Fir Tree Value Master Fund, LP, et al. v. Jarden Corp., No. 454, 2019 (Del. July 9, 2020) (Seitz, C.J.)
In this appraisal case, the Delaware Supreme Court affirmed the Court of Chancery’s decision that the $48.31 unaffected market price of the stock of Jarden Corporation (“Jarden”) was the only reliable indicator of the fair value of Jarden’s stock as of the date of its merger with Newell Brands (“Newell”). The Supreme Court stated that, although a corporation’s unaffected market price alone usually cannot support a determination of fair value, the trial court adequately explained its reasons for not relying on the alternative measures of fair value presented by the parties—a comparable companies analysis, market-based evidence, and discounted cash flow (“DCF”) models. The Supreme Court also ruled that the Court of Chancery did not abuse its discretion by refusing to use the $59.21 per share deal price as a “floor” for fair value, given that the sale price resulted from a flawed process and likely captured substantial synergies.
Jarden operated as a decentralized holding company with a large portfolio of consumer product brands in separate operating companies. Martin Franklin, Jarden’s co-founder, served as CEO and board chairman until 2011 when he stepped away from day-to-day operations but continued to be responsible for M&A activity.
Centerview Partners, which advised both Jarden and Newell, informed Franklin that Michael Polk, Newell’s CEO, wanted to meet Franklin. Franklin told Centerview that he was interested in a potential transaction with Newell. Franklin did not disclose this conversation to the Jarden board and the board had not authorized Franklin to discuss a potential sale of Jarden.
Franklin and Polk met several months later at an investor conference. Franklin told Polk that he was open to selling Jarden, and they agreed to continue the conversation. Franklin did not inform the Jarden board about his discussion with Polk until several days later.
Franklin subsequently told Polk that Newell’s offer for Jarden would have to “start with a six” and include a significant cash component. The Jarden board had not authorized Franklin to meet with Newell or discuss financial terms of a sale. At that time, Jarden’s stock was trading at a per-share price in the high $40s.
Several days later, Franklin briefed the Jarden board on his recent meeting with Polk. The board supported and encouraged further discussions within the financial parameters set by Franklin. Without authorization from the Jarden board, however, the parties began due diligence and Franklin shared nonpublic information with Newell, including a set of three-year projections (the “Projections”). When eventually meeting to formally discuss a potential sale, the Jarden board directed that negotiations with Newell continue and did not discuss a pre-signing market check.
Newell structured the deal based on $500 million in estimated annual cost synergies, which valued Jarden at $57-$61 per share. The parties ultimately agreed on a target price of $60 per share with $21 in cash plus a fixed exchange ratio of Newell shares. To facilitate confirmatory due diligence, the parties entered into an exclusivity agreement, which prohibited a market check.
After Jarden’s financial advisor provided an oral opinion that the merger was fair from a financial perspective, the Jarden board approved the merger. The board also approved separation and consulting agreements with Franklin and two Jarden executives in exchange for an annual $4 million fee for three years. The board also approved amendments to these three individuals’ employment agreements which resulted in change of control payments.
Several large Jarden stockholders refused to accept the merger consideration and petitioned for appraisal. The Court of Chancery held a four-day trial that involved 25 fact witnesses and three expert witnesses. Petitioners’ expert relied primarily on a comparable companies analysis to support a fair value calculation of $71.35 per share of Jarden stock. Jarden’s expert used a DCF analysis to support a fair value calculation of $48.01 per share.
In its post-trial decision, the court declined to calculate fair value based on the deal price less synergies due to the flaws in the sale process. The court rejected petitioners’ comparable companies analysis because Jarden had no reliable comparables. The court also declined to adopt either parties’ DCF models because of their “wildly divergent” fair value conclusions. The court selected its own inputs for its DCF analysis, which resulted in a fair value of $48.13 per share. The court did not rely on its DCF analysis in arriving at its fair value determination, however, and instead adopted Jarden’s unaffected market price of $48.31 as the best evidence of fair value, finding that the market for Jarden was informationally efficient and that the parties did not have material nonpublic information that was not reflected in Jarden’s unaffected stock price.
On reargument, the court corrected certain inputs for its DCF valuation, which resulted in a revised DCF value of $48.23 per share. Although it did not rely on this valuation method, the court stated that the revised DCF value corroborated its $48.31 per share fair value award.
On appeal, petitioners advanced three main arguments. First, petitioners argued that the Court of Chancery erred by relying on Jarden’s unaffected market price as the primary source for its fair value award. The Supreme Court rejected petitioners’ argument that there is a “long-recognized principle of Delaware law” that a corporation’s stock price does not equal fair value, stating that its recent appraisal decisions did not rule out using any recognized valuation methods to support fair value, as long as the trial court adequately explains its fair value calculus based on the record before it. Because Jarden stock traded in a semi-strong efficient market and the Projections merely reflected a divergence of opinion about Jarden’s prospects and not a material difference in available information, the Supreme Court determined it was reasonable for the trial court to rely on Jarden’s unaffected market price for its fair value award.
Second, petitioners argued that, given the flaws in the sale process and Franklin setting an artificial ceiling on the merger price, the trial court should have treated the $59.21 deal price as a floor for its fair value determination. In rejecting this argument, the Supreme Court stated that the record supported the conclusion that the deal price embraced synergies and, therefore, that the merger price could not serve as a floor for fair value.
Third, petitioners argued that the court’s DCF model, which it used only to corroborate the unaffected market price, was flawed. However, the Supreme Court held that the trial court’s explanation of its DCF analysis, including the corrections made after reargument, was adequate and did not constitute an abuse of discretion.