In Huff Fund Investment Partnership v. CKx, Inc. (Del. Feb. 12, 2015), the Delaware Supreme Court affirmed in full the Chancery Court’s decision which held that the merger price was the best evidence of the fair value of the common stock of CKx, Inc. (CKx). This is a significant decision as the past several years have seen the rise of entities purchasing shares after the announcement of a proposed merger in order to bring an appraisal claim.
In an appraisal proceeding, shareholders of a company are entitled to receive cash equal to the “fair value” of their shares, which excludes any value that arises as a result of the merger. The Court of Chancery held that it will consider “all relevant factors” when determining fair value, but may not presumptively assume that the merger price is the fair price for the shares.
In Huff Fund, the Court of Chancery viewed the merger process at issue as thorough and included a full canvass of the market. In addition, the company’s board had been successful in creating a bidding war for the company among multiple parties. The Court further determined that, in this instance, it would not be proper to use standard valuation methodologies because those could not be relied upon. In this factual context, although the Court of Chancery did not give presumptive weight to the merger price, the Court determined that “the merger price was the most reliable indicator of value” given the lack of other reliable evidence.
After the Court concluded that the merger price was the best evidence of fair value in this case, it considered whether any element of the value was created due to the impending merger and therefore was required to be excluded from its appraisal award. The court did not find any evidence that any of the value in the merger price was attributable to synergies the buyer would realize post-merger, and both parties declined to submit additional evidence on the issue.
The Delaware Supreme Court’s decision in Huff is ultimately a mixed decision for those engaged in appraisal arbitrage. The court is clear that it may not presume the merger price to be the best indicator of fair value in an appraisal proceeding, although it may find the merger price to be the most reliable indication of value. It is still not clear whether these opinions indicate a trend toward more “fair value” determinations that reflect the merger price.