In re Appraisal of Regal Entertainment Group ( 2021 )

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN RE APPRAISAL OF REGAL ) Cons. C.A. No. 2018-0266-JTL
ENTERTAINMENT GROUP )
MEMORANDUM OPINION
Date Submitted: April 1, 2021
Date Decided: May 13, 2021
Samuel T. Hirzel, II, Jamie L. Brown, HEYMAN ENERIO GATTUSO & HIRZEL LLP,
Wilmington, Delaware; David J. Margules, Elizabeth A. Sloan, BALLARD SPAHR LLP,
Wilmington Delaware; Thomas E. Redburn, Jr., Maya Ginsburg, LOWENSTEIN
SANDLER LLP, New York, New York; Attorneys for Petitioners.
Robert S. Saunders, Jenness E. Parker, Lauren N. Rosenello, Kaitlin E. Maloney, Justin C.
Barrett, Andrew D. Kinsey, SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP,
Wilmington, Delaware; Attorneys for Respondents.
LASTER, V.C.
The petitioners owned shares of Class A common stock in Regal Entertainment
Group (“Regal” or the “Company”). On February 28, 2018, Cineworld Group plc
(“Cineworld”) acquired the Company through a reverse triangular merger (the “Merger”).
Under the agreement and plan of merger that governed the transaction (the “Merger
Agreement”), each share of Regal common stock was converted into the right to receive
$23.00 per share in cash.
The petitioners sought appraisal and litigated the case through trial. The parties
presented three valuation indicators for the court’s consideration. The petitioners argued in
favor of a discounted cash flow (“DCF”) methodology, which they maintained supports a
fair value of $33.83 per share. Cineworld1 responded that the court should not consider a
DCF model and argued instead for relying on Regal’s unaffected trading price and the deal
price minus synergies. Cineworld proposed to give equal weight to those valuation
indicators, resulting in a fair value of $18.02 per share.
Each of the three methodologies could be used to generate a sufficiently reliable
valuation to use in an appraisal proceeding. Applying recent Delaware precedent to the
facts of the case, this decision looks to the deal price as the most reliable evidence of
1
Technically, an appraisal proceeding pits the petitioners who have opted for
appraisal against the corporation that survived the merger. After an acquisition, however,
the buyer is the real party in interest on the respondent’s side of the case. See In re
Appraisal of Columbia Pipeline Gp., Inc., 2019 WL 3778370, at *17 (Del. Ch. Aug. 12,
2019). Reflecting this reality, this decision refers to the respondent’s arguments as
Cineworld’s.
Regal’s value at the time of signing. To adjust the deal price to eliminate value arising from
the accomplishment or expectation of the Merger, this decision then subtracts $3.77 per
share, representing the portion of Cineworld’s anticipated synergies that the deal price
allocated to Regal’s stockholders.
The resulting value of $19.23 per share reflects the fair value of Regal when the
Merger Agreement was signed. The appraisal statute obligates the court to determine the
fair value of Regal when the Merger closed. The parties agreed that some adjustment was
necessary because after signing but before closing, Regal’s value increased when the Tax
Cuts and Jobs Act (the “Tax Act”) reduced the corporate tax rate from 35% to 21%. To
reflect that valuation increase, this decision adds $4.37 per share to the value of the deal
price minus synergies.
Consequently, based on the evidence presented at trial, the fair value of the
Company’s common stock at the effective time of the Merger was $23.60 per share. The
petitioners are entitled to this amount, plus pre- and post-judgment interest.
I. FACTUAL BACKGROUND
Trial took place over four days. The parties introduced 1,675 exhibits, including
twenty-two deposition transcripts. Six fact witnesses and four experts testified live. In the
pre-trial order, the parties agreed to 243 stipulations of fact. The following factual findings
represent the court’s effort to distill this record.2
2
Citations in the form “PTO ¶ ––” refer to stipulated facts in the pre-trial order. Dkt.
223. Citations in the form “[Name] Tr.” refer to witness testimony from the trial transcript.
2
A. The Company
Regal is a Delaware corporation headquartered in Knoxville, Tennessee. Regal
exhibits theatrical films (colloquially called “movies”) in hundreds of cinemas in the
United States.
The Anschutz Corporation (“Anschutz”) created Regal through a series of
transactions in 2001 and 2002. Anschutz is a private Delaware corporation headquartered
in Denver, Colorado. Philip F. Anschutz has controlled Anschutz since 1962.3
In 2002, Regal completed an initial public offering of Class A shares, which carried
one vote per share. From that point until the closing of the Merger, Regal’s Class A shares
traded on the New York Stock Exchange. Anschutz owned all of the Company’s Class B
shares, which carried ten votes per share.
After the IPO, Anschutz continued to hold a controlling interest in the Company. At
the time of the Merger, Anschutz held 12,440,000 Class A shares and 23,708,639 Class B
Citations in the form “[Name] Dep.” refer to witness testimony from a deposition
transcript. Citations in the form “JX ––– at ––” refer to a trial exhibit with the page
designated by the last three digits of the control or JX number or, if the document lacked a
control or JX number, by the internal page number. If a trial exhibit used paragraph
numbers, then references are by paragraph.
The parties deposed some witnesses multiple times. For those witnesses, the citation
includes the JX number of the pertinent deposition in parentheses.
3
My usual practice is to identify individuals by their last names without honorifics.
In this case, the risk of confusion between Mr. Anschutz, the biological person, and
Anschutz, the corporate person, warrants an exception. The same risk does not exist for
others, who are identified without honorifics. No disrespect is intended.
3
shares. See JX 304 at 19; JX 1444 at 96. In total, Anschutz controlled approximately 67%
of the Company’s outstanding voting power while owning shares reflecting 23% of the
Company’s economic value. PTO ¶ 4; JX 1363 at 12; JX 1461 at 5.
Despite Anschutz’s voting power, Mr. Anschutz did not serve on the Company’s
board of directors (the “Board”). The members of the Board comprised eight independent,
outside directors plus Amy Miles, who served as CEO and Chair of the Board. David
Ownby was Regal’s CFO. Peter Brandow was Regal’s General Counsel. Gregory Dunn
was Regal’s President and Chief Operating Officer.
B. The Company’s Business
At the time of the Merger, Regal was the second largest theatrical film exhibitor in
the world, operating 7,321 screens in 560 theaters across the United States.4 Regal’s two
largest competitors were AMC Theatres (“AMC”) and Cinemark USA, Inc. (“Cinemark”).
Together, the three firms accounted for roughly 50% of U.S. cinema screens and 65% of
U.S. box office revenues. Financial analysts viewed Regal as “an industry leader.” JX 790
at ’198.
4
The American spelling of the English word theatre likely resulted from Noah
Webster’s efforts after the Revolutionary War to establish a “national language” for the
newly formed United States of America, distinct from the orthographic predilections of its
imperial forebear. See Conrad T. Logan, Noah Webster’s Influence on American Spelling,
14 Elementary Eng. Rev. 18, 18–20 (1937) (“‘My lad,’ [Webster] said to the printer, ‘when
you use these words, please oblige me by spelling them as here: theater, enter, etc.’”
(quoting Horace E. Scudder, Noah Webster 214 (1890)). Contemporary exhibitors deploy
both spellings. Out of a mild sense of patriotism, this decision follows Webster.
4
The key drivers of Regal’s business were ticket sales, concessions, and “film rent,”
which is the portion of ticket revenue that a theater pays the studio that produces a film in
return for the right to show the film in its theaters. Studios historically licensed their films
exclusively to theater owners during the “theatrical release window.” JX 1630 (“Hollis
Report”) ¶ 72. After the theatrical release window, studios distributed the films to
consumers through other channels. Id. The duration of the theatrical release window had
shortened steadily over time, from approximately six months in 1997 to approximately 100
days when the Merger Agreement was signed in 2017. See JX 1575 at 1.
Ticket sales, also known as box office receipts, constituted Regal’s primary source
of revenue. Ticket sales were a function of attendance and ticket prices. Both variables
fluctuated from year to year.
Attendance peaked in 2002, then declined at a compound annual growth rate
(“CAGR”) of 1.6% through the announcement of the Merger. Hollis Report ¶ 20. In the
six years before the Merger, attendance declined at a lower CAGR of 0.5%. Calkins Tr.
131–32. Prices moved in the other direction, increasing at a CAGR of 2.1% during the six
years before the Merger. JX 1629 (“Calkins Report”) ¶ 80, Fig. 4, Fig. 12; Calkins Tr. 42–
43.
Regal also derived significant revenue from concessions sales. During the five years
before the Merger, concession spending per ticket increased at a CAGR of 5%. Calkins
Report ¶ 82, Fig. 5.
In addition to tickets and concessions, Regal generated revenue from in-theater
advertisements and from transaction fees on ticket sales through its online portal. See
5
Calkins Tr. 90; Ownby Tr. 228, 259; JX 564 at 14. At the time of the Merger, in-theater
advertisements and online ticketing fees were miniscule but rapidly growing components
of the Company’s revenue. See, e.g., JX 647 at 3 (online and mobile ticketing fees
“contributed to double-digit growth in [Regal’s] other revenue streams in first quarter of
2017”); id. at 5 (in 2017 online ticketing was “a relatively small part . . . of our overall
other revenue line” and increased “just a little less than 50% . . . versus the first quarter of
last year”); JX 1084 at ’101 (“Other Operating Revenues,” which include in-theater
advertisements and online ticketing fees, comprised approximately 6% of year-to-date
revenues in September 2017).
Beginning in 2011, exhibitors began investing in the theater experience to
counteract declining attendance.5 Regal enhanced its concessions offerings, added new
screen formats such as 3D and IMAX, and began offering mobile ticketing and reserved
5
Calkins Tr. 37–38 (describing increase in exhibitors’ “experience investments,”
including enhanced viewing formats such as 3D and IMAX, reclining seats, alcohol sales,
and enhanced concessions offerings, beginning in 2011); Calkins Report ¶ 61 (“[B]y 2011
studios and exhibitors were working together to put in place a series of initiatives that have
ultimately helped their attendance in recent years.”); Hollis Report ¶ 26 & n.22 (exhibitors
have invested in “a premium theater experience” in “reaction to falling or stagnating ticket
sales, offering consumers a differentiated experience from watching films at home”); see
JX 790 at ’196 (financial analyst report stating that “the movie going experience has
improved considerably in recent years due to several amenities (primarily recliner seating,
but also expanded food/beverage/alcohol offerings) and greater technologies (sound and
picture)”).
6
seating.6 Regal also invested in reclining seats.7 Regal observed that after adding reclining
seats, a theater generally experienced increased attendance for twelve to eighteen months.
Ownby Tr. 227; see Miles Tr. 429. On the concessions side, Regal invested in an expanded
food menu and began selling alcoholic beverages in some locations. JX 165 at 3; JX 189
at 5; see JX 166 at 18. Regal also developed an industry-leading loyalty program with over
twelve million members. JX 1222 at ’041; Dunn Tr. 188–89; JX 149 at 5.
At the time of the Merger, there were six major studios in the United States: Warner
Brothers, 20th Century Fox, Paramount Pictures, Universal Pictures, Sony Pictures
Entertainment, and Walt Disney. PTO ¶ 112; Calkins Tr. 19; Hollis Report ¶ 22. The
studios’ biggest and most popular films, called “tentpole releases,” produced an outsize
portion of theater revenues. Examples include movies in the Star Wars and Harry Potter
franchises. Tentpole releases typically arrived in theaters during the summer months and
winter holidays. The intervening months were referred to as “shoulder” periods, when
6
Dunn Tr. 175–76, 183–84; JX 155 at 3 (April 30, 2013, Regal earnings call
transcript stating that Regal is “well-positioned to capitalize on the numerous premium-
format films scheduled for release in the rapidly approaching summer movie season” and
describing other investments in “premium” theater experience); JX 157 at 3 (October 24,
2013, Regal earnings call transcript describing the “returns generated to date by our
investments in the premium experience”); JX 165 at 3 (February 13, 2014, Regal earnings
call transcript stating that Regal “expanded [its] rollout of existing amenities” and “began
installing new concepts” such as “luxury seating”).
7
JX 165 at 3 (Regal began installing luxury seating in 2013); see also Calkins
Report ¶ 90 (“[T]he most important viewing experience innovation over the past several
years has been the shift . . . to recliner-seated auditoriums.”).
7
studios generally released smaller films supported by smaller marketing campaigns.
Beginning around 2011, studios shifted their production and marketing efforts toward
tentpole releases.
From Regal’s IPO until the Merger, film rent remained relatively constant at just
over fifty percent of box office revenue. As a practical matter, the studios and theaters had
relatively equal bargaining power. If a studio demanded excessive film rent, then a large
exhibitor like Regal could refuse to show the film, and theater revenue and visibility were
important to the studios. But the exhibitors also needed the studios, because they could not
sell tickets without films.
During the years leading up to the Merger, studios began exploring the possibility
of offering premium video on demand (“PVOD”). Under this model, a studio would make
a film available for viewing at home over an online streaming service, during the theatrical
release window, to customers who paid a premium price. If widely adopted, PVOD would
shorten the theatrical release window and disrupt the exhibitors’ business model.
Exhibitors also faced competitive threats from widely available streaming services
such as Netflix, Hulu, and Amazon. By 2013, Netflix and Amazon had started producing
their own content, which enabled them to bypass studios and cinemas. And exhibitors faced
competitive threats from other forms of entertainment, such as video games, social media,
and free video alternatives such as YouTube. Yet despite these threats, movies remained
among the most popular and affordable leisure activities in North America.
8
C. 2014: The Failed Sale Process
In October 2014, the Board evaluated Regal’s strategic alternatives. For assistance,
Regal engaged Morgan Stanley & Co. LLC as its financial advisor. David Ownby, Regal’s
CFO, prepared a set of five-year financial projections (the “2014 Projections”) to “provide
the Board with meaningful context in which to evaluate [Regal]’s strategic alternatives.”
JX 189 at 1; see PTO ¶ 119; JX 187 at ’874. Regal’s management prepared annual budget
forecasts, but they did not regularly prepare multi-year projections. Ownby Tr. 211–12;
Miles Dep. (JX 1589) 197–98. Although management prepared the annual budget using a
detailed, “bottoms up” process, the 2014 Projections relied on “high-level assumptions”
and did not include “detailed theater-by-theater assumptions.” Ownby Tr. 215–16.
At a meeting in October 2014, Morgan Stanley provided the Board with valuation
analyses based on the 2014 Projections. JX 189 at 2. Morgan Stanley reported that before
the meeting, it had discussed a possible sale with Anschutz, and that Anschutz “would be
supportive.” Id. Morgan Stanley then summarized several potential strategic alternatives
available to the Company. Id. at 3. When reviewing the prospects for a sale, Morgan
Stanley identified AMC and Cinemark as possible strategic buyers. Id. Later that month,
Regal announced that the Board had “authorized the exploration of strategic alternatives to
enhance shareholder value, which may include a potential sale of the Company.” PTO ¶
121; JX 198; Miles Tr. 273–75.
Financial analysts reacted positively. They described Regal as “an extremely
attractive business” and characterized the timing of a possible sale as “perfect.” JX 202 at
9
’024–25. They also speculated that the idea for a sale might have originated with
Anschutz.8
In December 2014, Morgan Stanley reported that it had contacted seventy-one
potential buyers. Six potential financial sponsors and one strategic acquirer—Cineplex—
had executed non-disclosure agreements. Nine other firms had expressed interest. JX 219
at ’468. But no one had bid. The Board decided to continue its process through year-end
2014. JX 221. The Board also discussed “other monetization alternatives for Anschutz,
including secondary offerings and block trades.” Id.; see JX 245.
In January 2015, Morgan Stanley reported on the sale process. Morgan Stanley
explained that potential buyers viewed the cinema sector as fully valued, thought Regal
was well-run without obvious room for improvements, and saw long-term risks to Regal’s
business model. See JX 219 at ’469; JX 245 at 3; JX 247 at 2; Miles Tr. 275–77. Morgan
Stanley devoted roughly half of its presentation to the possibility that Anschutz might try
to exit from its position in Regal. See JX 245. On the positive side, Morgan Stanley noted
that an Anschutz exit could enable Regal “to broaden [its] shareholder base with longer
term investors” and could “[r]educe [or] eliminate” any “overhang” from the presence a
8
See id. at ’025 (“In our opinion, this news most likely reflects a decision made by
50 percent owner Phil Anschutz rather than management to unlock greater value for the
shares.” (internal quotation marks omitted)); id. at ’041 (“We believe Anschutz could . . .
be exploring a sale of Regal without previous inbound interest and with a relatively high
bar for the value he may be seeking.”); see also id. (describing lack of information about
“controlling shareholder Anschutz’s motivations”).
10
controlling stockholder. Id. at 9. But Morgan Stanley cautioned that an exit would be
viewed as a “[s]mart investor seen exiting [Regal’s] stock,” suggesting that Regal’s
prospects were trending downward. Id. at 12. Morgan Stanley also observed that if
Anschutz sold a portion of its position, then its remaining stake would create a “temporary
overhang” for Regal’s stock price. Id.
D. 2015 and 2016: Growing The Business
After ending the sale process, Regal returned to business as usual. Regal continued
to modernize its theaters and improve the customer experience. Regal experienced positive
results from its investments in reclining seats and improved concessions.9
In July 2015, Paramount proposed shortening the theatrical release window in return
for providing exhibitors with a share of its revenue from other distribution channels. See
JX 272. Paramount ultimately did not pursue its plan, but the proposal signaled that
changes to the theatrical release window might be coming. In November, the Board
9
See, e.g., JX 250 at 3 (“[O]ur installation of luxury reclining seats gained
significant momentum in the fourth quarter of 2014 and is already generating significant
returns in the New Year, with converted screens producing average box office revenue
growth of over 40% for the first six weeks of 2015. . . . [O]ur low-cost, low-risk investment
in . . . [providing] an enhanced menu and alcohol beverages to our customers is beginning
to have a more meaningful impact on our concession revenue . . . .”); JX 263 at 3 (“[O]ur
installation of luxury reclining seats is continuing at a steady pace with an additional 63
screens converted so far this year and another 92 currently under construction. . . . [O]ur
low-cost, low-risk investment in the equipment necessary to provide an enhanced menu
and alcoholic beverages to our customers continues to have a more meaningful impact on
concession revenues . . . .”).
11
authorized management to hire Bain & Company, Inc. to analyze various “windowing
strategies.” JX 278 at 2; Miles Tr. 278–80.
Bain presented its analysis in April 2016. Bain reported that the length of the
theatrical release window had decreased “slowly over time,” with the pace increasing in
the last five years. JX 310 at 2. Bain warned that the window could “meaningfully compress
in the near-term” due to financial pressures on the studios. Id. at 5; see also id. at 8. Bain
and the Board discussed possible ways to create a “win-win” by reaching an agreement
with studios about the theatrical release window. JX 309; JX 310 at 33–34. The Board
instructed management to “develop a strategy that best positions [Regal] for the possibility
that [the] exhibition industry would have a shortened theatrical release window.” JX 309.
During the same meeting, the Board “discussed a potential acquisition of Cinemark
and determined that exploring such a transaction was in the best interest of [Regal] and its
stockholders.” Id. After the meeting, management engaged with Cinemark. In June 2016,
representatives of Anschutz, Cinemark, and Regal met to discuss a potential transaction.
PTO ¶ 147; JX 342. In July, representatives of Cinemark and Regal met again to discuss a
potential combination. PTO ¶ 149. The talks did not bear fruit, and Regal refocused on
operating its business. See JX 380.
E. Anschutz Sells Two Large Blocks.
While Regal was in discussions with Cinemark, Anschutz began considering
“monetization alternatives” for its investment in Regal. JX 382. Regal’s stock price had
increased 24.3% in the previous twelve months, significantly outperforming its peers. Id.
at ’483. In late July 2016, Anschutz considered five possible monetization strategies,
12
including a block sale. Id. at ’490. Of those possibilities, a block sale created the “[g]reatest
likelihood of after-market selling pressure” on Regal’s stock. Id.
On July 30, 2016, representatives of Anschutz informed Regal that Anschutz wanted
“to be in a position to sell some shares as soon as possible.” JX 385 at 1. To facilitate the
sale, Regal’s management accelerated the filing of Regal’s Form 10-Q. Ownby testified
that there was a “sense of urgency” from Anschutz “to execute this trade quickly so that
they could lock in the price.” Ownby Tr. 241.
Over the next few days, Regal’s management and Morgan Stanley prepared “talking
points” to address the market’s reaction to the block sale. JX 387; JX 391; JX 392; JX 393;
JX 394; JX 395. The talking points described the sale as “completely understandable –
given that the shares are trading above $23 for only the second time in the last 5 years and
at a multiple that is near the high end of the historical range.” JX 393. During discussions
about the talking points, an Anschutz executive suggested attributing the sale to estate
planning. See JX 393; JX 395. Regal rejected the suggestion because it could invite
unwanted speculation about additional block sales. See Ownby Tr. 243–44. Mr. Anschutz
testified that estate planning was “not the reason for the block sale.” Anschutz Dep. 47–48.
He averred that he simply wanted to “lighten up” on his investment at an attractive price
because of concern about the business. Anschutz Tr. 519; see Anschutz Dep. 31–32.
On August 2, 2016, Anschutz sold a block of 13,000,000 Class A shares at $21.60
per share, a 7% discount to that day’s closing price. PTO ¶ 151; JX 397; JX 408. During a
meeting on August 31, the Board discussed the impact of the sale on Regal’s stock. JX 434
at 1–2. The “total shareholder return” of Regal’s stock over the past six months had
13
declined from 42% the day before Regal announced Anschutz’s block sale to 31% on
August 31. JX 433 at ’472. During the same meeting, Miles reported that Regal continued
to negotiate with the studios regarding potential changes to the theatrical release window.
JX 434 at 2. Miles also reported that talks with Cinemark had ended. Id. Miles stated that
Regal’s “current strategy of investing in its existing theatres would provide [Regal] with
significant returns over the next several years, but that management should review the
landscape of potential acquisition targets.” Id.
On November 17, 2016, Anschutz sold a second block of 13,000,000 Class A shares
at a price of $22.95 per share, reflecting a 6% discount to the closing price on that day.
PTO ¶ 155; JX 492. During the following month, Anschutz transferred another 5,560,000
Class A shares to a charitable foundation. PTO ¶ 156; JX 578 at 4. Through the two block
sales and the charitable contribution, Anschutz reduced its ownership of Class A shares by
63.1%. See JX 578 at 4. Anschutz continued to control a majority of Regal’s voting power
through its ownership of Class B shares. Jack Tyrrell, an independent board member of
Regal, emailed Ownby expressing his concern that Anschutz’s block sales might have
established “an effective ceiling on the stock price given [Anschutz’s] remaining
ownership.” JX 491.
F. Cineworld Contacts Anschutz About A Potential Deal.
In March 2017, Cineworld contacted Anschutz about a potential deal. Founded in
1995, Cineworld is the creation of Moshe (“Mooky”) Greidinger, its CEO, and his deputy
14
CEO and younger brother, Israel Greidinger.10 The Greidingers built their business by
expanding from a theater their family owned in Haifa, Israel. They first added theaters in
Israel, then built theater circuits in Central and Eastern Europe. In 2014, they created
Cineworld by merging with the largest cinema operator in the United Kingdom. For the
Greidingers, the next stage was to expand to the United States.
Mooky became interested in Regal while attending an industry conference hosted
by Rich Gelfond, the CEO of IMAX. Gelfond and Mooky had a close working relationship,
and Gelfond suggested to Mooky that there could be “an opportunity” to acquire Regal.
Greidinger Tr. 311; Gelfond Dep. 16–19. After the conference, Cineworld began analyzing
a potential acquisition. After looking at the market prices of the U.S. cinema exhibitors,
Cineworld concluded that their valuations were attractive. Greidinger Tr. 312.
Mooky contacted Gelfond and asked him for advice on acquiring Regal. Gelfond
introduced Mooky to David Posnick, a Blackstone employee and a “good connection into
the Anschutz organization.” Id. at 313; Gelfond Dep. 27–29, 42. Mooky and Israel met
with Posnick in April 2017. PTO ¶ 161; see JX 644. Afterward, Israel wrote to Posnick
that “[t]he transaction we are thinking about should facilitate a full exit for [Mr.
Anschutz].” JX 644. Posnick proceeded to arrange a meeting between the Greidingers and
Anschutz. Greidinger Tr. 314.
10
To avoid confusion, this decision refers to Mooky and Israel Greidinger by their
first names.
15
Meanwhile, on April 26, 2017, Regal held its earnings call for the first quarter of
2017. Regal reported better-than-expected revenues and its highest-ever quarterly
EBITDA. JX 647 at 5; JX 652; JX 658. During the call, Miles attributed Regal’s strong
performance in part to the studios’ successful efforts to release tentpole films during
shoulder periods. JX 647 at 3. She also credited “the industry’s efforts to improve the
customer experience.” Id. During the first quarter of 2017, over 25% of industry box office
revenue came from theaters with reclining seats and similar amenities, and box office
revenue in markets with the highest concentration of recliner-equipped theaters grew at
more than double the overall industry growth rate. Id. Regal increased ticket prices at a rate
of 5.5% in recliner locations during the first quarter of 2017, compared to 3.2% growth
overall. Id. at 3–4. Concessions per capita at those locations increased at nearly 6%
compared to 4% growth overall. Id. at 4–5.
By the time of the earnings call, Regal had introduced an improved food menu at
theaters representing 55% of Regal’s attendance base and alcohol at theaters representing
31% of Regal’s attendance base. Id. at 3. Regal’s first quarter revenue also received a boost
from its online booking and mobile ticketing platforms, which generated sales representing
“over 23% of [Regal’s] first quarter box office revenue and contributed to double-digit
growth in [Regal’s] other revenue streams.” Id.
During a meeting of the Board on May 3, 2017, Miles reported on Regal’s
discussions with the studios about the theatrical release window. Fox had been advocating
for a PVOD model that would allow consumers to rent films thirty days after their initial
16
theatrical release for $30. JX 673 at 2. Universal and Warner Brothers preferred a higher-
priced model that would shorten the theatrical release window even more. Id.
G. Israel Meets With Anschutz.
At a meeting in Denver on July 18, 2017, Israel engaged in discussion about Regal
with Anschutz representatives. Greidinger Tr. 314; see JX 697; JX 709. The Anschutz
representatives said that Regal was not for sale and that the timing was not optimal.
Greidinger Tr. 314. The Anschutz representatives also expressed comfort with Regal’s
performance and said that they were “not very eager to sell.” Id. In response to Israel’s
description of possible deal structures, the Anschutz representatives stated that Anschutz
would consider a sale only if all stockholders received the same cash consideration. The
Anschutz team expressed doubt that Cineworld could finance the deal. Id. at 315.
After the meeting, Israel met with his contacts at HSBC and Barclays about
financing a transaction. Cineworld also hired Ernst & Young (“E&Y”) and
PricewaterhouseCoopers (“PwC”). PTO ¶¶ 98–99. Cineworld tasked E&Y with evaluating
tax-efficient ownership structures for the post-merger company. See JX 971 at ’862.
Cineworld tasked PwC with analyzing merger synergies. Greidinger Tr. 337–38.
Cineworld believed it needed to point to significant synergies to be able to finance the deal.
