the value obtainable in a bona fide arm’s length transaction and provides the most reliable evidence of fair value”.

The DCF valuation analysis submitted by both parties were “widely divergent” and Chancellor Bouchard found them to be unreliable relying on Delaware jurisprudence such as Dell, Union Ill and PetSmart, Inc to prefer the merger price less synergies, as the best evidence of value.

Interestingly in post-trial submissions Solera argued that fair value was the unaffected stock price which was 35% less than the deal price. This argument was rejected by Chancellor Bouchard mainly due to the belatedness of the argument and the strong evidence from Solera’s own expert that the merger price adjusted for synergies is the “best evidence of Solera’s value” as of the date of merger.

In Norcraft, Vice Chancellor Slights did not find that the merger price (less synergies) reflected the fair value of Norcraft as of the merger date for the following reasons:

  • There was no pre-signing market check;
  • the post-signing go shop period was ineffective
  • Norcraft stock was thinly traded.

For these reasons, Vice Chancellor Slight used a DCF analysis to calculate the fair value of Norcraft but used the merger price as a “reality check” to confirm his own valuation, finding the difference between merger price and his valuation was a “product of the identified flaws in Norcraft’s deal process”.

We wait to see whether the Delaware Court’s continued reliance on the merger price will influence the Cayman Islands Grand Court’s approach to determining fair value.

 

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