By John M. Jascob, J.D., LL.M.
Appraisal petitions filed in the Delaware Court of Chancery have fallen over 75 percent since their high in 2016, a new report by Cornerstone Research finds. The report, “Appraisal Litigation in Delaware: Trends in Petitions and Opinions,” found that shareholders filed petitions to challenge the deal prices in only 26 proposed acquisitions in 2018, down from 76 petitions filed in 2016.
Cornerstone Research found that 433 appraisal petitions have been filed in the Delaware courts between 2006 and 2018, the sample period covered by the report. These petitions comprised 320 unique actions. Of the 34 cases that went to trial over this period, the typical case took over two years between the filing of the petition and the start of the trial, and the average time from trial to issuance of the initial opinion was almost eight months.
Premium to deal price awarded. The report found that the Delaware courts’ opinions during the sample period split almost evenly between awards above the deal price and awards at or below the deal price. The Chancery Court’s award in the Sprint/Clearwire merger resulted in the largest negative premium of 57 percent. The largest award in the opposite direction came in the ISN Software deal, with a positive 158 percent premium to deal price. The average premium across all 34 opinions was 18 percent above the deal price.
Emphasis on robust, arm’s length process. The report observes that between 2006 and 2018, 59 percent of the opinions issue by the Delaware courts used a discounted cash flow analyses to determine fair value, while 38 percent relied upon the deal price. Several recent decisions, however, have highlighted judicial concerns about the quality of the sales process and the appropriate methodologies used to evaluate fair value. In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., (Del. Ch. 2018), the Chancery Court adopted a new methodology for determining fair value: the target’s 30-day average unadjusted market price.
“Our findings show that the Delaware Courts place a strong emphasis on whether the merger was the product of a robust, arm’s-length sales process,” said Cornerstone Research Senior Vice President David Marcus in a news release. Marcus coauthored the report with Cornerstone Vice President Frank Schneider, who added that the methodologies used to determine a deal’s fair value appear to have been affected by the use of market prices of shares over deal prices in recent decisions. “We expect the Delaware Courts will provide more clarity on these issues in 2019 and beyond,” Schneider said.