In addition, because Cineworld traded on an exchange in the United Kingdom, it would be
required to report its synergy estimates when announcing a deal and to document realized
synergies two years after the transaction. Id. at 329; Cohen Tr. 601.
On July 26, 2017, Regal reported its earnings for the second quarter of 2017. PTO
¶ 167; JX 734. The results were disappointing, with box office revenue down 4.9%. JX 730
17
at 4; see JX 711. On the bright side, Regal reported record per capita concessions sales and
had deployed luxury seating to nearly one fourth of its locations. JX 730 at 3; JX 737.
AMC’s results were worse. On August 1, 2017, AMC pre-announced a net loss of
over $174 million for the second quarter of 2017, prompting a broad selloff in cinema
stocks. See JX 752; JX 753. AMC’s shares declined by 27% on the following day, and
Regal and Cinemark shares each dropped by 5%. JX 752. One news article asked, “Is
Netflix killing the multiplex?” Id. Another highlighted the rapid rise in popularity of
streaming services like Netflix, Hulu, and Amazon. JX 749. A few days later, Disney
announced that it would launch its own streaming service. JX 761; JX 762; JX 763. A
Business Insider article noted that short interest in the largest North American cinema
chains had increased “to the highest in years,” with Regal as the “biggest target.” JX 768
at ’341–43.
H. Regal Ends Discussions With Cinemark.
Throughout 2017, Regal had continued its on-again, off-again talks with Cinemark.
While the management teams interacted with each other, Mr. Anschutz engaged with Lee
Roy Mitchell, Cinemark’s founder and chairman. A deal with Cinemark would have been
a stock-for-stock merger. See JX 779; JX 786. Mr. Anschutz thought the transaction would
be difficult and would involve many “social issues, like who would run the company [and]
where would its headquarters be.” Anschutz Dep. 94–95.
In late August 2017, Regal terminated discussions, citing antitrust risk and “the
parameters that have been placed by you on any potential transaction.” JX 1332. Regal
management testified that Regal terminated discussions because Cinemark refused to
18
provide diligence information that Regal requested. Miles Dep. (JX 1589) 274–75; Ownby
Dep. (JX 1599) 224. There also are indications that Mr. Anschutz balked at a deal that
would leave Anschutz with a significant equity stake in the combined company but without
control. See Ownby Dep. (JX 1599) 82; JX 756.
During a Board meeting on August 30, 2017, Miles reported that industry box office
revenues for the third quarter were down because of a weak film slate. She predicted that
industry box office would finish the quarter down at least 14%. JX 818 at 1. Regal’s box
office and concessions revenues were down 18.8% and 17.1%, respectively. JX 817 at
’878. Miles added that since May, Regal had had “no meaningful discussions” with the
studios about PVOD and the theatrical release window. JX 818 at 2. At the meeting, the
Board authorized management to initiate a $50 million share repurchase program. Id.
I. Cineworld Returns.
On September 18, 2017, Israel met again with the Anschutz team. HSBC and
Barclays attended the meeting and expressed their willingness to consider financing an
acquisition of Regal by Cineworld. Greidinger Tr. 316–17; JX 812. The Anschutz
representatives were encouraged and directed Israel to contact Regal. Greidinger Tr. 317.
On September 27, 2017, Anschutz’s representative told Miles that Cineworld would
be contacting her about a possible deal. PTO ¶ 174. The Anschutz representative did not
specify an acceptable price or provide any instructions on how to run the deal process.
Miles Tr. 282. On the same day, Mooky scheduled a meeting with Miles for October 4. See
JX 859.
19
To prepare for Miles’ meeting with Mooky, Ownby prepared a new set of five-year
projections. JX 874 (the “2017 Projections”). He used the same process that he followed
for the 2014 Projections: He started with Regal’s annual forecast, then projected forward
for the next five years. JX 864; JX 874. His numbers assumed that Regal’s 2017 attendance
would be “very similar to Q4 of 2015 – roughly 56M attendees.” JX 864 at ’635. If that
estimate was correct, then attendance would have declined 4% year-over-year by the end
of 2017. See JX 1632 (“Yilmaz Rebuttal Report”) ¶ 113, Fig. 11; JX 874. The other key
assumption in the 2017 Projections was that attendance would increase by 3.5% in 2018
and by 0.9% in 2019. See JX 864 at ’635; JX 874 at ’800–01. After that, attendance would
increase modestly in a range between 0.1% and 0.3% annually through the end of 2022.
JX 874 at ’801. Ownby explained that roughly a third of the projected 2018 attendance
growth would occur naturally because in 2018 Regal would have the benefit of owning
theaters it had acquired mid-2017 for the full year. JX 864 at ’635. The 2017 Projections
also assumed that Regal could increase ticket and concessions prices by “between 2.0%
and 3.5%” annually. Id. at ’637.
Ownby testified that the 2017 Projections were “optimistic but achievable.” Ownby
Tr. 216, 265. He added that they were “reasonably prepared on bases reflecting the best
currently available estimates and judgments of Regal management . . . concerning the
future performance of the business.” Id. at 230. The 2017 Projections did not make any
assumptions or include sensitivities based on possible disruptions to Regal’s business
model from PVOD, a shortened theatrical release window, or streaming services. Id. at
220.
20
J. Cineworld Increases Its Bid.
During the meeting on October 4, 2017, Cineworld offered to purchase Regal for
$20.50 per share. The price represented a 21.2% premium to the closing price of Regal’s
Class A shares on October 4. During the meeting, Cineworld indicated that the transaction
would generate $50 million of synergies. See JX 908 at ’182. Regal rejected the offer as
inadequate, but agreed to facilitate due diligence so that Cineworld could determine
whether to improve its offer. JX 1665 at 23.
After the meeting, Greidinger contacted Mr. Anschutz, who declined to discuss the
transaction and instructed Cineworld to communicate with Regal. Follow-up meetings
between Regal and Cineworld took place on October 11 and 12. JX 965. On October 15,
Cineworld offered to acquire Regal for $21 per share. PTO ¶ 184; JX 946. The price
represented a 30% premium to the closing price of Regal’s Class A shares on October 13.
JX 946 at 2.
On October 19, 2017, the Board met to discuss Cineworld’s offer. Morgan Stanley
presented valuation analyses based on the 2017 Projections and a consensus set of analyst
projections. JX 971 at ’867–77; JX 965 at 3; see JX 971 at ’875 (DCF “Based on Street
Estimates”); id. at ’876 (DCF “Based on [Regal] Management Projections”). By this point,
the White House and Republican leaders in Congress had released a “unified framework”
for reducing taxes that contemplated slashing the corporate tax rate from 35% to 20%. See
JX 857. Morgan Stanley’s DCF analyses included sensitivity analyses that showed the
effects of the U.S. corporate tax rate decreasing to 30% or 20%. JX 971 at ’875–76.
21
Morgan Stanley’s presentation included a slide titled “Potential Interlopers,” which
identified other potential buyers. Id. at ’888; see also Kim Tr. 121–22. The slide
highlighted Cinemark and Vue, “one of Europe’s leading Cinema groups,” as the most
likely contenders. JX 971 at ’888. Morgan Stanley did not think that either company was
likely to engage. Morgan Stanley noted that Cinemark had not made an offer during
Regal’s prior sale process, that Cinemark had a conservative culture, and that the company
had limited “leverage capacity and cash on [its] balance sheet.” Id. Vue was also “[h]ighly
levered” and suffered from a “potentially conflicting strategic focus among [its] ownership
group.” Id. Morgan Stanley listed four other “Potential Buyers” that Morgan Stanley had
excluded “due to size/ strategic priorities”: Cinemex, Cineplex, Cinepolis, and AMC. Id.
In other words, other strategic bidders were not likely to bid, but due to reasons other than
the price of the transaction.
The Board decided to reject Cineworld’s offer. Although receptive to a deal, the
Board wanted to “play hard to get.” Bell Dep. (JX 1591) 86; see Miles Tr. 285–86.
On October 20, 2017, Miles and Bell told Cineworld that Regal was not for sale and
that Cineworld’s offer was too low for Regal to consider. Miles and Bell also cited
uncertainty over Cineworld’s ability to finance the transaction.
After Regal rejected Cineworld’s second offer, the Greidingers were pessimistic
about a deal. They decided to “put the deal on hold for the time being.” JX 985 at ’683.
Having declined Cineworld’s overtures, Miles continued working on a response to
the threats posed by PVOD and the possible shortening of the theatrical release window.
22
Miles felt that Regal was in a “very compelling and durable position,” with theater
exhibitions continuing to be an “extremely important driver” of studios’ revenues. JX 986.
On October 24, 2017, Regal reported its earnings results for the third quarter.
Revenue and EBITDA exceeded analysts’ expectations by 1% and 6%, respectively. JX
1022 at ’899. Regal highlighted that it had rolled out its new food and alcohol menus across
59% and 36% of its attendance base, respectively. JX 988 at 3. Ownby expected a return
to 2015 and 2016 industry attendance levels in 2018. See id. at 12. The positive earnings
did not have an immediate effect on Regal’s stock price. See JX 1021 at 1.
K. Cineworld Increases Its Offer Again.
After Regal’s second rejection, Cineworld and its advisors quickly resumed work
on a transaction. Barclays sent Israel analyses of prices ranging from $20 to $25 per share
using the 2017 Projections and an analyst consensus set of projections. JX 990. If the 2017
Projections were accurate, then a transaction would be accretive to Cineworld immediately
at prices up to $25 per share. Id. at ’726. Under the analyst consensus case, a transaction at
a price up to $24 per share would become accretive in 2019. Id. at ’727. Barclays drew a
red line at $22.95, labeled “[o]n 23rd Nov 2016 Anschutz sold 13m [Regal] shares at
$22.95 per share.” Id. at ’726–27.
On October 25, 2017, Cineworld made its third offer, this time at $22.50 per share.
PTO ¶ 190; JX 1003. The offer represented a 37.1% premium over the closing price of
Regal’s stock on that date.
On October 27, 2017, the Board met to consider Cineworld’s revised offer. Morgan
Stanley advised that the lack of any stock price reaction to Regal’s excellent third quarter
23
earnings likely was due to weak performance across the cinema sector generally. JX 1021
at 1. The median analyst forecast anticipated that Regal’s 2018 revenue would increase
year-over-year by 1%, EBITDA would increase by 4.1%, and Regal’s stock price would
appreciate by 2.7%. JX 1022 at ’901. The analyst community generally remained positive,
with some analysts increasing their price target for Regal’s stock. Id. But multiple analysts
cited concerns about competition from PVOD and streaming services. Id.
After Morgan Stanley’s presentation, the Board considered whether to pursue a sale.
JX 1021 at 2. The Board determined that the value of Regal to Cineworld was higher than
its value to a domestic theater company and that it was unlikely that other strategic buyers
or financial sponsors could complete a transaction at the price level under consideration.
Id. The Board also concluded that the risk of antitrust review was lower for a deal with
Cineworld than for a deal with a domestic competitor. Id. The Board considered reaching
out to other bidders, but concluded that the risk of a leak outweighed the benefits. Id. at 3.
Miles explained that Regal did not want to lose the “bird in the hand” by pursuing an open
sale process. Miles Dep. (JX 1589) 214–15. Regal’s unsuccessful sale process in 2014 and
2015 weighed heavily in the decision. Id. at 214; Bell Tr. 511.
The Board directed management make a counteroffer at $23.50 per share and to
insist on retaining the ability to evaluate competing offers. Miles Tr. 289–90; JX 1021 at
3. Miles communicated the Board’s position to Cineworld on October 30. PTO ¶ 193; see
JX 1032.
24
L. Cineworld Looks For More Synergies.
While engaging with Regal, the Cineworld management team also was refining its
views on synergies. After a meeting with Cineworld’s banks, Israel informed Mooky by
email that “[t]he banks expect us to reach a level of Non Capex Synergies . . . of 100 million
dollars.” JX 1052 at ’946. PwC’s initial report on synergies only showed $70 million of
synergies, meaning that Cineworld needed to “improve [its] position.” Id.
Israel then described line-by-line changes to Cineworld’s financial model that
resulted in greater synergies. Id. PwC had weighted the various synergies by their
probability of success, and Israel increased those percentages. Id. After Israel’s changes,
the synergy estimates added up to $100 million. Id.
M. The Parties Reach A Deal.
On November 1, 2017, Cineworld made its “final” offer of $23.00 per share. PTO
¶ 195; JX 1045. Cineworld’s final offer represented a 46.1% premium to the closing price
of Regal’s stock of $15.74 on that date.
The Board convened to consider Cineworld’s offer on the following day. Bell
reported that Anschutz supported accepting the offer. JX 1048. The Board decided to
accept the offer on the conditions that Regal would not negotiate exclusively with
Cineworld and that the Merger Agreement would have to include a go-shop provision and
a reverse break-up fee. Id.
The Board met again on November 8, 2017. Morgan Stanley recapped the sale
process and outlined next steps. JX 1085 at 2, 6. Morgan Stanley again described the
potential for “interlopers” and outlined the risks and benefits of a pre-signing market check,
25
noting that it would create “[f]avorable optics for the record” but increase the probability
of a leak. Id. at 7. The Board continued to regard a post-signing go-shop as the better option.
JX 1084 at ’119.
Miles reported that “industry box office revenues for the first nine months of 2017
decreased by about 5% over the same period in 2016, primarily due to poor performance
of the film product release in August.” Id. at ’117. The primary culprit was August 2017,
when industry box office revenue underperformed by almost $400 million. Id. at ’070; see
JX 988 at ’497. Box office revenue for October also was down by approximately $100
million. JX 1084 at ’070. As a result, Regal reported significant year-over-year declines in
revenue (-11.8%), adjusted EBITDA (-33%), and earnings per share (-75.9%) in the third
quarter of 2017. Id. at ’077.
Despite the underperformance in August and October 2016, Regal’s management
continued to expect a rebound. Id. at ’070. Miles predicted that November and December,
which traditionally accounted for 75% of fourth quarter box office, would compare
favorably with the remainder of 2017, due in part to the anticipated success of Justice
League and Star Wars: The Last Jedi. Id. Regal also was experiencing success in its
revenue stream from online bookings, which had increased 66% year-to-date in 2017. Id.
at ’075.
During the same time period, Cineworld’s board of directors convened to discuss
the Merger. See JX 1115. Cineworld’s financial advisors highlighted a “Window of
Opportunity” caused by “[d]islocation in [the] market value of US cinemas compared to
[their] long term average.” Id. at ’777. The advisors cited investors’ concerns about AMC’s
26
recent financial struggles, the weak film slate in 2017, and “noise” in the press about the
theatrical release window and PVOD. Id. Cineworld’s financial advisors presented a DCF
analysis that valued Regal at $25.70 per share using the analyst consensus case. Id. at ’813.
A DCF analysis based on the 2017 Projections generated a value of $36.40. Id. at ’814.
The presentation concluded that the Merger was “[c]ompelling” from a financial
perspective “[b]ased on [the] broker consensus case.” Id. at ’807 & n.1.
Cineworld’s financial advisors also identified three categories of merger-related
synergies that increased Regal’s per-share value.
• “Cost Reduction Opportunities,” which consisted of “[p]ublic to private savings,”
“[g]roup savings,” “[s]trategy and operations re-design,” and “[c]ommercial
economies of scale.” These categories were expected to generate $46 million in
annual benefits by 2019.
• “Leverage of Know-How & Industry Best Practice,” which consisted of “[l]oyalty
programs,” “[o]nline booking,” “[a]dvertising,” and “[c]oncession spend increase.”
These categories were expected to generate $62 million in annual benefits by 2019.
• “Tax Benefits,” which consisted of “[f]inancial structuring benefits” and
“[o]ptimization of transfer pricing.” These categories were expected to generate $72
million in annual benefits by 2019.
Id. at ’781. Using analyst consensus projections, Cineworld’s bankers valued the business
initiatives at $6.40 per share and the tax benefits at $7.10 per share. Id. at ’787. Using the
2017 Projections, Cineworld’s bankers valued the business initiatives at $8.10 per share
and the tax benefits at $7.10 per share. Id. at ’788.
While the parties were negotiating, news of the deal leaked. On November 20, 2017,
Regal’s stock closed at $16.01 per share. The trading price increased steadily and, a week
later, it closed on November 27 at $18.25 per share, 14% higher. JX 1200. The next day,
27
November 28, multiple news outlets published rumors about a potential transaction. PTO
¶ 211. Cineworld and Regal issued public statements confirming that they were in
discussions about a potential transaction. JX 1180; JX 1182 at ’196–98. Cineworld’s press
release reported a price of $23.00 per share in cash and stated that Cineworld would fund
the acquisition “through a mixture of incremental debt and a material equity raise.” JX
1182 at ’196.
Regal’s stock closed at $19.63 on November 28, up 7.6% from the previous day’s
closing price of $18.25. See PTO ¶¶ 209, 213; JX 1200. Cineworld’s stock declined by
17%. Kim Tr. 823; JX 1190.
Morgan Stanley reported to Regal that investors viewed the strategic rationale of
the deal as “sound” given the “consensus . . . that cinema businesses need to roll-out into
new geographies to grow” and the threat from streaming services like Netflix. JX 1190.
But investors questioned whether the transaction would produce “meaningful synergies . .
. given the lack in geographical overlap” between Cineworld and Regal, and they were
skeptical about Cineworld’s ability to finance the transaction. Id. Morgan Stanley
subsequently relayed more investor feedback, including a “[g]eneral sentiment” that
“[Anschutz] wants out and that [Regal] is operating in a tricky landscape.” JX 1215.
Morgan Stanley also reported that it had “not heard much in the form of interlopers”
because the “[i]mplied multiple of this transaction is full.” Id.; see Kim Tr. 824–25. Morgan
Stanley believed that the “[m]ost likely interlopers [are] likely to not have interest” because
“(i) AMC would struggle to make a transaction like this work and (ii) Cinemark is doing
their own thing.” JX 1215 at 1; see Kim Tr. 826.
28
N. The Board Approves The Merger Agreement.
On December 4, 2017, the Board met to consider the Merger Agreement. Morgan
Stanley noted that the deal price exceeded the valuation estimates of nine equity research
analysts. See JX 1256 at 11. Morgan Stanley also noted that the 2017 Projections were
more optimistic than the analysts’ expectations. As a result, a discounted equity value
analysis using the 2017 Projections produced a value of $25.15, while the same analysis
using consensus projections generated a value of $19.53. See id. at 14. Morgan Stanley’s
DCF valuation based on the 2017 Projections estimated Regal’s value at between $20.99
and $28.12 per share. Id. at 15. Morgan Stanley did not include a DCF analysis using
analysts’ projections. Cineworld’s offer price fell in the high end of the valuation matrix
that Morgan Stanley prepared. See JX 1267 at ’332–33.
While the parties were negotiating the Merger, legislation amending the tax code
continued moving through Congress:
• On October 19, 2017, the Senate passed a resolution that would allow the Senate to
amend the tax code through the budget reconciliation process.
• On November 2, 2017, the Tax Act was introduced in the House. It called for
reducing the corporate tax rate to 20%.
• On November 16, 2017, the House passed its version of the Tax Act.
• On December 2, 2017, the Senate passed its version of the Tax Act, which called
for reducing the corporate tax rate to 21%.
Morgan Stanley’s analyses, however, did not address the possibility of a lower corporate
tax rate, because Morgan Stanley believed it was “still too uncertain” to incorporate in a
valuation of Regal. JX 1257 at 3; Kim Tr. 844. The only nod to a lower corporate tax rate
29
was a sensitivity analysis for the DCF valuation that estimated Regal’s value based on a
range of tax rates and EBITDA multiples. JX 1256 at 15. It showed that reducing Regal’s
tax rate from 39.5% to 20% would increase Regal’s value by 6.5%. See id. Morgan Stanley
also “noted that the prospect of certain changes to corporate income tax rates could enhance
Morgan Stanley’s selling efforts.” JX 1257 at 3. Miles testified that the Board believed any
reduction in the corporate tax rate was uncertain and that in any event, “other buyers would
have that information as well.” Miles Tr. 296; see Kim Tr. 848.
At the conclusion of the meeting, the Board unanimously approved the Merger
Agreement. Its terms provided for (i) a termination fee, (ii) a go-shop provision that would
last until January 22, 2018, and (iii) a fiduciary out that the Board could exercise after the
expiration of the go-shop period if Regal received a superior proposal.11 The termination
fee provisions in the Merger Agreement established a two-tiered structure depending on
whether a superior proposal emerged before the end of the go-shop period. If Regal
terminated the Merger Agreement to accept a superior proposal made before the end of the
go-shop period, then Regal could terminate the Merger Agreement and pay a termination
fee equal to $36,270,000, or twenty-three cents per share, reflecting 0.63% of Regal’s
implied enterprise value and 1% of its implied equity value. See MA §§ 8.3(b)(i)–(ii). If
Regal terminated the Merger Agreement to accept a superior proposal that was not made
11
PTO ¶ 221; JX 1293 (“MA”) §§ 6.1(a) (go-shop), 6.1(c) (fiduciary out), 8.1–8.3
(termination provisions).
30
before the end of the go-shop period, then Regal could terminate the Merger Agreement
and pay a termination fee equal to $95,150,963, or sixty cents per share, reflecting 1.64%
of Regal’s implied enterprise value and 2.62% of its implied equity value.
Later on December 4, 2017, Ownby learned that Cineworld’s press release
announcing the Merger would claim “$100M (EBITDA) of combination benefits” and “an
additional $50M in tax structuring benefit.” JX 1258 at ’387. Ownby responded, “Those
are some bullshit numbers – glad I don’t have to deliver them!” Id. Miles responded,
“Ditto[.]” Id. She later added, “Beauty of an all cash deal. Not our responsibility[.]” Id.
O. The Go-Shop Process
After the Merger was announced, Morgan Stanley began soliciting other bidders as
part of the go-shop process. Morgan Stanley contacted a total of forty-seven parties,
including Adam Aron, the CEO of AMC. Aron stated that “AMC would like to take a look
at Regal” and requested a non-disclosure agreement. JX 1312; Aron Dep. 9–10. Morgan
Stanley sent Aron the non-disclosure agreement the next day. JX 1317. On December 12,
Regal’s outside counsel sent AMC a different and more restrictive non-disclosure
agreement along with a lengthy list of requests for detailed information from AMC,
including the “name, address, remaining lease term . . . , amenities, and box office for the
past two years of each theatre in the AMC circuit,” a “spreadsheet containing the name,
address, and amenities of any theatres that AMC intends to open or reopen within the next
two years,” and any analyses AMC had made of the antitrust implications of a transaction
with Regal. JX 1334 at ’814–16.
31
Aron balked at the request. He responded to Regal that “acquirers need to be courted
not insulted.” Id. at ’813. Continuing, he stated:
Your demands for information from AMC are sufficient to convince us NOT
to participate in your Go Shop process.
As a result of your unreasonable demands, AMC is hereby official pencils
down.
And unfortunately your action gives enormous fodder to plaintiffs attorneys
[sic] that you did not adequately canvas [sic] potential buyers in the sale of
Regal.
Id. at ’813–14.
Referencing a popular credit card commercial, Miles described Aron’s response as
follows:
Earlier bids. $0
Cineworld bid. $6.0 billion
AMC response Priceless
Id. at ’813. At trial, she testified that her message responded to Aron’s characteristic use of
“hyperbole,” and she expressed her belief that if AMC had “wanted to move forward . . .
[then] they would have moved forward.” Miles Tr. 297–98. AMC never executed a non-
disclosure agreement with Regal and never received any confidential information. Aron
Dep. 16–17, 43–46.
On December 15, 2017, Morgan Stanley reported to Miles that most of the parties
contacted had declined to engage. The financial sponsors thought it would be “[d]ifficult
to compete against a strategic with meaningful synergies.” JX 1336. Cinemark had passed,
“referencing prior conversations around governance, [Anschutz], etc.” Id.
32
During a meeting with the Board on January 10, 2018, Morgan Stanley reported that
the forty-seven parties contacted had shown “little interest” in Regal. JX 1392 at 2. Morgan
Stanley also reported that the Federal Trade Commission had granted early termination of
the Hart-Scott-Rodino waiting period, indicating that antitrust scrutiny was unlikely and
the Merger could proceed on an expedited schedule. Id.
On January 22, 2018, the go-shop period ended. No one had expressed interest. On
the same day, Regal’s stock closed at $22.94 per share, reflecting the market’s assessment
that the Merger would close at the agreed-upon price of $23 per share.
P. Cineworld Refines Its Synergies.
While the go-shop process was unfolding, Cineworld continued to refine its synergy
estimates and pursue financing. On December 19, 2017, PwC presented Cineworld with its
final synergies report. JX 1340. The report did not identify “tax synergies” or “[t]ax
benefits.” Id. at ’725, ’728. It rather focused on “Cost Reduction and contract
renegotiation” and “Leverage of know-how and industry best practice.” Id. The report
identified “stretched” estimates for each category, then applied an achievability factor to
those estimates. Id. PwC estimated $140.8 million in total run-rate synergies achievable by
2022, comprising $50.6 million in cost reduction and contract renegotiation benefits and
$90.2 million in benefits from leverage of know-how and industry best practice. Id.
On January 17, 2018, Cineworld sent its stockholders a letter announcing a
stockholder meeting to vote on the Merger. Cineworld represented that by implementing
its best practices in the U.S. market, it could create significant value. As examples of best
practices, Cineworld cited “enhancing the customer’s experience through venue
33
refurbishments and better seating, diversifying multiplex offering[s] using latest
technology, loyalty programmes, accretive bolt-on acquisitions and adopting a highly
disciplined approach to costs.” JX 1416 at 9.
Cineworld also anticipated the following annual “combination benefits” from the
Merger:
• $60 million in cost reductions “including the elimination of duplicated corporate
costs, public company expenses and functional overheads, the optimisation of
functions and economies of scale”
• $40 million in “benefits from business initiatives and implementing best practices
across sales and marketing, customer experience and other income”
• $10 million in “group structuring benefits . . . through the adoption of an efficient
financial structure”
Id. at 9–10. Cineworld stressed these synergies to reassure investors who believed
Cineworld had overpaid. See, e.g., Greidinger Tr. 357–59. Cineworld’s directors, however,
were skeptical about the “the ‘[$]100 million combination benefits’ story.” JX 1186.
In a lender presentation, Cineworld presented the same synergy figures. JX 1420 at
27. The presentation explained that Cineworld previously had expected the Merger to
create $50 million in group structuring benefits because of Cineworld’s status as a foreign
company and its ability to lower Regal’s effective tax rate once it was part of the Cineworld
enterprise. The Tax Act had rendered a substantial portion of those savings redundant.
After the Tax Act, Cineworld anticipated achieving $50 million in tax savings plus $10
million in group structuring benefits. Id.
On January 22, 2018, Institutional Shareholder Services Inc. (“ISS”) recommended
that Cineworld’s stockholders vote against the Merger. ISS cited the “significant
34
operational risk” involved in the transaction and the size of the acquisition. JX 1434 at 1.
ISS also doubted whether Cineworld could “deliver on the planned synergies,” which were
“critical for the success of the deal.” Id. at 9. On the bright side, ISS noted the “previously
unexpected” $50 million in estimated annual tax savings resulting from the Tax Act. Id. at
4.
