Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Apr. 16, 2019) (Per Curiam)

In this per curiam decision, the Delaware Supreme Court reversed the Court of Chancery’s determination in a statutory appraisal proceeding that the fair value of Aruba Networks, Inc. (“Aruba”) as of the date of its acquisition (the “Merger”) by Hewlett-Packard Company was $17.13 per share, the thirty-day average market price at which Aruba’s shares traded before the media reported news of the Merger.  Instead, the Supreme Court directed the Court of Chancery to enter judgment in the amount of $19.10 per share, reflecting the deal price minus the value of synergies, as determined by Aruba’s expert.

Under Delaware’s appraisal statute, 8 Del. C. § 262, stockholders who properly demand appraisal in connection with certain kinds of mergers are entitled to a determination by the Court of Chancery of the “fair value” of their shares.  That fair value determination, the statute provides, must be “exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation.”

In assessing the fair value of Aruba’s stock, the Court of Chancery determined to rely exclusively on the unaffected trading price, rather than the deal price minus synergies, because it posited that the Merger achieved “reduced agency costs,” which it viewed to be an element of value arising from the accomplishment of the Merger that was reflected in the deal price (even with the value of synergies deducted) but absent from the unaffected trading price. The Supreme Court held that the Court of Chancery abused its discretion in relying entirely on the unaffected trading price to determine fair value. The Supreme Court explained that there was no evidence in the record or basis in the relevant literature to support the determination that the reduced agency costs were not included as part of the synergies that were deduced from the deal price, and rejected the idea that agency costs might be reduced when the company’s ownership is consolidated, at least where the seller is acquired by a strategic, widely held public buyer as opposed to, for example, a private equity firm. 

The Supreme Court also rejected the trial court’s suggestion that the Supreme Court’s recent decisions in DFC Global Corp. v. Muirfield Value Partners, L.P., 172 A.3d 346 (Del. 2017) and Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017) compelled a finding that the unaffected market price was the best indicator of fair value.  The Supreme Court stated that those decisions found, in an efficient market, that the unaffected market price may be informative of fair value, but not necessarily an exclusive indicator.  The deal price, the Supreme Court explained, reflected a better assessment of Aruba’s going-concern value than the unaffected trading price because the unaffected trading price was several months removed from the valuation date, and the buyer had material non-public information that would not be reflected in the market price.  This result was further supported by the discounted cash flow, comparable companies, and comparable transactions analyses conducted by Aruba’s expert.

In addition, the Supreme Court noted due process concerns regarding the manner in which the trial court reached its decision. Prior to supplemental post-trial briefing requested by the trial court, neither party had advocated the unaffected market price as the sole indicator of fair value, depriving the petitioner of a fair opportunity to develop evidence in opposition to that theory. 

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