On February 15, 2018, in the statutory appraisal proceeding of Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., the Delaware Court of Chancery decided that the “most persuasive evidence” of Aruba Networks’ fair value was its 30-day average unaffected market price of $17.13 per share, significantly lower than the deal price that Hewlett-Packard paid in its acquisition of Aruba Networks of $24.67 per share. This decision came in the wake of the Delaware Supreme Court’s recent decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. and DFC Global Corporation v. Muirfield Value Partners, L.P. (previously discussed in our blog), both of which endorse the use of the market-based indicators – the stock price and deal price – as evidence of fair value in a transaction following an arm’s length and robust market check.
The Court of Chancery in the Aruba Networks decision, in applying Dell and DFC Global, considered the deal price as evidence of fair value, but ultimately did not rely on it, because the deal price in Aruba Networks incorporated the value from synergies expected to result from the merger and “agency costs” that result from unitary ownership of the business (i.e. that the company would be owned by a single owner and not publicly traded). The Court explained that deriving the fair value by deducting synergies from the deal price would require “exercises of human judgment” in determining the value of such synergies and therefore was “likely tainted by human error.” Further, the court explained that the deal-price-less-synergies figure would still continue to reflect the value of reduced agency costs that would result from the merger. Consequently, the court concluded that when there is a sufficient market, the unaffected market price provides “a direct route to the same end point,” as backing out synergies and reduced agency cost from the deal price, and that Aruba Networks’ unaffected market price provides “the best evidence of its going concern value.” Consistent with Dell and DFC Global, the court rejected the discounted cash flow valuations, noting that this method should be used “only when the respondent company was not public or was not sold in an open market check.”
As in Dell and DFC Global, the court in Aruba Networks refused to adopt a bright-line rule. The court cautioned against using the market price as the standard for fair value. Under the Delaware appraisal statue, “all relevant factors” should be considered.
For stockholders contemplating Delaware appraisal actions, Aruba Networks is a cautionary tale that a court could adopt a fair value significantly lower than the deal price and the price argued for by such stockholders. The Aruba Networks decision reiterated that the purpose of an appraisal is not to make sure the petitioners get the “highest conceivable value” but to determine the “fair or intrinsic value” at the closing of a transaction.
For dealmakers, Aruba Networks continues the momentum of using market-based indicators as evidence of fair value when a sufficient market is evident. In Aruba Networks, the court relied upon a few factors to find a sufficient market, including shares being traded on Nasdaq through the date of the merger, absence of a controlling shareholder, compliant SEC filings, analyst coverage, trading volume, and bid-ask spread. For a widely traded public company, the Aruba Networks decision is particularly significant in discouraging appraisal actions and therefore reducing appraisal risk for buyers, considering that the unaffected market price is usually lower than the deal price.
Notably, the petitioners in Aruba Networks have filed a motion for reargument and indicated that they intend to appeal the decision. We will continue to monitor the appeal for further developments.