On May 21, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery reaffirmed the Court’s earlier ruling that the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) for purposes of appraisal in connection with its acquisition by Hewlett-Packard Company (“HP”) was Aruba’s 30-day average unaffected market price ($17.13 per share), notwithstanding the deal price ($24.67 per share). Verition v. Aruba Networks, C.A. No. 11448-VCL (Del. Ch. May 21, 2018). As we discussed in our post regarding the prior decision, the Court made that determination by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell and DFC, but seemed to express reservations about doing so. Petitioners moved for reargument, contending the Court misapprehended the law and facts, in part due to “frustration” with the Delaware Supreme Court’s recent pronouncements on appraisal in those two cases. In this new decision denying the motion for reargument, the Court explained that it viewed “the Delaware Supreme Court’s endorsement of the efficient capital markets hypothesis and its emphasis on market indicators over the subjective views of knowledgeable insiders as altering the decisional landscape and authorizing greater reliance on market value.”
Elaborating on the prior decision, the Court noted that it considered the deal price to be a reliable indicator of value, but recognized that Dell, DFC, and the appraisal statute required the exclusion of synergy and other merger-related value. Finding that “[t]he market for Aruba’s common stock exhibited attributes consistent with the premises of the efficient capital markets hypothesis,” the Court concluded that the most persuasive evidence of Aruba’s fair value was its 30-day average unaffected market price because it provided a “direct indication” of value without the need for any adjustments.
The Court acknowledged that Dell and DFC did not require weight to be given to the unaffected market price and discussed the efficient market hypothesis “en route” to endorsing deal price, minus synergies, for valuation purposes. But based on its analysis of the decisions, it found that “the discussion of the efficient capital markets hypothesis in Dell and DFC was not merely deployed instrumentally in support of a deal-price-less-synergies metric, but rather was intended to have independent doctrinal heft as a means of altering the traditional skepticism with which Delaware decisions have approached the stock market price when determining fair value.”
This decision, however, is unlikely to be the last word. The Court itself emphasized that if it misunderstood the import of Dell and DFC, the “proper institutional remedy” lies with the Delaware Supreme Court. That appeal is pending.