In Re: Appraisal of Solera Holdings, Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
)
IN RE APPRAISAL OF SOLERA ) CONSOLIDATED
HOLDINGS, INC. ) C.A. No. 12080-CB
)
MEMORANDUM OPINION
Date Submitted: April 6, 2018
Date Decided: July 30, 2018
Stuart M. Grant, Christine M. Mackintosh, and Vivek Upadhya of GRANT &
EISENHOFER P.A., Wilmington, Delaware; Daniel L. Berger of GRANT &
EISENHOFER P.A., New York, New York; Lawrence M. Rolnick, Steven M.
Hecht, and Jonathan M. Kass of LOWENSTEIN & SANDLER LLP, New York,
New York; Attorneys for Petitioners.
David E. Ross and S. Michael Sirkin of ROSS ARONSTAM & MORITZ LLP,
Wilmington, Delaware; Yosef J. Riemer, Devora W. Allon, Elliot C. Harvey
Schatmeier, Richard Nicholson, and Madelyn A. Morris of KIRKLAND & ELLIS
LLP, New York, New York; Attorneys for Respondent.
BOUCHARD, C.
In this appraisal action, the court must determine the fair value of petitioners’
shares of Solera Holdings, Inc. as of March 3, 2016, when Vista Equity Partners
acquired Solera for $55.85 per share, or approximately $3.85 billion in total equity
value, in a merger transaction. Unsurprisingly, the parties have widely divergent
views on this question.
Relying solely on a discounted cash flow analysis, petitioners contend that the
fair value of their shares is $84.65 per share—approximately 51.6% over the deal
price. Until recently, respondent consistently argued that the “best evidence” of the
fair value of Solera shares is the deal price less estimated synergies, equating to
$53.95 per share. After an appraisal decision in another case recently used the
“unaffected market price” of a company’s stock to determine fair value, however,
respondent changed its position to argue for the same measure of value here, which
respondent contends is $36.39 per share—about 35% below the deal price.
Over the past year, our Supreme Court twice has heavily endorsed the
application of market efficiency principles in appraisal actions. With that guidance
in mind, and after carefully considering all relevant factors, my independent
determination is that the fair value of petitioners’ shares is the deal price less
estimated synergies—i.e., $53.95 per share.
As discussed below, the record reflects that Solera was sold in an open process
that, although not perfect, was characterized by many objective indicia of reliability.
The merger was the product of a two-month outreach to large private equity firms
followed by a six-week auction conducted by an independent and fully authorized
special committee of the board, which contacted eleven financial and seven strategic
firms. Public disclosures made clear to the market that the company was for sale.
The special committee had competent legal and financial advisors and the power to
say no to an underpriced bid, which it did twice, without the safety net of another
bid. The merger price of $55.85 proved to be a market-clearing price through a 28-
day go-shop that the special committee secured as a condition of the deal with Vista,
one which afforded favorable terms to allow a key strategic competitor of Solera to
continue to bid for the company.
The record further suggests that the sales process was conducted against the
backdrop of an efficient and well-functioning market for Solera’s stock. Before the
merger, for example, Solera had a deep base of public stockholders, its shares were
actively traded on the New York Stock Exchange and were covered by numerous
analysts, and its debt was closely monitored by ratings agencies.
In short, the sales process delivered for Solera stockholders the value
obtainable in a bona fide arm’s-length transaction and provides the most reliable
evidence of fair value. Accordingly, I give the deal price, after adjusting for
synergies in accordance with longstanding precedent, sole and dispositive weight in
determining the fair value of petitioners’ shares as of the date of the merger.
2
I. BACKGROUND
The facts recited in this opinion are my findings based on the testimony and
documentary evidence submitted during a five-day trial. The record includes over
400 stipulations of fact in the Stipulated Joint Pre-Trial Order (“PTO”),1 over 1,000
trial exhibits, including fourteen deposition transcripts, and the live testimony of four
fact witnesses and three expert witnesses. I accord the evidence the weight and
credibility I find it deserves.
A. The Parties
Respondent Solera Holdings, Inc. (“Solera” or the “Company”) is a Delaware
corporation with headquarters in Westlake, Texas.2 Solera was founded in 2005 and
was publicly traded on the New York Stock Exchange from May 2007 until March
3, 2016, when it was acquired by an affiliate of Vista Equity Partners (“Vista”) in a
merger transaction (the “Merger”).3
From Solera’s inception through the Merger, Tony Aquila served as Chairman
of the Board of Directors (the “Board”), Chief Executive Officer, and President of
Solera.4 Over this time period, Aquila made all top-level decisions about product
1
The court appreciates the parties’ efforts in reaching agreement on a thorough set of
factual stipulations.
