Guided by the Delaware Supreme Court’s recent emphasis in DFC and Dell on market evidence in determining “fair value” under Delaware’s appraisal statute, on February 15, 2018, the Delaware Court of Chancery concluded that the unaffected stock price of $17.13—a nearly 31% discount to the deal price of $24.67 per share—was the best evidence of fair value in an appraisal action arising out of Hewlett-Packard’s 2015 acquisition of Aruba Networks.

In a 129-page post-trial decision in Verition Partners Master Fund v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. Feb. 15, 2018), the Court held that both DFC and Dell “endorse using the market price of a widely traded firm as evidence of fair value.” Although no party introduced expert testimony to prove (or disprove) market efficiency, the Court determined that Aruba Networks’ stock traded in an efficient market because it “had basic attributes consistent with what the [Delaware Supreme Court] found sufficient” in DFC and Dell—i.e., “‘many stockholders; no controlling stockholder; highly active trading; and . . . information about the company [was] widely available and easily disseminated to the market.’”

The Court also considered the deal price as evidence of fair value, but ultimately did not rely upon it, because, according to the Court, it incorporated value from synergies and reduced agency costs, which are “not part of the going concern value of the firm.” The Court noted the “inherent difficulties” in the “judgment-laden exercise” of subtracting synergies and reduced agency costs from the deal price. The Court concluded that it could “reach the same endpoint” “using [the] unaffected market price,” which “provides the more straightforward and reliable method for estimating the value of the entity as a going concern.”

The Court was careful to state, however, that “[b]y awarding fair value based on the unaffected market price, this decision is not interpreting Dell and DFC to hold that market price is now the standard for fair value” and “[t]he governing standard for fair value under the appraisal statute remains the entity’s value as a going concern.”

Although we expect that Aruba Networks will be appealed to the Delaware Supreme Court, it represents the strongest indication yet that market evidence—in appropriate cases—will be given primacy in Delaware appraisal proceedings.