By: Betty J. McNeil
In Merion Capital L.P., v. BMC Software Inc., C.A. No. 8900-VCG, 2015 WL 67586 at *1-51 (Del. Ch. Oct. 21, 2015), the Chancery of the state of Delaware held that the merger stock price of $46.25 was the most persuasive indication of fair value.[1]
In fiscal years 2011 to 2013, BMC, one of the largest software companies in the world, saw a steady decrease in its revenue.[2] To account for the losses, BMC relied on its internal M&A department to come up with “Tuck-in” transactions.[3] However, even with the relatively stable revenue acquired from its M&A’s, in May 2012, investors commenced a proxy contest.[4] While attempting to handle the settlement terms with the hostile stockholders, BMC’s Strategic Review Committee explored other options to maximize shareholder value. [5]A short bidding war ensued, however, all offers were ultimately rejected by the Strategic Review Committee. [6]
A second auction of sale commenced in December 2012, and after nearly a year of bidding, BMC accepted an agreement with Buyer Group.[7] The agreement was presented to the board of directors after a fairness analysis was completed.[8] The Board approved the agreement and recommended that BMC stockholders follow suit; and in July 2014, the transaction was approved by 67% of the outstanding shares voting in favor of the merger.[9]
However, dissenters challenged the sale. They presented expert testimony showing that the stock was undervalued in the merger.[10] Specifically, the sale was valued at $46.25.[11] The Petitioner’s, stockholders, expert suggested that the fair value of BMC at the time of the merger was $67.08[12]; while the Respondent’s expert suggested that the fair value of the BMC shares were only $37.88[13]. Thus, the court was faced with the challenge of determining whether the shareholders received the fair value for their shares.
In Delaware, the appraisal statute indicates that stockholders can seek appraisals of their shares in Court when they do not wish to participate in a company induced merger. When challenged, the Court is under an obligation to determine the fair value of the cashed out shares. The Delaware law explicitly states: “Court’s shall determine the fair value of the shares. . . . of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.”[14]
The Court suggested that one of the most important relevant factors is the particular method used to determine the fair value of a share. Since both the Petitioning stockholders and the Respondent Board directors carried the burden of proof, both methods were thoroughly analyzed to determine if it produced a fair value for the cashed out shares.[15] Further, the Court suggested that other relevant factors are the different financial techniques which are acceptable in the financial community.[16] For instance, in Delaware, techniques such as discounted cash flow (DCF), comparable transactions, merger price, and comparable companies are relevant factors to determine fair value. [17]
As such, the Court in the current case analysis began by considering acceptable financial techniques. Specifically, the Court considered the DCF.[18] Since the DCF was disputed between the parties’ experts, the Court analyzed whether the Petitioner’s projections or the Respondent’s projections were accurate.[19] The Court concluded, from the financial reports, that the Respondent’s projections were too optimistic and were not an accurate reflection of the corporations’ quarterly revenue.[20] As such, the Court adopted a cash flow amount of 5%, which was more consistent with the corporations’ actual revenue.[21]
After rendering its calculations and finding a DCF of $48.00, the Court looked at a host of other techniques, but specifically the merger price as indication for fair value.[22] Under the merger price approach, the Court outlined a rule that: considers deal price as a factor for computing fair value, and suggested that courts must conclude that the merger price was generated by a process that provided market value – which is useful in determining fair value.[23]
The holding seems to suggest, that there is a two prong fair value analysis when dissenters seek appraisals of cashed out shares. In addition to the two prong fair value analysis, the relevant factor portion of the statute should be further analyzed under a two-step process to determine what factors are consistent with determining the fair value of shares.
Further, this case outlines the process that a court will take when dissenting shareholders argue that they did not receive the fair value of their shares. It appears, that courts will be go through a detailed analysis to first determine what the fair value should be by using tools that are common in the financial industry, and then the court will factor in any relevant additional factors that may be applicable to determine the fair value, such as synergies and deal prices.
Since expert opinion will often differ, challengers of a fair value price should attempt to place themselves in a position where they have chosen a method that identifies all the key parts used in the above holding. Likewise, respondents should structure deals that adopt narrowly tuned methods that initially factor into consideration: market values, merger prices, and sale prices. This will likely assure that, if challenged, the deal will meet the threshold set forth by the fair value standard.
[1] Merion Capital L.P., v. BMC Software Inc., C.A. No. 8900-VCG, 2015 WL 67586, 22 (Del. Ch. Oct. 21, 2015)
[2] Id. at 3.
[3] Id. at 8-10.
[4] Id. at 16-17.
[5] Id. at 17-18.
[6] Id. at 18-19.
[7] Id. at 20.
[8] Id. at 20.
[9] Id. at 23.
[10] Id. at 23-25.
[11] Id. at 21.
[12] Id. at 23.
[13] Id. at 24.
[14] 8 Del. C. § 262; Merion Capital L.P., v. BMC Software Inc., C.A. No. 8900-VCG, 2015 WL 67586, 30.
[15] Merion Capital L.P., C.A. No. 8900-VCG, 2015 WL 67586, at 31.
[16] Id. at 31.
[17] Id. at 31.
[18] Id. at 32.
[19] Id. at 32.
[20] Id. at 32.
[21] Id. at 32.
[22] Id. at 40-44.
[23] Id. at 48.