Delaware Supreme Court Affirms Appraisal Award Using Corporation’s Unaffected Market Price As Fair Value
In Fir Tree Value Master Fund, LP v. Jarden Corp., No. 454-2019, 2020 WL 3885166 (Del. July 9, 2020), the Delaware Supreme Court affirmed a Delaware Court of Chancery (Slights, V.C.) appraisal decision that adopted the respondent corporation’s unaffected market price as fair value, squarely rejecting petitioners’ argument that, as a matter of Delaware law, a corporation’s unaffected stock price can never equate to fair value. Under the appraisal statute, when determining the fair value of the shares on the closing date of the merger, the trial judge shall take into account “all relevant factors.” The Delaware Supreme Court’s decision makes clear that a corporation’s unaffected market price alone can be a “relevant factor” indicating fair value in mergers.
In 2015 respondent Jarden Corporation’s (“Jarden”) CEO and co-founder, Martin Franklin, began negotiating the sale of Jarden to Newell Brands (“Newell”). The parties announced the merger on December 14, 2015 and Jarden and Newell’s stockholders approved the merger on April 15, 2016. As of the closing, the mix of cash and stock valued Jarden at $59.21 per share. Several of Jarden’s large stockholders (“petitioners”) refused to accept this sale price and brought an appraisal action in the Delaware Court of Chancery.
At trial, petitioners’ expert relied primarily upon his comparable companies analysis to support a fair value of $71.35 per share. Jarden’s expert considered market evidence of respondent’s unaffected stock price and the merger price less synergies, comparable companies, and a discounted cash flow (“DCF”) analysis to support a fair value of $48.01 per share. Relying upon Jarden’s unaffected market price, and discounting the other price valuation methodologies, the Court of Chancery found $48.31 as the fair value of each share of Jarden stock as of the date of the merger.
Affirming the appraisal decision, the Supreme Court clarified that “[a]lthough it is not often that a corporation’s unaffected market price alone could support fair value,” “[t]here is no long-recognized principle that a corporation’s unaffected stock price cannot equate to fair value.” In adopting a fair value, whether the court weighs a single valuation metric or a variety of methodologies, it must justify its fair value calculus in a manner that is grounded in the record before it and in accepted financial principles relevant to determining the value of corporations and their stock.
The Court rejected petitioners’ argument that the Court’s recent decision in Veriton Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019), “foreclosed as a matter of law the court’s use of unaffected market price to support fair value.” The Court analyzed its decision in Aruba which did emphasize the “considerable weight” a court should give to the deal price “absent deficiencies in the deal process” because, for example, “a buyer in possession of material nonpublic information about the seller is in a strong position . . . to properly value the seller when agreeing to buy the company at a particular deal price.” However, the Court in Aruba also recognized that “when a market [is]informationally efficient in the sense that ‘the market’s digestion and assessment of all publicly available information concerning the Company is quickly impounded into the Company’s stock price,’ the market price is likely to be more informative of fundamental value.” Thus, it was reasonable for the Court of Chancery to rely on Jarden’s unaffected market price for fair value because Jarden’s stock traded in a semi-strong efficient market, meaning the market quickly assimilated all publicly available information into Jarden’s stock price, and the Court of Chancery found it was unlikely that there was material nonpublic information not incorporated into the market’s estimate of Jarden’s value.
The Supreme Court further reasoned that the Court of Chancery did consider alternative measures of fair value — a comparable companies analysis, market-based evidence, and DCF models. The Court of Chancery did not abuse its discretion when it disregarded these other valuation methods presented by the parties’ experts because there were no comparable companies to assess, the CEO dominated the sale process and the parties’ experts presented such wildly divergent DCF models that the models were deemed unhelpful to the court. The Court went on to reject petitioners’ argument that Jarden’s sale price should act as a valuation floor, reasoning that petitioners already successfully convinced the Court that the deal price resulted from a flawed sale process where the CEO acted with little to no Board oversight and volunteered a price range the Board would accept to sell for before negotiations began in earnest.
Jarden adds to a series of decisions by the Delaware Supreme Court in the past several years (such as Aruba) providing additional guidance to the Chancery Court in considering and deciding appraisal proceedings.