Q. The Merger Closes.
On February 1, 2018, Anschutz delivered a written consent that voted its shares in
favor of the Merger Agreement. Because Anschutz controlled approximately 67% of the
Regal’s outstanding voting power, the written consent resulted in the transaction being
approved. The next day, Regal filed a definitive information statement, which notified
Regal’s Class A stockholders of their right to seek appraisal. Holders of 8,809,239 shares
of Regal Class A common stock eschewed the consideration offered in the Merger and
pursued appraisal.
The Merger closed on February 28, 2018. Regal’s executives submitted their
resignations on the following day.
II. LEGAL ANALYSIS
“An appraisal proceeding is a limited legislative remedy intended to provide
shareholders dissenting from a merger on grounds of inadequacy of the offering price with
a judicial determination of the intrinsic worth (fair value) of their shareholdings.” Cede &
Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988). The appraisal statute states that
“the Court shall determine the fair value of the shares exclusive of any element of value
arising from the accomplishment or expectation of the merger or consolidation.” 8 Del. C.
35
§ 262(h). The statute instructs that “[i]n determining such fair value, the Court shall take
into account all relevant factors.” Id. “The time for determining the value of a dissenter’s
shares is the date on which the merger closes.” Brigade Leveraged Cap. Structures Fund
Ltd. v. Stillwater Mining Co., 240 A.3d 3, 17 (Del. 2020).
In its seminal decision on the meaning of fair value, the Delaware Supreme Court
provided the following explanation:
The basic concept of value under the appraisal statute is that the stockholder
is entitled to be paid for that which has been taken from him, viz., his
proportionate interest in a going concern. By value of the stockholder’s
proportionate interest in the corporate enterprise is meant the true or intrinsic
value of his stock which has been taken by the merger. In determining what
figure represents this true or intrinsic value, . . . the courts must take into
consideration all factors and elements which reasonably might enter into the
fixing of value. Thus, market value, asset value, dividends, earning
prospects, the nature of the enterprise and any other facts which were known
or which could be ascertained as of the date of the merger and which throw
any light on future prospects of the merged corporation are not only pertinent
to an inquiry as to the value of the dissenting stockholder’s interest, but must
be considered . . . .
Tri-Cont’l Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950). The Delaware Supreme Court has
adhered to this definition ever since.12
12
Stillwater, 240 A.3d at 10 (explaining that a stockholder should be awarded “‘his
proportionate interest in [the] going concern’” (alteration in original) (quoting Dell, Inc. v.
Magnetar Glob. Event Driven Master Fund Ltd., 177 A.3d 1, 21 (Del. 2017))); Verition
P’rs Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128, 132–33 (Del. 2019) (per
curiam) (“[f]air value is . . . the value of the company to the stockholder as a going
concern,” defined as the stockholder’s “proportionate interest in a going concern.” (internal
quotation marks omitted)); accord Montgomery Cellular Hldg. Co. v. Dobler, 880 A.2d
206, 222 (Del. 2005); Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 553 (Del. 2000);
Rapid-Am. Corp. v. Harris, 603 A.2d 796, 802 (Del. 1992); Cavalier Oil Corp. v. Harnett,
564 A.2d 1137, 1144 (Del. 1989); Bell v. Kirby Lumber Corp., 413 A.2d 137, 141 (Del.
36
To determine the fair value of a stockholder’s proportionate interest in the
corporation, the court must “envisage the entire pre-merger company as a ‘going concern,’
as a standalone entity, and assess its value as such.” Dell, 177 A.3d at 20. When doing so,
the court must value the corporation based on its “operative reality” at the time of the
merger. Id. “The underlying assumption in an appraisal valuation is that the dissenting
shareholders would be willing to maintain their investment position had the merger not
occurred.” Cede & Co. v. Technicolor, Inc. (Technicolor IV), 684 A.2d 289, 298 (Del.
1996). Consequently, the trial court must assess “the value of the company . . . as a going
concern, rather than its value to a third party as an acquisition.”13
A. Burdens Of Proof And Valuation Indicators
By stating that “the Court shall determine the fair value of the shares,” the appraisal
statute places the obligation to determine the fair value of the shares squarely on the court.
Gonsalves v. Straight Arrow Publ’rs, Inc., 701 A.2d 357, 361 (Del. 1997). Because of this
1980); Universal City Studios, Inc. v. Francis I. duPont & Co., 334 A.2d 216, 218 (Del.
1975). But see DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346, 371 (Del.
2017) (describing fair value inquiry as examining whether stockholders “receive fair
compensation for their shares in the sense that it reflects what they deserve to receive based
on what would fairly be given to them in an arm’s-length transaction”).
13
M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999); accord Golden
Telecom, Inc. v. Global GT LP, 11 A.3d 214, 217 (Del. 2010) (“fair value” means “the
value to a stockholder of the firm as a going concern, as opposed to the firm’s value in the
context of an acquisition or other transaction”). But see DFC, 172 A.3d at 346 (describing
fair value inquiry as evaluating whether stockholders “receive fair compensation for their
shares in the sense that it reflects what they deserve to receive based on what would fairly
be given to them in an arm’s-length transaction”).
37
statutory mandate, the allocation of the burden of proof in an appraisal proceeding differs
from a traditional liability proceeding. In an appraisal proceeding, “both sides have the
burden of proving their respective valuation positions by a preponderance of [the]
evidence.” Fir Tree Value Master Fund, LP v. Jarden Corp., 236 A.3d 313, 322 (Del.
2020) (alteration in original) (internal quotation marks omitted). “No presumption,
favorable or unfavorable, attaches to either side’s valuation.” Pinson v. Campbell-Taggart,
Inc., 1989 WL 17438, at *6 (Del. Ch. Feb. 28, 1989). “Each party also bears the burden of
proving the constituent elements of its valuation position . . . , including the propriety of a
particular method, modification, discount, or premium.” In re Appraisal of Stillwater
Mining Co. (Stillwater Trial), 2019 WL 3943851, at *18 (Del. Ch. Aug. 21, 2019) (internal
quotation marks omitted), aff’d sub nom. Brigade Leveraged Cap. Structures Fund Ltd. v.
Stillwater Mining Co., 240 A.3d 3 (Del. 2020).
A party may seek to prove fair value using “any techniques or methods which are
generally considered acceptable in the financial community and otherwise admissible in
court.” Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983). “In discharging its
statutory mandate, the Court of Chancery has discretion to select one of the parties’
valuation models as its general framework or to fashion its own.” M.G. Bancorporation,
Inc. v. Le Beau, 737 A.2d 513, 525–26 (Del. 1999). The Court of Chancery may “adopt
any one expert’s model, methodology, and mathematical calculations, in toto, if that
valuation is supported by credible evidence and withstands a critical judicial analysis on
the record.” Id. at 526. Or the court “may evaluate the valuation opinions submitted by the
parties, select the most representative analysis, and then make appropriate adjustments to
38
the resulting valuation.” Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in
Mergers and Consolidations, Corp. Prac. Series (BNA) No. 38-5th, at A-31 (2010 & 2017
Supp.) (collecting cases). “If neither party satisfies its burden, however, the court must then
use its own independent judgment to determine fair value.” Gholl v. eMachines, Inc., 2004
WL 2847865, at *5 (Del. Ch. Nov. 24, 2004).
Although the appraisal inquiry might seem to involve neutral principles of
valuation, “corporate finance is not law.” In re Appraisal of Jarden Corp. (Jarden Trial),
2019 WL 3244085, at *1 (Del. Ch. July 19, 2019), aff’d sub nom. Fir Tree Value Master
Fund, LP v. Jarden Corp., 236 A.3d 313, 322 (Del. 2020).
The appraisal exercise is, at bottom, a fact finding exercise, and . . . by
functional imperative, the evidence, including expert evidence, in one
appraisal case will be different from the evidence presented in any other
appraisal case. Different evidence, of course, can lead to different decision
paths and different outcomes.
Id.; accord Merion Cap. L.P. v. Lender Processing Servs., Inc., 2016 WL 7324170, at *16
(Del. Ch. Dec. 16, 2016) (noting that an argument which succeeds in one case “may not
prevail in another case if the proponents fail to generate a similarly persuasive level of
probative evidence or if the opponents respond effectively”). “What is necessary in any
particular appraisal case is for the Court of Chancery to explain its fair value calculus in a
manner that is grounded in the record before it.” Jarden, 236 A.3d at 325 (alterations and
internal quotation marks omitted); accord Stillwater, 240 A.3d at 16.
The parties presented three valuation methodologies for the court’s consideration.
The petitioners argued in favor of a DCF methodology, which they maintained supports a
fair value of $33.83 per share. Cineworld responded that the court should not rely on a
39
DCF analysis and argued instead for relying on Regal’s unaffected market price and the
deal price minus synergies. Cineworld proposed to give equal weight to its valuation
indicators, resulting in a fair value of $18.02 per share.
B. The DCF Methodology
The petitioners contend that the court should rely on a DCF model prepared by their
expert, Bilge Yilmaz. Cineworld did not submit its own DCF analysis. Instead,
Cineworld’s valuation expert, G. William Kennedy, critiqued Yilmaz’s model. As the
proponent of valuing Regal using this method, the petitioners bore the burden of proving
the reliability of the valuation.
The DCF method is a technique that is generally accepted in the financial
community. “While the particular assumptions underlying its application may always be
challenged in any particular case, the validity of [the DCF] technique qua valuation
methodology is no longer open to question.” Campbell-Taggart, 1989 WL 17438, at *8
n.11. It is a “standard” method that “gives life to the finance principle that firms should be
valued based on the expected value of their future cash flows, discounted to present value
in a manner that accounts for risk.” Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640,
at *9 (Del. Ch. Aug. 19, 2005).
During the four decades after Weinberger, Delaware courts frequently used the DCF
methodology to derive fair value. See, e.g., ONTI, Inc. v. Integra Bank, 751 A.2d 904, 916
(Del. Ch. 1999) (“[S]ince the abolishment of the Delaware Block method . . . this Court
frequently has employed the discounted cash flow as at least one method of valuation.”
(footnote omitted)). Chancellor Allen endorsed the approach, observing that “[i]n many
40
situations, the discounted cash flow technique is in theory the single best technique to
estimate the value of an economic asset.” Cede & Co. v. Technicolor, Inc., 1990 WL
161084, at *7 (Del. Ch. Oct. 19, 1990), aff’d in part, rev’d in part on other grounds, 636
A.2d 956 (Del. 1994). By the late 1990s, the DCF methodology had become “the model of
choice for valuations in this Court.” Grimes v. Vitalink Commc’ns Corp., 1997 WL 538676,
at *1 (Del. Ch. Aug. 26, 1997); accord Cede & Co. v. JRC Acq. Corp., 2004 WL 286963,
at *10 (Del. Ch. Feb. 10, 2004) (“In recent years, the DCF valuation methodology has
featured prominently in this Court . . . .”); Crescent/Mach I P’ship, L.P. v. Turner, 2007
WL 1342263, at *10 (Del. Ch. May 2, 2007) (“[T]he Court tends to favor the discounted
cash flow method . . . .”).
In Dell and DFC, the Delaware Supreme Court cautioned against using the DCF
methodology when a reliable market-based indicator is available. In Dell, the high court
explained that “[a]lthough widely considered the best tool for valuing companies when
there is no credible market information and no market check, DCF valuations involve many
inputs—all subject to disagreement by well-compensated and highly credentialed
experts—and even slight differences in these inputs can produce large valuation gaps.”
Dell, 177 A.3d at 37–38. The senior tribunal warned that when a reliable market-based
indicator is available, “the Court of Chancery should be chary about imposing the hazards
that always come when a law-trained judge is forced to make a point estimate of fair value
based on widely divergent partisan expert testimony.” Id. at 35. Making the same point
conversely in DFC, the Delaware Supreme Court advised that a DCF model should be used
41
in appraisal proceedings “when the respondent company was not public or was not sold in
an open market check.” 172 A.3d at 369 n.118.
This court has heeded the admonition to favor market-based valuation indicators. In
the aftermath of Dell and DFC, this court has explained that the fair value analysis should
“begin with the market evidence.” Jarden Trial, 2019 WL 3244085, at *2. And this court
has observed that a more subjective valuation technique, like a DCF methodology or a
comparable company analysis, “is necessarily a second-best method” when “market-based
indicators are available.”14
This appraisal proceeding involves a company and a merger where a DCF model is
unlikely to provide more reliable evidence of fair value than a market-based indicator.
Regal was a well-known, publicly traded company whose shares were widely held. Regal’s
business was straightforward, and its business model was mature. The Merger resulted
from an arm’s-length process that included an open and active post-signing market check,
and all stockholders received the same cash consideration for their shares.
In addition to factors favoring market-based indicators, there are reasons to question
the result that Yilmaz generated using his DCF methodology. The principal grounds are
14
In re Appraisal of Panera Bread Co., 2020 WL 506684, at *40 (Del. Ch. Jan. 31,
2020) (quoting Stillwater Trial, 2019 WL 3943851, at *60–61); accord Columbia Pipeline,
2019 WL 3778370, at *52; see also In re Appraisal of Solera Hldgs., Inc., 2018 WL
3625644, at *32 (Del. Ch. July 30, 2018) (agreeing with expert’s conclusion that merger
price minus synergies was more reliable fair value measure “given the uncertainties . . .
surrounding several inputs to the DCF valuation” (omission in original) (internal quotation
marks omitted)).
42
the divergence between his valuation conclusion and market-based indicators and his
reliance on optimistic management projections.
1. The Divergence Between Yilmaz’s DCF Valuation And Market-Based
Indicators
One reason to question Yilmaz’s DCF valuation is its divergence from market-based
indicators. Deploying a customary tactic, Cineworld portrayed Yilmaz’s valuation
conclusion of $33.83 per share as an outlier by comparing it with Regal’s trading price at
various points in time and with the deal price. See JX 1631 (“Kennedy Report”) ¶ 129.
Cineworld noted that Yilmaz’s DCF valuation represents a premium of 47.1% over the
deal price and observed that if that valuation were accurate, then Cineworld received a
windfall of $1.7 billion. Dkt. 259 at 5, 41. Cineworld argues that it is implausible bordering
on impossible to think that ardent capitalists on the sell-side would sacrifice that amount,
or that no competing bidder would have intervened if such a pricing discrepancy existed.
Cineworld’s comparisons undermine Yilmaz’s analysis, but the argument has less
force than in prior cases.15 Most of the delta between Yilmaz’s valuation and the deal price
results from the Tax Act’s lowering of the corporate tax rate. JX 1632 (“Yilmaz Report”)
15
See Panera, 2020 WL 506684, at *17, *40–43 (rejecting petitioners’ 60% DCF-
weighted valuation (the remaining 40% attributable to comparable analyses also rejected
by the Court) that was 12% higher than the deal price); Columbia Pipeline, 2019 WL
3778370, at *50 (rejecting petitioners’ DCF-derived valuation that was 27% higher than
the deal price); Solera, 2018 WL 3625644, at *16, *29–32 (rejecting petitioners’ DCF-
derived valuation that was 51.6% higher than the deal price); In re Appraisal of PetSmart,
Inc., 2017 WL 2303599, at *22–23, *31–40 (Del. Ch. May 26, 2017) (rejecting petitioners’
DCF-derived valuation that was 55% higher than the deal price).
43
¶ 14. The parties agree that Regal’s value increased after signing and before closing
because of the Tax Act. In preparing his DCF valuation as of closing, Yilmaz used the
lower corporate tax rate that the Tax Act adopted. When Yilmaz modified his DCF model
to use Regal’s pre-Tax Act rate, his methodology generated a value of $26.51 per share.
That output remains 15.3% higher than the deal price, but the divergence is obviously less
extreme.
Once adjusted to exclude the post-signing change in Regal’s value, Yilmaz’s DCF
model generates results comparable to the DCF model prepared by Cineworld’s financial
advisors. Using analyst consensus projections and varying assumptions for the weighted
average cost of capital (“WACC”) and terminal growth rate, Cineworld’s financial advisors
generated a valuation range for Regal of $21 to $32.30 per share, with a midpoint of $25.70
per share. JX 1115 at ’813. Without the effects of the Tax Act, Yilmaz’s valuation is only
3.15% higher. Using a WACC of 7%, nearly identical to Yilmaz’s WACC of 6.99%,
Cineworld’s financial advisors valued Regal at between $26.80 and $32.30 per share,
slightly higher than Yilmaz. Id.; see Yilmaz Report Ex. 12. Using the 2017 Projections and
a similar range of assumptions for the WACC and terminal growth rate, Cineworld’s
financial advisors generated a valuation range for Regal of $30.30 to $44.80 per share, with
a midpoint of $36.40 per share, well above Yilmaz. JX 1115 at ’814.
The Delaware Supreme Court has stated that “a buyer in possession of material
nonpublic information about the seller is in a strong position (and is uniquely incentivized)
to properly value the seller.” Aruba, 210 A.3d at 137. Describing an acquirer’s superior
insight into the value of the target, the high court posited that “HP’s access to nonpublic
44
information . . . improved [its] ability to estimate Aruba’s going-concern value over that of
the market as a whole. In particular, HP had better insight into Aruba’s future prospects
than the market because it was aware that Aruba expected its quarterly results to exceed
analysts’ expectations.” Id. at 139 (footnote omitted). These observations suggest that a
buyer’s internal valuations carry an extra imprimatur of reliability and are likely to provide
more persuasive evidence of value than the buyer’s actual bids, which are tempered by the
buyer’s desire to acquire the target for the lowest possible price. See In re Dunkin’ Donuts
S’holders Litig., 1990 WL 189120, at *9 (Del. Ch. Nov. 27, 1990) (“A bidder’s objective
is to identify an underpriced corporation and . . . acquire it at the lowest price possible.”).16
In this case, Cineworld’s internal valuations corroborate Yilmaz’s valuation conclusion.
The fact that Cineworld’s financial advisors reached valuation conclusions that are
similar to Yilmaz’s when using the same DCF methodology does not change the fact that
16
Recent precedent creates some uncertainty about the extent to which a trial court
should consider the buyer’s internal valuations. The Aruba decision suggests that the
buyer’s internal valuations are highly probative. In DFC, however, the Delaware Supreme
Court cast doubt on the propriety of a trial court relying on a buyer’s internal valuations.
There, the trial court had noted that the buyer “thought it was taking an opportunity to buy
DFC at trough pricing and that it could reap the upside of this risk.” 172 A.3d at 374 n.145.
Observing that “[o]ne would expect a buyer to think it made a wise decision with an
upside,” the high court suggested that “it is in tension with the [appraisal] statute itself to
argue that the subjective view of post-merger value of the acquirer can be used to value the
respondent company in an appraisal,” because rigid adherence to that approach would risk
discouraging buyers from pursuing transactions that otherwise would be “valuable to
selling stockholders.” Id. The high court thus indicated that the buyer’s higher internal
valuation of the target and its belief that the target was undervalued should not be given
significant weight.
45
those valuation conclusions are inconsistent with market-based indicators. The Delaware
Supreme Court’s decisions in DFC and Dell teach that a trial court should be skeptical of
valuation conclusions reached using a judgment-laden methodology when that method
diverges from market indicators. Yilmaz’s DCF valuation was not so extreme as to strain
credulity, but the degree of divergence weighs against using it to value Regal.
2. Yilmaz’s Reliance On The 2017 Projections
A second reason to view Yilmaz’s DCF valuation as less reliable than market-based
indicators is his reliance on the 2017 Projections, which have a mixture of positive and
negative characteristics. Ultimately, however, the 2017 Projections contain a sufficient
dose of optimism to warrant harboring doubt about a valuation that relies on them.
When evaluating the suitability of projections, Delaware cases express a strong
preference for management projections prepared in the ordinary course of business and
available as of the date of the merger.17
17
See, e.g., JRC Acq. Corp., 2004 WL 286963, at *2 (“[T]his Court prefers
valuations based on management projections available as of the date of the merger . . . .”);
In re Appraisal of SWS Gp., Inc., 2017 WL 2334852, at *11 (Del. Ch. May 30, 2017) (“This
Court has long expressed its strong preference for management projections.”); PetSmart,
2017 WL 2303599, at *32 (“[T]his court has deemed projections unreliable where . . . the
projections were created for the purpose of obtaining benefits outside the company’s
ordinary course of business . . . .” (internal quotation marks omitted)); LongPath Cap., LLC
v. Ramtron Int’l Corp., 2015 WL 4540443, at *17 (Del. Ch. June 30, 2015) (“[T]he final
nail in the coffin for the Management Projections is that Ramtron did not rely on them in
the ordinary course of its business.”); Gearreald v. Just Care, Inc., 2012 WL 1569818, at
*4 (Del. Ch. Apr. 30, 2012) (“[T]he Court generally relies on management projections
made in the ordinary course of business . . . .”); Cede & Co. v. Technicolor, Inc., 2003 WL
23700218, at *7 (Del. Ch. Dec. 31, 2003) (“When management projections are made in the
ordinary course of business, they are generally deemed reliable.”), aff’d in part, rev’d in
46
By corollary, projections prepared outside of the ordinary course do not
enjoy the same deference. In fact, management projections can be, and have
been, rejected entirely when they lack sufficient indicia of reliability, such as
when they were prepared: (1) outside of the ordinary course of business; (2)
by a management team that never before had created long-term projections;
(3) by a management team with a motive to alter the projections, such as to
protect their jobs; and (4) when the possibility of litigation, including an
appraisal action, was likely and probably affected the neutrality of the
projections.
Ramtron, 2015 WL 4540443, at *10.
Another issue that arises regularly with projections is the distinction between so-
called “bottom-up” and “top-down” processes. Projections prepared using a “bottom-up”
process start with detailed information drawn from business units, then aggregate it to
create a company-wide forecast. See, e.g., Merion Cap. LP v. BMC Software, Inc., 2015
WL 6164771, at *4 (Del. Ch. Oct. 21, 2015). A “top-down” process, by contrast, relies on
broad assumptions about the company’s performance and industry trends. See Yilmaz
Report ¶ 61. Projections prepared using a “bottom-up” process generally are more reliable
than projections prepared using a “top down” process. See PetSmart, 2017 WL 2303599,
at *34 n.386 (“[M]anagement’s projections were ‘top down’ rather than ‘bottom up’
projections, which is contrary to best practices.”); see also In re Dole Food Co., Inc.
part on other grounds, 884 A.2d 26 (Del. 2005); see also Gray v. Cytokine
Pharmasciences, Inc., 2002 WL 853549, at *8 (Del. Ch. Apr. 25, 2002) (rejecting
respondent’s “litigation-driven projections” as less reliable than contemporaneous
management projections).
47
S’holder Litig., 2015 WL 5052214, at *30–31 (rejecting “top down” projections as
unreliable).
When evaluated in light of Delaware precedent, the record surrounding the 2017
Projections is mixed. On the positive side, they were prepared by Regal’s “gold standard”
management team and were available at the time of the Merger. They were not created for
purposes of litigation. Ownby repeatedly testified that they were “optimistic but
achievable.” Ownby Tr. 216, 265. No one from the management team disavowed the 2017
Projections, and they reflected the team’s best judgment concerning Regal’s future
performance. See Ownby Tr. 229–30; Miles Tr. 438. The Board reviewed and discussed
them with management during a meeting on October 19, 2017, and the minutes do not
reflect any disapproval or concern about their reliability. See JX 965 at 2. Regal included
the 2017 Projections in the definitive information statement it filed in connection with the
Merger. JX 1444 at 37. Although Regal included appropriate caveats regarding the
projections, management clearly believed in their reliability.
On the negative side, the 2017 Projections were not prepared in the ordinary course
of business. They were created for Regal’s negotiations with Cineworld. Ownby Tr. 211,
214–15; Ownby Dep. (JX 1599) 229. Given this context, there is reason to think that
management erred on the bullish side. As noted, Ownby described the projections as
“optimistic but achievable.” Ownby Tr. 216, 265.
Also on the negative side, Regal management did not have experience preparing
five-year projections. In the ordinary course of business, Regal management only prepared
an annual operating budget. The one previous time that management prepared five-year
48
projections was for the 2014 sale process, when Ownby prepared the 2014 Projections
using the same method. Ownby Tr. 216. Regal failed to meet the 2014 Projections, with
the degree of underperformance increasing over time.18 Kennedy calculated that if the 2017
Projections were adjusted downward to reflect the degree by which Regal underperformed
the 2014 Projections, then the value generated by Yilmaz’s DCF model would fall to
$20.93 per share. Kennedy Report ¶ 112.
As a further negative consideration, Regal management prepared the 2017
Projections using a “top-down” process, which differed from the “bottom-up” process that
management used for the annual budget. In the annual budgeting process, management
“gathered information from the various departments” and estimated revenues and expenses
“theater by theater, month by month, and line by line.” Ownby Dep. (JX 1599) 141.
Management then adjusted the budget based the anticipated performance of “key metrics,”
such as “attendance, average ticket price, concession sales per patron, . . . and film rent.”
Id.This process enabled management to create forecasts based on “detailed theater-
by-theater assumptions.” Ownby Tr. 215. By contrast, for the 2017 Projections,
18
Compare JX 874 (projecting $3.4 billion in revenue for 2015, $3.5 billion in
revenue for 2016, and $3.6 billion in revenue of 2017), with JX 1509 at 16 (reporting $2.9
billion in revenue for 2015, $3.2 billion in revenue for 2016, and $3.2 billion in revenue
for 2017). See Kennedy Report ¶ 169 (depicting increasing levels of underperformance
versus 2014 Projections across attendance, attendance per screen, revenue, and adjusted
EBITDA); Yilmaz Tr. 684 (conceding that Regal did not meet the 2014 Projections).
49
management made “high-level assumptions.” Id. As a result, the 2017 Projections were
less rigorous, and therefore less reliable, than the annual budget. See Yilmaz Report ¶ 61.
Yet another negative factor is that the 2017 Projections were highly sensitive to
theater attendance. The 2017 Projections assumed that attendance would rebound in 2018
after a weak 2017, then continue to increase in 2019 at a rate of 0.9%. See JX 864 at ’635;
JX 874 at ’800–01. By projecting year-over-year growth in attendance going forward, the
2017 Projections diverged from the historical trend. Looking backward, Regal’s attendance
had declined at a CAGR of -1.8% from 2010 until 2017, and there had been a 20%
aggregate decline in attendance since 2002.19 Those declines were consistent with
attendance falling industry-wide at a CAGR of -0.5% from 2011 until 2017. Calkins Tr.
40. Regal management did not have a persuasive explanation for reversing the long-term
decline in cinema attendance. The 2017 Projections also did not account for potential
disruptions to Regal’s business model from PVOD, a shortened theatrical release window,
or streaming services. Ownby Tr. 217, 220.
19
See Hollis Report ¶¶ 77–80, Fig. 12, Fig. 13; Miles Tr. 300. Of the two
assumptions—a rebound in 2018 and projected growth thereafter—the former was more
reasonable. In forecasting the rebound, the 2017 Projections took into account a mid-year
theater acquisitions that Regal completed in mid-2017, which would increase total
attendance in 2018. See JX 864 at ’635 (“[S]ome of that growth . . . comes simply from
having the Warren and Santikos acquisitions for a full year.”); JX 874 at ’800 (“Attendance
rebounds in 2018 . . . partially due to screens acquired in 2017[.]”). But the rebound also
anticipated real growth in attendance during 2018, and the 2017 Projections contemplated
further growth in subsequent years. Hollis Report ¶ 77, Fig. 12.
