Delaware Supreme Court Again Reverses Court of Chancery Appraisal Decision: The Court Directs Entry of Judgment at Deal Price Less Synergies, 22.6% Below Deal Price

Sullivan & Cromwell LLP - April 18, 2019

For the third time in less than two years, the Delaware Supreme Court reversed a significant appraisal decision from the Court of Chancery in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. Unlike the previous two reversals in DFC and Dell that reduced the Chancery appraisal awards, the Supreme Court in Aruba ruled that the trial court awarded petitioners too little by concluding that the fair value of Aruba’s stock was equal to the unaffected market price of Aruba’s shares, a price 30% lower than the deal price. In an unusually combative, unsigned decision, the Supreme Court ruled that the Vice Chancellor’s “decision to use the trading price as his sole basis for determining fair value was his alone, and in no way dictated by a rational reading of Dell,” and might be seen “as a results-orientated move to generate an odd result compelled by his personal frustration at being reversed in Dell.” Nevertheless, the Supreme Court agreed with the Court of Chancery’s conclusion that, on this record, “‘the deal price . . . operates as a ceiling for value.’” After properly excluding synergies “or other value the buyer expects from changes it plans to make to the company’s ‘going concern’ business plan,” the Supreme Court accepted Aruba’s calculation of its fair value at $19.10 per share, 22.6% below the $24.67 per share deal price but above the trial court’s $17.13 market price valuation. The Aruba decision reinforces recent Delaware jurisprudence finding that the deal price—assuming a reasonable sale process—ought in most cases to impose a ceiling on fair value in appraisals, subject to reduction for synergies and other pricing factors unrelated to intrinsic value.