Veriton Parnters Master Fund Ltd. v. Aruba Networks, Inc.

210 A.3d 128 (2019)

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Nature of the Case

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Facts

Hewlett-Packard Company (HP), approached Aruba about a potential combination. Aruba hired professionals and, in addition to negotiating with HP, began to shop the deal. Five other logical strategic bidders were approached. None showed any interest. After several months of negotiations, Aruba decided to accept HP's offer of $24.67 per share. Naturally, the deal leaked causing Aruba's stock price to jump from $18.37 to $22.24. The next day, after the market closed, Aruba released its quarterly results, which beat analyst expectations. Aruba's stock price rose by 9.7% the following day on the strength of its earnings to close at $24.81 per share, just above the deal price. Both companies' boards approved the transaction. No superior bid emerged, and the deal closed on May 18, 2015. P filed this appraisal proceeding in the Court of Chancery, asking the court to appraise the 'fair value' of their shares under §262. P maintained that Aruba's fair value was $32.57 per share. Aruba contended that its fair value was either $19.45 per share (before trial) or $19.75 per share (after trial). After this Court issued its opinion in DFC, the Court of Chancery allowed the parties to submit supplemental briefing on the opinion's implications. The Vice Chancellor then made a sua sponte request on January 26, 2018. Aruba abandoned deal price minus synergies as its main benchmark and argued for the first time that its preannouncement stock price was 'the single most important mark of its fair value.' Aruba asked the Court of Chancery to award the thirty-day unaffected market price of $17.13 per share. The Court of Chancery found that the fair value under 262 was $17.13 per share. It considered the 'unaffected market price' of Aruba's stock before news of the merger leaked; second, the deal price minus the portion of synergies left with the seller; and third, the two expert witnesses' valuations, which were based primarily on discounted cash flow ('DCF') models. The Court gave no weight to the parties' DCF models. The Court determined, based on its analysis, that the appropriate deal price minus synergies value was $18.20. It started with an estimate of the total amount of synergies HP expected to realize. To determine how much of those synergies Aruba's stockholders received in the deal price, the Court of Chancery took the midpoint of a study suggesting that 'on average, sellers collect 31% of the capitalized value of synergies, with the seller's share varying widely from 6% to 51%.' This was $18.20 per share. The Court failed to explain why its estimate of $18.20 per share was more reliable than Aruba's estimate of $19.10 per share. The Court elected to rely exclusively on the stock price because it thought it would need to estimate and back out these theoretical 'reduced agency costs' from the deal price to arrive at a figure that reflected Aruba's value as a going concern. The Court reasoned that using the 'unaffected market price' of Aruba's publicly traded shares 'provided a direct estimate' of that endpoint, which led him to find the sole indicator of fair value to be that 'unaffected market price' of $17.13 per share. Section 262 requires the Court to assess Aruba's fair value as of 'the effective date of the merger.' Instead, it used the trading price of Aruba's stock during the thirty days before news of the merger leaked, which was three to four months prior to closing.