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M&A Law

Delaware Supreme Court Applies the “Going-Concern” Standard in Deal Appraisal

By George Khoukaz

On April 16, 2019, the Delaware Supreme Court (the “Supreme Court”) rejected the appraisal method used by the Court of Chancery (the “Court”), holding that the going-concern appraisal method is the appropriate way to determine the fair value of a company sold to a third-party.

Verition Partners Master Fund Ltd. (“Verition”) filed an appraisal suit asking the Court to determine the fair value of one of Verition’s holdings, Aruba Networks Inc. (“Aruba”), in its acquisition by Hewlett-Packard Co. (“HP”). The Court, relying exclusively on Aruba’s average share price during the 30 days of trading before the deal became public, arrived at a per share value of $17.30, down from the $24.67 per share value paid in the sale.

On appeal, the Supreme Court reversed, and held that the Court “abused its discretion in using Aruba’s unaffected market price because it did so on the inapt theory that it needed to make an additional deduction from the deal price for unspecified ‘reduced agency costs.’” The Supreme Court applied the going-concern appraisal method that relies on the deal price less synergies realized in the transaction to determine the fair value of an acquisition target. Using this method, the Supreme Court reached a per share value of $19.10.

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