In a noteworthy decision by Vice Chancellor Parsons, the Delaware Chancery Court in Longpath Capital, LLC v. Ramtron International Corporation[1] set the fair value of the target company at the agreed merger price minus estimated synergies.

Ramtron, a fabless semiconductor company, was acquired by Cypress in 2012 for $3.10 per share (approximately $110 million in total, for a 71% premium over the unaffected share price) after having previously rejected five lower, unsolicited offers from Cypress (the first one at $2.48 per share) and after having relentlessly but unsuccessfully sought out other bidders.

In assessing the fair value of Ramtron, the Court relied exclusively on the merger price after concluding that all other traditional valuation methods (i.e., discounted cash flows (“DCF”), comparable companies and comparable transactions) were either unreliable or altogether unavailable in this instance.  Specifically, the DCF analysis put forward by the plaintiff was based on management projections that, among other flaws, were prepared outside the ordinary course after the company first received a bear hug letter from Cypress, partly as a tool for marketing the company to potential bidders, by a new management team, using a new methodology, and relying on distorted sales figures and unrealistic cost-savings assumptions.  In addition, management had provided another set of projections to Ramtron’s bank.  Following a lengthy and well-reasoned discussion of the management projections, the Court therefore discarded the typically-favored DCF analysis.

In arriving at this conclusion, the Court interestingly quoted a precedent opinion to state that the DCF model “has much less utility in cases where the transaction giving rise to appraisal was an arm’s-length merger, [or] where the data used in the model are not reliable.”[2]  Since the mergers at issue in appraisal actions are often arm’s-length, and management projections that are generally relied upon in those actions often lack some or all of the “indicia of reliability” used by the Court as a benchmark (notably, those projections are often prepared outside the ordinary course of business and for purposes of marketing the company), this prompts the question whether the Chancery Court will come to rely less on the DCF valuation method (and instead rely on the transaction price) in future appraisal actions.

With respect to the last two traditional valuation methods, the parties agreed there were no comparable companies, and the Court opined that the comparable transactions approach used by the plaintiff was not reliable either, because of the dearth of data points (two transactions only).

In light of the above, the Court decided, as it had in certain precedents[3], that the transaction price offered the most reliable indication of fair value.  Unlike the precedent transactions, however, here only one company (Cypress) had bid for Ramtron.  The Court held that a multi-bidder auction was not required in order for the sale process to be thorough – and its outcome indicative of the fair value.  In this case, Ramtron had actively shopped itself to potential buyers for three months, and none had made a firm offer.  In the meantime, Cypress had repeatedly raised its price until Ramtron ultimately accepted $3.10 per share.  This provided enough confidence to the Court that the merger price was the highest value Ramtron could have extracted from the process.

Recognizing that it is inappropriate to include merger-specific value in an appraisal action, the Court went on to assess the value of synergies to be deducted from the merger price.  Rejecting for lack of substantiating evidence Ramtron’s contention that synergies amounted to 10% of the merger price, the Court adopted the plaintiff’s position that synergies amounted to just below 1% of such price (because of alleged significant negative synergies), overall resulting in a fair value of $3.07 per share, or three cents less than the merger price.  The Chancery Court’s assessment of the fair value below the agreed merger price is a remarkable development, and hopefully heralds a trend toward recognizing the transaction price in a well-run process as the best indicator of fair value.

[1] C.A. No. 8094-VCP (Del. Ch. June 30, 2015).

[2] Highfields Capital, Ltd. v. AXA Fin., Inc., 939 A.2d 34, 52-53 (Del. Ch. 2007).

[3] In re Appraisal of, Inc., 2015 WL 399726 (Del. Ch. Jan. 30, 2015); Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807 (Del. Ch. Nov. 1, 2013); The Union Illinois 1995 Inv. Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d 340 (Del. Ch. Jan. 5, 2004).