(Reuters) - Shareholder lawyer Stuart Grant of Grant & Eisenhofer lost two big appraisal decisions at the end of February, as judges in Delaware Chancery Court begin to apply the Supreme Court’s recently-issued strictures on appraisal actions asking the court to set a fair value for shares of acquired companies, one against dissenting shareholders at Aruba Networks, the other by shareholders suing AOL. Last week, Grant filed motions for rehearing in both cases.
I’ve told you about his remarkable brief in the Aruba case, in which Grant said he shared Vice-Chancellor Travis Laster’s frustration with Supreme Court’s new anti-appraisal policies but pleaded with Laster not to make dissenting Aruba shareholders “collateral damage” in the judge’s protest against Supreme Court directive.
Grant’s newly-filed rehearing brief in the AOL case strikes a notably different tone. That’s deliberate. The Aruba Networks decision, in which Vice-Chancellor Laster relied on Aruba’s trading price to set a fair value for its shares, is an unmitigated disaster for dissenting shareholders if it holds up. Grant’s rehearing motion suggested that Vice-Chancellor Laster may not even believe in the legal theory he applied, but on its face, as Grant wrote, the decision wipes out appraisal litigation in any deal involving a premium over the acquired company’s share price.
Vice-Chancellor Samuel Glasscock’s AOL decision, on the other hand, could actually be considered a boon for dissenting shareholders, as I’ll explain. So instead of protesting the judge’s legal reasoning, the motion for rehearing takes issue with Glasscock’s “computational errors,” arguing that if the vice-chancellor had used the right inputs for certain components of his analysis, he would have arrived at a fair value higher than the $50 per share Verizon paid for AOL.
“AOL as an opinion was good for petitioners seeking appraisal,” Grant told me. “The result was not good. But if the court fixes it, the result will be above the deal price. I hope that’s what happens. It’s what should happen.”
The good part of the opinion, for dissenting shareholders, was the vice-chancellor’s conclusion that, despite the Delaware Supreme Court’s 2017 rulings in DFC Global v. Muirfield Value Partners and Dell v. Magnetar, he owed no deference to the AOL deal price. Glasscock found the Verizon acquisition was not “Dell compliant,” to use his phrase, because AOL and Verizon took steps to restrict other buyers from topping Verizon’s bid after it was announced.
“On the front end, the market canvas appears sufficient so long as interested parties could submit bids on the back end without disabling impediments. However, here my concern arises,” the vice-chancellor wrote, citing a $150 million breakup fee for Verizon if AOL opted for a different merger partner and the AOL CEO’s public statements supporting the Verizon bid. Those comments, the judge said, “could reasonably cause potential bidders to pause when combined with the deal protections here.”
Really? A breakup fee and comments supporting an announced merger – especially from a troubled company known to have been seeking a deal - seem like standard deal features. If that’s all dissenting shareholders need to show to convince Chancery judges to disregard the deal price in appraisal actions, appraisal arbitrage may have more of a future than I thought last week.
Of course, acquired companies may also benefit when Chancery judges disregard the deal price in appraisal actions. AOL’s lawyers at Wachtell Lipton Rosen & Katz, for instance, argued that Verizon paid a premium for AOL because of perceived synergies: The true value of AOL shares, according to AOL’s expert economist in the appraisal case, wasn’t the $50 Verizon agreed to pay but rather a mere $44.85 per share.
Both companies and dissenting shareholders, in other words, have reasons to argue against Chancery judges deferring to the deal price. In the AOL case, Vice-Chancellor Glasscock said both sides urged him to look at discounted cash flow analyses, rather than just the Verizon deal price, to decide fair value. He ended up giving no weight whatsoever to the Verizon price except as a check on his own determination of fair value.
I won’t bore you with the details of the vice-chancellor’s analysis, which was based on the report from AOL’s economist, except to say that the judge used a slightly higher long-term growth rate than AOL’s expert recommended and concluded that AOL’s fair value should reflect two pending agreements with Microsoft that AOL’s expert disregarded. He came up with a per-share value of $48.70 – less than AOL proposed but also, crucially, less than the $50 per-share deal price. The dissenting shareholders who brought the appraisal action, under Vice-Chancellor Glasscock’s decision, are entitled to less (not counting accrued interest) than they would have received if they’d tendered their shares to Verizon.
Grant’s rehearing brief contends Vice-Chancellor Glasscock mistakenly used a valuation from a different AOL contract to assess the value of one of the Microsoft agreements, erred in not assigning additional per-share value from the second Microsoft deal and understated the impact of both agreements in calculating a growth rate. If the judge had used the right evidence and calculations, according to the brief, he would have arrived at a per-share valuation of nearly $52.
In a response brief, AOL’s lawyers at Wachtell said the dissenting shareholders cloaked their rehearing request in a supposed math mistake but they are really asking Vice-Chancellor Glasscock to ignore the Delaware Supreme Court’s directive to consider market realities. “Taking no account of the substantial market evidence, petitioners now claim that the fair value of AOL is $51.98 per share, far above the amount anyone — any strategic buyer, any financial buyer, any stockholder — was ever prepared to pay for AOL’s shares,” the brief said. “Petitioners thus ask the court, using a DCF model, to find that a public company was undervalued in an arm’s length transaction — precisely the outcome that the Supreme Court rejected in its ruling in Dell v. Magnetar.”
If the vice-chancellor really wants to reevaluate AOL’s share price, the company said, he ought to use a more realistic assessment of the company’s future growth rate and conclude the fair value was $45.54 per share – “a valuation entirely in accord with the market evidence recently credited by the Supreme Court,” the company’s brief said.
Appraisal litigation, as I wrote last week, is at an inflection point as Chancery judges like Glasscock and Laster figure out how to apply Delaware Supreme Court precedent. Both the Aruba Networks and AOL rulings are quirky, but they’re going to be important milestones for the future of appraisal litigation.