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(Article from Securities Law Alert, September/October 2020)

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On October 12, 2020, the Delaware Supreme Court affirmed a Chancery Court decision holding that the deal price was the most reliable indicator of a metal mining company’s fair value in an appraisal action, even though “[t]he sale process was not perfect.” Brigade Leveraged Capital Structures Fund v. Stillwater Mining Co., 2020 WL 6038341 (Del. 2020) (Montgomery-Reeves, J.). The Delaware Supreme Court further determined that the Chancery Court did not err in declining to adjust the deal price to account for an increase in palladium prices. The Delaware Supreme Court explained that “fair value is just that, fair. It does not mean the highest possible price that a company might have sold for.”

The Delaware Supreme Court observed that the Chancery Court “walked through each step of the sale process” and “found that there were objective indicia of reliability.” While the Delaware Supreme Court acknowledged that there were “fewer indicia of fairness than [it] identified when reviewing the sales processes in DFC, Dell or Aruba, the [Chancery Court] did not abuse its discretion by determining that the objective indicia that were present provide a cogent foundation for relying on the deal price as a persuasive indicator of fair value.”[1]

The Delaware Supreme Court noted that the Chancery Court recognized the “flaws” in the pre-signing process, such as “the lack of Board involvement until later in the sales discussions,” but concluded that these “flaws” did “not undermine the reliability of the sale price.” The Delaware Supreme Court found the Chancery Court “did not abuse its discretion when it held that the pre-signing process was sufficient to support reliance on the deal price as evidence of fair value,” despite the imperfections in the process.

The Delaware Supreme Court also noted that the Chancery Court “considered and rejected” plaintiffs’ contention that the deal price failed to account for the increase in palladium prices between signing and closing. The Chancery Court found, inter alia, that “the Merger Agreement was not designed to give the stockholders the benefit of a transaction that included the potential upside or downside that would result from changes in the price of palladium after signing.” Moreover, the Chancery Court pointed out that if the company’s “stockholders had wanted to capture the increased value of palladium, then they could have voted down the Merger and kept their shares.”

Because the Chancery Court “thoroughly analyzed the facts surrounding [the company’s] sale in accordance with [Delaware Supreme Court] precedent,” the Delaware Supreme Court declined to “second-guess” the Chancery Court’s determination that “the deal price was a reliable indicator of [the company’s] fair value.”