2
PTO ¶ 75.
3
Id. ¶¶ 1, 77 & Ex. A.
4
Id. ¶ 81.
3
innovation, corporate marketing, and investor relation efforts.5 After the Merger,
Aquila remained the CEO of Solera.6
Petitioners consist of seven funds that were stockholders of Solera at the time
of the Merger: Muirfield Value Partners LP, Fir Tree Value Master Fund, L.P., Fir
Tree Capital Opportunity Master Fund, L.P., BlueMountain Credit Alternatives
Master Fund L.P., BlueMountain Summit Trading L.P., BlueMountain Foinaven
Master Fund L.P., and BlueMountain Logan Opportunities Master Fund L.P.
Petitioners collectively hold 3,987,021 shares of Solera common stock that are
eligible for appraisal.7
B. Solera’s Business
In early 2005, Aquila founded Solera with aspirations to bring about a digital
evolution of the insurance industry, starting with the processing of automotive
insurance claims.8 Aquila viewed Solera as a potential disruptor, akin to
Amazon.com, Inc., in its specific industry.9
5
Id. ¶ 82.
6
Id. ¶ 83.
7
Id. ¶¶ 12, 22-24, 30-32, 39.
8
Id. ¶¶ 76, 80.
9
Tr. 369-70, 375 (Aquila).
4
Solera, in its current form, is a global leader in data and software for
automotive, home ownership, and digital identity management.10 At the time of the
Merger, Solera’s business consisted of three main platforms: (i) Risk Management
Solutions; (ii) Service, Maintenance, and Repair; and (iii) Customer Retention
Management.11 The Risk Management Solutions platform helps insurers digitize
and streamline the claims process with respect to automotive and property content
claims.12 The Service, Maintenance, and Repair platform digitally assists car
technicians and auto service centers to diagnose and repair vehicles efficiently,
accurately, and profitably, and to identify and source original equipment
manufacturer and aftermarket automotive parts.13 The Customer Retention
Management platform provides consumer-centric and data-driven digital marketing
solutions for businesses that serve the auto ownership lifecycle, including property
and casualty insurers, vehicle manufacturers, car dealerships, and financing
providers.14 Solera was operating in 78 countries at the time of the Merger.15
10
PTO ¶ 117.
11
Id. ¶ 118.
12
Id. ¶ 120.
13
Id. ¶ 125.
14
Id. ¶ 128.
15
Tr. 659-60 (Giger).
5
C. Solera Expands Aggressively Through Acquisitions
Solera’s business was not always so diverse. During the Company’s early
years, the vast majority of Solera’s revenues was derived from claims processing.16
But the claims business was facing pressure17 as a result of maturation,18 advances
in automotive technology like collision avoidance and self-driving cars,19 and
competition.20
In August 2012, Aquila implemented a plan called “Mission 2020” to increase
Solera’s revenue and EBITDA through acquisitions and diversification.21 Solera
aspired to become a “cognitive data and software and services company” that would
address the entire lifecycle of a car.22
The Mission 2020 goals included growing revenue from $790 million in fiscal
year 2012 to $2 billion by fiscal year 2020, and increasing adjusted EBITDA from
$345 million to $800 million over that same period.23 To meet these benchmarks,
16
PTO ¶¶ 134-138.
17
Id. ¶ 163.
18
Tr. 23-24 (Cornell); JX0121.0007.
19
Tr. 32 (Cornell); JX0092.0012-13.
20
Tr. 207-08 (Cornell); 758-60 (Yarbrough); JX0092.0014-15.
21
PTO ¶¶ 159-61, 163.
22
Tr. 372-73, 381 (Aquila).
23
PTO ¶ 160.
6
Solera implemented its “Leverage. Diversify. Disrupt.” (“LDD”) business
strategy.24
LDD was a three-pronged strategy. First, Solera sought to “leverage” its
claims processing revenue in a given geographic area to gain a foothold in that area.
