Chancery Cuts SWS Merger Price In Blow To
Law360, Wilmington (May 30, 2017, 8:08 PM EDT) -- A shareholder lawsuit
seeking a Delaware Chancery Court appraisal of a $350 million merger price
turned against holdout investors Tuesday, with a fair value ruling that
will pay 7.8 percent less for Texas-based bank and broker-dealer
SWS Group Inc. than the official deal.
Vice Chancellor Sam Glasscock III pegged the company’s fair, stand-alone
value when purchased by
Hilltop Holdings Inc. at the equivalent of $6.38 per share, down from
the $6.92 equivalent per share paid at closing in January 2015 and far
below the $9.61 value sought by stockholders.
The change, the vice chancellor said, was based on a court-calculated
value of SWS, excluding synergies that the deal represented to Hilltop.
“When the merger price represents a transfer to the sellers of value
arising solely from a merger, these additions to deal price are properly
removed from the calculation of fair value," the vice chancellor wrote,
citing earlier decisions.
Attorneys for seven stockholder groups holding more than 7.4 million SWS
shares had petitioned the Chancery Court to appraise the company and
determine its fair value in the sale, under a provision of Delaware
corporate law that allows challenges to official merger terms for
The choice can pay huge dividends if a court assigns a fair value higher
than the deal price. Dissenting stockholders also receive interest on any
gain from the appraisal at 5 percent plus the
Federal Reserve discount rate, compounded quarterly from the date of
It did not work out that way for SWS investors, however.
“The petitioners argue that the sales process was so hopelessly flawed
that the deal price is irrelevant,” Vice Chancellor Glasscock wrote. “The
respondents argue that the deal price is improper here because it includes
large synergies inappropriate to statutory fair value.”
During a four-day trial, attorneys for stockholders and the companies had
also clashed in part over the effect of the cashing-in of $87.5 million in
stock warrants by Hilltop and
Oak Hill Capital Partners, a private equity lender to SWS.
Attorneys for the shareholders argued that the warrant redemptions created
additional capital unaccounted for in the deal price. Hilltop, which
argued that the fair value could be as low as $5.17 per share, said the
transactions shifted debt to equity without adding to the company’s value.
The vice chancellor sided strongly with the company, noting that “the
exercise of the warrants did not directly put a single cent into the
In December, attorneys Ronald Brown III and Keenan Lynch of
Skadden Arps Slate Meagher & Flom LLP wrote in Law360 that there had
been a general perception that appraisal challenges were on the rise in
The article noted it also appeared that “the court has been more willing
to defer to the merger price if the other evidence, such as the
petitioners’ expert valuation evidence, is seen as problematic.” The
attorneys cautioned that even well-run sales processes cannot guarantee
that the courts will not choose an alternative valuation method.
“Appraisal will remain one of the most closely watched areas of Delaware
corporate law, as the number of appraisal cases continues to increase and
courts further address the issue of merger price as evidence of a
company’s fair value,” the article said.
In another case last week, Vice Chancellor Joseph R. Slights pointed to a
“well-constructed and fairly implemented auction process” as part of his
reason for accepting the $83 per share paid in
PetSmart Inc.’s $8.7 billion sale to London private equity shop
BC Partners PLC. That decision noted that stockholders failed to
justify claims for a $4.5 billion higher share value.
Vice Chancellor Glasscock acknowledged the court’s past conclusion that
market values derived from public sales are often the best indicator of
fair value, but said conditions in the case of SWS made the market result
The petitioners are represented by Kurt M. Heyman, Patricia L. Enerio and
Melissa N. Donimirski of
Proctor Heyman Enerio LLP, Marcus E. Montejo, Kevin H. Davenport, Eric
J. Juray and Chaz L. Enerio of
Prickett Jones & Elliott PA, and Thomas J. Fleming and Brian A. Katz
Olshan Frome Wolosky LLP.
SWS and Hilltop are represented by Garrett B. Moritz and Eric D. Selden
and Nicholas D. Mozal of
Ross Aronstam & Moritz LLP and William Savitt, Andrew J.H. Cheung,
Adam S. Hobson and Noah B. Yavitz of
Wachtell Lipton Rosen & Katz.
The case is In re: Appraisal of SWS Group Inc., case number CA-10554, in
Court of Chancery of the State of Delaware.
--Editing by Edrienne Su.
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