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Intrinsic Value Realization




The Delaware Supreme Court issued a ruling on December 14, 2017 that endorsed its interpretation of the "Efficient Market Hypothesis" as a foundation for relying upon market pricing to define a company’s “fair value” in appraisal proceedings. The Forum accordingly reported that it would resume support of marketplace processes instead of judicial appraisal for its participants' realization of intrinsic value in opportunistically priced but carefully negotiated buyouts. See:

December 21, 2017 Forum Report

 Reconsidering Appraisal Rights for Long Term Value Realization



Forum distribution:

Appraisal arbitrage funds learn about valuation risks in buyouts based on strategic combinations


For the court decision reported below, see

Research alerting investors to likely deductions of value attributable to "synergies" in appraisals of strategic business combinations, as distinguished from "standalone" buyouts, was presented in the September 10, 2013 Forum Report: Court Rules for Appraisal: Fair Value = Intrinsic Value.


Source: Law360, May 30. 2017 article

Chancery Cuts SWS Merger Price In Blow To Investors

By Jeff Montgomery

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 Delaware-chartered companies.

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 the deal.

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 company.”

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 Delaware.

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 “unreliable.”

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 of 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 the Court of Chancery of the State of Delaware.

--Editing by Edrienne Su


© 2017, Portfolio Media, Inc.


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