ACP Master, Ltd. v. Sprint Corp., C.A. No. 8508-VCL (Del. Ch. July 21, 2017) (Laster, V.C.) & ACP Master, Ltd. v. Clearwire Corp., C.A. No. 9042-VCL (Del. Ch. July 21, 2017) (Laster, V.C.)
In this post-trial opinion involving consolidated breach of fiduciary duty and statutory appraisal actions, the Court of Chancery held that the fair value of Clearwire Corp. (“Clearwire”) was $2.13 per share, significantly lower than the $5 per share deal price Sprint Nextel Corporation (“Sprint”) paid in July 2013 to acquire the 49.8% stake in Clearwire that it did not already own. The Court also found that Sprint did not breach the fiduciary duties it owed as controlling stockholder because the merger was entirely fair to Clearwire’s minority stockholders.
Sprint had initially offered a buyout price of $2.97 per share, but negative stockholder reaction and a subsequent bidding war with Dish Network Corp, (“DISH”) caused Sprint to agree to raise its offer to $5.00 per share. Ultimately, a special committee recommended that the stockholders approve Sprint’s final offer at $5.00 per share, and 70% of Clearwire’s unaffiliated stockholders voted in favor of the merger. Thereafter, Aurelius Capital Management, LP and certain affiliates (“Aurelius”) filed a plenary lawsuit contending that the merger resulted from Sprint’s breach of its fiduciary duties as a controlling stockholder of Clearwire and arguing that the stock was worth over $16.00 per share. Aurelius also filed a statutory appraisal proceeding. The Court consolidated and tried both cases.
The Court first considered the fiduciary duty claims. Because the transaction involved a controlling stockholder, the Court concluded that entire fairness was the applicable standard of review, with defendants bearing the burden of proving that the transaction was entirely fair. Although the Court found that “multiple instances of unfair dealing” occurred in the first phase of the merger process – i.e., related to the deal priced at $2.97 per share – the Court held that DISH’s subsequent higher bids and the ensuing bidding war “changed the landscape so substantially as to render immaterial the instances of unfair dealing that took place during the first phase” of the sale process. Thus, the Court held that Sprint carried its burden in showing that the eventual $5.00 per share merger price and the process that led to it were entirely fair, despite Sprint’s unfair dealing during the first phase of the transaction.
After finding the merger to be entirely fair, the Court turned to the appraisal claims. Because neither party argued that the Court should give weight to the deal price, and because the merger price reflected synergies not properly within the scope of an appraisal valuation, the Court declined to utilize the merger price as evidence of fair value. Instead, the Court relied exclusively on the Discounted Cash Flow (“DCF”) analysis prepared by Sprint’s expert to determine the fair value of Clearwire’s stock. The Court found the valuation of Sprint’s expert superior to that of Aurelius’ expert in its choice of future cash flow projections, perpetuity growth rates, discount rates, and its valuation of the unused portion of Clearwire’s spectrum.
The Court adopted the cash flow projections used by Sprint’s expert because those projections were prepared in the ordinary course of business by Clearwire’s management. In contrast, Aurelius’s expert relied on unrealistic projections created by Sprint’s management that, according to the Court, failed to reflect Clearwire’s operative reality at the time of the merger.
The Court likewise approved of Sprint’s use of a perpetuity growth rate at 3.35%, which represented the midpoint of inflation and GDP growth. Noting that the discount rates between the two determinations accounted for less than 1% of their difference in valuation results, the Court adopted Sprint’s discount rate with minimal discussion and for the sake of consistency with its acceptance of the other components of Sprint’s DCF analysis.
Lastly, the Court rejected Aurelius’s valuation of Clearwire’s 40MHz of unused spectrum in favor of Sprint’s determination of the unused spectrum’s value. The Court found Sprint’s valuation more accurate because it relied on figures implied by the price offered in an earlier proposal from DISH to purchase 40MHz worth of Clearwire’s capacity, which reflected what a buyer was willing to spend on the unused spectrum.