Merion Capital L.P., et al. v. Lender Processing Services, Inc., C.A. No. 9320-VCL (Del. Ch. Dec. 16, 2016) (Laster, V.C.)
In this memorandum opinion, the Court of Chancery determined the fair value of the shares of stock of Lender Processing Services, Inc. (“LPS” or the “Company”) following a statutory appraisal proceeding. The Court concluded that the merger price provided reliable evidence of the Company’s fair value both at the time of signing of the merger agreement and at the effective time of the merger, valuing the Company at the merger price of $37.14 per share.
Fidelity National Financial (“Fidelity”) acquired LPS in 2014. The acquisition was the result of a sale process implemented by the LPS board following the receipt of a number of unsolicited indications of interest. In the sales process, the Company solicited bids from several financial and strategic buyers. Despite the broad market canvas, Fidelity was the only solicited party to submit an offer to buy the entire Company. On May 27, 2013, the Company’s board approved the entry into a merger agreement with Fidelity at a merger price of $33.25 per share, which was payable 50% in cash and 50% in Fidelity stock. The merger agreement also contained a 40-day post-signing go-shop period, a five-day initial match right that fell back to a two-day unlimited match right, and a reduced termination fee of 1.27% of the equity value of the deal for any transaction generated during the go-shop period. Thereafter, the LPS stockholders overwhelmingly approved the deal. Following the signing of the merger agreement, Fidelity’s stock price increased, which resulted in a final merger price of $37.14 per share at the effective time of the merger, representing a premium of 28% over LPS’s unaffected market price.
During the post-signing go-shop period, numerous financial and strategic buyers were contacted, but none submitted an indication of interest. Merion Capital purchased 5.7 million shares of the Company after the merger was announced and then sought appraisal.
In the appraisal proceedings, the experts for both sides conducted a discounted cash flow (“DCF”) analysis that yield markedly different estimates of fair value for the Company. Merion Capital’s expert opined that fair value of the Company was $50.46 per share, while the Company’s expert opined that fair value of the Company was $33.57 per share. The Court rejected both of those valuations and focused on whether the merger price was a reliable indicator of fair value.
In prior decisions, the Court emphasized the importance of the DCF analysis and indicated that it would rely solely or primarily on the merger price when both (i) the merger price would be a particularly reliable indicator of fair value and (ii) a DCF (or other financial valuation analysis) would be particularly unreliable. In this decision, the Court did not find that a DCF valuation must necessarily be unreliable for the Court to rely on the merger price as the best indicator of fair value.
In finding that the merger price was particularly reliable, the Court relied on (i) the “meaningful competition” in the sales process, (ii) the reliability of information about the Company shared with the potential bidders, and (iii) the fact that there was no collusion or favoritism towards any particular bidder. Here, the Court found that there was “meaningful competition” in the sales process, even though Fidelity was ultimately the sole bidder, because the market check was crafted to create actual competition and, when actual competition did not materialize, the process was crafted to create the “threat” of potential competition. The Court also found that the information provided about the Company was reliable given the absence of (i) significant regulatory uncertainty, (ii) “persistent misperceptions about the corporation’s value,” or (iii) “indications of irrational or exaggerated pessimism, whether driven by short-termism or otherwise, that could have anchored the price negotiations at levels below fair value.” Lastly, the Court found an “absence of any explicit or implicit collusion, whether among bidders or between the seller and a particular bidder or subset of bidders.”
The Court conducted its own DCF analysis, which yielded a result of $38.67 per share. The Court found it comforting that its DCF analysis yielded a result that was similar to the merger price, but gave “100% weight” to the merger price as the determinant of fair value.