Second, Solera sought to “diversify” its service offerings in the given geographic
area. Third, Solera’s longer-term objective was to “disrupt” the market by
integrating its service offerings such that vehicle owners and homeowners could use
Solera’s software to manage their purchases, maintenance, and insurance claims all
in one place.25
D. The Market’s Reaction to LDD
Between the formulation of Mission 2020 and the Merger, Solera invested
approximately $2.1 billion in acquisitions.26 These acquisitions often were “scarcity
value transactions” that involved Solera paying a premium for unique assets. 27 The
multiples Solera paid in these acquisitions not only were relatively high but were
increasing over time, generating lower returns on invested capital.28 As a result,
24
Id. ¶ 132.
25
Id. ¶ 133.
26
Id. ¶ 165.
27
Tr. 386-88 (Aquila).
28
Id. at 387 (Aquila), 1063 (Hubbard); JX0899.0050-51.
7
Solera’s leverage increased while its EPS essentially remained flat and its EBITDA
margins shrank.29
Some analysts were skeptical of Solera’s evolution-through-acquisitions
strategy, taking a “show me” approach to the Company. 30 These analysts struggled
to understand Solera’s diversification plan31 and complained that management’s lack
of transparency about the Company’s strategy impeded their ability to value Solera
appropriately.32 Aquila, the Board, and other analysts believed that the market
misunderstood Solera’s value proposition and that its stock traded at a substantial
discount to fair value.33
Compounding the challenges Solera was facing in the equity markets, Solera
was encountering difficulties in the debt markets. Solera needed to have access to
debt financing to execute its acquisition strategy, but by the time of the Merger,
Solera was unable to find lenders willing to finance its deals due to its highly-levered
balance sheet. For example, upon the announcement that Solera planned to issue
tack-on notes in November 2014, “the proceeds of which, along with balance sheet
29
JX1101.0056, 151-52, 175-76.
30
JX1101.0030.
31
PTO ¶ 241; Tr. 478-79 (Aquila).
32
PTO ¶¶ 244-46.
33
Tr. 464-67 (Aquila), 861 (Yarbrough); JX0175.0108 (William Blair & Company);
JX0301.0001 (Goldman Sachs); JX0325.0001 (Goldman Sachs).
8
cash, [were] expected to effect a strategic acquisition,” Moody’s Investors Service
downgraded Solera’s credit rating from Ba2 to Ba3.34 Moody’s noted that “the
company has been actively pursuing acquisitions, often at very high purchase
multiples,” and warned that “[r]atings could be downgraded [further] if the company
undertakes acquisitions that, after integration, fail to realize targeted margins.”35
In late May 2015, management began discussing an $850 million notes
offering with Goldman Sachs, the proceeds of which the Company planned to use to
fund acquisitions and refinance outstanding debt.36 The offering fell approximately
$11.5 million short, and Goldman was forced to absorb the notes that it could not
sell into the market.37 In July 2015, Moody’s downgraded Solera again,38
commenting “[t]he ongoing, cumulative impacts of debt assumed for acquisitions
and for the buyout of its joint venture partner’s 50% share . . . plus ramped up share
buybacks and dividends, have pushed Moody’s expectations for [Solera’s]
intermediate-term leverage to approximately 7.0 times, a level high even for a B1-
34
JX0140.0003. “Ba” obligations are those “judged to be speculative and are subject to
substantial credit risk.” Rating Symbols and Definitions, MOODY’S INV’R SERV. 6 (June
2018),
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
35
JX0140.0003.
36
Tr. 409-11 (Aquila); JX0258.004.
37
Tr. 412-14 (Aquila); JX0318.001.
38
Tr. 416-17 (Aquila); JX0310.0004.
9
rated credit.”39 As Aquila testified, Solera was “out of runway” shortly before the
Merger to execute the rest of its acquisition strategy because creditors were
unwilling to loan funds to Solera at tolerable interest rates.40
E. Aquila Expresses Displeasure with his Compensation at Solera
Solera’s stock price affected Aquila personally. His compensation was tied
to “total shareholder return,” and the majority of his stock options were underwater.41
Aquila did not receive a performance bonus in 2011, 2012, or 2013.42 In February
2015, he emailed Thomas Dattilo, Chair of the Compensation Committee, saying
“I’ve poured a great deal of time, inventions and sacrifice during this time in the
company’s transition and I really need to get something meaningful for it.”43 At one
point, Aquila threatened to leave Solera if his compensation was not reconfigured.44
The Board recognized Aquila’s value to the Company and took his request
and threat to leave seriously. Dattilo commented “the way [S]olera is structured, we
would probably need three people to replace him, and even that would not really
39
JX0310.0004. “B” obligations are those “considered speculative and are subject to high
credit risk.” Rating Symbols and Definitions, MOODY’S INV’R SERV. 6 (June 2018),
https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
40
Tr. 414 (Aquila).
