Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.
210 A.3d 128 (2019)
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Rule of Law:
In a statutory appraisal proceeding, the deal price resulting from a robust, arm's-length sales process is a strong indicator of fair value. Any deductions for merger-specific value, such as synergies, must be based on record evidence; a theoretical deduction for 'reduced agency costs' separate from established synergy calculations is improper, as such costs are typically subsumed within the synergy estimates.
Facts:
- In August 2014, Hewlett-Packard Company (HP) approached Aruba Networks, Inc. (Aruba), a publicly traded company, to discuss a potential merger.
- Aruba's board engaged financial advisors and contacted five other potential strategic buyers, but none expressed interest in an acquisition.
- After several months of negotiations, Aruba's board agreed to accept HP's offer to purchase the company for $24.67 per share.
- Shortly after the agreement, news of the potential deal leaked to the media, causing Aruba's stock price to increase significantly.
- The day after the leak, Aruba announced quarterly financial results that exceeded analysts' expectations, causing its stock price to rise again, closing at $24.81 per share.
- Aruba and HP formally announced the merger at the agreed price of $24.67 per share.
- The final merger agreement allowed for a passive market check, but no other bidders came forward with a superior offer.
- The merger between HP and Aruba closed on May 18, 2015.
Procedural Posture:
- Verition Partners Master Fund Ltd. (Verition) filed a statutory appraisal proceeding in the Delaware Court of Chancery seeking a determination of the 'fair value' of its shares in Aruba Networks, Inc. (Aruba).
- Initially, neither party argued that the unaffected stock price was the proper measure of fair value; Verition advocated for a higher value and Aruba advocated for a 'deal price less synergies' value of $19.10 per share.
- After the conclusion of trial and in light of recent Delaware Supreme Court precedent, the trial judge, on his own motion, requested supplemental briefing on the appropriateness of using Aruba's unaffected market price.
- The Court of Chancery issued a post-trial opinion concluding that the fair value of Aruba's shares was $17.13 per share, representing the 30-day average trading price before news of the merger leaked.
- Verition, as appellant, appealed the Court of Chancery's final judgment to the Delaware Supreme Court, with Aruba acting as appellee.
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Issue:
Did the Court of Chancery abuse its discretion in a statutory appraisal proceeding by exclusively relying on the company's 30-day average unaffected market price to determine fair value, based on a finding that it needed to deduct theoretical 'reduced agency costs' from the deal price in addition to merger-related synergies?
Opinions:
Majority - Per Curiam
Yes, the Court of Chancery abused its discretion by setting fair value at Aruba's unaffected market price. The court's decision was based on the erroneous factual finding, unsupported by the record, that it needed to deduct unspecified 'reduced agency costs' from the deal price in addition to merger synergies. This reasoning is flawed because any reduction in agency costs for a strategic buyer like HP would already be captured within its overall synergy calculation; deducting them separately constitutes a form of double-counting. The deal price minus synergies, which resulted from a robust sale process where other buyers declined to bid, is a much more reliable indicator of fair value than a stale, months-old trading price that did not account for nonpublic information like Aruba's strong quarterly earnings.
Analysis:
This decision solidifies the Delaware Supreme Court's position, following its rulings in DFC and Dell, that the deal price is a highly reliable indicator of fair value in appraisal cases when it results from a robust, arm's-length sale process. The court strongly cautioned against trial courts inventing or relying on theoretical valuation adjustments, like 'reduced agency costs,' that lack a basis in the evidentiary record. This ruling reinforces the primacy of market-based evidence over more speculative judicial valuations and curtails the trial court's discretion to deviate from the deal price without a compelling, fact-based reason.
