Law School Case Brief
Verition Partners Master Fund, Ltd. v. Aruba Networks, Inc. - 210 A.3d 128 (Del. 2019)
Fair value is more properly described as the value of the company to the stockholder as a going concern, rather than its value to a third party as an acquisition. The court of chancery must exclude from any appraisal award the amount of any value that the selling company's shareholders would receive because a buyer intends to operate the subject company, not as a stand-alone going concern, but as a part of a larger enterprise, from which synergistic gains can be extracted. For this reason, in cases where the court of chancery has used the price at which a company is sold in a third-party transaction, it has excised a reasonable estimate of whatever share of synergy or other value the buyer expects from changes it plans to make to the company's going concern business plan that has been included in the purchase price as an inducement to the sale.
In August 2014, Hewlett-Packard Company (HP), a publicly traded company, approached Aruba, another publicly traded company, about a potential combination. Aruba hired professionals and, in addition to negotiating with HP, began to shop the deal. After several months of negotiations between the two companies, the Aruba board decided to accept HP's offer of $24.67 per share. News of the deal leaked to the press about two weeks later, causing Aruba's stock price to jump from $18.37 to $22.24. The next day, after the market closed, Aruba released its quarterly results, which beat analyst expectations. Aruba's stock price rose by 9.7% the following day on the strength of its earnings to close at $24.81 per share, just above the deal price. Not long after the deal leaked, both companies' boards approved the transaction, and Aruba and HP formally announced the merger at a price of $24.67 per share. The final merger agreement allowed for another passive market check. However, no superior bid emerged, and the deal closed on May 18, 2015.
On August 28, 2015, petitioners Verition Partners Master Fund Ltd. and Verition Multi-Strategy Master Fund Ltd. (Verition), filed an appraisal proceeding in the Court of Chancery, asking the court to appraise the "fair value" of their shares under 8 Del. C. § 262. The respondent was Aruba, albeit an Aruba now 100% controlled by HP. In its pretrial and initial post-trial briefing, Verition maintained that Aruba's fair value was $32.57 per share, and Aruba contended that its fair value was either $19.45 per share (before trial) or $19.75 per share (after trial). In its post-trial answering brief, Aruba contended that its "deal price less synergies" value was $19.10 per share. Neither party claimed that Aruba's preannouncement stock price was the best measure of fair value at the time of the merger. The Court of Chancery found that the fair value of Aruba Networks, Inc., as defined by § 262, was $17.13 per share, which was the 30-day average market price at which its shares traded before the media reported news of the transaction that gave rise to Verition's appraisal rights. Verition appealed.
Was the Court of Chancery's decision to use Aruba's stock price instead of the deal price minus synergies erroneous?
The Supreme Court of Delaware held that the Court of Chancery abused its discretion in arriving at Aruba's 30-day average unaffected market price as the fair value of Verition’s shares, because the Court of Chancery's decision to use the corporation's stock price instead of the deal price minus synergies was rooted in an erroneous factual finding that lacked record support; the Court of Chancery abused its discretion in using the corporation's unaffected market price; because the Court of Chancery's decision to use Aruba's stock price instead of the deal price minus synergies was rooted in an erroneous factual finding that lacked record support, the supreme court reversed the Court of Chancery's judgment and remanded, directing the Court of Chancery to enter a final judgment for the petitioners Verition awarding them $19.10 per share, which reflected the deal price minus the portion of synergies left with the seller as estimated by the respondent in this case, Aruba.
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