41
Id. at 460, 485 (Aquila); JX0088.0002.
42
Tr. 461 (Aquila).
43
PTO ¶ 222.
44
Id. ¶ 224; JX0174.0002-03.
10
fulfill the Solera requirements because of the pervasive founder[’]s culture found
there. . . . Solera possibly couldn’t exist without Tony.”45 Although the
Compensation Committee was looking for a solution to address Aquila’s underwater
stock options, they ultimately “didn’t get it done.”46
F. Aquila Privately Explores a Sale of Solera
Around the time that Aquila complained to the Board about his compensation,
he began to engage in informal discussions with private equity firms regarding a
potential transaction to take the Company private. In December 2014, Aquila was
introduced to David Baron, an investment banker at Rothschild Inc.
(“Rothschild”).47 Aquila and Baron met again in January 2015, when they “talked
through a bunch of buy-side ideas” and Aquila expressed his frustration at the
disconnect between Solera’s stock price performance relative to its peers and his
own views on the Company’s growth opportunities.48
In March 2015, Aquila was introduced to Orlando Bravo, a founder of the
private equity firm Thoma Bravo LLC (“Thoma Bravo”), and Robert Smith, the
45
JX0174.0002.
46
Tr. 464 (Aquila).
47
PTO ¶ 251.
48
Id. ¶ 252.
11
founder of Vista.49 Before these two meetings, Aquila was aware that both Thoma
Bravo and Vista recently had launched new multi-billion dollar funds.50
On April 29, 2015, Baron contacted Brett Watson, the head of Koch Equity,
to tell him, without identifying Solera as the target, about an opportunity to invest in
preferred equity.51 Baron wrote in an email to Watson: “I’d like you to speak for as
much of pref[erred stock] as possible – Ceo objective is to try to get control back[.]
I’m going to clear it w[ith] chairman/ceo next week.”52
On May 4, 2015, Baron travelled to Aquila’s ranch in Jackson Hole,
Wyoming, bringing with him a presentation book that included leverage buyout
(“LBO”) analyses that the two had previously discussed.53 Two days later, during
an earnings call on May 6, Aquila raised the possibility of taking Solera private as a
means of returning money to its stockholders while still pursuing its growth strategy:
Q (Analyst): And just if I can bring that around to [the Solera CFO’s]
comment about being opportunistic in share repurchases when you
think the stock is detached from intrinsic value, you haven’t bought a
lot of stock. So how do we square that circle in terms of what you think
the Company is worth today?
A (Aquila): Look, you’re bringing up a great point. So, look, it is a
chicken-or-egg story. We’re going to make some of you happy, which
49
Tr. 480 (Aquila); PTO ¶¶ 258-60.
50
Tr. 481-84 (Aquila).
51
PTO ¶ 262.
52
JX0208.0002.
53
Tr. 500-01 (Aquila); JX1120.0004, 17.
12
we’re trying to go down—we’re trying to keep the ball down the middle
of the fairway. We definitely like to hit the long ball as much as we
can. But in reality, we have to do what we’re doing, and we have to
thread the needle the way we are. Our only other alternative is either
to take up leverage, buy stock right now. That’s going to cause a ratings
issue. That’s going to cause some dislocation. We want to buy content
because we want double-digit businesses in the emerging content world
as apps take a different role on your phone to manage your risks and
your asset. So when you think of that, we’ve done a decent job. We
bought, I don’t know, $300 million worth of stock back since we did
the stock buying program, and our average price is, like, $52, $53.
So we’re kind of dealing with all the factors—we got the short game
playing out there. And we’ve got to thread the needle. And the only
other option to that is to go private and take all the shares out.54
Aquila testified that this comment was “not preplanned,” and he was not “trying to
suggest that [going private] was a decision that had been made.”55
A few days later, on May 11, 2015, Aquila met with Smith from Vista and his
partner Christian Sowul in Austin, Texas.56 After the meeting, Sowul followed up
with Baron, saying “we are very interested. [T]ony sounded like now is the time.
[N]ext 4-6 weeks.”57
Also on May 11, the Board commenced a series of meetings and dinners in
Dallas, Texas.58 Before these meetings, Aquila discussed with every Board member
54
JX0214.0014-15 (emphasis added).
55
Tr. 424-25 (Aquila).
56
JX0251.0001.
57
JX0234.0001.
