Judge and Banker—Valuation Analyses in the Delaware Courts
By William A. Groll and David Leinwand.
Litigation challenging public company merger and acquisition transactions is on the increase. Whereas, not too long ago, only transactions involving director conflicts of interest or other potentially troubling facts would bring forth the plaintiffs’ lawyers, today, lawsuits can be expected challenging even those transactions in which a board of directors has, by all readily apparent views, pursued a reasonable process in fulfillment of its fiduciary duties, garnering a significant premium for its shareholders. In such merger and acquisition litigation, the financial advisor to the board of directors often finds itself in the center of the lawyers’ fray with its valuation analyses a crucial factor in the case. Senior bankers are in depositions and before judges more often than in the past, and now, more than ever, financial advisors should expect their analyses to be subject to close scrutiny in the course of deal litigation.
Recent cases decided in the state courts of Delaware, where most merger and acquisition litigation historically has been brought, provide useful guidance for lawyers who counsel financial advisors as well as those who advise principals to transactions regarding how to mitigate litigation risk arising out of a financial advisor’s opinion and analyses. The cases helpful to practitioners can be divided roughly into two groups—appraisal/entire fairness cases and disclosure cases.
The appraisal and entire fairness cases provide guidance regarding the substance and application of valuation analyses. In a typical appraisal action, for instance, the court must determine the “fair value” of the shares at issue, and such determination usually is based on a review of competing valuation analyses submitted by the parties. Similarly, the entire fairness standard, which is applied to certain conflict of interest transactions, requires the court to determine whether an “entirely fair price” was paid to shareholders. In the course of such determination, the court often will closely scrutinize the valuation work performed by the financial advisor for the subject company’s board of directors.