Delaware Supreme Court Reverses Chancery Court’s Determination in Aruba Appraisal Ruling | Practical Law

Delaware Supreme Court Reverses Chancery Court’s Determination in Aruba Appraisal Ruling | Practical Law

The Delaware Supreme Court reversed and remanded the Court of Chancery's determination that the appraised value of Aruba Networks, Inc. was the 30-day average unaffected market price. The Supreme Court held that the fair value for appraisal purposes is deal price less synergies.

Delaware Supreme Court Reverses Chancery Court’s Determination in Aruba Appraisal Ruling

by Practical Law Corporate & Securities
Published on 18 Apr 2019Delaware, USA (National/Federal)
The Delaware Supreme Court reversed and remanded the Court of Chancery's determination that the appraised value of Aruba Networks, Inc. was the 30-day average unaffected market price. The Supreme Court held that the fair value for appraisal purposes is deal price less synergies.
In a highly anticipated statutory appraisal ruling arising out of Hewlett-Packard Company's 2015 acquisition of Aruba Networks, Inc., the Delaware Supreme Court unanimously reversed the Court of Chancery's decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. to use the stock trading price rather than the deal price in valuing Aruba's shares ( (Del. Ch. Feb. 15, 2018)). The Supreme Court held that the correct measure of appraised value is "deal price minus the portion of synergies left with the seller" (Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., , at *1 (Del. Apr. 16, 2019)).

Chancery Court Decision

The Chancery Court valued the Aruba shares at $17.13 per share, an amount based on the 30-day average unaffected market price before news of the potential acquisition first leaked out to the public. While it noted that the Delaware Supreme Court's decisions in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. (177 A.3d 1 (Del. 2017)) and DFC Global Corp. v. Muirfield Value Partners, L.P. (172 A.3d 346 (Del. 2017)) endorsed using the deal price less synergies as evidence of fair value in a third-party, arm's-length deal, the Chancery Court ultimately reasoned that the unaffected stock price provided the "best evidence" of the target's value as a going concern (, at *54-55 (Del. Ch. Feb. 15, 2018)); for more information on the Dell and DFC Global opinions, see Legal Update, Dell Appraisal: Delaware Supreme Court Reverses Chancery Court's Appraisal Award, Upholds Negotiated Price as Evidence of Fair Value.
The Chancery Court declined to use its own valuation of deal price less synergies due to both:
  • The potential for human error in the calculation of synergies.
  • Its view that, even if it had properly calculated and excluded synergies, the deal price still reflected a premium in the form of "reduced agency costs that result from unitary (or controlling) ownership."

Outcome on Appeal

In its per curiam opinion, the Delaware Supreme Court held that the appraised value of the shares should not be based on the unaffected market price, but rather the price paid by Hewlett-Packard in the arm's-length transaction minus an estimate of synergies from the deal. This approach resulted in an appraised value of $19.10 per share as estimated by Aruba, a higher amount than the Chancery Court's valuation of $17.13. The court adopted Aruba's calculation of the synergies, which it found to be "corroborated by abundant record evidence," including various financial analyses such as Hewlett-Packard's and Aruba's standalone discounted cash flow (DCF) models used by Aruba's and Hewlett-Packard's boards in approving the transaction and Aruba's expert's DCF, comparable companies, and comparable transactions analyses (, at *8-9 (Del. Apr. 16, 2019)).
The Supreme Court found that the Chancery Court abused its discretion by:
  • Double counting agency costs. It noted that the Chancery Court's use of unaffected market price was based on "the inapt theory that it needed to make an additional deduction from the deal price for unspecified 'reduced agency costs.'" (, at *4 (Del. Apr. 16, 2019).)
  • "Injecting due process and fairness problems into the proceedings." By introducing the use of unaffected market price late in the lower court proceedings (after requesting post-trial briefing on the matter), it deprived the parties of the opportunity to use pretrial discovery and expert depositions and testimony to develop a record and comment on this valuation method at trial. Moreover, though the Supreme Court ultimately took the Chancery Court's Vice Chancellor "at his word," it referenced the petitioners' assertion that the Vice Chancellor's decision not to award deal price less synergies may have been motivated by "a results-oriented move to generate an odd result compelled by his personal frustration at being reversed" in the prior Dell appraisal decision. (, at *7-8 (Del. Apr. 16, 2019).)
In explaining why the deal price was a better measure of Aruba's going concern value than the unaffected market price, the Supreme Court observed that:
  • The stock price "was a measurement from three to four months before the valuation date, a time period during which it is possible for new, material information relevant to a company's future earnings to emerge." Section 262(h) of the Delaware General Corporation Law requires that the appraised fair value be determined as of the effective date of the merger.
  • Hewlett-Packard "had more incentive to study Aruba closely than ordinary traders in small blocks of Aruba shares, and also had material, nonpublic information that, by definition, could not have been baked into the public trading price."
The Supreme Court ordered that the Chancery Court enter final judgment for the petitioners in the amount of $19.10 per share plus any interest. As with the Chancery Court's appraised value, this amount was well below the $32.57 sought by the petitioners (based on their DCF analysis) and the $24.67 deal price.

Practical Implications

The Delaware Supreme Court's decision reversing Aruba definitively establishes that the unaffected market price is not an appropriate measure to establish fair value in a Delaware appraisal proceeding. Instead, the Supreme Court reiterated its view that the appropriate measure in Aruba was the deal price less synergies, a measure that it relied on in prior high profile appraisal cases where there was both an efficient market and the deal price was negotiated in an arm's-length transaction, such as Dell and DFC Global. Nonetheless, the Supreme Court's language cannot be interpreted as establishing a bright-line rule, merely that a "buyer in possession of material nonpublic information about the seller is in a strong position (and is uniquely incentivized) to properly value the seller when agreeing to buy the company at a particular deal price, and that view of value should be given considerable weight by the Court of Chancery absent deficiencies in the deal process." (, at *6 (Del. Apr. 16, 2019) (emphasis added).)
Unfortunately, the Delaware Supreme Court did not spend much time in Aruba analyzing how synergies should be calculated. Instead, the Supreme Court merely adopted Aruba's estimate. Nonetheless, by noting that Aruba's estimate was "corroborated by abundant record evidence" the Supreme Court provided a clue that the calculation of synergies can be corroborated with traditional financial analyses, including the DCF, comparable companies, and comparable transactions analyses, if the analyses confirm a valuation that is somewhere in the ballpark of the deal price minus synergies' estimate.
Although Aruba was a strategic acquisition, the Delaware Supreme Court in dicta also seems to open the door to potential future arguments that even in an acquisition by a financial buyer (where synergies are not typically expected, unless the acquisition is a portfolio add-on acquisition), the appraised fair value may be lower than the deal price due to reduced agency costs. Specifically, in finding that the Chancery Court inappropriately double counted agency costs in its determination of fair value, the Supreme Court distinguished Aruba from a private equity deal where it noted law review articles have made the argument that "replacing a dispersed group of owners with a concentrated group of owners can be expected to add value because the new owners are more capable of making sure management isn't shirking or diverting the company's profits, and that added value must be excluded under § 262 as 'arising from the accomplishment or expectation of the merger or consolidation.'" (, at *4 (Del. Apr. 16, 2019).)
Ultimately, although the Delaware Supreme Court reversed the Chancery Court in Aruba and awarded the petitioners a slightly higher appraisal price, that amount was still significantly below the deal price. Accordingly, it is unlikely that this decision will reverse the recent trend of decreased appraisal proceedings.