58
Tr. 762-63 (Yarbrough).
13
the possibility of pursuing strategic alternatives, given that Solera was “out of
runway” to execute its growth-by-acquisition strategy.59 Company director Stuart
Yarbrough encouraged Aquila to have these conversations with the other directors,
and explained that the Board felt Solera was “being criticized in the market” and
knew that the Company was paying higher multiples for larger acquisitions.60
On May 12, 2015, Company director Michael Lehman emailed Yarbrough
and Larry Sonsini of the law firm Wilson Sonsini Goodrich & Rosati about the
possibility of retaining his firm to assist in reviewing strategic alternatives. Lehman
stated in the email: “Tony and the board have just begun conversations about
‘evaluating strategic alternatives,’” of which “[o]ne of the more attractive conceptual
alternatives is a ‘going private,’ which would likely mean that the CEO would have
significant stake in that entity [] (think Dell computer type transaction).”61
In an executive session on May 13, the Board unanimously agreed that Aquila
should “test the waters” with financial sponsors.62 In doing so, the Board recognized
that Aquila would probably have a significant equity stake in a private Solera, posing
an “inherent” conflict in his outreach to private equity firms.63 The Board authorized
59
Id. at 425-27 (Aquila), 760-62 (Yarbrough).
60
Id. at 862-64 (Yarbrough).
61
JX0250.0003.
62
Tr. 428-29 (Aquila), 762-63, 816 (Yarbrough).
63
Tr. 829-31 (Yarbrough); JX0250.0003.
14
Aquila to “put together a target list” of large private equity firms and to “go have
discussions and see what the interest was.”64 The Board decided to start with private
equity firms and add strategic firms later in the process because it believed that
strategic firms presented a greater risk of leaks65 and an interested strategic bidder
could get up to speed quickly.66 The Board also wanted to focus on larger private
equity firms to avoid the complexity of firms having to partner with each other.67 At
this stage, the Board prohibited “any use of nonpublic information.”68
G. A Special Committee is Formed after Aquila “Tests the Waters”
Between May 13 and June 1, 2015, Aquila, with assistance from Rothschild,
contacted nine private equity firms: Pamplona, Silver Lake, Apax, Access
Industries, Hellman & Friedman, Vista, Blackstone, CVC Capital Partners, and
Thoma Bravo.69 Aquila and Rothschild had follow-up contact with at least Silver
Lake,70 Blackstone,71 and Thoma Bravo72 between June 1 and July 14, 2015. After
64
Tr. 865 (Yarbrough).
65
Id. at 764 (Yarbrough).
66
Id. at 764-65 (Yarbrough).
67
Id. at 865 (Yarbrough).
68
Id. at 764 (Yarbrough).
69
PTO ¶¶ 268, 271-78.
70
Id. ¶ 279.
71
Id. ¶¶ 277, 280, 282.
72
Id. ¶¶ 278, 283-84.
15
his meeting with Aquila, Orlando Bravo emailed Baron, saying “Unreal meeting. I
love Tony man. We want to do this deal.”73 On July 18, 2015, Aquila reported back
to the Board that Thoma Bravo was going to make an offer for Solera.74
On July 19, 2015, Thoma Bravo submitted an indication of interest to
purchase Solera at a price between $56-$58 per share. In the letter submitting their
bid, Thoma Bravo stated that they “are contemplating this deal solely in the context
of being able to partner with Tony Aquila and his management team.”75
On July 20, 2015, the Board discussed the indication of interest received from
Thoma Bravo and formed a special committee of independent directors to review
the Company’s strategic alternatives (the “Special Committee”).76 The Special
Committee consisted of Yarbrough (Chairman), Dattilo, and Patrick Campbell, each
of whom had served on multiple boards and had extensive M&A experience.77 The
Special Committee was granted the “full power and authority of the Board” to
review, evaluate, negotiate, recommend, or reject any proposed transaction or
strategic alternatives.78 The Board resolution establishing the Special Committee
73
JX0315.0001.
74
Tr. 526-27 (Aquila).
75
PTO ¶ 285.
76
Id. ¶¶ 286-87. The written consent establishing the Special Committee is dated July 23,
2015 (see JX0359), but it is stipulated that it was formed on July 20, 2015. PTO ¶ 287.
77
PTO ¶ 287; Tr. 754-56, 771-772 (Yarbrough).
78
JX0359.0002.
