By Anne Sherry, J.D.
Appraisal petitioners took the wrong lesson from the Delaware Supreme Court’s recent trilogy of appraisal cases, the court suggested in affirming a chancery court opinion that appraised Jarden Corporation at well below the deal price. The cases reiterated that the chancery court must look to all relevant factors and explain how it arrived at a fair value for the corporation. In the case of Jarden, the chancery court reasoned that the deal price was an unreliable indicator of fair value because Jarden’s CEO acted with little oversight and volunteered an acceptable price range before negotiations really began (Fir Tree Value Master Fund, LP v. Jarden Corporation, July 9, 2020, Seitz, C.).
In 2016 Newell Rubbermaid acquired Jarden for a mix of cash and shares worth $59.21 per share of Jarden. Dissenting shareholders filed an appraisal suit, their expert’s discounted cash flow analysis valuing the company at $71.35 per share. The chancery court ultimately valued Jarden at $48.31 per share, its unaffected market price at the time of the transaction. This value was corroborated by the respondents’ expert’s analysis, an event study, and the court’s own DCF analysis using the "most credible components" of both parties’ expert analyses.
On appeal, the Delaware Supreme Court affirmed. Contrary to the petitioners’ arguments, there is no "long-recognized principle" in Delaware law that a corporation’s unaffected stock price cannot equate to fair value. Neither Aruba nor the DFC and Dell opinions that preceded it foreclosed any fair-value measurement as a matter of law. The cases emphasize that the court must take into account all relevant factors and justify its methodology under accepted financial principles applied to the facts of the case. Aruba also elaborates that when there is a robust deal process, the buyer, who holds material nonpublic information about the seller, has both the information and the incentive to properly value the seller. On the other hand, if the market for the seller’s stock is informationally efficient, the market price may be a better indicator of value.
The chancery court found that Jarden traded in a semi-strong, efficient market and that there was not likely to be material nonpublic information that was not incorporated into Jarden’s market value. Although the petitioners countered that certain projections were not public at the time of the negotiations, the chancery court found that an event study demonstrated that when the information was eventually disclosed, the market’s reaction did not suggest that it had misjudged the stock price before.
The petitioners also took a strategic risk in the appraisal trial, successfully convincing the chancery court that the deal price was the result of a flawed sale process because Jarden’s CEO acted without much board oversight and signed an artificial ceiling on what Newell was willing to pay. Despite this, the petitioners urged on appeal that the deal price should have at least acted as a floor for fair value. The high court said it was "hard-pressed to fault the court for not looking to the deal price as a floor for fair value when the petitioners told the court that synergies only became relevant if the deal price was reliable." Furthermore, the chancery court understood that the deal price had to be adjusted for synergies, and while the evidence from the competing experts was less than definitive, the court was satisfied that Jarden probably captured synergies in the merger price.
Finally, the Supreme Court found that chancery did not abuse its discretion in reviewing other market evidence to support the conclusion that the unaffected market price represented fair value, nor was it error to change the terminal investment rate in its DCF analysis. Making this one change caused a wild swing in value, so the chancery court did not rely on its DCF model in finding fair value, other than to corroborate the unaffected market price.
The case is No. 454, 2019.