In re Appraisal of SWS Grp., Inc.

In re Appraisal of SWS Grp., Inc.

Opinion

MEMORANDUM OPINION

GLASSCOCK, Vice Chancellor

The Petitioners here are former stockholders of SWS Group Inc. ("SWS" or the "Company"), a Delaware corporation. They are seeking a statutory appraisal of their shares. The Company was exposed to the market in a sales process. As this Court has noted, most recently in In Re Appraisal of PetSmart, Inc.,¹ ] a public sales process that develops market value is often the best evidence of statutory "fair value" as well. [*2]  As noted below, however, the sale of SWS was undertaken in conditions that make the price thus derived unreliable as evidence of fair value, in my opinion. Methods of valuation derived from comparable companies are similarly unreliable here. I rely, therefore, on a discounted cash flow ("DCF") analysis to determine the fair value of SWS, assisted by the learned but divergent opinions of the parties' experts. My rationale for rejecting sale price, and my resolution of the disputed issues involved in the competing DCFs, follows.

This action arises from the Petitioners' statutory right to receive a judicial determination of the fair value of their shares of SWS. On January 1, 2015, SWS merged into a wholly-owned subsidiary of Hilltop Holdings, Inc. ("Hilltop"), itself a substantial creditor of SWS. SWS shareholders received a mix of cash and stock worth $6.92. The Petitioners are a series of funds holding appraisal-eligible shares of SWS. The Petitioners bring this action challenging the merger consideration as unfair. It is my statutory duty to determine the fair value of the Petitioners' shares as of the date of the merger.

This case presents two divergent narratives. The first is [*3]  that the Company was on the brink of a turnaround before the sale, and had only been suffering due to unique and unprecedented market conditions. The second is that the Company had fundamental structural problems making it difficult to compete at its size. The reality is somewhere in the middle, in my view. The Company was a struggling bank which had a chance to modestly improve its outlook around the time of sale. It still faced a long climb, however.

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