16
further provided that “the Board shall not recommend a Possible Transaction or
alternative thereto for approval by the Company’s stockholders or otherwise approve
a Possible Transaction or alternative thereto without a prior favorable
recommendation of such Possible Transaction or alternative thereto by the Special
Committee.”79
H. The Special Committee Begins its Work
On July 30, 2015, the Special Committee met with its legal advisors, Sullivan
& Cromwell LLP and Richards, Layton & Finger P.A., and financial advisor
Centerview Partners LLC (“Centerview”).80 Rothschild remained active in the sales
process and was formally engaged to represent the Company,81 but, in reality, it also
continued to represent Aquila personally.82
At its July 30 meeting, the Special Committee approved a list of potential
buyers to approach, including six strategic companies that were selected based on
their business initiatives and stated future plans, and six financial sponsors
(including Vista) that were selected based on their experience and interest in the
technology and information services industry and their capability to execute and
79
Id.
80
Tr. 776-78 (Yarbrough); PTO ¶ 289.
81
JX0625; JX0673.0020; JX1161.0001. Both Centerview and Rothschild each were paid
approximately $25 million in advisory fees. JX0673.0020.
82
Tr. 568 (Aquila); JX1170.
17
finance a transaction of this size.83 The Special Committee also distributed to
management a short document that Sullivan & Cromwell prepared concerning senior
management contacts with prospective bidders, which, aptly for a company focused
on the automotive industry, was referred to as the “Rules of the Road.”84 The
document stated, among other things, that “senior management must treat potential
Bidders equally” and refrain from “any discussions with any Bidder representatives
relating to any future compensation, retention or investment arrangements, without
approval by the independent directors.”85
Between July 30 and August 4, 2015, Centerview contacted 11 private equity
firms and 6 potential strategic bidders, including Google and Yahoo!, the two that
Special Committee Chair Yarbrough believed were most likely to bid.86 Aquila
already had “tested the waters” with some of the private equity firms that the Special
Committee contacted. All six strategic firms contacted declined to explore a
transaction involving Solera.87 At this time, the Special Committee did not contact
IHS Inc. (“IHS”), another possible strategic acquirer, because IHS was one of
83
PTO ¶ 289.
84
Tr. 782-83 (Yarbrough); JX0380.0003-05.
85
JX0380.0005.
86
PTO ¶ 295; Tr. 870-71 (Yarbrough).
87
PTO ¶ 298.
18
Solera’s key competitors and the Special Committee had “a low level of confidence”
in IHS’s ability to finance a transaction.88
From time to time, Aquila, through Rothschild and his legal counsel, Kirkland
& Ellis LLP,89 apprised the Special Committee on his thoughts about the sales
process. On July 30, 2015, Baron told the Special Committee’s legal and financial
advisors in an email that Aquila did not want IHS included in the sales process,
stating “fishing expedition, too competitive, need 50% stock . . .”90
On August 3, 2015, Aquila’s counsel sent the Special Committee a proposed
“Management Retention Program.”91 This proposal stated that “an incremental $75
million cash retention pool” should be created to align management and shareholder
incentives, and to “enhance impartiality of management among all potential
buyers.”92 The proposal warned that under the current compensation plan, “the
program inadequately aligns management’s interests with those of stockholders and
exposes the Company to risks of losing key managers through closing” of a
transaction.93 Solera did not implement this proposed “Management Retention
88
Tr. 780-82 (Yarbrough).
89
JX1170.
90
JX0378.0001.
91
Tr. 546 (Aquila); JX0402.
92
JX0402.0003, 07.
93
JX0402.0003.
19
Program,” but the Compensation Committee did award Aquila a $15 million bonus
in August 2015.94
I. The Special Committee Solicits First-Round Bids and News of the
Sales Process Leaks
By August 11, 2015, Yarbrough viewed “the state of the world to be one
where if there’s going to be a deal, it’s going to be with a private equity firm.”95 On
August 10, 2015, at the direction of the Special Committee, Centerview sent a letter
to the five remaining parties inviting them to submit first-round bids by August 17,
2015.96 These parties had signed confidentiality agreements and were provided
Board-approved five-year projections for the Company, which were based on
projections created in the normal course of business but then modified in connection
with the sales process (the “Hybrid Case Projections”).97 Before the August 17 bid
deadline, Baron spoke to certain potential bidders directly without involving
Centerview.98
94
Tr. 558, 589 (Aquila).
95
Id. at 854 (Yarbrough).
96
PTO ¶ 299; JX0756.0044.