50
Finally, the 2017 Projections deviated from the analyst consensus to a significant
degree. As noted, Cineworld’s financial advisors prepared DCF valuations using analyst
consensus projections and the 2017 Projections. Using the former, the model generated a
midpoint valuation for Regal of $25.70 per share; using the latter, the same model produced
a midpoint valuation of $36.40 per share. JX 1115 at ’813–14. For many companies, there
could be good reasons why management would be better positioned than analysts to project
long-term financial results. For Regal, that was unlikely to be the case. The business was
stable and easy to understand. The key driver was attendance, which generally depended
on the quality of the film slate. Regal’s management team did not have any unique insight
into the pipeline of future films that was not available to industry analysts. Ownby Tr. 264;
Miles Tr. 272.
The 2017 Projections were not unreliable. They represented management’s best
estimates of the future performance of the business, and Regal had a “gold standard”
management team. Dunn Tr. 171; see Ownby Tr. 257; Miles Tr. 301; Anschutz Tr. 516;
Kim Tr. 859. If a reliable market-based indicator were not available, then the court could
value Regal using the 2017 Projections and a DCF methodology. But that does not mean
that the court should do so.
“It’s difficult to make predictions, especially about the future.” In re Altaba, Inc.,
241 A.3d 768, 776 (Del. Ch. 2020) (noting that this observation has been attributed
variously to Mark Twain, Yogi Berra, and Niels Bohr, among others). That truism applies
to the 2017 Projections. Sufficient doubt surrounds the 2017 Projections that Yilmaz’s DCF
valuation is a less desirable approach than a market indicator.
51
3. Other Aspects Of Yilmaz’s DCF Valuation
Once the analysis moves beyond the preceding points, there is relatively little to
criticize in Yilmaz’s valuation. By and large, Yilmaz grounded his valuation on
conservative assumptions.
For example, Yilmaz modified the cash flows in his DCF valuation to reflect
Regal’s actual results for the fourth quarter of 2017. Yilmaz Report ¶ 65. Regal’s actual
results were lower than the 2017 Projections, so this change lowered Yilmaz’s valuation
conclusion. Yilmaz Tr. 567.
Another example involved Regal’s projected capital expenditures during the
terminal period. Using one method, Yilmaz calculated the average reinvestment rate during
the projection period and applied the same rate during the terminal period. Yilmaz Report
¶ 78, Ex. 7-1. Using another method, Yilmaz estimated “the average useful life of Regal’s
asset base” and the “annual cost and overall duration of significant capital projects like the
recliner conversion,” then used those variables to derive a rate for the terminal period. Id.The first method generated a higher figure, resulting in a lower valuation estimate. Yilmaz
nevertheless selected that method to make his valuation more conservative. Id.
4. The Conclusion Regarding The DCF Methodology
On balance, the court declines to use Yilmaz’s DCF methodology as a valuation
indicator. In many respects, Yilmaz’s analysis is conservative. Nevertheless, there are
sufficient questions raised by the divergence between Yilmaz’s valuation conclusion and
the market-based indicators, and there is sufficient uncertainty surrounding the 2017
52
Projections, to make the DCF methodology a less desirable methodology than a market-
based approach.
C. The Unaffected Trading Price
Cineworld contends that the trading price of Regal’s stock provides reliable
evidence of fair value. The petitioners respond that the court should not rely on Regal’s
trading price. As the proponent of using the trading price, Cineworld bore the burden of
proving its reliability.
Reliance on the trading price of a widely held stock is generally accepted in
the financial community, and the trading price or metrics derived from it are
regularly used to estimate the value of a publicly held firm based on its
operative reality in that configuration.
Stillwater Trial, 2019 WL 3943851, at *51; accord Kennedy Tr. 1014 (testifying that
reliance on the unaffected market price is a “widely accepted methodolog[y]”). “[T]here is
extensive case law on [the use of the trading price] because of its role as one of the three
elements of the Delaware Block Method.” Finkelstein & Hendershot, supra, at A-57.
Recent Delaware Supreme Court decisions have endorsed the use of trading prices as a
valuation indicator. See Dell, 177 A.3d at 35–38; DFC, 172 A.3d at 369–70 & n.118.
Although the Delaware Supreme Court reversed a decision that relied exclusively on the
unaffected trading price, see Aruba, 210 A.3d at 140, the high court subsequently rejected
the notion that “a corporation’s unaffected stock price cannot equate to fair value.” Jarden,
236 A.3d at 316. The high court confirmed the “traditional Delaware view that in some
cases the price a stock trades at in an efficient market is an important indicator of its
economic value and should be given weight.” Id. at 325 (internal quotation marks omitted).
53
Whether the trading price should be used as a valuation indicator turns on whether
the market exhibits sufficient evidence of informational efficiency. The concept of
informational efficiency describes how rapidly security prices reflect or impound new
information that arrives to the market. See Alex Frino et al., Introduction to Corporate
Finance 305 (5th ed. 2013). Informational efficiency differs from fundamental-value
efficiency, which concerns the extent to which the market price reflects intrinsic value. It
is impossible to determine whether a stock trades in a market that is fundamental-value
efficient, but that does not render trading prices useless for purposes of appraisal.
Whether called fundamental value, true value, intrinsic value, or fair value,
the really-real value of something is always an unobservable concept. No
valuation methodology provides direct access to it. Fundamental value is like
a Platonic form, and the various valuation methodologies only cutouts
casting shadows on the wall of the cave. The real issue is not whether a
particular method generates a shadow (they all do), but rather whether the
shadow is more or less distinct than what other methods produce.
Stillwater Trial, 2019 WL 3943851, at *51. For purposes of determining fair value in an
appraisal proceeding, the trading price has a lot going for it.20
20
See, e.g., Richard A. Booth, Minority Discounts and Control Premiums in
Appraisal Proceedings, 57 Bus. Law. 127, 151 n.130 (2001) (“[M]arket price should
ordinarily equal going concern value if the market is efficient.”); William J. Carney &
Mark Heimendinger, Appraising the Nonexistent: The Delaware Court’s Struggle with
Control Premiums, 152 U. Pa. L. Rev. 845, 847–48, 857–58 (2003) (“The basic conclusion
of the Efficient Capital Markets Hypothesis . . . is that market values of companies’ shares
traded in competitive and open markets are unbiased estimates of the value of the equity
of such firms.”); id. at 879 (noting that the appraisal statute requires consideration of all
relevant factors and stating that “in an efficient market, absent information about some
market failure, market price is the only relevant factor” (internal quotation marks omitted));
Lawrence A. Hamermesh & Michael L. Wachter, The Short and Puzzling Life of the
“Implicit Minority Discount” in Delaware Appraisal Law, 156 U. Pa. L. Rev. 1, 54 (2007)
54
The question in an appraisal proceeding is whether the trading market for the
security to be valued is “informationally efficient enough, and fundamental-value efficient
enough, to warrant considering the trading price as a valuation indicator when determining
fair value.” Stillwater Trial, 2019 WL 3943851, at *52. As an initial cut at this question,
the Delaware Supreme Court has looked to an array of factors, many of which are
associated with public company status. See Dell, 177 A.3d at 25–28; DFC, 172 A.3d at
369–70.
Regal was a public company that traded on a major exchange, and the factors
associated with a company of that type are present in this case.
• Public Information: The Delaware Supreme Court has cited the existence of
“robust public information” about a company as supporting reliance on its trading
price. DFC, 172 A.3d at 349. Regal had been a public company since 2002 and had
generated an extensive body of public information by making the filings required
by the federal securities laws.
• Stock Exchange Listing: The Delaware Supreme Court has cited the fact that a
company is “listed on a major U.S. exchange” as making it “unlikely that the market
would somehow miss out” on information about the company’s value. Id. at 372.
Regal was listed on a major stock exchange.
(“Take the case of a publicly traded company that has no controller. Efficient market theory
states that the shares of this company trade at the pro rata value of the corporation as a
going concern.”); id. at 60 (“As a matter of generally accepted financial theory . . . , share
prices in liquid and informed markets do generally represent . . . going concern value . . .
.”); see also Lawrence A. Hamermesh & Michael L. Wachter, Rationalizing Appraisal
Standards in Compulsory Buyouts, 50 B.C. L. Rev. 1021, 1033–34 (2009) (positing trading
prices should not be used to determine fair value if there is either no public market price at
all, if the shares are illiquid or thinly traded, or if there is a controlling stockholder,
implying that outside of these scenarios, “because financial markets are efficient, one can
simply use the market value of the shares”).
55
• Active Trading: The Delaware Supreme Court has held that when a company’s
stock is subject to “highly active trading,” it is more likely that “the price at which
its shares trade is informative of fair value, as that value reflects the judgments of
many stockholders about the company’s future prospects.” Id. at 373. The average
daily and weekly trading volumes for Regal’s stock were significantly higher than
the average company in indices of similarly sized companies. Kennedy Report ¶
132, Fig. 12.
• Followed by Equity and Credit Analysts: The Delaware Supreme Court has stated
that “the pre-transaction trading price of a public company’s shares” is more
informative when the company’s performance and competitive position are covered
by debt and credit analysts. DFC, 172 A.3d at 373; see Dell, 177 A.3d at 7 (citing
equity analyst coverage as “suggest[ing] the market for Dell stock was semi-strong
efficient”). Regal was followed by more equity analysts than the average company
in the S&P 600, S&P 500, and S&P 400 indexes. See Kennedy Report ¶ 132, Fig.
12. Regal also was covered by credit analysts. See JX 735 (Regal credit report
prepared by Standard and Poor’s). The existence of equity and credit specialists who
covered Regal strengthens the inference that the market’s “digestion and assessment
of all publicly available information” about Regal “was quickly impounded” into its
trading price. Dell, 177 A.3d at 7.
• Bid-Ask Spread: The Delaware Supreme Court has cited the fact that a company’s
stock had a narrow bid-ask spread as supporting the inference that the market for
the company’s stock is efficient. Dell, 177 A.3d at 7. Regal’s stock exhibited a bid-
ask spread of 0.05% of the price of its shares, which is narrower than the bid-ask
spread of 0.08% that was cited with approval in Dell. Kennedy Report ¶ 130, Fig.
12; see Dell, 177 A.3d at 7.
• Market Capitalization. The Delaware Supreme Court has cited a company’s large
market capitalization as supporting the inference that the market for the company’s
stock is efficient. Dell, 177 A.3d at 7. Regal’s market capitalization was
approximately $2.85 billion, more than double the market capitalization of the
company in in Stillwater, a case in which this court found that the company’s market
capitalization provided evidence that its stock traded in an efficient market.
Kennedy Report ¶ 132, Fig. 12; see Stillwater Trial, 2019 WL 3943851, at *53.
These attributes suggest as an initial matter that Regal’s common stock had
sufficient attributes of market efficiency to warrant considering it as an indicator of fair
value. But despite these high-level indicators, Cineworld failed to carry its burden to prove
56
the trading price for Regal’s stock was a sufficiently reliable to use in this case. Three
reasons collectively contribute to this conclusion.
First, Regal had a controlling stockholder—Anschutz. The Delaware Supreme
Court has expressed support for relying on the trading price when a company is widely
traded and has “no controlling stockholder.” Dell, 177 A.3d at 25. This court also has cited
the lack of a controlling stockholder as support for relying on the trading price. See Jarden
Trial, 2019 WL 3244085, at *27; see also Stillwater Trial, 2019 WL 3943851, at *51 n.22
(collecting research supporting reliability of unaffected trading price in absence of
controlling stockholder). Cineworld attempted to respond to this concern by arguing that
there was no evidence that Anschutz “obtained any ‘private benefits of control.’” Kennedy
Report ¶¶ 138–39. That observation does not carry the day, because in an efficient market,
participants will perceive the possibility that the controller will act in its own interests and
discount the minority shares accordingly. Moreover, as Kennedy himself acknowledged,
Regal’s annual reports included as a risk factor “that the interests of Anschutz could
conflict with the interests of other shareholders.” Kennedy Report ¶ 136.
Second, Anschutz engaged in block sales that created an overhang that capped the
price of Regal’s stock. The Board, management, and Morgan Stanley contemporaneously
identified this issue.21 After Anschutz’s first block sale, Regal and Anschutz worked on
21
See JX 245 at ’060, ’063; JX 247; JX 382 at ’490; JX 433 at ’472; JX 434 at 1–2;
see also Ownby Tr. 235–36.
57
talking points to mitigate the downward pressure on Regal’s stock.22 Market participants
took note of the sale, and investment banks sent Anschutz unsolicited offers to execute any
future block sales. JX 560; JX 579; JX 585. The Board continued to worry about the
overhang through the approval of the Merger Agreement.23 Cineworld responds that
Anschutz’s block sales could have signaled that a whole-company sale was in the offing,
causing traders to anticipate a merger premium and bid up the stock. That is theoretically
possible, but there is no persuasive evidence that Anschutz’s block sales had that effect.
The contemporaneous evidence indicates that Anschutz’s block sales capped the value of
the stock.
Finally, the petitioners introduced evidence that Regal’s stock was in a “trough” due
to the disastrous film slate in summer 2017. Dkt. 255 at 35–36. Between May and mid-
August 2017, Regal’s stock dropped precipitously, erasing over $830 million in market
capitalization. See JX 781. AMC contributed to an industry-wide selloff by issuing a
disastrous pre-earnings release that disclosed a large net loss for the second quarter of 2017.
See JX 752; JX 753. Market participants also became more concerned about competition
from streaming services such as Netflix, Hulu, and Amazon. JX 743; JX 752; see JX 749.
22
See JX 387; JX 391; JX 392; JX 393; JX 394; JX 395.
23
See JX 1257 at 3 (December 4, 2017, Board minutes discussing overhang); see
also Ownby Tr. 250–51 (the Board worried about the overhang until as late as 2017).
Ownby believed that Regal’s stock price was not “indicative of anything.” JX 1220 at 1;
see Ownby Tr. 252–53.
58
Short sellers targeted the cinema sector, with Regal as their “biggest target.” JX 768 at
’341–43. During this period, Regal’s insiders concluded that Regal’s stock had become
disconnected from its fundamental value. See JX 1220 at 1; Ownby Tr. 252–53; Bell Tr.
490–91; see also PTO ¶¶ 179–180. Standing alone, this evidence would not be sufficient
to undermine the reliability of the unaffected market price. See DFC, 172 A.3d at 374 n.145
(rejecting trial court’s reliance on acquirer’s belief that deal took place at “trough pricing”
that enabled buyer to “reap the upside”); Dell, 177 A.3d at 30 (rejecting trial court’s
reliance on contemporaneous evidence that the company’s management and financial
advisors believed the company was worth up to more than double its trading price because
market did not perceive success of corporate transformation and reorganization). In
conjunction with the Anschutz-related factors, it contributes to the questions surrounding
the market price.
Because of these factors, the court declines to rely on the trading price as an
indicator of fair value. This decision has not held that the trading market for Regal’s
common stock was inefficient, nor that the trading price of Regal’s common stock was
wholly unreliable. To reiterate, the question of efficiency is a matter of degree. See
Bradford Cornell & John Haut, How Efficient Is Sufficient: Applying the Concept of Market
Efficiency in Litigation, 74 Bus. Law. 417, 422 (2019). In this case, Cineworld failed to
carry its burden to show that the market for Regal’s common stock was sufficiently
59
efficient to be used as an indicator of fair value when another market-based indicator is
available.24
D. The Deal Price Minus Synergies Adjusted For Any Changes In Value
Between Signing And Closing
Finally, Cineworld contends that the deal price minus synergies provides reliable
evidence of the fair value of Regal. The petitioners contend that the court should not use
the deal price minus synergies. As the proponent of this valuation methodology, Cineworld
bore the burden of proving its reliability.
The Delaware Supreme Court has endorsed using the deal price in an arm’s-length
transaction as an indicator of fair value.25 The high court has stressed that although a deal
price that results from a reliable sale process often will provide the best evidence of fair
value, “there is no presumption in favor of the deal price.” DFC, 172 A.3d at 349.
Nevertheless, the Delaware Supreme Court has instructed this court to give “considerable
weight” to the deal price “absent deficiencies in the deal process.” Aruba, 210 A.3d at 137.
24
Assuming for the sake of argument that the court used the trading price as a
valuation indicator, then the trading price would provide an indication of Regal’s value on
the trading date. Adjustments would be necessary to derive Regal’s fair value at closing.
25
See, e.g., Aruba, 210 A.3d at 135 & n.41 (describing the “long history of giving
important weight to market-tested deal prices in the Court of Chancery and [the Delaware
Supreme Court]”); Dell, 177 A.3d at 23 (“[T]he record as distilled by the trial court
suggests that the deal price deserved heavy, if not dispositive, weight.”); DFC; 172 A.3d
at 349 (“[U]nder the conditions found by the Court of Chancery, economic principles
suggest that the best evidence of fair value was the deal price . . . .”); Gilbert, 731 A.2d at
796 (“A merger price resulting from arms-length negotiations where there are no claims of
collusion is a very strong indication of fair value.”).
60
1. Step One: The Reliability Of The Sale Process
The first step in using the deal-price metric is to determine whether the process that
led to the deal is sufficiently reliable that the deal price can be regarded as a reliable ceiling
on fair value. See id. at 142. If that process is sufficiently reliable, then the deal price
establishes an upper bound for fair value because “it is widely assumed that the sales price
in many M & A deals includes a portion of the buyer’s expected synergy gains, which is
part of the premium the winning buyer must pay to prevail and obtain control.” DFC, 172
A.3d at 371. But under the appraisal statute, fair value must be determined “irrespective of
the synergies involved in a merger.” Gilbert, 731 A.2d at 796–97 (emphasis omitted).
Consequently, fair value under the appraisal statute typically will be less than the deal price
that results from a reliable transaction process.
When evaluating the reliability of a transaction process, the Delaware Supreme
Court has identified certain “objective indicia” which suggest that the process was
sufficiently reliable. Stillwater, 240 A.3d at 11–12. In accordance with precedent, this
decision considers the extent to which the sale process exhibits the objective indicia.26 If
sufficient indicia are present, then the court “must determine whether they outweigh
weaknesses in the sale process, or whether those weaknesses undermine the persuasiveness
of the deal price.” Panera, 2020 WL 506684, at *19.
26
Panera, 2020 WL 506684, at *19–24; Stillwater Trial, 2019 WL 3943851, at
*22–24; Columbia Pipeline, 2019 WL 3778370, at *24–25.
61
The first objective indicator is whether the buyer was an unaffiliated third party.27
Cineworld was an unaffiliated acquirer with no prior ownership interest in Regal.
The second objective indicator is whether the seller’s board labored under any
conflicts of interest.28 Eight of the Board’s nine members were disinterested, outside
directors. As a super-majority of the Board, those directors had the statutory authority
under the Delaware General Corporation Law to say “no” to any merger. See 8 Del. C. §
251(b). None of the members of the Board joined the post-merger entity. In cases involving
claims for breach of fiduciary duty, Delaware decisions generally discount the implications
of board service with the surviving company.29 Here, even that possible influence was
absent.
27
See DFC, 172 A.3d at 349; Panera, 2020 WL 506684, at *19; Stillwater Trial,
2019 WL 3943851, at *22; Columbia Pipeline, 2019 WL 3778370, at *25.
28
See Dell, 177 A.3d at 28; Panera, 2020 WL 506684, at *19; Stillwater Trial, 2019
WL 3943851, at *22; Columbia Pipeline, 2019 WL 3778370, at *25.
29
See, e.g., In re Trados Inc. S’holder Litig., 73 A.3d 17, 45 (Del. Ch. 2013)
(holding that director’s post-merger “board membership [in post-merger entity], standing
alone, would not be sufficient to create a disqualifying interest”); Orman v. Cullman, 794
A.2d 5, 28–29 (Del. Ch. 2002) (“The only fact alleged in support of Orman’s allegation of
director Barnet’s interest is that he ‘has an interest in the transaction since he will become
a director of the surviving company.’ No case has been cited to me, and I have found none,
in which a director was found to have a financial interest solely because he will be a director
in the surviving corporation. To the contrary, our case law has held that such an interest is
not a disqualifying interest.” (footnote omitted)); Krim v. ProNet, Inc., 744 A.2d 523, 528
n.16 (Del. Ch. 1999) (“[T]he fact that several directors would retain board membership in
the merged entity does not, standing alone, create a conflict of interest.”). Academic studies
indicate that there may be good reason to think that losing or gaining a board seat is
material. See Lucian Bebchuk & Jesse Fried, Pay Without Performance: The Unfulfilled
Promise of Executive Compensation 25 (2004) (describing benefits of board service and
62
The one director who faced a conflict was Miles, Regal’s CEO. She was not
disinterested or independent with respect to the Merger because, like other senior
executives of Regal, she received a generous change-in-control package.30 But she was
only one of nine directors, and the Board knew about her change-in-control package and
the interests it created. Moreover, none of the members of Regal’s senior management
stayed on as employees of the Company after the Merger, making it unlikely that divided
loyalties tainted the sale process. See DFC, 172 A.3d at 376 (crediting trial court’s finding
concluding that “[i]n most cases, these benefits are likely to be economically significant to
the director.”); David I. Walker, The Manager’s Share, 47 Wm. & Mary L. Rev. 587, 633
(2005) (arguing that from an economic perspective, “[t]he incentive to retain a board
position generally outweighs the incentive to maximize shareholder value”); David
Yermack, Remuneration, Retention, and Reputation Incentives for Outside Directors, 59
J. Fin. 2281, 2282, 2307 (2004) (finding “statistically significant evidence that outside
directors receive positive performance incentives from compensation, turnover, and
opportunities to obtain new board seats” that have a direct impact on the accumulation of
wealth by that director and “considering that an outside director may serve on several
boards, these incentives appear non-trivial, albeit much smaller than those offered to top
managers”); Jarrad Harford, Takeover Bids and Target Directors’ Incentives: The Impact
of a Bid on Directors’ Wealth and Board Seats, 69 J. Fin. Econ. 51, 68 (2003) (finding
statistical evidence that a board seat is difficult to replace, because directors who lose a
seat as a result of a takeover can expect to hold one fewer directorship than peers for two
years following a completed merger; finding that directors suffer a net financial penalty
from the loss of the directorship “between zero and -$65,443”); see also Renée B. Adams
& Daniel Ferreira, Do Directors Perform for Pay?, 46 J. Acct. & Econ. 154, 168–69 (2008)
(finding statistically significant correlation between director attendance and per meeting
fees, indicating that per-meeting payments of approximately $1000 have a material
influence on directors).
30
See Miles Tr. 475 (Miles’ total severance, cash and equity compensation
following the Merger was “north of $16 million”); JX 1499, “Amy” tab (Miles received
$10,533,734 in change-in-control payments as a result of the Merger).
63
that “[t]he deal did not involve the potential conflicts of interest inherent in a management
buyout or negotiations to retain existing management—indeed, Lone Star took the opposite
approach, replacing most key executives” as supporting reliability of deal price (emphasis
and internal quotation marks omitted)).
A third objective indicator is the existence of “robust public information” about the
value of the company. Id. at 349; see Panera, 2020 WL 506684, at *20. Regal had been a
public company since 2002 and was followed by more equity analysts than the average
company in the S&P 600, S&P 400, and S&P 500 indexes. Kennedy Report ¶ 132, Fig. 12.
Robust public information about Regal was available.
A fourth objective indicator is whether the bidder conducted diligence to obtain non-
public information about the company’s value. See Panera, 2020 WL 506684, at *20;
Stillwater Trial, 2019 WL 3943851, at *23; Columbia Pipeline, 2019 WL 3778370, at *25.
The Delaware Supreme Court has stated that a buyer armed with “material nonpublic
information about the seller is in a strong position (and is uniquely incentivized) to properly
value the seller.” Aruba, 210 A.3d at 137. This factor is satisfied if the buyer has “signed a
confidentiality agreement, done exclusive due diligence, [and] gotten access to material
nonpublic information.” Id. at 140. Cineworld did each of these things.
64
A fifth objective indicator is whether the parties engaged in negotiations over the
price.31 Regal rejected Cineworld’s initial offer of $20.50 per share, which represented a
21.2% premium over Regal’s stock price at the time. Regal did not counter, forcing
Cineworld to increase its bid. Regal next rejected Cineworld’s second offer of $21 per
share, a 30% premium over Regal’s stock price at the time, and told Cineworld that Regal
was not for sale. Regal only expressed interest in a potential transaction after Cineworld
increased its bid to $22.50 per share, a 37.1% premium over Regal’s stock price at the time.
Regal then countered at $23.50 and demanded the ability to evaluate competing offers. The
parties ultimately reached agreement at a price of $23.00 per share, representing a 46.1%
premium over Regal’s stock price and a 12.2% increase over Cineworld’s original offer.
See JX 1045; JX 1200.
A sixth objective indicator is whether the merger agreement was sufficiently open
to permit bidders to emerge during the post-signing phase.32 The Merger Agreement
31
See id. at 139; Dell, 177 A.3d at 28; Panera, 2020 WL 506684, at *20; Stillwater
Trial, 2019 WL 3943851, at *23; Columbia Pipeline, 2019 WL 3778370, at *25.
32
See Panera, 2020 WL 506684, at *21–24; Columbia Pipeline, 2019 WL 3778370,
at *25; see also Aruba, 210 A.3d at 136 (“It cannot be that an open chance for buyers to
bid signals a market failure simply because buyers do not believe the asset on sale is
sufficiently valuable for them to engage in a bidding contest against each other.”); Dell,
177 A.3d at 29 (“Fair value entails at minimum a price some buyer is willing to pay—not
a price at which no class of buyers in the market would pay.”); id. at 33 (finding that
absence of higher bid meant “that the deal market was already robust and that a topping
bid involved a serious risk of overpayment,” which “suggests the price is already at a level
that is fair”); DFC, 172 A.3d at 376 (citing “the failure of other buyers to pursue the
65
permitted Regal to conduct an active post-signing market check during which Morgan
Stanley contacted forty-seven potential buyers. The Merger Agreement did not contain any
exceptional deal protection measures. If a competing bidder had emerged during the go-
shop phase, then the Company could have engaged with the bidder and terminated the
Merger as long as the Company paid Cineworld the termination fee of $36,270,000, equal
to 1% of the Merger’s equity value. If a competing bidder had emerged after the go-shop
phase, then the Company could have engaged with the bidder and terminated the Merger
as long as the Company paid Cineworld the termination fee of $95,150,963, equal to 2.62%
of the Merger’s equity value.33
The sale process that led to the Merger thus exhibited sufficient objective indicia of
an arm’s-length transaction to warrant a finding that the deal price operates as a ceiling on
fair value. Consequently, the court must determine whether these objective factors
“outweigh weaknesses in the sale process, or whether those weaknesses undermine the
persuasiveness of the deal price.” Panera, 2020 WL 506684, at *19.
company when they had a free chance to do so” as factor supporting fairness of merger
price).
33
Concern about the reliability of a sale process may arise if other acquirers perceive
an incumbent bidder possesses an informational advantage. See Lender Processing, 2016
WL 7324170, at *19 (explaining that a company “can create informational inadequacies
by providing disparate information to bidders,” which reduces competition from other
bidders). Cineworld’s expert opined that Regal was a mature public company in a mature
industry, making it unlikely that a topping bidder would be deterred by Cineworld’s
informational advantage. See Kennedy Report ¶ 123; see also Miles Tr. 273 (“[W]e were .
