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(Article from Securities Law Alert, February 2015)

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On January 30, 2015, the Delaware Chancery Court determined that the merger price was “the best indicator” of the fair value of Ancestry’s shares in a Section 262 appraisal action brought in connection with Permira’s 2012 acquisition of Ancestry. In re Appraisal of Ancestry.com, Inc. (Ancestry), 2015 WL 399726 (Del. Ch. 2015) (Glasscock, V.C.). The Ancestry court explained that, “given Ancestry’s unique business[,]”“there [were] no comparable companies to use for purposes of valuation.” Moreover, because Ancestry’s “management did not create projections in the normal course of business,” the court found that there was “reason to question management projections, which were done in light of the transaction and in the context of obtaining a fairness opinion.” In view of the inherent unreliability of management’s projections, the court had no “great confidence” in the discounted cash flow (“DCF”) analyses based on those projections.

The Ancestry court determined that “fair value in these circumstances [was] best represented by the market price.” The court found that the sales process “was reasonable, wide-ranging and produced a motivated buyer.” Moreover, the court noted that the merger “ha[d] been approved of, as free from the taint of breaches of fiduciary, by this [c]ourt.” In light of the “robust” nature of the sales process, the court concluded that the merger price was “unlikely to have left significant stockholder value unaccounted for.”

The Ancestry court explained that in Huff Fund Investment Partnership v. CKx, 2013 WL 5878807 (Del. Ch. 2013) (Glasscock, V.C.), the Chancery Court had “relied on the merger price as an indicia of fair value” where “the process leading to the transaction [was] a reliable indicator of value” and “merger-specific value [was] excluded.”[1] The court also noted that in Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.3d 34 (Del. Ch. 2007), the Delaware Chancery Court had stated that “a reviewing court should give substantial evidentiary weight to the merger price as an indicator of fair value” provided that “the transaction giving rise to the appraisal resulted from an arm’s-length process between two independent parties” and “no structural impediments existed that might materially distort the crucible of objective market reality.”

Significantly, the Ancestry court did conduct its own DCF analysis based on management projections under two different scenarios, and arrived at a value just a few cents short of the merger price ($31.79 per share as compared to the merger price of $32 per share). The court explained that because its own DCF valuation was “close to the market,” the court felt “comfort[able] that no undetected factor [had] skewed the sales process.” The Ancestry court therefore held “that the merger price of $32 [was] the best indicator of Ancestry’s fair value as of the [m]erger [d]ate.”