In Delaware, like in the Cayman Islands, shareholders have the right to dissent from a merger and demand “fair value” for their shares as determined by the Court. A string of decisions from the Delaware Courts in the latter part of 2019 suggest a shift away from DCF towards market-based valuation approaches in appraisal proceedings.
- In Jarden Corporation Slights VC determined that the unaffected trading price was the best indicator of fair value of Jarden’s stock (representing a 18.4% discount to the deal price). The market for Jarden’s stock was efficient, the stock was traded on the NYSE, it became a member of the S&P 400 index in 2012, its shares were heavily traded, and there was no controlling shareholder. Read more on this here.
- In Columbia Pipeline and in Stillwater Mining Company Laster VC (the Judge in both cases, decided less than two weeks apart) found the deal price to be the most reliable indicator of fair value in the circumstances of those cases. The Judge noted that the deal price is reliable only when market conditions leading to the transaction are conducive to achieving a fair price. In both cases, the Judge found that, although not perfect, the sale process was sufficiently reliable to make the deal price a persuasive indicator of fair value.
In all three cases, the Court declined to rely upon more traditional valuation methodologies, such as comparable companies or DCF, in favour of market-based evidence. The Judges recognised that legitimate debates over the inputs in a DCF valuation can undercut the reliability of that DCF model.
The valuation process in any given case will depend on the particular facts and circumstances and is largely a fact-finding exercise. As the Delaware Supreme Court noted in Dell the appraisal endeavour is by design a flexible process. Further, just because the approach of an expert has met the approval of the court on prior occasions, does not mean that the Court in a later case will not reject that approach if the general opinion of the professional community has moved on in the interim.
There has also been a series of changes on Delaware’s Court of Chancery and Supreme Court, including the retirement of Delaware Supreme Court Chief Justice Leo E. Strine, Jr. and the expansion of the Court of Chancery from five to seven vice chancellors.