By Anne Sherry, J.D.
The Delaware Court of Chancery appraised Panera Bread Company below the price at which it sold itself to JAB Holdings B.V. in 2017. The deal price of $315 per share was the best indicator of fair value in this case, minus cost and tax synergies of $11.56 per share. However, to reduce its potential interest liability pending the appraisal case, Panera had prepaid the full deal price to dissenting shareholders, but it did not negotiate for a clawback in case the company appraised below the deal price. The vice chancellor declined to read a refund requirement into the appraisal statute (In re Appraisal of Panera Bread Company, January 31, 2020, Zurn, M.).
Prior to striking a deal with JAB, Panera also had discussions with Starbucks, but those negotiations were unfruitful. JAB initially offered $286 per share, a 21.7 percent premium over Panera’s then-stock price. After Panera received JAB’s second offer of $296.50 per share, and while JAB was conducting due diligence, Morgan Stanley, Panera’s financial advisor, presented seven different valuation metrics to the board and identified other potential purchasers. The board agreed with CEO Ronald Shaich that none of these companies, nor anyone else, was likely to be interested. News of a possible sale leaked to the press, and Panera’s stock price jumped to $282. JAB made a final offer of $315 per share with a 3 percent termination fee. The board approved the merger, as did 97 percent of the shareholder votes cast at a special meeting, representing 80 percent of the outstanding shares. The merger closed in July 2017 with no other potential bidders having come forward.
Thirty dissenting stockholders, representing over 1.8 million shares, filed appraisal petitions in August and September 2017. Between December 2017 and May 2018, Panera prepaid 29 of these stockholders the full $315 per share of merger consideration plus statutory interest through the date of payment. Several of the petitioners withdrew their demands and dropped out of the consolidated appraisal action; the rest contended that the fair value of their shares was $361 per share. This analysis gave no weight to the deal price, instead basing their figure on analyses by their expert: 60 percent weight to his discounted cash flow analysis, 30 percent weight to his comparable companies analysis, and 10 percent to his precedent transaction analysis.
The court, however, looked at “indicia of fairness” of a transaction that suggest that the deal price is persuasive—but not presumptive—evidence of fair value following the Delaware Supreme Court’s appraisal decisions in Dell, DFC, and Aruba Networks. Here, it was more or less undisputed that Panera’s stock traded in an efficient market. The parties negotiated at arm’s length, and the board was independent and unburdened by conflicts of interest. JAB assessed Panera’s value using public information and due diligence into confidential information. After reviewing the specific nonpublic information that Shaich thought would lead to a greater value, JAB internally raised its offer and ultimately struck a deal price well above what it had said was its ceiling. The court also considered the fact that no other potential bidders emerged after the negotiations leaked to the press or after the parties announced the merger, even though the deal protections were not preclusive.
The court also dismissed the argument that weaknesses in the sale process undermined the deal price’s reliability as an indicator of fair value. While Shaich led the negotiations, the board negotiated the terms of the merger and unanimously approved the final merger agreement. It worked with Morgan Stanley to value the company and focused on getting JAB to raise its offer ceiling. JAB’s focus on confidentiality and speed benefited Panera, and the board negotiated for less restrictive deal protections, successfully bargaining down to a 3 percent termination fee from JAB’s offer of 4 percent. There was also no evidence that Shaich was conflicted due to his desire to retire; on the contrary, the court saw him as motivated to place the company he had founded in the hands of the right buyer at the best price.
Not only did the appraisal petitioners fail to secure an upwards price revision, but Panera proved $11.56 per share in synergies (based on combined cost and tax synergies at $37.29 per share, 31 percent of which was built into the deal price). Nevertheless, the petitioners received the full deal price as a prepayment by Panera, and the court denied the company’s request for a refund of the difference. The parties did not negotiate a clawback, the statute does not explicitly contemplate a refund, and it was logical that the General Assembly intended to omit a refund mechanism when it enacted the prepayment scheme in the shadow of the Model Business Corporation Act. Although the court did not break down the amount that Panera overpaid the dissenting stockholders, it should approximate $20 million, plus interest, based on the number of shares at stake and the difference between the deal price and fair value.
The case is No. 2017-0593-MTZ.