Chancery Uses Market Price In LPS-Fidelity
Law360, Wilmington (December
16, 2016, 6:18 PM EST) -- A Delaware Chancery judge appraised
Lender Processing Services Inc. on Friday at the final deal price of
$37.14 per share in the company's roughly $3.5 billion sale to
Fidelity National Financial Inc., deviating from a recent clip of
appraisal cases where market value took a backseat to other factors.
In a 75-page opinion that examined several valuation methods, Vice
Chancellor J. Travis Laster wrote that in this instance, he “gave 100
percent weight to the transaction price,” ruling that LPS ran a sale
process that “generated reliable evidence of fair value.”
The decision sided with one of the positions LPS went with at trial: that
the final merger price, which had a per-share value that was nearly four
dollars higher than when
the deal was revealed, ought to be the ceiling for appraising
the company’s value.
Vice Chancellor Laster wrote that although LPS did also provide a
discounted cash flow analysis as valuation evidence, that methodology was
not as reliable in this case, because even small changes to the
assumptions behind the methodology led to wild variations in the company’s
value. The petitioners seeking appraisal had provided such an analysis
that generated a value upwards of $50.46 per share, but when the vice
chancellor went about trying to resolve the differences in the methods, he
came up with a price that came very close to the final merger price,
bolstering his confidence that the deal price was the way to go, according
to the opinion.
“My best effort to resolve the differences between the experts resulted in
a DCF valuation that is within 3 percent of the final merger
consideration,” Vice Chancellor Laster wrote. “The proximity between that
outcome and the result of the sale process is comforting.”
The decision comes amid a relatively tense climate in which the Chancery
Court has been the target of some criticism for giving less to weight to,
or in some cases abandoning, deal price when appraising transactions.
Under Delaware law, stockholders who did not vote for a deal can petition
the Chancery Court to examine the transaction, and if the court rules a
company was undervalued, it can be on the hook to make up the difference
to the shareholders who have asked for the process.
Many cases — such as
BMC Software Inc. and CKx Inc., all presided over by Vice Chancellor
Sam Glasscock III — have gone with the deal price as what the court terms
as “fair value” for the transaction, but at least two recent and
high-profile deals deviated from that track.
Chancellor Andre G. Bouchard
ruled in September that Lone Star Fund VIII underpaid by more
than $100 million when it bought payday lender DFC Global Corp. for $1.3
billion, a decision that drew strong rebuke from the target company
DFC Global argued that the chancellor’s decision threatened to embolden
shareholders who use appraisal actions as an investment strategy and
inject too much uncertainty into the merger market.
Vice Chancellor Laster had also given limited weight to deal price in
his May appraisal of
Dell Inc.’s take-private deal by company founder Michael Dell, finding
that the transaction was undervalued by nearly 30 percent.
The vice chancellor cited the Dell decision in his LPS opinion Friday,
noting that in Dell's case, he evaluated a management-led buyout and “the
petitioners proved that there were structural impediments to a topping bid
on the facts of the case, particularly in light of the size and complexity
of the company and the sell-side involvement of the company’s founder.”
In the LPS case, the petitioners, two Merion Capital Group funds,
had argued that the deal left $1.2 billion of value on the
table, and that the actual market price of the company did not accurately
capture its value, because Fidelity never faced any sort of competitive
bidding when courting its target. Also, the deal took place at a market
low, the funds said.
LPS had just gone through a bruising regulatory gauntlet brought on by the
subprime mortgage crisis and was poised for healthy long-term growth
because of the breadth of the company's products and good relationships
with customers, Merion Capital argued.
LPS countered that Merion Capital’s analysis could not withstand multiple
methodologies, including the deal price, that disagreed with such a wide
valuation gap, and said the petitioner’s numbers were “litigation-driven.”
Representatives for Merion did not immediately respond to requests for
comment Friday. A representative for LPS declined to comment.
The dispute stems from Fidelity’s buying back its former spinoff LPS in a
$2.9 billion cash and stock deal that closed in 2014 after the
Federal Trade Commission, which had said it had limited antitrust
concerns about the tie-up, gave the transaction the OK on the condition
that the companies sell certain title insurance assets in Oregon.
At the time the deal was unveiled, in May 2013, LPS shares were valued at
$33.25 apiece, and the company was to be folded into Fidelity's
ServiceLink business, with Boston-based Thomas H. Lee buying a 19
percent stake in the new entity — dubbed Black Knight Financial Services
Inc. — for about $381 million.
By the time the deal closed, the aggregate value stockholders received
from the transaction was $34.17, according to the opinion.
Merion Capital is represented by Steven T. Margolin of
Greenberg Traurig LLP and Stephen E. Jenkins, Marie M. Degnan and
Peter H. Kyle of
Ashby & Geddes PA.
LPS is represented by Bradley R. Aronstam and S. Michael Sirkin of
Ross Aronstam & Moritz LLP and John A. Neuwirth, Evert J. Christensen
Jr., Matthew S. Connors and Elizabeth Kerwin-Miller of
Weil Gotshal & Manges LLP.
The case is Merion Capital LP et al. v. Lender Processing Services Inc.,
case number 9320, in the
Court of Chancery of the State of Delaware.
--Additional reporting by Jody Godoy and Melissa Lipman. Editing by
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