. . a company in a mature industry.”).
66
a. The Petitioners’ Arguments About A “Single Bidder” Process
The petitioners contend that the sale process did not generate reliable evidence of
fair value because the “Board decided to pursue a single bidder strategy by engaging in
secret negotiations solely with Cineworld” and “[t]here was no auction or pre-signing
market check.” Dkt. 255 at 36–37. The argument that additional pre-signing competition
generally leads to a higher deal price is theoretically sound.34 Whether the company might
have obtained a higher price, however, is not the issue in an appraisal proceeding. 35 The
court in an appraisal proceeding is charged with determining fair value, not the highest
price that the seller reasonably could have obtained.36 The key question during the first step
34
See, e.g., Nihat Aktas et al., Negotiations Under the Threat of an Auction, 98 J.
Fin. Econ. 241, 242 (2010) (“It is well known that competition increases the expected
revenue of the seller. . . . Our empirical results confirm the existence of latent competition
on acquirers’ bidding in one-on-one negotiations: More potential competitors are
associated with higher bids.” (citations and footnote omitted)); see also Jeremy Bulow &
Paul Klemperer, Auctions Versus Negotiations, 86 Am. Econ. Rev. 180, 180 (1996) (“Since
the informational demands for computing optimal mechanisms are substantial, and the
computations involved are complex, . . . it will often be more worthwhile for a seller to
devote resources to expanding the market than to collecting the information and making
the calculations required to figure out the best mechanism.”).
35
See Jarden, 236 A.3d at 322 (“[T]he trial judge must determine fair value, and
‘fair value is just that, “fair.” It does not mean the highest possible price that a company
might have sold for.’”) (footnote omitted) (quoting DFC, 172 A.3d at 370)); DFC, 172
A.3d at 370 (noting that “the purpose of an appraisal is not to make sure that the petitioners
get the highest conceivable value that might have been procured had every domino fallen
out of the company’s way”); Dell, 177 A.3d at 33 (“The issue in an appraisal is not whether
a negotiator has extracted the highest possible bid. Rather, the key inquiry is whether the
dissenters got fair value and were not exploited.”).
36
See Aruba, 210 A.3d at 142 (holding sale process that exhibited objective indicia
of reliability meant that “the deal price . . . operates as a ceiling for fair value” (omission
in original) (internal quotation marks omitted)); Lender Processing, 2016 WL 7324170, at
67
of evaluating the deal price as a valuation indicator is whether the sale process exhibited
sufficient indications of reliability to establish by a preponderance of the evidence that the
deal price likely exceeded the company’s standalone value, even if the sale process might
not have generated the last nickel for the seller’s stockholders. See Dell, 177 A.3d at 33
(“The issue in an appraisal is not whether a negotiator has extracted the highest possible
bid.”).
Delaware law recognizes that a deal price that results from a single-bidder process
can provide reliable evidence of fair value.37 In addition to the other objective indicia of
reliability, a court evaluating a single-bidder process will examine whether the merger
agreement allowed for a sufficiently open post-signing market check. If the post-signing
process was sufficiently open and there are no other factors that would call the sale process
into question, then the deal price resulting from a single-bidder process generally will
operate as a ceiling on fair value.
*26 (“The existence of combinatorial synergies provides an additional reason to think that
the Final Merger Consideration exceeded the fair value of the Company.”); see also Dell,
177 A.3d at 30–31 (holding that “deal price has heavy, if not overriding, probative value .
. . . [g]iven the objective indicia of the deal price’s reliability”); Stillwater Trial, 2019 WL
3943851, at *44 (“[G]iven the arm’s-length nature of the Merger, the premium over
market, and the substance of what took place during the sale process, it is not possible to
say that an award at the deal price would result in the petitioners being exploited.”).
37
See Stillwater Trial, 2019 WL 3943851, at *24–30; Columbia Pipeline, 2019 WL
3778370, at *25; Ramtron, 2015 WL 4540443, at *21; see also Blueblade Cap.
Opportunities LLC v. Norcraft Cos., Inc., 2018 WL 3602940, at *24 & n.265 (Del. Ch.
July 27, 2018) (finding “no basis in law or fact” for proposition that a single bidder process
followed by a go-shop “will never produce fair value for the target” (citation omitted)).
68
As discussed above, the Merger Agreement provided for a post-signing market
check that was sufficiently open to serve as an objective indicator of the reliability of the
sale process. Delaware law will afford evidentiary weight to a single-bidder process
combined with a passive post-signing market check.38 The sale process in this case included
an active post-signing market check. Because of the objective indicia of reliability present
in this case, the petitioners must point to flaws that undermined the efficacy of the sale
process in generating a deal price that would act as a ceiling on fair value.
i. Regal’s Treatment Of AMC
As the only meaningful flaw in the post-signing phase, the petitioners contend that
Regal subjected AMC to “an intrusive information request to which Regal did not make
any other potential bidder respond.” Dkt. 263 at 13. The petitioners contend that as a result,
Regal squandered the opportunity to engage with “a major strategic buyer with the financial
wherewithal and appetite to challenge Cineworld’s bid.” Id.As a threshold matter, AMC’s expression of interest demonstrates that the Merger
Agreement was sufficiently open to permit third-parties to engage. AMC’s participation in
38
See Panera, 2020 WL 506684, at *24; Stillwater Trial, 2019 WL 3943851, at
*24–30; Columbia Pipeline, 2019 WL 3778370, at *26; see also Aruba, 210 A.3d at 136
(“[A]fter signing and the announcement of the deal, still no other buyer emerged even
though the merger agreement allowed for superior bids.”); DFC, 172 A.3d at 359 (citing
the absence of bidding during a passive post-signing market check as supporting the
fairness of the deal price).
69
the post-signing process thus supports the reliability of the deal price as an indication of
fair value.
The petitioners are correct that Regal’s discussions with AMC fell apart after Regal
asked for information from AMC that Regal did not request from any other bidder. The
fact that Regal requested additional information from AMC, however, does not establish
that Regal undermined the sale process. The evidence at trial demonstrated that a deal with
AMC presented unique antitrust concerns, and Regal asked for information that the Board
believed was necessary to assess antitrust risk. See Miles Tr. 472–74; Kim Tr. 831–32; see
also Aron Dep. at 12–13. The Board also asked for additional information because it was
concerned about AMC’s ability to finance a transaction. Kim Tr. 825 (AMC was “not
performing well operationally” at the time and its ability to “finance[] a $6 billion
transaction . . . was a key issue or question that was raised”); Miles Tr. 472–73 (“AMC had
significant leverage, [and] would have had very much difficulty getting this transaction
done.”). The evidence also demonstrated that Regal had good reason not to want to provide
confidential information to AMC unless AMC could consummate a transaction. This court
has recognized that a company can be validly concerned about providing confidential
information to its largest competitor. See PetSmart, Inc., 2017 WL 2303599, at *28.
The evidence indicates that AMC decided to withdraw from the post-signing
process because AMC was not genuinely interested in an acquisition, not because Regal
drove off AMC. Regal’s management team knew AMC’s executives well. Miles testified
credibly that if AMC wanted to pursue a deal, then it would have. Miles Tr. 474–75 (“We
asked for reasonable information. They refused to provide it. That indicated to me that they
70
were not serious. And through knowing [AMC’s CEO], I’m confident that if he was really
serious, . . . . [h]e would have picked up the phone and called me.”).
Regal’s interactions with AMC did not undermine the reliability of the sale process.
At best for the petitioners, AMC might have paid more than Cineworld and forced the deal
price to a level that exceeded fair value to a greater degree. AMC’s withdrawal from the
sale process does not indicate that the deal price left part of Regal’s fundamental value on
the negotiating table.
ii. The Lack Of Outreach During The Pre-Signing Phase
Having failed to identify any meaningful flaws in the post-signing market check,
the petitioners return to the pre-signing phase in their effort to undermine the reliability of
the sale process. Because the post-signing phase involved an effective market check, the
petitioners must do more than simply identify arguable flaws in the pre-signing process.
The petitioners must identify flaws that “sufficiently impaired the sale process as a whole,
including the post-signing phase, so as to prevent the deal price from serving as a
persuasive indicator of fair value.” Stillwater Trial, 2019 WL 3943851, at *30. The
petitioners have not pointed to anything about the pre-signing phase that would have tainted
the overall reliability of the sale process.
The petitioners are correct that Regal did not engage in any active outreach during
the pre-signing phase after Cineworld made its initial offer. That fact, however, did not
undermine the sale process. What matters is that Regal did not do anything during the pre-
signing phase that would have dissuaded other bidders from participating in the post-
signing phase.
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The Board’s decision not to contact other bidders during the pre-signing phase also
does not suggest any motive to suppress value. To the contrary, the Board had good reasons
for that decision. Regal had canvassed the market in 2014 and failed to generate any
interest. When announcing the termination of the 2014 sale process in January 2015, the
Board stated its continued willingness to evaluate strategic alternatives. The Company had
engaged with Cinemark, a natural candidate for a merger, and those discussions had not
borne fruit. When Cineworld appeared, Regal did not want to lose the “bird in the hand”
by engaging in pre-signing outreach. Miles Dep. (JX 1589) 214–15; see Bell Tr. 511. This
court has recognized the validity of that concern. See Panera, 2020 WL 506684, at *23
(crediting board’s conclusion that buyer was “the only remaining logical bidder” when
board had “already exhausted” the option of engaging with “the only other potential buyer
that could afford Panera” (footnote omitted)).
Moreover, although the Board did not contact other bidders before signing, news of
the Merger leaked on November 28, 2017, nearly a week before the parties executed the
Merger Agreement. After the leak, both parties publicly confirmed that they were in
discussions about a potential transaction, and Cineworld disclosed that the anticipated deal
price was $23 per share. The leak gave any potentially interested bidder an opportunity to
contact Regal and engage before Regal became subject to the Merger Agreement. No one
came forward, providing additional evidence that Regal’s lack of affirmative outreach
during the pre-signing phase did not have any meaningful effect.
72
b. The Petitioners’ Arguments About Anschutz
In a separate line of attack on the sale process, the petitioners contend that the Board
“effectively delegat[ed] to [Anschutz] the determination of a fair sale price for Regal.” Dkt.
255 at 39. Noting that the deal price was close to the prices at which Anschutz executed its
block trades in 2016, the petitioners argue that those sales anchored the parties’
negotiations, preventing the Board from obtaining fair value.
The petitioners accurately observe that Cineworld knew about Anschutz’s block
trades and focused on those prices when developing its bidding strategy. Barclays
presented illustrative transaction scenarios to Cineworld in October 2017 that depicted a
red line at $22.95, reflecting the price of Anschutz’s second block trade in November 2016.
JX 990 at ’726–27. The petitioners also correctly point out that once Cineworld offered
$22.50 per share, Anschutz representatives told Bell that the bidding was “nearing levels
that Anschutz would support.” JX 1021 at 3. The petitioners then attack the Board’s
decision to counter at $23.50, claiming that by doing so, the Board “effectively established
[Anschutz]’s $23 trigger as the mid-point, locking in the minimum price it knew Regal’s
controlling stockholder would accept.” Dkt. 255 at 40. According to the petitioners, the
Board’s deference to Anschutz was problematic because Anschutz “was motivated to sell
for reasons unrelated to maximizing fair value, having demonstrated over the years that it
wanted to monetize its investment in Regal for reasons related to [Mr. Anschutz’s] health
and estate planning needs.” Id. at 40–41.
As a preliminary matter, the evidence does not support the contention that $23 was
a magic number for Anschutz. In August 2016, Anschutz sold its first block at $21.60 per
73
share, a 7% discount to that day’s closing price of $23.29 per share. PTO ¶ 151; JX 397.
In November 2016, Anschutz sold its second block at $22.95 per share, a 6% discount to
that day’s closing price of $24.45 per share. PTO ¶ 155; JX 492. These transactions
evidence Anschutz’s decisions in 2016. They do not suggest any particular price at which
Anschutz wanted to sell all of its shares almost a year later, when Regal’s stock traded at
much lower levels. See JX 1200 (Regal stock trading in mid-teens prior to deal leak on
November 28, 2017).
The record contains weak evidence suggesting that Mr. Anschutz had idiosyncratic
reasons to favor a near-term cash deal. When reviewing a press release about the first block
sale, an Anschutz representative suggested that Regal include a reference to “estate
planning” as having prompted the sale. See JX 393; JX 395. All else equal, a desire to
engage in estate planning could have led Mr. Anschutz to favor a near-term cash sale that
would have facilitated his estate planning and diversification. Consistent with this interest,
there is evidence that representatives of Anschutz told Cineworld that Anschutz wanted an
all-cash deal. See JX 804. A desire for a cash deal also could explain the abrupt end to
Regal’s talks with Cinemark in August 2017, after Mr. Anschutz learned that the
discussions contemplated a stock deal in which Anschutz would hold a substantial block
in the post-transaction entity. See JX 786.
Credible trial testimony put to rest those possible inferences. Mr. Anschutz testified
explicitly that estate planning was “not the reason for the block sale,” Anschutz Dep. 47–
48, and that his company had “no need for liquidity.” Anschutz Dep. 97–98. Bell and Miles
testified that Anschutz never pressured the Board to pursue a transaction or to seek a
74
particular price. See Bell Tr. 507–08; Miles Dep. (JX 1664) 83; Bell Dep. (JX 1591) 88–
89, 134. Miles conceded that “we had indications that we were getting close to a price that
[Anschutz] would support,” but she stressed that “the objective of the board throughout the
process was to try to get the highest price and a price at which we thought the deal could
actually be consummated.” Miles Dep. (JX 1664) 84.
Assuming for the sake of argument that Mr. Anschutz had a desire to obtain liquidity
for estate planning purposes or otherwise, then that interest was not strong enough to
undermine the sale process for purposes of an appraisal proceeding. Any interest that Mr.
Anschutz might have had was far weaker and less problematic the Michael Dell’s buy-side
interest in Dell. There, Mr. Dell held 15.4% of the stock of Dell Inc., served as the
company’s CEO, and teamed up with Silver Lake, a private equity firm, to take Dell
private. In re Appraisal of Dell Inc. (Dell Trial), 2016 WL 3186548, at *5, *12 (Del. Ch.
May 31, 2016), aff’d in part, rev’d in part sub nom. Dell, Inc. v. Magnetar Glob. Event
Driven Master Fund Ltd., 177 A.3d 1, 21 (Del. 2017). Under the terms of the transaction,
Mr. Dell “rolled over his entire 16% equity stake into the new company and contributed
$750 million in cash,” increasing his ownership in Dell to 74.9% and making him “a net
purchaser in the transaction.” Id. at *43. As a result, “any increase in the deal price would
cost him money.” Id. At the trial level, the court found that Mr. Dell’s role with the
company and his involvement with the buyout group were factors contributing to the deal
price being an unreliable indicator of fair value. Dell Trial, 2016 WL 3186548, at *44, *51.
On appeal, the Delaware Supreme Court reversed, explaining that the sale process bore
many “objective indicia of reliability.” Dell, 177 A.3d at 28. The high court did not regard
75
Mr. Dell’s role as problematic, holding instead that “sound economic and policy reasons
support[] the use of the deal price as the fair value award on remand.” Id. at 44.
Any interest that Mr. Anschutz might have had in this case also was weaker and less
problematic than the interests of the CEO and financial advisor in Aruba. There, “the
petitioners proved that Aruba’s bankers catered to HP,” the buyer, in an effort to convince
HP to use their services in the future. Verition P’rs Master Fund Ltd. v. Aruba Networks,
Inc. (Aruba Trial), 2018 WL 922139, at *42 (Del. Ch. Feb. 15, 2018), rev’d, 210 A.3d 128(Del. 2019) (per curiam). The trial court also found that the bankers’ eagerness to complete
a transaction undermined their roles as Aruba’s sell-side advisors. Id. at *43. And the trial
court found that Aruba’s CEO “had divergent interests” in the form of “a combination of
personal and professional goals that included hastening his return to a personally fulfilling
retirement.” Id. Despite acknowledging that different negotiators might have obtained a
better price, the court found that the deal price had not “left a portion of Aruba’s
fundamental value on the table.” Id. at *44. For other reasons, however, the trial court
rejected the deal price as a valuation indicator and relied on the unaffected market price of
Aruba’s stock. Id. at *54–55. On appeal, the Delaware Supreme Court cited the reliability
of the sale process and held that it provided “compelling evidence of fair value on this
record.” Aruba, 210 A.3d at 141.
The evidence in this case does not establish that Mr. Anschutz had a divergent and
idiosyncratic interest that undermined the sale process. To the contrary, as a large
stockholder, Anschutz’s incentives generally were aligned with the interests of the
stockholders as a whole, and Anschutz received the same consideration as the other
76
stockholders. Yet assuming for the sake of argument that Mr. Anschutz had some divergent
interest, it was far weaker than the interests in Dell and Aruba, which the Delaware
Supreme Court regarded as insufficient to overcome the objective indicia of reliability
exhibited by the sale processes in those cases. Likewise in this case, the objective indicia
of reliability are sufficient to overcome any potentially divergent interest that Mr. Anschutz
might have had. The limited involvement that Anschutz had in the sale process does not
undermine its reliability.
2. Step Two: The Deduction For Synergies
Based on the foregoing analysis, the sale process that led to the Merger Agreement
was sufficiently reliable to make it probable that the deal price establishes a ceiling for the
determination of fair value. See id. at 142. The analysis of the deal price metric next moves
to the second step, which is to determine whether any synergies were allocated to the seller
that should be deducted to arrive at fair value.
The court must exclude synergies when using the deal price as a valuation indicator
because the appraisal statute mandates that the court determine the fair value of the
corporation “exclusive of any element of value arising from the accomplishment or
expectation of the merger.” 8 Del. C. § 262(h). Fair value thus is “more properly described
as the value of the company to the stockholder as a going concern, rather than its value to
a third party as an acquisition,” meaning that the court must “exclude from any appraisal
award the amount of any value that the selling company’s shareholders would receive
because a buyer intends to operate the subject company, not as a stand-alone going concern,
77
but as part of a larger enterprise, from which synergistic gains can be extracted.” Aruba,
210 A.3d at 133 (internal quotation marks omitted).
When deriving a synergy deduction, the court engages in two tasks. BMC Software,
2015 WL 6164771, at *17. Initially, the court determines which categories of value arise
from the accomplishment or expectation of the merger, and it strives to reach a “reasonable
estimate” of those sources of value. Aruba, 210 A.3d at 133. Some sources of value may
not qualify for exclusion under the Delaware appraisal statute, because those sources of
value may already have been available to the seller. Other sources of value may qualify for
exclusion.
Next, the court estimates the extent to which those sources of value were “captured
by the sellers in the deal price.” BMC Software, 2015 WL 6164771, at *17. “[N]o bidder
will rationally pay more than a 100% of the expected synergy value to a seller,” because
then the deal price would exceed the buyer’s estimate of value. Cinerama, Inc. v.
Technicolor, Inc., 663 A.2d 1134, 1143 (Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del. 1995).
Moreover, a buyer has no reason to bestow value gratuitously on a seller; “[a] bidder’s
objective is to identify an underpriced corporation and . . . acquire it at the lowest price
possible.” Dunkin’ Donuts, 1990 WL 189120, at *9. Rather, the seller must bargain for a
price that extracts a share of the value that the buyer expects to create. Some sellers will
have greater success than others.
When identifying synergies, quantifying them, and determining the amount that was
allocated to the seller, the court “may rely upon its expertise and upon whatever evidence
is presented to determine fair value,” using “whatever methodology [is] supportable by the
78
record to reach a valuation result that exclude[s], to the extent reasonably possible, the
synergies implicit in the . . . transaction being considered.” Montgomery Cellular, 880 A.2d
at 222. As part of its determinations, the court may consider evidence of the buyer’s
synergy expectations.39 That evidence is relevant and potentially persuasive because the
buyer logically incorporates some amount of its expected synergies into its offer,
recognizing the sharing of synergies as part of the price that the buyer must pay to obtain
control.40 Under the appraisal statute, the amount that the buyer agrees to pay thus reflects
39
See Panera, 2020 WL 506684, at *36–40 (excluding value of buyer’s expected
cost savings and tax benefits); Solera, 2018 WL 3625644, at *29 (excluding value of
buyer’s expected “portfolio company revenue synergies, private company cost savings, and
the tax benefits of incremental leverage”); Ng v. Heng Sang Realty Corp., 2004 WL
1151980, at *5 (Del. Ch. May 18, 2004) (excluding buyers’ expected cost savings from
post-merger tax status conversion); see also Highfields Cap., Ltd. v. AXA Fin., Inc., 939
A.2d 34, 60–61 (Del. Ch. 2007) (finding it “appropriate to rely on” buyer’s internal
synergies estimate “after certain adjustments”); Union Ill. 1995 Inv. Ltd. P’ship v. Union
Fin. Gp., Ltd., 847 A.2d 340, 353 & n.26 (Del. Ch. 2004) (finding buyer’s synergy estimate
“reasonable”). But see DFC, 172 A.3d at 374 n.145 (asserting that “it is in tension with the
statute itself to argue that the subjective view of post-merger value of the acquirer can be
used to value the respondent company in an appraisal”).
40
See DFC, 172 A.3d at 371 (“[I]t is widely assumed that the sale price in many
M&A deals includes a portion of the buyer’s expected synergy gains, which is part of the
premium the winning buyer must pay to prevail and obtain control.”); Dunmire v. Farmers
& Merchs. Bancorp of W. Pa., Inc., 2016 WL 6651411, at *8 & n.95 (Del. Ch. Nov. 10,
2016 (recognizing that target corporations generally extract a portion of synergy value and
citing academic research in support of that proposition); Olson v. ev3, Inc., 2011 WL
704409, at *10 (Del. Ch. Feb. 21, 2011) (“In an arm’s-length, synergistic transaction, the
deal price generally will exceed fair value because target fiduciaries bargain for a premium
that includes . . . a share of the anticipated synergies . . . .”); Union Ill., 847 A.2d at 356(“[A]cquirers typically share a portion of synergies with sellers in sales transactions and
that portion is value that would be left wholly in the hands of the selling company’s
79
value “arising from the accomplishment or expectation of the merger.” 8 Del. C. § 262(h)
(emphasis added). If a buyer overpays for a company based on the buyer’s subjective yet
unrealistic synergy expectations, then the deal price nevertheless reflects those synergy
expectations. The price is based on the buyer’s synergy expectations and the seller’s
success in extracting a portion of the anticipated value, not whether the synergy
expectations ultimately are achieved.
Cineworld identified two types of synergies: operational synergies and financial
savings. Cineworld analyzed the two categories of synergies separately. This decision does
so as well.
a. Operational Synergies
Cineworld asserts that it anticipated $8.10 per share in operational synergies.
Cineworld’s expert, Kennedy, did not calculate this figure himself; he reviewed and
deemed reasonable a valuation of the operational synergies prepared by Cineworld’s
financial advisors for a meeting of Cineworld’s board of directors on November 16, 2017.
Kennedy Report ¶¶ 18, 90, 103; see JX 1115 (the “Banker Presentation”) at ’788. The
Banker Presentation estimated $8.10 per share of operational synergies by calculating the
present value of cost savings and revenue enhancements. JX 1115 at ’788, ’812. As the
source of the cost savings and revenue enhancements, the Banker Presentation relied on
stockholders, as a price that the buyer was willing to pay to capture the selling company
and the rest of the synergies.”).
80
work conducted by PwC. See id. at ’797; JX 1094 (the “PwC Synergy Report”). The
clearest evidence of the composition of the operational synergies appears in the PwC
Synergy Report, and both sides analyzed the PwC Synergy Report when addressing the
categories of operational synergies.41
The petitioners did not dispute that Cineworld anticipated $8.10 per share in
operational synergies. They instead questioned the reliability of the synergy estimates, and
they argued that Regal already was pursuing many of the initiatives, meaning that they
were not sources of value that arose from the accomplishment or expectation of the Merger.
i. The Qualifying Operational Synergies
For a category of synergies to be excluded under the appraisal statute, it must
“aris[e] from the accomplishment or expectation of the merger.” 8 Del. C. § 262(h). This
valuation principle “rul[es] out consideration of not just the gains that the particular merger
will produce, but also the gains that might be produced from any other merger.” Aruba,
210 A.3d at 133. The principle most obviously excludes value “resulting from economies
of scale or increased market share,” but it also excludes value that “derive[s] from the
acquirer’s plans to operate the post-merger enterprise more efficiently.” Lawrence A.
Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in Delaware Appraisal
41
See Dkt. 255 at 51–57 (criticizing PwC Synergy Report); Dkt. 259 at 21–22 (citing
later draft PwC Synergy Report). The petitioners objected to the PwC Synergy Report as
hearsay, but it is admissible both as a business record and as the type of information on
which an expert typically would rely. See Aruba Trial, 2018 WL 922139, at *37 n.346.
81
Law, 31 J. Corp. L. 119, 148 (2005) [hereinafter Cornfields]. Stated conversely, the
corporation’s operative reality at the time of the merger “does not include the capitalized
value of possible changes which may be made by new management.”42 Consequently, “the
benefits of an alternative method of operation that is neither proposed before the merger
nor implemented thereafter should not be taken into account in determining ‘fair value.’”
Hamermesh & Wachter, Cornfields, supra, at 161. By contrast, if the corporation was
pursuing an initiative at the time of closing, then it is part of the corporation’s operative
reality and should not be excluded from the fair value calculation, even if the initiative was
not fully implemented.43
The PwC Synergy Report divided the potential operational synergies into the
following categories:
• Cost Reduction Opportunities
42
Gonsalves, 701 A.2d at 362–63; see Panera, 2020 WL 506684, at *37 (excluding
value that serial acquirer that planned by create through financial optimization, including
by extending the days payable in the company’s cash collection cycle, because although
incumbent management could have made that change, “Panera’s management culture and
priorities did not support the changes that JAB intended to make”).
43
See, e.g., Technicolor IV, 684 A.2d at 299 (holding that because management
implemented the “Perelman Plan” after a first-step tender offer and before a second-step
merger, the trial court was obligated to value the company’s operative reality at the time of
the merger based on the Perelman Plan); In re Emerging Commc’ns, Inc. S’holders’ Litig.,
2004 WL 1305745, at *13 (Del. Ch. June 4, 2004) (including costs savings that the
defendants attributed to the merger when calculating fair value “because they were
contemplated well before the going private merger and could have been achieved without
it”); ONTI, 751 A.2d at 906–07, 911 (including value of acquisition that had been planned
and could have been effectuated without the merger).
82
o Public To Private
o Group Services
o Strategy and Operations Re-Design
o Economy Of Scale (Commercial)
• Leverage Of Know-How And Industry Best Practice
o Loyalty Programs
o Online Booking – Increase Traffic
o Advertising
o Concession Spend Increase
JX 1094 at ’025 (formatting added). Most of these categories of value must be excluded as
arising from the accomplishment or expectation of the merger.
Under the heading “Public to Private,” Cineworld anticipated achieving cost savings
by “[d]e-listing Regal and transitioning it to an operational subsidiary.” Id. at ’027. The
savings included the expenses associated with listing Regal’s stock on the New York Stock
Exchange, professional services costs associated with running a U.S. public company, and
the compensation paid to Regal’s directors and senior executives. Cohen Tr. 605–06. Off-
setting costs included the lower compensation for a new senior management team and the
expense to upgrade Cineworld’s accounting team so it could oversee Regal’s operations.
