Chancery Court Sets Fair Value in Appraisal Action at Deal Price Less Synergies
In In re Appraisal of Solera Holdings, Inc., C.A. No. 12080-CB (Del. Ch. July 30, 2018), the Delaware Court of Chancery, applying an adjusted deal price analysis in a statutory appraisal proceeding, determined that the fair value of the stock of Solera Holdings, Inc. (“Solera” or the “Company”) at the time of its March 2016 going-private merger transaction was $53.95 per share–the deal price less estimated synergies. The Court reached this conclusion after thoroughly examining and ultimately rejecting the use of (a) the discounted cash flow (“DCF”) analysis, proposed by seven investment funds that were former stockholders of Solera (the “Petitioners”) and the (b) the unaffected market price analysis, proposed by Solera in supplemental briefing in response to the use of such analysis in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., C.A. No. 11448-VCL (Del. Ch. May 21, 2018).
On March 3, 2016 Vista Equity Partners (“Vista”) acquired Solera for $55.85 per share, or approximately $3.85 billion in total equity value, in a going-private merger transaction. The Petitioners requested appraisal of their shares of Solera under 8 Del. C. § 262, arguing that Tony Aquila, Solera’s founder, CEO, President and Chairman, organized the deal out of frustration over his compensation and a desire to reassert control over the Company. Relying solely on one expert’s discounted cash flow analysis, the Petitioners contend that the fair value of their shares was $84.65 per share—approximately 51.6% over the deal price.
Until recently, Solera consistently argued that the best evidence of the fair value of Solera shares was the deal price less estimated synergies, equating to $53.95 per share. However, after the Aruba appraisal decision, which used the “unaffected market price” of a company’s stock to determine fair value, Solera changed its position to argue for the same measure of value, which it contends is $36.39 per share—approximately 35% below the deal price.
The Court relied on two recent decisions by the Delaware Supreme Court for guidance in determining fair value in appraisal proceeding: DFC Global Corporation v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1 (Del. 2017), and the Court of Chancery’s application of those decisions in In re Appraisal of AOL Inc., 2018 WL 1037450 (Del. Ch. Feb. 23, 2018).
In DFC and Dell the Delaware Supreme Court, explained that when the market for a company’s shares is efficient, the market price is typically superior to other valuation techniques because it distills the collective judgment of the publicly available information about a given company and the value of its shares. In AOL, the Court of Chancery construed DFC and Dell to mean that where “transaction price represents an unhindered, informed, and competitive market valuation, the trial judge must give particular and serious consideration to transaction price as evidence of fair value” and that where “a transaction price is used to determine fair value, synergies transferred to the sellers must be deducted.”
Following this guidance, the Court held that Solera’s going-private merger was the product of an open process that, although not perfect, had the requisite objective indicia of reliability. Solera’s stock was traded on the New York Stock Exchange and covered by analysts. The merger itself was the product of a two-month outreach to large private equity firms in May and June of 2015, followed by a six-week auction by an independent and fully authorized special committee (“Special Committee”) of three independent and experienced directors appointed by the Solera board of directors on July 20, 2015. The Special Committee solicited bids from eleven private equity and seven strategic firms. The Special Committee had competent financial and legal advisors and the power to say no to an underpriced bid, which it did on two separate occasions without the safety net of another bid. In addition to the 18 potential bidders directly contacted by the Special Committee, the universe of potential bidders was put on notice that the Company was for sale due to numerous public disclosures revealing not only the identities of potential buyers, but also the approximate amounts of their bids. In addition to the robust public information available, the Company provided all serious bidders access to deeper, non-public information after they signed non-disclosure agreements.
After a thorough examination of the facts, the Court rejected the Petitioner’s DCF valuation of $84.65 per share as speculative and facially unbelievable as it suggests potential buyers left almost $2 billion on the table by not outbidding Vista. Solera’s DCF valuation of $53.15 per share, though much closer to the deal price less synergies, was also found less reliable than the merger price, given uncertainties about some of its inputs. Lastly, the Court rejected Solera’s recent, supplemental position that the fair value of the shares should be based on an unaffected market price valuation of $36.39 per share as a dramatic and unconvincing shift from its earlier position advancing the merger price as the best evidence of the fair value of the shares.
Based on the foregoing, the Court gave sole and dispositive weight to the deal price and determined that the fair value of the Solera stock was an adjusted deal price of $53.95 per share, representing the deal price minus the 3.4 percent, or $1.90 per share, reflecting noncompensable “synergies” arising from the combination of Solera and Vista.In re Appraisal of Solera Holdings, Inc., memorandum opinion 180730