In Verition Partners Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Apr. 16, 2019), the Delaware Supreme Court unanimously held that the Court of Chancery abused its discretion when it calculated the fair value per share of the common stock of Aruba Networks, Inc. (“Aruba”) in an appraisal proceeding. The Court of Chancery assessed Aruba’s per share value at $17.13 by using the 30-day average market price at which Aruba’s shares publicly traded before Aruba’s merger negotiation with Hewlett Packard Company (“HP”) became public. The Delaware Supreme Court found this improper and affirmed its practice of viewing merger consideration as evidence of fair value, calculating Aruba’s fair value per share as $19.10 (the deal price minus the portion of synergies left with the seller).
In August 2014, HP approached Aruba about a potential merger. After several months of negotiations, Aruba accepted HP’s offer of $24.67 per share. News of the deal leaked to the press, causing a jump in Aruba’s stock price. Not long thereafter, Aruba released higher than expected quarterly earnings, and the stock price rose again to $24.81, just above the deal price. A few months later, the merger was formally approved and the deal closed at $24.67 per share.
Aruba stockholders Verition Partners Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. asked the Court of Chancery to appraise the “fair value” of their shares under 8 Del. C. § 262(a) and (h), which provide that stockholders who meet certain conditions are entitled to an appraisal by the Court of Chancery of the fair value of their shares, such amount to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.”
Delaware’s Court of Chancery opted to postpone the Aruba appraisal hearing until the Delaware Supreme Court released its decision in DFC Global Corp. v. Muirfield Value Partners, L.P. In December 2018, the Supreme Court reversed the Court of Chancery’s appraisal in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., holding that the lower court erred by equally weighing the transaction price, a discounted cash flow analysis, and an analysis of comparable companies. After this reversal, the Court of Chancery, through the same Vice Chancellor who was the trial judge in Dell, requested supplemental briefings on “the market attributes of Aruba’s stock.”
On February 15, 2018, the Court of Chancery issued its post-trial opinion. In considering various valuation measures, the Vice Chancellor rejected the deal price minus synergies approach because he believed it failed to incorporate all of the value resulting from the merger, including potential reduced agency costs. The Court of Chancery instead elected to rely exclusively on the unaffected 30-day average stock price prior to the leaked news of the merger. However, the Supreme Court opinion states that 8 Del. C. § 262(h) requires the Court of Chancery to assess Aruba’s fair value as of the “effective date of the merger,” which occurred three to four months after the news leaked.
The Delaware Supreme Court reversed this decision, in large part, because the appraisal should “value the company as an operating entity… but without regard to post-merger events.” In its opinion, the Delaware Supreme Court notes both courts’ history, long before Dell, of “giving important weight to market-tested deal prices.” According to the Delaware Supreme Court, the Court of Chancery was incorrect to perceive Dell and DFC as suggesting that trading prices should be treated as exclusive indicators of fair value. Nor, per the Delaware Supreme Court, should these cases be read to imply that market price is necessarily the best estimate of a stock’s “fundamental value at a particular time.” The Delaware Supreme Court stated that in this case the record did not provide any reason to believe there were additional agency costs not already factored in to the negotiated price, and that the price HP paid for Aruba may reflect a better assessment of Aruba’s going value. This was particularly true given HP’s access to Aruba’s non-public information offered under a confidentiality arrangement (which information would not likely be reflected in the public trading price of Aruba stock) and the extended period of time HP had to study Aruba closely. (For example, HP knew about Aruba’s strong quarterly earnings before the market did and likely took that information into account when pricing the deal.)
In reversing the Court of Chancery’s decision, the Delaware Supreme Court ordered a final judgment be entered using a deal price minus synergies calculation, and awarded $19.10 per share, consistent with the calculation proffered by Aruba’s expert.