JX 1094 at ’027. Regal obviously could not achieve the net savings under its operative
reality as a public company. The net savings therefore arose from the accomplishment or
expectation of the Merger and must be excluded from the fair value determination.
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Under the heading “Group Services,” Cineworld anticipated achieving savings by
eliminating redundant finance, information technology, and construction functions and
relocating functions to jurisdictions with lower labor costs. Id. The savings associated with
Group Services are a straightforward example of economies of scale that Regal could not
achieve on its own, independent of the Merger. They arose from the accomplishment or
expectation of the Merger and must be excluded from the fair value determination.
Under the heading “Strategy and Operations Re-Design,” Cineworld anticipated
achieving savings by implementing layoffs in areas such as marketing, film booking, retail,
maintenance, human resources, risk management, security, and sales. Id. at ’028; Cohen
Tr. 607–08. This category also included Cineworld’s plan to negotiate an increase in the
fees that Regal received from online ticket sales. JX 1094 at ’028; see Cohen Tr. 610. These
cost savings reflect economies of scale arising from the combination of the two entities’
operations, and Regal could not have achieved them on its own. Regal might have tried to
renegotiate its fee-sharing arrangement, but management had no plan to do so, and Regal
would not have had the bargaining power associated with the combined company’s larger
operations. The benefits associated with Strategy Operations and Re-Design arose from the
accomplishment or expectation of the Merger and must be excluded from the fair value
determination.
Under the heading “Economy of Scale (Commercial),” Cineworld expected to
achieve cost savings on concessions and other consumables and on a large commercial
84
insurance contract. JX 1094 at ’025; see Cohen Tr. 608, 610.44 The PwC Synergy Report
estimated that the combined entity’s purchasing power could improve Regal’s gross margin
on concessions by two percent. JX 1094 at ’028; see Greidinger Tr. 347–48. Regal had not
renegotiated its commercial insurance contract in ten years and did not have any plan to
address it. Cohen Tr. 608. The savings in this category arose from the accomplishment or
expectation of the Merger and must be excluded from the fair value determination.
Under the heading “Loyalty Programs,” Cineworld expected it could increase
revenue by bringing its own specialized loyalty programs to Regal. JX 1094 at ’029;
Greidinger Tr. 349–50. Cineworld offered its customers both a points-based program
where users could generate “points” from purchases at Cineworld locations, as well as an
“all-you-can-watch” subscription program that allowed moviegoers to pay a monthly fee
for unlimited access to theaters. Greidinger Tr. 349–51; Cohen Tr. 612–14. Regal had the
industry-leading loyalty program in the United States, but it was only a points-based
program. Dunn Tr. 188–89; Greidinger Tr. 349–51. Cineworld’s plan for a subscription
program was novel and carried risk, because it depended on negotiating arrangements with
the studios so that the film rents did not exceed the subscription fees. Greidinger Tr. 351.
44
When testifying, Cohen mistakenly described the renegotiation of the commercial
insurance contract as falling into the “Strategy Operations and Redesign” category, but the
PwC Synergy Report listed it as a component of the “Economy of Scale (Commercial)”
category. Compare Cohen Tr. 607–08 with JX 1094 at ’028. This decision follows the PwC
Synergy Report. Because this decision finds that both categories comprised value arising
from the accomplishment or expectation of the Merger, the distinction is immaterial.
85
No studio had agreed to a similar program in the United States, but Cineworld had
experience developing and operating the program in Europe and believed it was feasible.
Id. at 350–51, 411–12. Regal management had no plan to implement a subscription-based
loyalty program, making this source of value one that arose from the accomplishment or
expectation of the Merger.
Cineworld also believed that it could increase the volume of online ticket sales, and
the PwC Synergy Report identified these benefits under the heading “Online Booking –
Increase Traffic.” JX 1094 at ’029. The PwC Synergy Report observed that Regal’s
“current online ticket purchasing [percentage] out of total admission is low.” Id. Cineworld
planned to increase online bookings by expanding the availability of reserved seating from
recliner seats to all available seats. Greidinger Tr. 351–53; Cohen Tr. 614. Cineworld also
envisioned driving online booking traffic to Regal’s website, avoiding the need to share
online booking fees with a third-party provider. JX 1094 at ’029. Regal management,
however, already had implemented a program to promote online booking, which by
November 2017 had increased by 66% year-to-date. JX 1084 at ’075; see Miles Tr. 428;
Ownby Tr. 259. Regal also already offered its own mobile application for online sales. See
JX 1089 at 29–30. The evidence thus shows that the pursuit of these initiatives was part of
Regal’s operative reality at the time of the Merger, so value associated with this category
will not be deducted from the appraisal award.
Under the heading “Advertising,” Cineworld expected to increase Regal’s average
advertising revenue per patron by gradually shifting the timing of advertisements to play
after the movie’s scheduled showtime to maximize revenue from so-called “gold-spot”
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advertising slots. Cohen Tr. 618–9; Greidinger Tr. 353–54. Regal management was not
pursuing this strategy, making this source of value one that arose from the accomplishment
or expectation of the Merger.
Under the heading “Concession Spend Increase,” Cineworld planned to increase
average concession spend per patron through the expansion of reserved seating. JX 1094
at ’030. Cineworld believed that expanding reserved seating would mean that “people will
have more patience to queue in the snack bar . . . because you don’t need to run into the
auditorium to grab the best seats because you know your seat is reserved.” Greidinger Tr.
354–55. Regal already offered reserved seating via online and mobile ticketing, and
Cineworld did not demonstrate that demand existed for more reserved seating in Regal’s
theaters. Regal already was pursuing initiatives to increase concessions spending per
patron, which had resulted in high growth in that metric in the five years preceding the
Merger.45 The evidence thus shows that the pursuit of these initiatives was part of Regal’s
operative reality at the time of the Merger, so value associated with this category will not
be deducted from the appraisal award.
ii. The Value Of The Qualifying Operational Synergies
Having determined which categories of operational synergies qualify for exclusion
under the appraisal statute, the next step is to value those synergies. Because this decision
45
See Calkins Report ¶¶ 82–83, Fig. 5; Bell Tr. 501; JX 197 at 3; JX 250 at 3–4; JX
263 at 3–4; JX 296 at 2–3; JX 647 at 4–5; JX 730 at 3–4; JX 988 at 3–4, 9.
87
has found that two categories of operational synergies did not qualify as value arising from
the accomplishment or expectation of the Merger, the value associated with those
categories will not be deducted from the deal price. A second issue presented by the
evidence in this case is Cineworld’s degree of confidence in its synergy expectations.
The total value of run-rate operational synergies in the PwC Synergy Report was
$141.3 million. JX 1094 at ’025. Revenue from online booking and concessions accounted
for $18.2 million and $16.9 million, respectively. Together, these categories comprised
24.84% of the total value of operational synergies. This means that excludable, merger-
specific synergies comprised 75.16% of the total value of operational synergies.
Multiplying the $8.10 per share estimate of operational synergies in the Banker
Presentation by 75.16% yields a per-share value of $6.09.
Although the court could use the value of $6.09 per share as the value of the
operational synergies, the evidence suggests that Cineworld was not fully confident in its
ability to achieve that figure. Instead, Israel increased Cineworld’s synergy expectations to
satisfy the banks’ demands for $100 million in operational synergies. As discussed
previously, PwC’s original synergy model generated benefits of $70 million. See JX 1052.
After a meeting with Cineworld’s bankers, Israel told Mooky that the bankers “expect us
to reach a level of Non Capex Synergies . . . in 2019 of 100 million dollars.” JX 1052.
Israel then described “[t]he recommended changes after sitting with PWC,” which
consisted of line-by-line changes to PwC’s model to bridge the $30 million gap. JX 1052.
PwC adjusted the inputs to its model to arrive at an estimate of 2019 operational synergies
of $99.9 million. JX 1039. Cineworld disclosed the $100 million figure to the market, but
88
Cineworld’s directors remained skeptical about “the ‘[$]100 million combination benefits’
story.” JX 1186.
This decision credits that Israel subjectively believed that Cineworld had the
potential to achieve $100 million in synergy benefits, but the evidence also suggests that
Israel regarded the incremental $30 million in benefits as more difficult to achieve. Those
synergies appear to have been necessary to convince the lenders to finance the deal. Later,
Cineworld stressed these synergies to reassure investors who believed Cineworld had
overpaid. See, e.g., Greidinger Tr. 357–59; JX 1298. Given the higher risk associated with
the incremental synergies and the need for Cineworld to retain their value, it is unlikely
that Cineworld would have shared those synergies with Regal. This decision therefore does
not include the $30 million in incremental synergies as part of the value that was available
for inclusion in the purchase price. Instead, this decision uses the original, more
conservative estimate of operational synergies that PwC prepared.
PwC originally estimated total synergies of $70 million in 2019. See JX 1052. That
amount is 70% of the $100 million in synergies that Cineworld presented to its lenders and
to the market. To derive the value of synergies that potentially will be deducted from the
deal price, this decision uses 70% of the value of the operational synergies. Multiplying
the $6.09 per share estimate of qualifying operational synergies by 70% yields a per-share
value for operational synergies of $4.26 per share. Put differently, when negotiating the
Merger, Cineworld expected to achieve operational synergies of $4.26 per share that both
qualified for potential exclusion from the deal price under the appraisal statute and which
Cineworld was prepared to allocate to Regal as part of the price negotiations.
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b. The Financial Savings
Cineworld also contends that the deal price included $4.93 per share of financial
savings. Dkt. 259 at 44–45. Both experts assumed the existence of financial savings.
Neither provided a reliable valuation. This decision values the financial savings at $2.73
per share.
As with the operational synergies, the process of quantifying the financial savings
involves two steps. First, the court must determine which elements of the financial savings
qualify as synergies under the appraisal statute. Second, the court must value the qualifying
synergies. For the financial savings, the two elements are interrelated, because the passage
of the Tax Act caused a portion of the financial savings that otherwise would have qualified
as synergies to qualify no longer.
While the parties were negotiating the deal price, before the Tax Act became law,
Cineworld anticipated being able to achieve significant financial savings by moving
revenue out of the United States and into lower-tax jurisdictions. The quantum of savings
that Cineworld could achieve depended in large part on the delta between Regal’s higher
tax rate in the United States and the lower rates in other jurisdictions. The passage of the
Tax Act lowered Regal’s tax rate in the United States, which reduced the quantum of
financial savings that Cineworld could achieve.46 For appraisal purposes, the reduced tax
46
See Greidinger Tr. 415–17 (agreeing that Cineworld reduced its estimate of
financial savings it could achieve after the Tax Act was passed); JX 1163 at ’294–96 (E&Y
noting that the Tax Act would “substantially limit” the benefits from shifting income to
other jurisdictions and could eliminate the benefits of transfer pricing entirely); see also
90
rate also meant that the portion of financial savings attributable to those expectations no
longer was a synergy arising from the accomplishment or expectation of the Merger. After
the Tax Act, those financial savings were a component of value available to Regal in its
operative reality as a stand-alone entity. The overall value of the financial savings
achievable from the lowered corporate tax rate did not change. What changed was whether
Regal could achieve them on its own.
Notably, the Tax Act also contained provisions that limited Cineworld’s ability to
reduce Regal’s U.S.-based revenue using transfer pricing, and Cineworld reduced its
expectations regarding financial savings in light of those provisions. The Tax Act’s effect
on transfer pricing did not transform any portion of that category of synergies into benefits
that Regal could achieve on its own. The effect of that aspect of the Tax Act was to impair
Cineworld’s ability to achieve its expectations. When the parties were negotiating over the
deal price, however, Cineworld expected to be able to achieve those benefits. Those
expected benefits were attributable to the accomplishment or expectation of the Merger
and therefore qualify for exclusion from the deal price.
Kennedy valued the financial savings by starting with the figure of $7.10 per share
that appeared in the Banker Presentation. JX 1115 at ’788. The Banker Presentation
reached that figure by estimating that the combined company could save $54 million
Kennedy Tr. 1055 (noting that after the passage of the Tax Act, Cineworld “didn’t need to
go through some of the restructuring that might have shifted income from a high tax rate
country like the U.S. to lower tax rate countries”).
91
annually through “[f]inancial structuring benefits” and $18 million through the
“[o]ptimization of transfer pricing,” for a total of $72 million in annual savings. Id. at ’781.
Those estimates seem to have been derived from analyses conducted by E&Y. Greidinger
Dep. 185–86 (financial savings estimate in Banker Presentation was “copied from an E&Y
analysis that . . . calculat[ed] this complicated structure”); see JX 1163 (E&Y analysis).
Kennedy next adjusted the calculation in the Banker Presentation to account for the
Tax Act. He recognized that the figure of $7.10 per share reflected value that Cineworld
could have achieved by generating tax savings based on Regal’s effective tax rate before
the adoption of the Tax Act, and he acknowledged that Regal could achieve some of those
benefits as a standalone company. He concluded correctly that those benefits no longer
qualified as synergies under the appraisal statute.
To identify the value that no longer qualified for exclusion as a merger-related
synergy, Kennedy consulted Cineworld’s press release that announced the Merger on
December 5, 2017. That press release stated that Cineworld anticipated “US$50 million of
group structuring benefits . . . through the adoption of an efficient financial structure.” JX
1296 at ’994. Because the Banker Presentation had estimated $72 million in savings before
the Tax Act, and because Cineworld still anticipated $50 million in savings when the
passage of the Tax Act was imminent, Kennedy concluded that the difference of $22
million reflected savings that Regal could achieve on its own after the passage of the Tax
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Act. Kennedy Report ¶ 101. Kennedy excluded a proportionate amount from the per-share
synergies figure, resulting in an adjusted savings of $4.93 per share.47
Kennedy’s approach was logical, but Cineworld provided a more credible estimate
of the benefits it could achieve after the passage of the Tax Act. In January 2018, Cineworld
reduced its estimate of the value of the financial structuring benefits to $10 million annually
in a letter to its stockholders and in two presentations to potential lenders. See JX 1416 (the
“January Stockholder Letter”) at 9–10; JX 1420 (the “January Lender Presentation”) at 8,
27; JX 1425 at ’435–36. Put differently, rather than still being able to achieve $50 million
in financial savings after the passage of the Tax Act, as Kennedy assumed, Cineworld
thought it could achieve only $10 million annually. Cineworld made no reference to
benefits from transfer pricing in either document, suggesting that Cineworld no longer
thought that it could achieve benefits through transfer pricing.
This decision uses Kennedy’s method to calculate the per-share value of the
financial savings, but it relies on the January Stockholder Letter and the January Lender
Presentation to estimate the financial savings Cineworld could generate after the Tax Act.
In other words, because the Banker Presentation had estimated $71.5 million48 in savings
47
To make the adjustment, Kennedy divided $50 million, representing the amount
of financial savings after the passage of the Tax Act, by the $72 million estimate in the
Banker Presentation. He then multiplied the resulting percentage (69.4%) times the
estimate of financial savings in the Banker Presentation ($7.10 per share). That calculation
produced his figure of $4.93 per share. Kennedy Report ¶ 101.
48
The spreadsheet that supported the Banker Presentation valued financial savings
at $71.5 million annually. See JX 1116, “Merger” tab, cells BM53:BQ53. The Banker
93
before the Tax Act, of which $17.5 million was due to transfer pricing, and because
Cineworld still anticipated $10 million in savings after the passage of the Tax Act, the
difference of $44 million reflected savings that Regal could achieve on its own after the
passage of the Tax Act.
Yilmaz attempted to value the financial savings that no longer could be claimed as
synergies by recreating Kennedy’s calculation while using $10 million for the value of the
financial structuring benefits that Cineworld could achieve after the enactment of the Tax
Act. His calculation resulted in financial savings of $2.65 per share,49 but it contained an
error. He assumed that Kennedy valued annual financial structuring benefits of $54 million
at $4.93 per share, when Kennedy actually valued annual financial structuring benefits of
Presentation appears to have rounded up to $72 million for simplicity. To be more precise,
this decision uses $71.5 million as Cineworld’s estimate of the financial savings.
49
To make the adjustment, Yilmaz broke the calculation into two components. For
the first component, he divided $10 million, representing his estimate of the amount of
financial savings after the passage of the Tax Act, by the $54 million that he believed
Kennedy estimated. He then multiplied the resulting percentage (18.52%) times Kennedy’s
estimate of the financial savings attributable to that component ($4.93 per share). That
calculation produced a figure of $0.91 per share for the first component. For the second
component, Yilmaz divided $17.5 million in transfer pricing benefits by the $71.5 million
of total financial savings that originally appeared in the Banker Presentation, then
multiplied the resulting percentage (24.48%) times Kennedy’s total estimate of financial
savings ($7.10 per share). That calculation produced a figure of $1.74 per share for the
second component. The sum the two components generated a value of $2.65 per share.
Yilmaz Rebuttal Report ¶ 39 & nn.45–46.
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$50 million at $4.93 per share.50 Corrected for this error, Yilmaz’s calculation shows that
Cineworld expected to achieve financial savings of $2.73 per share that Regal could not
achieve as a standalone entity.51 Put differently, Cineworld expected to achieve $7.10 per
share in financial savings when it negotiated the Merger, but $4.37 of this amount reflected
value that Regal could have achieved on its own under its operative reality at closing and
which therefore cannot be deducted from a fair value determination under the appraisal
statute. The calculation continues to include value attributable to Cineworld’s expectation
that it could achieve financial savings through transfer pricing. When Cineworld bargained
with Regal over the deal price, Cineworld believed it could achieve those benefits, and they
could not be achieved absent the Merger. The subsequent passage of the Tax Act interfered
with Cineworld’s ability to achieve those benefits, but it did not alter either Cineworld’s
expectations about them at the time Cineworld negotiated the deal price, or the fact that
Regal never had the ability to achieve those benefits as a standalone entity.
This decision adopts the corrected version of Yilmaz’s calculation. When
negotiating the Merger, Cineworld anticipated financial savings of $2.73 per share that
50
Compare Yilmaz Rebuttal Report ¶ 39 & n. 45 (valuing financial structuring
benefits of “$54 million annually”), with Kennedy Report ¶ 101 (valuing financial
structuring benefits of $50 million annually).
51
To calculate the value of $10 million of financial structuring benefits and $17.5
million of benefits from transfer pricing, Yilmaz should have divided the sum of both
values ($27.5) by $71.5 million and multiplied the result (38.46%) by $7.10 per share, for
a total financial savings value of $2.73 per share.
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both qualified for potential exclusion from the deal price under the appraisal statute and a
portion of which Cineworld was prepared to allocate to Regal as part of the price
negotiations.
c. The Sharing Of Synergies
“[T]he proper way of applying a merger-price-less-synergies approach is to
determine the value paid for a company and then subtract that portion of the purchase price
representing synergies.” Ramtron, 2015 WL 4540443, at *25. This decision has concluded
that the Merger generated operational synergies of $4.26 per share and financial savings of
$2.73 per share that potentially were available for allocation to Regal’s stockholders. The
court’s next task is to estimate how much of the $6.99 in total synergies was in fact
allocated to Regal’s stockholders in the purchase price.
As noted previously, Delaware law recognizes that sell-side stockholders typically
receive a share of synergies as part of the deal premium, and there is academic support for
that proposition.52 There also is evidence that sell-side stockholders receive, on average, a
52
See, e.g., Lawrence A. Hamermesh & Michael L. Wachter, Finding the Right
Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies, 73 Bus. Law.
961, 1003 (2018) [hereinafter Finding the Right Balance] (“The question in any given
appraisal proceeding . . . is to determine the extent to which estimated synergies were
allocated in the deal to target stockholders and how much of that value was retained by the
acquirer.”); Kenneth R. Ahern, Bargaining Power and Industry Dependence in Mergers,
103 J. Fin. Econ. 530, 531, 547 (2012) (demonstrating that targets capture on average
“modestly more” of the merger gains than buyers); Jens Kengelbach et al., Divide and
Conquer: How Successful M&A Deals Split the Synergies 4, 9 (2013) [hereinafter 2013
M&A Report] (explaining that a buyer may “demand a share of [synergies] in the form of
a takeover price higher than the [company]’s standalone valuation” and that “[t]o arrive at
a transaction price acceptable to the seller, in most cases, the acquirer must agree to share
96
majority of the synergies.53 That observation, however, reflects a generalization across
deals; the outcome in any individual deal may be different.54
To date, Delaware law has not recognized a presumption that the seller’s
stockholders capture synergies. Instead, the court must make a fair value determination
“that is grounded in the record before it.”55 To obtain a synergy deduction, the seller “bears
expected synergies”); Richard A. Brealey et al., Principles of Corporate Finance 813–14
(10th ed. 2011) (explaining that “in mergers sellers generally do better than buyers”);
Robert F. Bruner, Applied Mergers and Acquisitions 936 (2004) (“In efficient markets for
securities, the stand-alone value of the firm should equal its market capitalization. If this
assumption is reasonable . . . , then the test for value creation for the buyer reduces to:
VSynergies > ΠBid.”). See generally William J. Carney & Keith Sharfman, The Death of
Appraisal Arbitrage: Ending Windfalls for Deal Dissenters, 43 Del. J. Corp. L. 61, 94–96
(2018) (summarizing research).
53
DFC, 172 A.3d at 371 (collecting authorities); see, e.g., Tim Koller et al., Value
169 (2011) (“[D]espite the fact that acquisitions overall create value, the distribution of
any value they create tends to be lopsided, with the selling companies’ shareholders
capturing the bulk.”); Gregor Andrade et al., New Evidence and Perspectives on Mergers,
15 J. Econ. Persp. 103, 110 (2001) (“Target firm shareholders are clearly winners in merger
transactions.”); Bruner, supra, at 775 (“Buyers give more (and targets take more) of the
middle ground.”).
54
See Kengelbach et al., 2013 M&A Report, supra, at 9 (explaining that the
allocation of synergies “varies . . . according to factors such as the relative negotiating
strengths of the buyer and seller and the amount of competition to acquire the target”);
Hamermesh & Wachter, Finding the Right Balance, supra, at 1005–06 (“[A] perception
that bargaining was relatively weak may imply that the target’s stockholders received a
relatively smaller share of overall synergies, and vice versa.”); Carney & Sharfman, supra,
at 104 (“The more competitive the market for the target, the greater its bargaining power,
and the higher the acquisition price will rise, leaving fewer benefits from the bargain for
the buyer . . . .”).
55
Jarden, 236 A.3d at 325 (internal quotation marks omitted); see also Panera,
2020 WL 2020 WL 506684, at *18 (“Because the Court determines fair value based on an
97
the burden of demonstrating what, if any, portion of [the synergies] value was included in
the price-per-share.” Jarden Trial, 2019 WL 3244085, at *26 (alteration in original)
(internal quotations omitted).
The parties agree on these general principles, but they disagree about the evidentiary
showing necessary to carry the burden. The petitioners argue that Cineworld must point to
deal-specific evidence in the factual record that supports an allocation of synergies to the
seller. Cineworld argues that in light of the substantial premium over the unaffected market
price, the drop in Cineworld’s stock price upon news of the deal, and the extensive evidence
that Cineworld contemplated synergies, Regal’s stockholders necessarily received some
allocation. To quantify the allocation, Cineworld’s expert relied on a 2018 version of a
study by the Boston Consulting Group (the “2018 BCG Study”) that sought to estimate
how synergies are allocated across deals. See Jens Kengelbach et al., The 2018 M&A
Report: Synergies Take Center Stage (2018) [hereinafter 2018 M&A Report].
Each side has precedents that support its position. Decisions pre-dating DFC and
Dell favor the petitioners. Decisions post-dating DFC and Dell favor Cineworld.
i. Synergy Allocations Before DFC and Dell
Although the appraisal statute dates back to 1899,56 the deal-price-less-synergies
metric is a recent innovation. In 2003, then-Vice Chancellor Strine introduced the
adversarial presentation blending facts, opinions, and argument, the Court’s conclusions in
one appraisal proceeding may not squarely inform its conclusions in another.”).
56
See 21 Del. Laws 445, 462–63, ch. 273 § 56 (1899).
98
methodology in his Union Illinois decision, using it as the exclusive metric for valuing a
privately held company.57 He started with the deal consideration of $10.20 per share, then
57
See Union Ill., 847 A.2d at 364. As precedent for the deal-price-less-synergies
metric, the Union Illinois decision cited three cases: Gilbert, Cooper v. Pabst Brewing Co.,
1993 WL 208763 (Del. Ch. June 8, 1993), and Van de Walle v. Unimation, Inc., 1991 WL
29303 (Del. Ch. Mar. 7, 1991). See Union Illinois, 847 A.2d at 357 & nn.36–37 (citing the
three cases and stating that “our case law recognizes that when there is an open opportunity
to buy a company, the resulting market price is reliable evidence of fair value”).
The Pabst decision appears to be the first Delaware case to reference the pricing of
the deal that gave rise to the appraisal proceeding, but the Pabst decision approached the
question differently than Union Illinois. After a public auction involving competitive
bidding by multiple suitors, G. Heileman Brewing Company acquired Pabst Brewing
Company through a structurally coercive, two-tiered tender offer, in which Heileman paid
$32 per share in the first step and squeezed out the remaining stockholders in the back-end
merger for a package of subordinated debentures with a face value of $24 per share. Pabst,
1993 WL 208763, at *2, *8. The court rejected all of the parties’ valuation methods, forcing
the court to “make a determination based upon its own analysis.” Id. at *8. The court
reached a fair value conclusion of $27 per share by blending the front-end and back-end
consideration to reach a value of $29.50, and then deducting a control premium, which the
court estimated “did not exceed $2.50 per share.” Id. at *8–9. The court did not equate the
control premium with a synergies-based deduction.
After Pabst, the concept of a deal price metric next surfaced in Gilbert. The
petitioners were minority stockholders in privately held company that was sold to a third-
party buyer. The trial court valued the company using a DCF analysis. The respondent
appealed, asserting that the trial court erred by failing to give weight to the transaction price
and relying heavily on Van de Walle, a breach of fiduciary duty action in which a controlled
company was sold to a third party and all stockholders received consideration having the
same value. As one of several reasons for entering judgment in favor of the defendants, the
Van de Walle court cited the arm’s-length negotiations between the seller and the buyer.
Coining a phrase that has figured prominently in twenty-first century appraisal decisions,
the Van de Walle court observed that “[t]he fact that a transaction price was forged in the
crucible of objective market reality (as distinguished from the unavoidably subjective
thought process of a valuation expert) is viewed as strong evidence that the price is fair.”
1991 WL 29303, at *17. In Gilbert, however, the Delaware Supreme Court distinguished
Van de Walle as a breach of fiduciary duty case and observed that “[a] fair merger price in
the context of a breach of fiduciary duty claim will not always be a fair value in the context
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discounted that figure by 13% to reflect the synergies he found to have been captured by
the seller, basing that figure on the opinion of the respondent’s valuation expert. Id. at 353–
54. Although the opinion does not describe the expert’s method for allocating synergies,
Vice Chancellor Strine characterized the figure as reasonable “given the nature of the
purchasers who were interested in buying UFG. All of them were other, larger banks who
expected synergistic gains.” Id. at 353 n.26. He also cited the fairness opinion of the seller's
financial advisor, which “had mid-range synergy assumptions of 15%–20% for the synergy
value that would be shared” with the seller. Id. The Union Illinois decision thus relied on
deal-specific evidence to support the synergy adjustment.
