The PetSmart appraisal decision (May 26, 2017) reaffirms the Delaware Court of Chancery's recent trend of increased reliance on the merger price to determine appraised “fair value” when the sales process involved “meaningful competition” and the target company projections available for a DCF analysis were unreliable. Moreover, in our view, commentary in the opinion suggests that the court may be more likely than in the past to rely on the merger price where there has been a sales process involving “meaningful competition,” even if the company projections available for a DCF analysis were reliable. (We note that in the appraisal decision issued yesterday, SWS, the court did not rely on the merger price—but this decision was based on “unique facts” that are rarely applicable.)
The sales process undertaken by PetSmart provides a roadmap for a process that maximizes the likelihood of judicial reliance on the merger price to determine appraised “fair value.” Notably, the court relied on the merger price notwithstanding that (i) only financial sponsors (and no strategic buyers) submitted bids for the target company and (ii) the target company experienced improved post-signing financial performance—to the point that it declared an $800 million dividend at year-end after the closing, representing a 38% return on equity invested. Also of note is that the court rejected the contention (which was made by the petitioners in the case and had been suggested by the court itself in prior recent decisions) that a financial buyer's price, which is based on an “LBO pricing model,” cannot reflect “fair value” for appraisal purposes.
In the attached Fried Frank PE Briefing, we analyze the decision and offer related practice points.