In a Mergers and Acquisitions Update, Cadwalader attorneys analyzed two recent decisions by the Delaware Court of Chancery ( Blueblade Capital Opportunities, LLC v. Norcraft Companies, Inc. and In re Appraisal of Solera Holdings, Inc.) which highlight the importance of a company's high-quality sales process in shaping the outcome of an appraisal proceeding.
As described more fully in the update, in Blueblade Capital Opportunities, LLC v. Norcraft Companies, Inc. – an appraisal proceeding that emanated from a transaction in 2015, in which Fortune Brands Home & Security Inc. bought a cabinet manufacturer, Norcraft Companies – the Court determined that a valuation of $26.16 per share was the most accurate measure of fair value. In a memorandum opinion, the Vice Chancellor held that the deal price was not reflective of Norcraft's "fair value" due to flaws in the sales process, including, but not limited to, failure to consider other possible merger partners and the absence of a pre-signing market check. The Vice Chancellor conducted his own discounted cash flow ("DCF") analysis and evaluated "DCF inputs and assumptions step-by-step, making determinations about which expert submitted more credible testimony for each disputed input."
The proceeding In re Appraisal of Solera Holdings, Inc. arose from a March 2016 transaction, in which Vista Equity Partners acquired Solera Holdings, Inc. for $55.85 per share. The Court concluded the fair value of petitioners' shares to be "the deal price less estimated synergies – i.e., $53.95 per share."
The attorneys explained that a pre-signing market check is critical in a Delaware Court of Chancery's evaluation of the quality of a company's sales process because directors must illustrate that they were apprised of possible buyers and had a deliberate reason for negotiating with only the buyer. Additionally, buy-side financial advisors should refrain from seeking to obstruct a seller's sale process. Dissuading other potential buyers from making acquisition proposals during the go-shop process, for instance, may "render the entire process inadequate to justify reliance on the deal price as a basis for fair value." The attorneys further identified several other key "takeaways" from the two rulings, including:
- the seller's board is solely responsible for overseeing the sales process;
- parties must offer specific evidence that the market for the company's stock is efficient in order to persuade a court that the "unaffected trading price immediately before announcement of a potential transaction is probative of fair value"; and
- valuation experts must maintain their reliability with the Court in order to be effective.
The memorandum was authored by Jason M. Halper, William Mills, Ellen V. Holloman, Joshua Apfelroth, James M. Fee, and William Simpson.
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