In a recent decision of the Delaware Court of Chancery, which will be of particular interest to parties involved in Cayman Islands ‘section 238’appraisal litigation, Vice Chancellor Joseph Slights dealt strategic investors a significant blow by relying solely on the unaffected trading price to determine fair value. Although it remains to be seen whether the Cayman Islands Courts will adopt a similar approach under section 238 of the Cayman Islands Companies Law, the decision in In re: Appraisal of Jarden Corporation is a particularly stinging loss for appraisal investors.
The case concerned the acquisition of Jarden Corporation (the Company) by Newell Rubbermaid Inc at a price of $59.21 per share (consisting of cash and Newell stock). The Petitioners, who collectively held approximately 2.5million shares of the Company purchased after the announcement of the acquisition, sought to persuade the Court that fair value was $71.35 per share. The Company on the other hand argued for a price of $48.01.
In deciding to go with the unaffected trading price of $48.31, the Court rejected: a ‘merger price less synergies approach’, as there were significant flaws in the sale process and it was unclear to what extent the value of synergies was reflected in the merger price; a comparable companies analysis, as no suitable peer companies had been identified; and both parties’ DCF valuations as they “utilized very different inputs” and reached “fantastically divergent conclusions”. In contrast the unaffected market price was held to be a reliable indicator of fair value on the basis that there was an efficient market for the Company’s stock – characterized by the fact there was no controlling stockholder, its public float was 93.9%, it was well covered by numerous professional stock analysts, its stock was heavily traded and it enjoyed a narrow bid-ask spread – and it was corroborated by the Court’s own DCF analysis.
Although the decision remains subject to appeal, strategic investors will no doubt be concerned that unaffected trading price has survived as a viable valuation approach following the Delaware Supreme Court’s decision in Verition Partners Master Fund v Aruba. This is particularly so as the Petitioners in this case suffered a $26.5million loss on the merger price, giving rise to a down-side risk for investors that largely has not materialized to date.
Protagonists of Cayman ‘238’ appraisal litigation will be watching with eager anticipation to see if a similar approach makes its way to the Cayman Islands.