This court next deployed the deal-price-less-synergies metric in 2007, when Vice
Chancellor Lamb gave 75% weight to that valuation methodology. Highfields, 939 A.2d at
61. The transaction price was $31 per share, and the respondent’s expert opined that the
price incorporated shared synergies equal to 25% of the deal price, or $7.75 per share. In
of determining going concern value.” 731 A.2d at 797. The high court did express
agreement with “the general statement made by the Court in Van de Walle” to the effect
that “[a] merger price resulting from arms-length negotiations where there are no claims of
collusion is a very strong indication of fair value.” Id. But the high court again cautioned
that “in an appraisal action, that merger price must be accompanied by evidence tending to
show that it represents the going concern value of the company rather than just the value
of the company to one specific buyer.” Id. Citing the trial court’s broad discretion when
assessing fair value, the high court in Gilbert affirmed the trial court.
The decisions in Pabst, Van de Walle, and Gilbert do not provide direct support for
the deal-price-less-synergies metric. The decision in Union Illinois stands as the wellspring
of the approach.
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reaching this estimate, the expert considered estimates from industry analysts, the seller’s
financial advisor, and the buyer’s management team. Id. at 60. Vice Chancellor Lamb noted
that in his other analyses, the expert had not relied on the work of the seller’s financial
advisor, and he rejected the expert’s selective reliance on that source for a synergy
deduction. Id. at 61. Vice Chancellor Lamb found more credible the expert’s reliance on
the synergy estimates of the acquirer’s management team, which he noted were informed
by a detailed actuarial analysis. After adjusting the acquirer’s estimates for an updated
actuarial study, Vice Chancellor Lamb concluded that the deal price incorporated synergies
of $4.12 per share. Id. at 60–61. That figure coincidentally worked out to a deduction of
13%, the same number used in Union Illinois. In reaching this figure, however, the
Highfields decision relied on record evidence specific to the deal in question.
After Union Illinois and Highfields, the deal-price-less-synergies metric lay
dormant, only to re-emerge and rise to prominence during 2015 and 2016, when this court
considered the deal price as evidence of fair value in seven appraisal decisions.58 The
58
See In re Appraisal of DFC Glob. Corp. (DFC Trial), 2016 WL 3753123, at *20–
21 (Del. Ch. July 8, 2016), rev’d sub nom. DFC Glob. Cor. v. Muirfield Value P’rs, L.P.,
172 A.3d 346 (Del. 2017); Dell Trial, 2016 WL 3186538, at *29–44; Lender Processing,
2016 WL 7324170, at *16–26; BMC Software, 2015 WL 6164771, at *14–17; Ramtron,
2015 WL 4540443, at *20–24; Merlin P’rs LP v. AutoInfo, Inc., 2015 WL 2069417, at
*11–17 (Del. Ch. Apr. 30, 2015); In re Appraisal of Ancestry.com, Inc., 2015 WL 399726(Del. Ch. Jan. 30, 2015).
Two earlier decisions highlighted the deal price as evidence of fair value. In a 2010
opinion, then-Vice Chancellor Strine stated that “an arms-length merger price resulting
from an effective market check is entitled to great weight in an appraisal.” Glob. GT LP v.
Golden Telecom, Inc., 993 A.2d 497, 507 (Del. Ch. 2010), aff’d, 11 A.3d 214 (Del. 2010).
101
following year, the Delaware Supreme Court elevated the deal-price-less-synergies metric
to its current position as first among equals.
In the decisions that preceded the Delaware Supreme Court’s powerful endorsement
of the methodology, this court exhibited reluctance to apportion synergies to the seller
without persuasive, deal-specific evidence. Of the seven decisions issued during this
period, only one made a deduction for synergies, and that decision rejected the respondent’s
position and adopted the petitioner’s much lower adjustment.59 In three decisions, the court
did not reach the issue.60 In three other decisions, the court found that the respondent had
He declined to apply the deal-price-less-synergies metric on the facts of the case because
two large stockholders under common ownership stood on both sides of the transaction and
a special committee treated the deal as if the company had a controlling stockholder. Id. at
503, 508–09.
Subsequently, in 2013, Vice Chancellor Glasscock relied exclusively on a deal price
metric to value a privately held company, and the Delaware Supreme Court summarily
affirmed the decision. See Huff Fund Inv. P’ship v. CKx, Inc., 2013 WL 5878807 (Del. Ch.
Nov. 1, 2013), aff’d, 2015 WL 631568 (Del. Feb. 12, 2015) (ORDER). It seems likely that
Huff provided the catalyst for the emphasis on the deal price in 2015 and 2016.
59
See Ramtron, 2015 WL 4540443, at *1, *25–26 (rejecting respondent’s estimate
of $0.34 per share and adopting petitioner’s estimate of $0.03 per share).
60
In Lender Processing, the record contained extensive factual evidence about the
existence of synergies, but the respondent waived its ability to seek a synergy adjustment
by not raising the issue until post-trial briefing and its valuation expert had “declined to
offer any opinion on the quantum of synergies or to propose an adjustment to the merger
price” and “affirmed that he did not have any basis to opine regarding a specific quantum
of synergies.” 2016 WL 7324170, at *33. In Dell, the trial court found that the deal price
was a sufficiently reliable metric to exclude the petitioner’s significantly higher valuation,
but that it did not provide reliable evidence of fair value due to flaws in the sale process.
See Dell Trial, 2016 WL 3186538, at *44. Because the court did not use the deal price
metric to derive fair value, it did not have to confront the synergy deduction. In DFC, the
court found that the deal price was sufficiently reliable to use as one of three valuation
102
not provided deal-specific evidence to support an allocation of synergies to the seller.61
The AutoInfo, Ramtron, and BMC Software decisions illustrate the deal-specific
approach that prevailed during this period. In AutoInfo, the appraisal proceeding followed
a sale to a financial buyer. The buyer introduced evidence that it anticipated cost savings
from taking the company private, and its expert argued that the seller’s stockholders likely
captured 100% of that value. 2015 WL 2069417, at *17. To support his opinion, the expert
cited “academic literature that concludes that target firms capture virtually all of the value
created by corporate combinations through the price paid by the acquirer.” Id. This court
refused to make a deduction for synergies, explaining that the evidence needed to be
merger-specific. Id. The expert’s method, by contrast, would call for “a near automatic
reduction in price,” which “would reverse the burden that is on the party arguing that
metrics but did not make a synergy adjustment because the acquirer “was a financial buyer
rather than a strategic acquirer.” 2016 WL 3753123, at *20–21 & n.230. In the earlier Huff
decision from 2013, the synergy issue also arose too late. In its post-trial decision
determining fair value to be $5.50 per share based on deal price, the court noted that the
record contained limited evidence on synergy value and authorized the parties to
supplement the record on this issue. Huff, 2013 WL 5878807, at *15. After a motion for
reargument, the trial court found that the respondent had not provided an adequate
evidentiary record to make a downward adjustment to the merger price. See Huff Fund Inv.
P’ship v. CKx, Inc., 2014 WL 2042797, at *3 (Del. Ch. May 19, 2014), aff’d, 2015 WL
631586 (Del. Feb. 12, 2015) (ORDER).
61
See BMC Software, 2015 WL 6164771 at *17 (finding that respondent failed to
prove a synergy deduction); AutoInfo, 2015 WL 2069417, at *17 (same); Ancestry, 2015
WL 399726 at *16–17, 23 (declining to make a deduction for synergies where the buyer
was a financial acquirer and the respondent’s expert agreed that synergies were unlikely in
a non-strategic acquisition).
103
adjustments are warranted.” Id.The court reasoned similarly in Ramtron, but ultimately adopted the petitioner’s
proposed synergy deduction. After a sale to a strategic buyer, the buyer’s expert opined
that synergies contributed to more than 10% of the transaction price, warranting a
deduction of $0.34 per share. 2015 WL 4540443, at *25. To support that deduction, the
buyer’s expert prepared “a market-wide analysis of the premia paid by financial versus
strategic buyers and . . . concluded that average synergies could be removed from the
purchase price by applying the ratio of the average financial buyers’ premium to the
average strategic buyers’ premium, i.e., effectively multiplying the Merger price by
[$]0.73.” Id. The court rejected the expert’s reliance on “general data,” explaining that it
did not provide insight into “this specific transaction, which must be the focus in a Section
262 action.” Id. As an alternative measure, the buyer’s expert quantified the anticipated
synergies, “then assumed that Ramtron’s stockholders captured between 25% and 75% of
these synergies and took the midpoint of those calculations.” Id. The court rejected this
calculation as insufficiently reliable, noting that it had a “back-of-the-envelope feel.” Id.Perhaps anticipating that some reduction was warranted, the petitioner’s expert advocated
for a far lower deduction of $0.03 per share. The court adopted the petitioner’s figure,
stating simply that “it better conforms to the evidence adduced at trial.” Id. at *26.
In both AutoInfo and Ramtron, the buyer’s expert testified about the appropriate
synergy deduction. In BMC Software, a financial buyer claimed that it had anticipated
financial savings from operating the target as a private company. 2015 WL 6164771, at
104
*17. But the buyer’s expert “did not opine on the fair value of the Company using a deal-
price-less-synergies approach.” Id. Instead,
[d]uring trial and in post-trial briefing, [the buyer] offered the testimony of a
Bain principal to show that the Buyer Group would have been unwilling to
pay the Merger price had they not intended to receive the tax benefits and
cost reductions associated with taking the Company private. In fact, had these
savings not existed, the Buyer Group would have been willing to pay only
$36 per share, an amount that resembles the going-concern value posited by
[the buyer’s] expert.
Id. The court rejected this evidence, explaining that “demonstrating the acquirer’s internal
valuation is insufficient to demonstrate that such savings formed a part of the purchase
price.” Id. The court also noted that the buyer “required a 23% internal rate of return in
their business model to justify the acquisition,” suggesting that the buyer needed to retain
the synergies to achieve the “rate of return that was required to justify the leverage
presumably used to generate those savings.” Id. The court ultimately found that
[n]either party has pointed to evidence, nor can I locate any in the record,
sufficient to show what quantum of value should be ascribed to the
acquisition, in addition to going-concern value; and if such value was
available to the Buyer Group, what portion, if any, was shared with the
stockholders.
Id. The court therefore held “that the Merger price does not require reduction for synergies
to represent fair value.” Id.Taken together, these cases suggest that a buyer during this period faced a relatively
heavy burden when seeking to establish a synergy deduction. The buyer needed to identify
case-specific factual evidence that supported not only the existence of potential synergies,
but also the allocation of a portion of the synergies to the seller. Expert testimony based on
broad market studies was not sufficient.
105
ii. Synergy Allocations After DFC and Dell
After the Delaware Supreme Court’s decisions in DFC and Dell, this court’s
appraisal decisions took a different approach. In three cases, this court allocated synergies
based on a 2013 study prepared by the Boston Consulting Group (“2013 BCG Study”),
which is a predecessor to the 2018 BCG Study on which Cineworld relies in this case.62
The 2013 BCG Study used stock price reactions to conclude that on average, sellers collect
31% of the capitalized value of synergies (the median allocation in the sample). Across
deals, however, the study showed wide variation, with stock price reactions suggesting a
range of synergy allocations from 6% to 51%. See Kengelbach et al., 2013 M&A Report,
supra, at 12.
In Aruba Trial, the respondent’s expert opined that the standalone value of the target
company was $19.85 per share, the result of his DCF valuation. See Aruba Trial, 2018 WL
922139, at *49. To support the reasonableness of his valuation, the respondent’s expert
noted that it fell within the same range as the DCF valuations prepared by the buyer and its
62
See Panera, 2020 WL 506684, at *38; Solera, 2018 WL 3625644, at *28 n.364;
Aruba Trial, 2018 WL 922139, at *45. A fourth decision declined to allocate synergies to
the seller based on a failure of proof. See Columbia Pipeline, 2019 WL 3778370, at *44.
A fact witness for the acquirer testified that the acquirer had allocated all of the synergies
to the target, but the contemporaneous evidence did not support that claim. The acquirer’s
valuation materials identified synergies, but they also showed the deal price falling
comfortably within the indicative range of fair value without any allocation of synergies.
Id. The court held that the buyer had not carried its burden of proof on the synergy
deduction it claimed, and that although the buyer “likely could have justified a smaller
synergy deduction,” the buyer “claimed a larger and unpersuasive one.” Id. at *45.
106
financial advisor, and he placed particular emphasis on the buyer’s internal DCF valuation
of $19.10 per share. See id. at *53. As further support for his valuation opinion, the expert
looked to the allocation of synergies implied by the difference between the deal price and
the buyer’s internal DCF valuation of $19.10 per share. Assuming that the delta reflected
synergies allocated to the seller, then the allocations fell within the range described in the
2013 BCG Study. See id. at *45. The respondent’s expert argued that his DCF-based
valuation conclusion therefore was reasonable.
Attempting to follow the teachings of DFC and Dell, the trial court did not rely on
a DCF methodology. Id. at *52. Instead, the trial court looked to the unaffected trading
price and the deal price as market-based indicators of value. Id. at *51–55.
Using the deal price as a valuation indicator meant that the trial court needed to
deduct the value of the synergies allocated to the seller as part of the purchase price. There
was no direct evidence regarding the allocation, and the parties agreed that it was not
possible to determine with precision what portion of the final deal price reflected synergy
value. Id. at *44. “The respondent’s expert conceded that ‘[t]he percentage of synergies
actually paid by HP to Aruba cannot be accurately measured.’” Id. (alteration in original).
The trial court nevertheless attempted to determine an appropriate synergy
deduction. To quantify the amount of synergies, the trial court relied on a synergies
estimate prepared by the buyer’s outside consulting firm. Id. at *45. Noting that the
respondent’s expert had relied on the 2013 BCG Study, the trial court estimated a valuation
range for the deal-price-less-synergies metric using the range of percentage allocations in
the study. Id. The mid-point of the range was $18.20 per share. Based on the trial court’s
107
review of the negotiation process, the trial court was “inclined to think that [the seller’s]
representatives bargained less effectively than they might have,” which would have
suggested that “they obtained a relatively low share of the synergies” and would have
supported a valuation below the midpoint. Id. But “[h]aving no way to gauge the marginal
impact of their ineffectiveness,” the trial court used $18.20 per share as the valuation
indication for the deal-price-less-synergies methodology. Id.
Despite having reached this conclusion regarding synergies, the trial court regarded
the deal-price-less-synergies indicator as resting on series of uncertain judgments.
My deal-price-less-synergies figure could have errors at multiple levels. To
cite just a few, I may have erred when making my case-specific allocation of
synergies to the sell-side. I might have misinterpreted the information that
Aruba’s expert cited, or that data itself could contain sampling and
measurement errors. The size of the original synergy estimates might also be
off, as could any number of individual estimates that added up to the
overarching estimates. After all, they were necessarily predictions about
complex matters. Perhaps errors at one level might counterbalance errors at
another, but there is no way to know, and the smaller number of judgments
involved (compared to the number of trades generating the market price)
makes it more likely that the errors could skew the figure, just like a small
and undiversified portfolio can produce extreme results. The Delaware
Supreme Court’s expressed preference in Dell and DFC for market indicators
over discounted cash flow valuations counsels in favor of preferring market
indicators over the output of a similarly judgment-laden exercise of backing
out synergies.
Id. at *53. Believing that the unaffected trading price was a more reliable indication of
standalone value, the trial court used the unaffected trading price to determine fair value
and did not rely on the deal-price-less-synergies metric. Id. at *54–55.
In a per curiam decision, the Delaware Supreme Court reversed the trial court’s fair
value finding and remanded with instructions to enter judgment determining fair value to
108
be $19.10 per share. Aruba, 210 A.3d at 142. In its opinion, the high court noted at several
points that the respondent described the figure of $19.10 per share as a deal-price-less-
synergies metric. See id. at 130, 131, 134, 141. The respondent described its figure in those
terms, but it had not developed that valuation indicator by starting with the deal price and
deducting a synergy allocation. The respondent had proceeded in the opposite direction by
starting with the buyer’s internal DCF valuation of $19.10 per share, then arguing that by
paying $24.67 per share, the buyer necessarily gave the seller over half of the synergies.
See C.A. No. 11448, Dkt. 163 at 1, 3, 30, 41. The respondent’s deal-price-less-synergies
indicator of $19.10 per share thus was a plain vanilla DCF valuation, which the buyer used
to argue that the court should adopt its expert’s marginally higher DCF-based valuation
indicator. See id. at 63.
The Delaware Supreme Court treated the figure of $19.10 per share as a true deal-
price-less-synergies metric, remarking that the trial court “failed to explain why [its]
estimate of $18.20 per share was more reliable than [the buyer’s] own estimate of $19.10
per share.” Aruba, 210 A.3d at 132. The Delaware Supreme Court noted that the trial court
had relied on the 2013 BCG Study in reaching its conclusion, but did not comment one
way or the other on the propriety of its use. Instead, by adopting the buyer’s internal DCF
valuation, the high court implicitly endorsed a synergy allocation in which the seller’s
stockholders captured 49.12% of the buyer’s synergies estimate.63
63
Internally, the buyer estimated total merger synergies of $11.34 per share. C.A.
No. 11448, Dkt. 163 at 30. The difference between the merger price of $24.67 per share
109
The Aruba decision sent at least two strong messages. First, the Delaware Supreme
Court directed the trial court to enter what the high court understood to be a deal-price-
less-synergies valuation indicator, providing its most powerful endorsement yet of that
methodology. Second, the high court discounted the trial court’s concern about the
difficulties involved in making a reliable synergy deduction. The Delaware Supreme Court
instead admonished that “estimating synergies and allocating a reasonable portion to the
seller certainly involves imprecision, but no more than other valuation methods, like a DCF
analysis that involves estimating (i) future free cash flows; (ii) the weighted average cost
of capital (including the stock’s beta); and (iii) the perpetuity growth rate.” Aruba, 210
A.3d at 141. One might debate the comparisons,64 but the Delaware Supreme Court’s
and the DCF valuation of $19.10 per share was $5.57. See id. Dividing $5.57 per share by
$11.34 per share results in 49.12%, meaning the seller’s stockholders captured 49.12% of
the total merger synergies. The respondent had argued that this implied synergy allocation
was reasonable because it fell within the range of outcomes in the 2013 BCG Study, albeit
at the higher end of the range. See Aruba Trial, 2018 WL 922139, at *49.
64
The financial literature has established methods for projecting free cash flows,
deriving the weighted average cost of capital, and estimating the perpetuity growth rate.
By contrast, the finance literature “does not contain a reliable method for estimating the
portion of a merger premium that results from expected synergy value.” Union Illinois, 847
A.2d at 356 n.35. Like Kennedy in this case, experts in other cases have acknowledged that
difficulty. See, e.g., Aruba Trial, 2018 WL 922139, at *44 (respondent’s expert conceding
that “[t]he percentage of synergies actually paid by HP to Aruba cannot be accurately
measured”); Lender Processing, 2016 WL 7324170, at *33 (“At trial, Fischel affirmed that
he did not have any basis to opine regarding a specific quantum of synergies.”); Ramtron,
2015 WL 4540443, at *25 (expert “assumed that Ramtron’s stockholders captured between
25% and 75% of these synergies and took the midpoint of those calculations,” which the
court rejected in part due to its “back-of-the-envelope feel”); Andaloro, 2005 WL 2045640,
at *18 n.74 (“Puglisi candidly admitted that he cannot find reliable data supporting the
inference that higher premiums are paid in deals that are expected to yield synergies for the
110
statement provided forceful encouragement for trial judges to make synergy deductions
using their best judgment.
And the judges of this court have made the attempt. In Solera, decided while Aruba
was on appeal, the respondent’s expert reviewed three studies that examined the percentage
of synergies generally allocated to the seller. 2018 WL 3625644, at *28. The respondent’s
expert elected to allocate 31% of the synergy value to the seller, using the median
percentage in the 2013 BCG Study. The court noted that the 31% deduction was the lowest
supported by the three studies that the expert reviewed. Id. The Solera court recognized
that “the appraisal statute mandates excision of synergies specific to the merger at issue,”
but noted that “this court has used general estimates of the percentage of synergies shared,
as provided by experts, to derive appraisal value from deal price.” Id. at *28 n.364 (citing
Union Ill., 847 A.2d at 353 & n.26). The court adopted the resulting deal-price-less-
synergies metric as “the best evidence of the fair value of petitioners’ shares of Solera at
the time of the Merger.” Id. at *28.
In Panera, decided after the Aruba decision, the same expert who testified for the
respondent in Solera allocated 31% of the synergy value to the seller based on the median
percentage in the 2013 BCG Study. Panera, 2020 WL 506684, at *38. In response to the
petitioners’ objection that the 2013 BCG Study did not constitute deal-specific evidence,
buyer than in deals that are not of this nature.”). Scholars have described the “relatively
sparse literature” on quantifying and allocating synergies as “inconsistent.” Hamermesh &
Wachter, Finding the Right Balance, supra, at 1003.
111
the respondent relied on Solera. The court agreed that “the adoption of a methodology,
expert opinion, or metric in one appraisal action does not mandate its adoption in a different
appraisal action” and confirmed that the court’s “previous acceptance of [the expert’s]
proffered study is not conclusive in this case.” Id. The court instead noted that “Petitioners
have not cast doubt on the reliability of this study, or put forward a more appropriate
percentage” and concluded that the respondent therefore had proven its synergy allocation
by a preponderance of the evidence. Id.
iii. The Synergy Allocation In This Case
With this jurisprudential history in mind, the court must determine whether to adjust
the deal price for synergies in this case. The strongest evidence that Regal extracted a
portion of the anticipated synergies comes from the fact that the deal price of $23 per share
reflected a premium of 46.1% over Regal’s unaffected market price.65 In addition,
Cineworld’s stock price declined after the merger talks leaked and Cineworld disclosed the
anticipated transaction price,66 suggesting that market participants initially perceived that
Cineworld was paying a price greater than Regal’s fair value. See Kennedy Report ¶ 108;
65
See DFC, 172 A.3d at 371 (“[I]t is widely assumed that the sales price in many
M & A deals includes a portion of the buyer’s expected synergy gains, which is part of the
premium the winning buyer must pay to prevail and obtain control.”). But see Agranoff v.
Miller, 791 A.2d 880, 897 (Del. Ch. 2001) (discussing possible grounds for paying a
control premium and observing that “[a]s a practical matter, however, it is impossible to
make precise determinations about what motivated an acquiror to pay a control
premium.”).
66
Kim Tr. 823; JX 1190; Kennedy Report ¶ 108.
112
JX 1645 (“Kennedy Rebuttal Report”) ¶¶ 8, 40. Cineworld’s share price recovered
somewhat after Cineworld disclosed its synergy estimates. See JX 1400 at 3. This pattern
suggests that once market participants understood the value of the combined company, they
inferred that Cineworld had not overpaid but merely allocated some of the anticipated
synergies to Regal.
By contrast, other case-specific evidence indicates that Regal did not extract any
synergies in the transaction. When negotiating the Merger, the Board did not consider
synergies. See, e.g., Bell Dep. (JX 1591) 83–84. Bell, Miles, and Ownby testified that the
parties never discussed them.67 Ownby thought Cineworld’s synergies estimates were
unreliable. When he learned on December 4, 2017, that Cineworld planned to announce
$100 million in annual cost and revenue synergies, he derided the number as “bullshit.”
Ownby Tr. 256; JX 1258 at 1. The absence of any explicit attempt to bargain for synergies
weighs against a case-specific finding that Regal extracted them. The contemporaneous
valuations that Cineworld’s financial advisors prepared also suggest that Regal did not
extract any synergies. In the Banker Presentation, Cineworld’s financial advisors
commented that the $23 per share offer price was “in line with [Regal’s] standalone
valuation.” JX 1115 at ’788; accord JX 1203 at ’012 (lender presentation).
67
See Ownby Tr. 256–61; Bell Tr. 502–03; Miles Dep. (JX 1589) 210–13; Bell Dep.
(JX 1591) 83.
113
Cineworld’s expert, Kennedy, conceded that he could not ascertain with any
certainty how the synergies were split without “being in the smoke-filled room where
negotiations were taking place.” Kennedy Tr. 1059–60. He instead relied on the 2018 BCG
Study, which found that “since 2007, the shareholders of target companies have captured,
on average, 54% of the value of synergies, thanks to share price increases near the
announcement date.” Kengelbach et al., 2018 M&A Report, supra, at 18 (using “average”
to refer to median in sample); accord id. Fig. 12. The 2018 BCG Study thus estimates that
sell-side stockholders generally capture significantly more synergies than in the 2013 BCG
Study (54% versus 31%).
The petitioners object to the court using the 2018 BCG Study. They argue that it
uses stock price reactions following the announcement of mergers to estimate the synergy
allocation, which has not been shown to provide persuasive evidence of the allocation of
synergies. Although it is true that stock price reactions do not measure the allocation of
synergies directly, that is not a sufficient reason to discard the study. As Cineworld points
out, the academic literature contains support for the use of stock price reactions to measure
synergies.68 The 2018 BCG Study relied on short-window event studies. See Kengelbach
68
See Gregor Andrade et al., supra, at 109 (“The most statistically reliable evidence
on whether mergers create value for shareholders comes from traditional short-window
event studies, where the average abnormal stock market reaction at merger announcement
is used as a gauge of value creation or destruction.”); see also Tim Koller et al., Valuation:
Measuring and Managing the Value of Companies 569–72 (6th ed. 2015) (summarizing
research and noting that “[t]hese studies typically examine the stock market reaction to an
acquisition within a few days of its announcement”).
114
et al., 2018 M&A Report, supra, App’x A. The 2018 BCG Study examined “all reported
M&A transactions from 1990 through the first half of 2018,” and the median synergy
allocation of 54% resulted from analyzing “1,000 public-to-public M&A transactions
between 2008 and 2017.” Id. Ex. 12, App’x A. The 2018 BCG Study therefore is a useful
tool for assessing how synergies are allocated generally.
The petitioners also object to the study because it does not account for deal-specific
or industry-specific factors. Dkt. 255 at 58–59. And they point out that Kennedy did not
attempt to replicate the study’s methodology and that Kennedy agreed that he could not
have done so. Kennedy Tr. 1063–64. It is true that the 2018 BCG Study’s synergy sharing
estimates do not incorporate deal-specific or industry-specific factors, but by using the
predecessor version of the study to allocate synergies, the Solera and Panera decisions
showed that this was not a fatal defect. The fact that Kennedy did not and could not
replicate the study’s methodology also does not defeat its usefulness for making a
“reasonable estimate” of the allocation of synergies. Aruba, 210 A.3d at 133.
In addition, as a case-specific argument against using the 2018 BCG Study, the
petitioners maintain that Regal did not receive any synergies, because “Cineworld needed
to keep all the ‘synergies’ to raise the debt needed to finance the transaction.” Dkt. 255 at
57. The petitioners’ case-specific argument does not obviate the potential need for a
synergy deduction. This decision already has concluded that Cineworld likely increased its
synergy estimates to satisfy its lenders and would have been unlikely to share the value
represented by the increased estimates with Regal. To reflect Cineworld’s retention of
115
those synergies, this decision already has discounted the total value of operational
synergies by thirty percent. It does not follow that Cineworld kept all of the synergies.