97
PTO ¶ 388; JX0445.0005.
98
See JX0467.0001 (Silver Lake); JX0456.0001 (Pamplona).
20
By August 17, 2015, two potential bidders had dropped out of the sales
process, believing “that they would not be able to submit competitive bids.” 99 The
remaining three financial sponsors provided indications of interest: Vista offered
$63 per share, Thoma Bravo offered $60 per share, and Pamplona offered $60-$62
per share.100 Each made clear that they wanted Aquila’s participation in the deal.101
On August 19, 2015, news of the sales process leaked when Bloomberg
reported that Solera was “exploring a sale that has attracted interest from private
equity firms.”102 The next day, the Company issued a press release announcing that
it had formed the Special Committee and that it was contemplating a sale.103 Also
on August 20, the Financial Times reported that Vista was “considering a bid of $63
per share” and that Thoma Bravo and Pamplona were “considering separate bids for
$62 per share.”104
In a further development on August 20, Advent International Corporation, a
private equity firm, reached out to Centerview and Rothschild separately to express
99
JX0465.0001.
100
PTO ¶ 302.
101
JX0340.0003; JX0464.0005, 08.
102
PTO ¶ 305.
103
Id. ¶ 306.
104
JX0499.0002.
21
interest in the Company.105 Centerview confirmed to Baron that it planned to ignore
the inquiry,106 about which the members of the Special Committee were never
informed.107 The Special Committee also was not made aware of interest that
Providence Equity Partners, L.L.C.,108 another private equity firm, expressed to
Centerview on August 26.109 When Centerview made Baron aware of this inquiry,
he responded: “Too late obv[iously] but Tony not a fan . . .”110 Neither Advent nor
Providence gave any indication as to the price they would be willing to pay for Solera
or the amount of time they would need to get up to speed.111
During the August 22-23, 2015 weekend, Smith traveled to Aquila’s ranch en
route to his own ranch in Colorado.112 Before the meeting, Smith’s team at Vista
researched the size of the option pools that Vista had offered management in its
“recent take privates” so that Smith would “know the comps before his meeting with
[T]ony.”113 Aquila did not have authorization from the Special Committee to discuss
105
JX0497.0001-02 (August 20, 2015 email from Advent to Centerview); JX0517.0001
(August 21, 2015 email referencing Advent call to UK head of Rothschild).
106
JX0497.0001.
107
Tr. 844-45 (Yarbrough).
108
Id. at 845-46 (Yarbrough).
109
JX0556.0001.
110
Id.
111
JX0497; JX0556.
112
Tr. 597-98 (Aquila); JX0523; JX0525.
113
JX0525.0002.
22
his post-transaction compensation at this time.114 Shortly after the meeting, Vista
began to model a 9% option pool with a 1% long-term incentive plan (LTIP), up
from the 5% option pool with a 1% LTIP that Vista had modeled before Aquila’s
meeting with Smith.115
J. IHS Expresses Interest in a Potential Transaction
On August 21, 2015, IHS contacted Centerview to express its interest in a
potential acquisition of Solera at an unspecified valuation and financing structure.116
By August 23, IHS suggested that it would be able to submit a bid in excess of $63
per share, and it indicated that it could complete due diligence and execute definitive
transaction documents within ten calendar days despite not yet having received non-
public information.117 The parties entered into a confidentiality agreement on
August 24.118
On August 26, 2015, senior representatives of IHS, including its CFO,
attended a meeting with the Company’s management, before which Aquila had a
one-on-one conversation with IHS’s CFO for 90 minutes.119 Centerview requested
114
Tr. 833 (Yarbrough).
115
JX0525.0001; JX0541.0001.
116
PTO ¶ 307.
117
Id. ¶ 308.
118
Id. ¶ 309.
119
Id. ¶ 312.
23
numerous times that IHS’s CEO Jerre Stead attend the management meeting, but he
declined even though the acquisition would have been the largest in IHS’s history.120
By August 27, Solera had provided IHS with non-public Company information,
including the Hybrid Case Projections.121
On September 1, IHS submitted a bid of $55-$58 per share, comprised of 75%
cash and 25% stock, and included “highly confident” letters from financing
sources.122 On September 2, Aquila travelled separately to meet with Stead
personally, who commented that IHS was “looking at another big deal as well.”123
The next day, IHS submitted a revised bid of $60 per share, but did not specify the
mix of consideration and did not include any indication of financing
commitments.124 IHS said it could complete diligence “within a matter of days.”125
120
Id. ¶ 312; Tr. 441 (Aquila), 793 (Yarbrough).
