On January 26, 2018, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery ruled in a post-trial opinion that the thirty-day average unaffected market price was the best evidence of the fair value of Aruba Networks, Inc. (“Aruba”) in an appraisal action arising from the acquisition of Aruba by Hewlett-Packard Company (“HP”). Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Jan. 26, 2018). The Court reached this conclusion by applying the efficient market hypothesis espoused by the Delaware Supreme Court in Dell but expressed reservations about doing so. Though facially helpful for defendants in appraisal actions, the decision effectively invites the Supreme Court to revisit Dell and DFC, suggesting that those decisions compelled the trial court to ignore evidence of a less-than-robust deal process and undervaluation of Aruba by stock market analysts.
Aruba primarily sold components for enterprise wireless local area networks and was a significant, though not dominant, industry player. HP believed that Aruba’s stock was undervalued and that a combination with Aruba would yield significant synergies. Negotiations proceeded over the course of seven months between 2014 and 2015, during which time Aruba solicited interest from other potential strategic partners (none of whom expressed willingness to bid) and broke off negotiations with HP after initial exchanges revealed the parties were far apart on price. The parties eventually agreed to a deal whereby HP would acquire Aruba for $24.67 per share. Aruba’s stockholders overwhelmingly approved the transaction, and the deal closed in May 2015.
In finding that the unaffected market price was the best evidence of Aruba’s fair value, Vice Chancellor Laster described the key issue in an appraisal action as not whether stockholders got the highest value possible but rather “whether the dissenters got fair value and were not exploited.” The Court observed that, for public companies that were widely traded and had no controlling stockholder, DFC and Dell left little room to evaluate whether market price and deal price accurately reflected fair value. Accordingly, Vice Chancellor Laster ruled that for such companies the deal price was effectively a ceiling on fair value and, out of concern for the inherently “judgement-laden” evaluations required to calculate and then subtract synergies from the deal price, declined to do so. For similar reasons (and again citing Dell), he declined to employ his own discounted cash flow analysis and rejected the parties’ proposed analyses. Though the Court questioned both the price and the process—citing evidence that HP and Aruba each believed the market mispriced Aruba stock and that Aruba’s financial advisors tried to curry favor with HP during negotiations—the Court found that Dell and DFC precluded consideration of these facts. Notwithstanding his misgivings about the efficient market hypothesis generally, the lack of expert testimony concerning the relevant market, and that neither party argued that the unaffected market price was the actual fair value for Aruba, Vice Chancellor Laster applied the efficient market hypothesis and concluded (based on factors identified in Dell) that Aruba’s thirty-day average unaffected market price of $17.13 per share was its fair value—a number lower than any value argued by the litigants.
The precedential value of this decision is open to question, as it appears primarily focused on challenging the Supreme Court’s decisions in Dell and DFC. Indeed petitioners have already moved for reargument, expressing sympathy with the Court’s “frustration with many of the Supreme Court’s pronouncements” and warning that, in reality, the unaffected market price will always be lower than the deal price, meaning that Vice Chancellor Laster’s ruling—and by extension, arguably Dell and DFC—would effectively eliminate the statutory right to appraisal under Delaware General Corporation Law.