DELAWARE COURT OF CHANCERY USES COMPANY’S UNAFFECTED MARKET PRICE TO DETERMINE FAIR VALUE IN APPRAISAL ACTION
By Josh Gaul and Frank Mazzucco
In In Re: Appraisal of Jarden Corporation, C.A. No. 12456-VCS (Del. Ch. Jul. 19, 2019), the Delaware Court of Chancery (the “Court”) determined in a statutory appraisal action that, in connection with a merger, the fair value of Jarden Corporation was best represented by the unaffected market price of the company’s shares.
In an April 2016 merger (the “Merger”), Newell Rubbermaid, Inc. (“Newell”) acquired Jarden Corporation (“Jarden” or the “Company”) for cash and Newell stock equaling $59.21 per share (the “Merger Price”). Following the closing, several hedge fund investors that were Jarden shareholders as of the Merger’s effective date (the “Petitioners”) initiated litigation to seek a judicial appraisal of the fair value of their Jarden shares.
The Court noted that, under Delaware’s appraisal statute, 8 Del. C. § 262(h), the trial court’s function is to “determine the fair value of the [dissenting shareholders’] shares” at the time of a transaction (i.e., the pro rata share of the appraised company’s value as a going concern) by taking into account “all relevant factors.” Both parties produced experts with competing views of the Company’s fair value as of the Merger. Jarden’s expert contended that the Company’s fair value was $48.01 per share, in reliance on the Company’s unaffected market price and a “Merger Price-less-synergies” analysis. Conversely, the Petitioners’ expert alleged that the Company’s fair value was $71.35 per share, in reliance on a market multiples (i.e., comparable company) analysis and discounted cash flow (“DCF”) analysis.
In finding for Jarden that the Company’s unaffected market price of $48.31 per share (i.e., approximately 18% less than the Merger Price) was a powerful indicator of its fair value at the time of the Merger, the Court broadly agreed with the market-based metrics put forth by Jarden’s expert. The Court concluded that the use of such methodologies and reliance on the Company’s unaffected market price were particularly appropriate because: Jarden’s stock was heavily traded in a semi-strong efficient market; Jarden had no controlling stockholder and a public float of 93.9% of its outstanding stock; Jarden was well covered by professional stock analysts; and there was no credible evidence that material information relevant to Jarden’s fair value was withheld from the market as of the Merger. The Court also noted that, in advance of the Merger, Jarden had financed an acquisition with an equity offering valued at $49.00 per share and authorized a related stock buyback at the same price, which constituted further evidence that Jarden management’s internal valuation of the Company matched the unaffected market price.
The Court found that the DCF analyses provided by both parties’ experts in support of their respective valuations — which diverged significantly — “utilized inputs . . . that were not justified and that skewed the results.” As a result, the Court performed its own DCF valuation, which yielded a fair value of $48.13 per share and was generally consistent with the Company’s unaffected market price of $48.31 per share. By contrast, the Court observed that the “Petitioners’ proffered estimate of fair value for Jarden of $71.35 is, to put it mildly, an outlier.”
Because both parties’ experts acknowledged the difficulty of valuing deal synergies and, in particular, assessing which party captured the value from such synergies in the Merger, the Court declined to rely on the “Merger Price-less-synergies” methodology in conducting its fair value determination. Similarly, the Court declined to agree with the Petitioner’s proposal to eschew market evidence in favor of a market multiples analysis, because, in the Court’s view, the Petitioners had failed to establish a reliable peer group of comparable companies for Jarden.
In support of their claims, the Petitioners also alleged that the sale process leading to the Merger was flawed. The Court recognized that Jarden’s chairman began negotiations regarding a potential sale without first obtaining approval from Jarden’s board of directors (the “Board”) and neglected to seek Board input at certain points during the sale process and that the Board failed to test the Merger Price by conducting a post-signing market check. Given that this flawed sale process had led to the Merger Price, the Court concluded that the Merger Price should not be determinative in appraising the fair value of the Company and instead relied on the unaffected market price of the Company’s shares corroborated by the Court’s own DCF analysis.
In general, Jarden demonstrates that, in statutory appraisal actions, the Court’s determination of fair value will remain primarily a fact-intensive inquiry involving consideration of different valuation methodologies, as appropriate. In addition, a court will make an independent determination of such value and will not simply accept “the entirety of one expert’s analysis over the other’s.” Id. at 99-100 (citing Gonsalves v. Straight Arrow Publ’rs, Inc., 701 A.2d 357, 361 (Del. 1997)).