The court’s task under the appraisal statute is to value Regal, and the question
remains how much of the synergies to allocate to Regal’s stockholders. The court faces a
less than optimal record and unsettled precedent as to what is necessary to prove a synergy
allocation. In deciding how to proceed, the court heeds the Delaware Supreme Court’s
admonition in Aruba, which called on the trial court to use its best judgment in apportioning
synergies despite the imprecision inherent in that exercise.
Nor is it unprecedented for the trial courts to deploy rough estimates in appraisal
cases. During an earlier jurisprudential era, this court was unable to quantify the amount of
synergies required to adjust a valuation metric derived using a comparable transactions
methodology. The Delaware Supreme Court observed with approval that this court
“account[ed] for the synergies in a different way, namely, by reducing the total weight
accorded to the comparable transactions component of the overall valuation, from 80% to
65%.” Montgomery Cellular, 880 A.2d at 221. The high court affirmed this approach,
noting that “[a]lthough in a perfect world that may not have been the ideal solution, in this
world it was the only one permitted by the record evidence.” Id.69 Likewise, during a period
69
It is unclear whether the Delaware Supreme Court would endorse a similar
method today. In DFC, the Delaware Supreme Court reversed a decision by this court that
weighted three valuation techniques, admonishing that when confronted with multiple
valuation indications the Court of Chancery “may well feel tempted to turn its valuation
decisions into a more improvisational variation of the old Delaware Block Method, but one
in which the court takes every valuation method put in the record, gives each equal weight,
116
when this court added a control premium to an appraisal valuation derived from a
comparable company methodology to correct for the implicit minority discount that was
understood to infect that method, this court relied on cross-deal studies and similar expert
analyses to derive a rough estimate of the amount of the control premium.70 Estimating a
and then divides by the number of them.” 172 A.3d at 388. The high court mandated that
if the Court of Chancery relies on multiple valuation methods, it “must exercise its
considerable discretion while also explaining, with reference to the economic facts before
it and corporate finance principles, why it is according a certain weight to a certain indicator
of value.” Id. Heeding this instruction, the trial court rejected a request by the petitioners
in the Dunmire case to adjust for synergies in a manner resembling the Montgomery
Cellular decision. The petitioners argued that the court should address synergies by either
adjusting the weight given to their expert’s comparable transactions valuation or,
alternatively, asked the court to deduct 5% or 10% of the value to reflect synergies. The
court “decline[d] to go down that road for lack of any principled basis by which to
determine the amount of weight to give [the expert’s] analysis or to determine the
appropriate level of an adjustment for potential synergies.” Dunmire, 2016 WL 6651411,
at *9 n.109.
70
On the implicit minority discount generally, see Hamermesh & Wachter, The
Short and Puzzling Life of the “Implicit Minority Discount” in Delaware Appraisal Law,
supra. Because the comparable company method was understood to contain an implicit
minority discount, decisions sought to correct for what was understood to be an
impermissible stockholder-level discount when that valuation methodology was used in
appraisal cases. To correct for the implicit minority discount, Delaware decisions added an
estimate of a control premium derived from studies of acquisition premiums or the prices
at which large blocks traded. The decisions recognized that the premium incorporated
several factors, including synergies available to an acquirer and the value of control. The
upward adjustment in the valuation to add control value thus was conceptually similar to,
albeit the directional opposite of, the deduction from the deal price to exclude synergy
value. The cases that sought to account for the implicit discount with an upward adjustment
did not rely on company-specific or transaction-specific evidence. See, e.g., Agranoff, 719
A.2d at 900 (applying a premium of 30% to correct for an implicit minority discount;
basing adjustment on testimony by expert regarding aggregate control premiums paid in
acquisitions of public companies during the valuation year); Bomarko, Inc. v. Int’l
Telecharge, Inc., 794 A.2d 1161, 1186 (Del. Ch. 1999) (adding control premium of 30%
to correct for implicit minority discount), aff’d, 766 A.2d 437 (Del. 2000) (per curiam);
117
synergy deduction based on the evidence available in this case is comparable to the
exercises of judgment reflected in those precedents.
The record evidence establishes that the combination of Regal and Cineworld would
create synergies. The premium reflected in the merger consideration and the associated
stock price reactions are sufficient to establish by a preponderance of the evidence that
Regal’s stockholders received at least some of the synergistic value. The 2018 BCG Study
is the best tool available for an imprecise task. It also results in an outcome close to the
nearly equal synergy allocation implied by the Delaware Supreme Court’s decision in
Aruba, another case in which the trial record did not clearly demonstrate how synergies
were allocated.
This decision has found that the amount of synergies available for sharing was $6.99
per share; 54% of that figure equals $3.77 per share. The deal price thus included $3.77 of
synergies.
Borruso v. Commc’ns Telesystems Int’l, 753 A.2d 451, 459 (Del. Ch. 1999) (electing to
apply 40% premium to compensate for implicit minority discount in comparable company
analysis, but reducing 40% premium to 30% to reflect potential synergistic value from
merger); Hintmann v. Fred Weber, Inc., 1998 WL 83052, at *8 (Del. Ch. Feb. 17, 1998)
(adopting expert’s comparable company valuation in which expert corrected for the
implicit minority discount by “analyz[ing] the control premia paid for publicly-held
companies between July 1, 1991 and June 30, 1992,” finding that “the mean premium was
approximately 45% and that the median premium was approximately 55%,” and then
applying an adjusted premium of 20% “[b]ecause a portion of those premia reflected post-
merger values expected from synergies”).
118
d. Deal Price As Reliable Indicator Of Fair Value At Signing
Because the sale process bore multiple objective indicia of reliability and compared
favorably to the facts of other appraisal cases in which the Delaware Supreme Court has
endorsed the deal price as a reliable valuation indicator, the deal price provides reliable
evidence of Regal’s fair value as of signing. This decision has evaluated the parties’
competing arguments about synergies and ultimately made its own estimate of the portion
of synergies that must be excluded from the deal price. The Merger produced $6.99 of
excludable synergies, and a reasonable estimate of the amount of synergies that Regal’s
stockholders captured is $3.77 per share. Subtracting $3.77 from the deal price of $23 per
share yields a deal-price-less-synergies value of $19.23 per share.
3. Step Three: The Change In Value Between Signing And Closing
After the court has concluded that the deal price is a reliable valuation indicator, and
after the court has deducted an appropriate synergy allocation, then the analysis proceeds
to the third step: determining whether the value of the corporation changed between signing
and closing. In an appraisal proceeding, the court must determine the fair value of the
dissenter’s shares as of the date on which the merger closes. Stillwater, 240 A.3d at 17.
The valuation date is “not the date the merger agreement is executed.” In re Solera Ins.
Coverage Appeals, 240 A.3d 1121, 1135 (Del. 2020). “Thus, if the value of the corporation
changes between the signing of the merger agreement and the closing, then the fair value
determination must be measured by the ‘operative reality’ of the corporation at the time of
the merger.” Stillwater, 240 A.3d at 17.
119
Ordinarily, “the party seeking an adjustment to the deal price reflecting a valuation
change between signing and closing bears the burden to identify that change and prove the
amount to be adjusted.” Id. In this case, both sides agree that Regal’s operative reality
changed between signing and closing when the Tax Act became law on December 22,
2017. Both sides agree that this event necessitates an upward adjustment to the deal-price-
less-synergies metric. The only question is the amount.
a. The Implications Of The Go-Shop Phase
Despite agreeing that an adjustment to the deal-price-less-synergies metric is
warranted to reflect a post-signing, pre-closing change in value, Cineworld contends that
the adjustment should be minimal because no one bid for Regal during the go-shop phase.
Dkt. 259 at 6, 25–26. At a superficial level, this argument makes sense: If parties have
agreed on a price for an asset, and if the value of that asset has increased such that the asset
is now underpriced, then other bidders should compete for the asset. See Dell, 177 A.3d at
32–33. But depending on the facts of a specific case, the intuition may not hold.
One reason why the absence of a higher bid might not convincingly negate the
existence of a change in value is if the parties to the deal created meaningful barriers to an
overbid. At trial, the petitioners sought to show that Regal was generally hostile to a
competing bid by pointing to contemporaneous documents that described a topping bidder
as an “interloper.” See JX 1215 at 1; JX 1085 at 7. That term has a pejorative connotation
and suggests someone who is not wanted. See Kim Tr. 854–56. But in an M&A deal, the
term generally has a pejorative connotation only from the perspective of an incumbent
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bidder, if at all.71 The term commonly is used to refer to a topping bidder without any
negative connotations from the perspective of the target company,72 so it does not signal
anything exceptional about Regal’s sale process. The more important factor was whether
the Merger Agreement established meaningful barriers to a competing bidder’s
participation. As this decision has explained, it did not. See Part II.D.1, supra.
Another reason why the absence of a higher bid might not convincingly negate the
existence of a change in value is if there were a limited number of potential bidders who
realistically could challenge the incumbent, yet those bidders were unable to engage for
71
See, e.g., Ramtron, 2015 WL 4540443, at *21 (“Cypress began preparing for its
hostile bid well in advance. Part of that diligence involved predicting potential
interlopers.”); In re Dollar Thrifty S’holder Litig., 14 A.3d 573, 582 (Del. Ch. 2010) (“JP
Morgan viewed Goldman Sachs as an interloper trying to angle into JP Morgan’s deal.”);
Arthur Fleischer, Jr. et al., Takeover Defense: Mergers and Acquisitions § 16.04 (8th ed.
2018) (“[I]f the confidentiality agreement has a standstill, the initial bidder will generally
insist that any interloper be subject to the same restrictions.”); Steven J. Brams & Joshua
R. Mitts, Mechanism Design in M&A Auctions, 38 Del. J. Corp. L. 873, 878 (2014)
(“[E]ven if the board announces an agreement with a winning bidder at the highest price
among participants in the auction, the transaction is always vulnerable to subsequent
interlopers who might make a topping bid.”).
72
See, e.g., Panera, 2020 WL 506684, at *13 (“Morgan Stanley also identified and
ranked ‘Potential Interlopers’ by their strategic rationale and ability to pay.”); In re Synthes,
Inc. S’holder Litig., 50 A.3d 1022, 1037 (Del. Ch. 2012) (“[T]he deal protections were, by
traditional standards, not of a size that would have prevented a serious topping bid by a
genuine, motivated interloper.”); Scott M. Freeman et al., “Don’t Ask, Don’t Waive”:
Standstill Provisions in Light of Recent Delaware Cases, 17 M & A Law. 14 (2013) (“The
stalking horse has the benefit of reasonable deal protections, such as matching rights and a
break-up fee, but otherwise recognizes that the deal is open to being topped by an
interloper.”); Stephen I. Glover, Designing Termination Fee Payment Triggers, 6 M & A
Law. 14 (2002) (“[T]he target stockholders will choose not to approve a transaction only
if an interloper has made a better offer.”).
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reasons unrelated to price. The Merger was a synergistic transaction, making it likely that
only trade bidders with access to synergies could compete with Cineworld. In this case, the
two logical trade bidders were AMC and Cinemark. The petitioners assert that Regal drove
away AMC, but this decision already has rejected that argument. See Part II.D.1.a.i, supra.
Nevertheless, the evidence indicates that AMC and Cinemark elected not to engage for
reasons other than price. AMC faced likely insuperable antitrust issues and was struggling
financially at the time, and Cinemark was focused on its standalone business rather than
on M&A. See Kim Tr. 825–26.
Yet another reason why the absence of a higher bid might not convincingly negate
the existence of a change in value is if the valuation increase would be available to the
incumbent and the competitors alike. Under those circumstances, the competition for the
incremental value would operate as a common value auction, “defined as an auction in
which ‘every bidder has the same value for the auctioned object.’” Stillwater Trial, 2019
WL 3943851, at *49 (quoting Peter Cramton & Alan Schwartz, Using Auction Theory to
Inform Takeover Speculation, 75 L. Econ. & Org. 27, 28–29 (1991)).
In a competition for that incremental value, the incumbent bidder’s matching
right would loom large. To make it worthwhile to bid, a potential deal jumper
would not only have to perceive that the value of the target had increased
above the level set by the deal price plus the termination fee and fee
reimbursement plus the deal jumper’s likely transaction costs, but also
perceive a pathway to success that was sufficiently realistic to warrant
becoming involved, taking into account the potential reputational damage
that could result from being unsuccessful.
Id; see Brian JM Quinn, Normalizing Matching Rights, 1 Harv. Bus. L. Rev. Online 7, 9
(2010) (“Matching rights work to deter subsequent bids when held by an initial bidder. In
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the context of common value auctions . . . , the effect of a matching right is to deter
subsequent bidders and appropriate rents to the initial bidder.”). The Tax Act increased the
value of Regal’s future free cash flows by reducing Regal’s future tax payments. That value
likely would have been available to any competing bidder, including Cineworld,
eliminating any pathway for a competitor to capture the common value created by the Tax
Act.
The fact that no one bid during the go-shop period does not provide persuasive
evidence that the Tax Act had a minimal effect on Regal’s value. It is possible that the Tax
Act could have caused Regal’s value to increase materially, despite the absence of any
bids.
b. The Implications Of Anschutz’s Approval Of The Deal
Cineworld next contends that because Anschutz approved the Merger, any
incremental value from the Tax Act must have been minimal. Anschutz’s approval of the
Merger lacks probative value because Anschutz executed a voting agreement that bound
Anschutz to vote for the Merger without any meaningful outs. See JX 1289 § 3(b); accord
JX 1346 at ’875. As it was obligated to do, Anschutz approved the Merger by written
consent. JX 1290 at 78–80; JX 1346 at ’107–09. Anschutz’s approval reflected its
compliance with a contractual obligation, not its view regarding the incremental value
created by the Tax Act.
Assuming for the sake of argument that Anschutz had a choice, then the evidence
would not support Cineworld’s position. In Stillwater, the court rejected a similar
argument, noting that stockholders only would vote down the deal if they preferred to
123
return to the Company’s operative reality as a standalone firm. Stillwater Trial, 2019 WL
3943851, at *50. Stockholders might well prefer “the surer option of the deal price, even
if they believed that the Company’s value had increased between signing and closing such
that the deal price no longer reflected fair value.” Id. Anschutz’s large holdings and its
status as Regal’s controlling stockholder constrained its ability to sell. If Anschutz wanted
liquidity, then it likely would have had to engage in further block sales at a discount to the
market price, and its sales could have created a further overhang on the stock. In fact, the
evidence suggests that Anschutz was sufficiently happy with the deal price that it never
evaluated the implications of the Tax Act for Regal’s value. See Anschutz Dep. 86–87.
The fact that Anschutz approved the Merger does not provide persuasive evidence
that the Tax Act had a minimal effect on Regal’s value. It is possible that the Tax Act could
have caused Regal’s value to increase materially, despite approval from Anschutz.
c. The Double-Counting Issue
In addition to arguing that the go-shop phase and Anschutz’s vote meant that any
post-signing change in value was minimal, Cineworld maintains that the deal price at
signing already included a measure of value resulting from the expectation that the
corporate tax rate would fall. Cineworld failed to prove that the deal price included a
quantifiable amount of value from this source.
Kennedy sought to establish that the deal price included value from an anticipated
lowering of tax rates by citing market commentary which claimed that traders were
considering this issue. See Kennedy Tr. 994–99; Kennedy Report ¶¶ 151–56. To quantify
the impact, Kenney relied on a J.P. Morgan report, issued in November 22, 2017, in which
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the bank predicted that the Tax Act “would translate to ~8% of S&P 500 price
appreciation” and estimated that “about ~3% is priced in.” JX 1148 at 2. In a later report
issued on December 4, 2017, J.P. Morgan estimated that the effect of reducing the
corporate tax rate was “currently ~50% priced-in.” JX 1252 at 1. Kennedy also determined
that market multiples did not react materially when the Tax Act became law. See Kennedy
Report ¶ 21; Kennedy Rebuttal Report ¶ 56.
Kennedy’s market evidence was not persuasive. Analysts had been writing about
the possibility of lower tax rates since the 2016 election, so the existence of market
commentary on the issue was trivial. The J.P. Morgan reports sought to quantify the effect,
but the firm’s conclusions were speculative and unsupported. The fact that market
multiples did not react significantly upon the passage of the Tax Act indicates that by that
point, the effects of a lower corporate tax rate were priced in, but it does not provide
evidence of when the changes were priced in—an occurrence that likely took place over
time and to different degrees for different companies.
More importantly, Cineworld failed to translate its generic evidence about market
prices into specific evidence about Regal. Cineworld failed to provide any persuasive
evidence regarding the degree to which Regal’s stock price incorporated value from a
lowered tax rate. Cineworld also did not point to any channel by which value theoretically
imbued in the stock price would have percolated into the deal price. Cineworld did not
prove that the parties anchored the deal price off of the market price or any metric based
on the market price.
125
There also was a timing disconnect. The Tax Act became law on December 22,
2017. The negotiations that led to the deal price began in October 2017, and the parties
reached agreement on price on November 3, 2017, seven weeks before the Tax Act passed
and almost three weeks before J.P. Morgan estimated that 3% of the value of the Tax Act
was priced in to the S&P 500. The Board ultimately approved the Merger Agreement on
December 4, three weeks before the Tax Act became law, but the parties had reached
agreement on pricing weeks before that.
Notably, Cineworld did not argue that a double-counting problem arises because
Cineworld had expected to generate cost savings by moving income from the United States
into lower jurisdictions, only to have a significant portion of that value become part of
Regal’s operative reality as a standalone entity as a result of the Tax Act. Kennedy accepted
that Cineworld could not claim a portion of that value as synergies, warranting a lower
synergy deduction from the deal price, and he agreed that an adjustment was necessary to
account for the change in Regal’s value between signing and closing. This decision has
made different findings regarding the amount of the synergy deduction and the subsequent
increase in value between signing and closing, but it otherwise agrees with Kennedy’s
approach and does not treat the passage of the Tax Act as creating a double-counting
problem. The former step in the analysis is necessary to derive the standalone value of the
Company at signing as implied by the deal price; the latter step is necessary to adjust the
standalone value of the Company to reflect the change in value between signing and
closing.
126
Cineworld thus did not carry its burden of proving that a double-counting problem
existed.
d. The Estimates Of The Change In Value
The record contains various estimates of the change in Regal’s value between
signing and closing. This decision ultimately adopts a value of $4.37 per share, which is
the value implied by Cineworld’s disclosures about the amount of financial savings it could
achieve before and after the passage of the Tax Act. That figure is the same value that this
decision deducted from Cineworld’s expectation of financial savings to account for the
passage of the Tax Act. The two are not necessarily equivalent: Cineworld’s estimate of
the financial savings it no longer could achieve might be higher or lower than the actual
value of a lower corporate tax rate to Regal as a standalone entity. For purposes of this
case, however, Cineworld’s estimate is the most reliable indicator. First, unlike the experts
in this case, Cineworld had actual dollars at risk. Second, when making its disclosures
regarding financial savings, Cineworld was attempting to portray the deal in a positive light
to the markets, its investors, and its lenders, meaning that Cineworld had an incentive to
identify any financial savings that its management team believed the Merger could
generate. A valuation based on the reduced amount of benefits that Cineworld thought it
could generate therefore is likely to be conservative.
Notwithstanding Cineworld’s arguments that sought to minimize the change in
value between signing and closing, Kennedy opined that Regal’s value increased by $0.92
due to the passage of the Tax Act. As noted, Kennedy derived this figure using the two J.P.
Morgan reports. See Kennedy Tr. 1074; Kennedy Report ¶¶ 116, 154. He relied blindly on
127
J.P. Morgan’s estimates, and he did not test or attempt to replicate J.P. Morgan’s
methodology. Kennedy Tr. 1075. His valuation therefore is unpersuasive.
Yilmaz opined that Regal’s value increased by $7.32 between signing and closing.
To derive this figure, Yilmaz prepared a DCF valuation of Regal using its effective tax rate
before the passage of the Tax Act, then conducted a DCF valuation of Regal using its
effective tax rate after the Tax Act passed. See Yilmaz Rebuttal Report ¶ 46. Both
valuations used the 2017 Projections. This decision has explained that there are sufficient
questions surrounding the 2017 Projections to eschew using them for valuation purposes.
This decision therefore will not use Yilmaz’s methodology to determine the change in
value between signing and closing.
The record contains two contemporaneous estimates of the value of a lower tax rate
to Regal. One estimate was prepared on December 2, 2017, by Christopher Frye, Regal’s
Vice President of Tax, who used the 2017 Projections to estimate Regal’s tax savings in
2017, 2018, and 2019. See JX 1235. Using Frye’s calculations, the court estimates that the
reduction in tax rates had a value of $4.66 per share.73 That result, however, depends
ultimately on the reliability of the 2017 Projections and other debatable inputs.
73
To derive this figure, the court first adjusted Frye’s estimates to reflect the tax
rate of 21% in the Tax Act, rather than the 20% rate that Frye anticipated. Making this
change causes Frye’s model to predict savings of $33.65 million in 2017, $42.26 million
in 2018, and $47.25 million in 2019. To calculate the present value of the these cash flows,
the court used the formula PV = C / (1 + r)n, where PV is the present value of the future
cash flow, C is the amount of the future cash flow, r is the discount rate, and n is the number
of years in the future. To value the tax savings into perpetuity, the court derived a terminal
value by treating the 2019 savings as the final year of the projection period in a DCF
128
A second contemporaneous estimate of the value of the tax rate reduction appears
in the January Stockholder Letter and the January Lender Presentation, in which Cineworld
estimated that it would receive $50 million in tax savings as a result of the Tax Act. JX
1416 at 10; JX 1420 at 5. Using Kennedy’s method for calculating the value of financial
savings, $50 million of annual tax benefits would equal $4.97 per share.74 That estimate is
not sufficiently supported by the record evidence. It appears to have been derived by adding
the $17.5 million of savings from transfer pricing to the $31 million of projected savings
from financial structuring under the “base case” scenario in a draft of an E&Y tax synergies
report, and rounding up. See JX 1163 at ’290, ’292. In any event, because this decision
already has excluded the value of $44 million of expected financial savings from the
calculation of synergies, using a higher number risks double-counting.
This decision uses $4.37 per share as its estimate of the change in value between
signing and closing due to the Tax Act. This decision has found that the deal price included
$2.73 per share that was attributable to Cineworld’s expectations of financial savings.
valuation and using the formula TV = CSteady State / (r – g), where TV is the steady-state
expected free cash flow for the year after the final year of the cash flow forecast, r is the
discount rate, and g is the perpetuity growth rate. Using a perpetuity growth rate of 1.5%
(drawn from Yilmaz’s DCF) and a discount rate of 7.66% (drawn from Kennedy’s critique
of Yilmaz’s DCF), this calculation yields a present value of $734.65 million. Dividing this
number by the 157.7 million outstanding shares of Regal stock results in tax savings valued
at $4.66 per share.
74
If $71.5 million of financial savings translates to $7.10 per share, then $50 million
divided $71.5 million (69.93%) times $7.10 per share equals $4.97 per share.
129
Cineworld originally had anticipated financial savings of $7.10 per share, but the remaining
$4.37 per share represented value that became part of Regal’s operative reality at the time
of the Merger after the enactment of the Tax Act.
The $4.37 per share represents the value of Cineworld’s original estimate of $71.5
million in 2019 run rate tax savings, reduced to account for (i) the $17.5 million of savings
from transfer pricing that Cineworld expected to achieve before the passage of the Tax Act
and (ii) the $10 million of group structuring benefits that Cineworld continued to believe
it could achieve after the passage of the Tax Act. The resulting $44 million of annual tax
savings is more conservative than Morgan Stanley’s estimate of $85 million to $100
million in annual tax savings that would result from the Tax Act.75 The per-share value of
$4.37 implied by the $44 million in annual tax savings also is lower than Yilmaz’s estimate
of $7.32 per share.
The court’s calculation based on Frye’s estimates, the values disclosed by
Cineworld in the January Stockholder Letter and the January Lender Presentation, and the
value implied by Cineworld’s expectation of financial savings before and after the passage
of the Tax Act cluster in a range between $4.37 and $4.97 per share. The congruence among
75
See JX 1232. That said, valuing the tax savings at $4.37 per share admittedly is
higher than a Morgan Stanley sensitivity analysis, prepared in early December 2017, which
implied that Regal’s value using a DCF methodology would increase by $1.52 to $1.62 if
the federal tax rate was reduced. See JX 1256 at 15.
130
these estimates suggests that the resulting calculation is a reasonable one.76 Ultimately, the
court adopts the most conservative of the three—the $4.37 implied by Cineworld’s
expectation of financial savings.
e. Adjusted Deal Price As Reliable Indicator Of Fair Value At
Closing
This decision has concluded that the deal price provided a reliable indicator of the
fair value of Regal at signing. This decision has determined that the Merger price included
$4.26 per share of operational synergies and $2.73 per share of financial savings, for total
synergies value of $6.99 per share. This decision has concluded that Cineworld shared 54%
of the synergies with Regal’s stockholders, necessitating a synergy deduction of $3.77 per
share. After the deduction, the adjusted deal price points to a fair value at signing of $19.23
76
See, e.g., Aruba, 210 A.3d at 142 (adopting deal-price-minus-synergies estimate
that “was corroborated by HP’s and Aruba’s real-time considerations and Aruba’s DCF,
comparable companies, and comparable transactions analyses” (footnotes omitted));
Jarden Trial, 2019 WL 3244085, at *50 (adopting unaffected market price and noting that
the valuation conclusion was corroborated by the results of a DCF methodology); S. Muoio
& Co. LLC v. Hallmark Ent. Invs. Co., 2011 WL 863007, at *20 (Del. Ch. Mar. 9, 2011)
(“[I]t is preferable to take a more robust approach involving multiple techniques . . . to
triangulate a value range . . . .”); In re Hanover Direct, Inc. S’holders Litig., 2010 WL
3959399, at *3 (Del. Ch. Sept. 24, 2010) (citing use of “multiple valuation techniques that
support one another’s conclusions” as supporting adoption of respondent’s expert
valuation); James M. Wahlen et al., Financial Reporting, Financial Statement Analysis,
and Valuation 995 (8th ed. 2015) (“Our experience with valuation suggests that using
several valuation approaches yields more useful insights than using just one approach in
all circumstances.”); Joshua Rosenbaum & Joshua Pearl, Investment Banking: Valuation,
Leveraged Buyouts, and Mergers & Acquisitions 138 (2009) (“[O]nce a . . . valuation range
is determined, it should be compared to the valuation ranges derived from other
methodologies.”); cf. DFC, 172 A.3d at 388 (admonishing Court of Chancery against using
a weighted average of multiple valuation indicators).
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per share. Between signing and closing, Regal’s value increased by $4.37 per share. Adding
the valuation increase to the adjusted deal price results in a fair value indicator as of closing
of $23.60 per share.
III. CONCLUSION
The most reliable metric for determining the fair value of the petitioners’ shares is
the deal price minus synergies plus the change in value between signing and closing.
Accordingly, the fair value of Regal as of the date of the Merger was $23.60 per share. The
petitioners are entitled to this amount, plus pre- and post-judgment interest.
132