121
PTO ¶ 313.
122
Id. ¶ 317.
123
Tr. 442-44 (Aquila).
124
PTO ¶ 321.
125
JX0611.0002.
24
K. The Special Committee Negotiates with Potential Buyers
On September 4, 2015, Vista and Thoma Bravo submitted revised bids.126
Pamplona had dropped out of the sales process by this point,127 and the Special
Committee felt like it was “moving backwards” in its negotiations with IHS.128
Both of the active bidders lowered their offers. Thoma Bravo lowered its bid
to $56 per share, attributing the drop to “challenges in availability and terms of
financing (both debt and equity) due in part to turbulence in global financial
markets.”129 Vista lowered its bid to $55 per share, but subsequently indicated that
it could increase its price to $56 per share.130 Vista explained that it dropped its bid
because of changes to Solera’s balance sheet, increased financing costs, and a
decline in Vista’s forecasted EBITDA for Solera.131 Unbeknownst to Solera, one of
the reasons Vista lowered its bid is that it had made a spreadsheet error in its financial
model before submitting its first-round bid, resulting in the model overstating
Solera’s future equity value by approximately $1.9 billion.132 If this error had been
126
PTO ¶¶ 322, 324.
127
Id. ¶ 311.
128
Tr. 796-97 (Yarbrough).
129
PTO ¶¶ 322-23.
130
Id. ¶ 324.
131
JX0620.0001-02; JX0626.0001.
132
Tr. 934-35, 964-67 (Sowul). Petitioners question the veracity of this explanation, but I
found Sowul’s testimony on the point to be credible and one of petitioners’ own experts
confirmed the spreadsheet error. Id. at 301-04 (Buckberg).
25
noticed and corrected, Vista’s first-round bid would have been closer to $55 per
share, rather than $63 per share.133
On September 5, 2015, Aquila signaled that he was willing to roll over $15
million of his Solera shares in a transaction with any bidder.134 That day, the Special
Committee met135 and decided to press for more from the bidders, proposing to Vista
that it either raise its price to $58 per share, or agree to a go-shop and reduced
termination fee to enable Solera to continue discussions with IHS.136 Vista agreed
to the go-shop and the termination fee reduction on September 7, but also told
Centerview that day that one of its anticipated sources of equity financing had
withdrawn its commitment and that it would need additional time to obtain
replacement financing to support its bid.137
On September 8, Vista lowered its bid to $53 per share.138 Vista told Solera
that its bid would expire at midnight, and that “[a]fter midnight, we will not be
spending any more time on” Solera.139 The Special Committee rejected Vista’s bid
133
Id. at 934-35 (Sowul).
134
PTO ¶¶ 382-84; Tr. 589 (Aquila); JX0623.
135
JX0628.
136
PTO ¶ 325.
137
Id. ¶¶ 329-31.
138
Id. ¶ 332.
139
JX0638.0001.
26
as inadequate that same day,140 and decided “to let the process play out.”141 The
Special Committee set September 11, 2015 as a deadline for Vista and Thoma Bravo
to make final bids.142 On September 9, Bloomberg reported that Solera had received
bids from Vista and Thoma Bravo, and that the Company was “nearing a deal to sell
itself for about $53 a share.”143
When September 11 arrived, Thoma Bravo offered $54 per share, expiring at
midnight and contingent on Solera “shutting off dividends” and reducing advisory
fees.144 The Special Committee said “no.”145 The press again reported in real time,
with Reuters writing that Vista and Thoma Bravo had “made offers that failed to
meet Solera’s valuation expectations,” and that Solera was “trying to sell itself to
another company”—IHS—“rather than an investment firm.”146
The next morning, on September 12, Vista submitted an all-cash, fully
financed revised bid of $55.85 per share that also included the go-shop and
termination fee provisions the Special Committee had requested.147 The Special
140
PTO ¶ 334.
141
Tr. 969-70 (Sowul).
142
Id. at 806 (Yarbrough).
143
JX0644.0001.
144
PTO ¶ 338; Tr. 806 (Yarbrough).
145
Tr. 807 (Yarbrough).
146
JX0651.0001.
147
PTO ¶ 339; JX0756.0052; Tr. 807-08 (Yarbrough).
27
Committee tried to push Vista up to $56 per share, but Vista refused, saying $55.85
was its best and final offer.148 Centerview opined that $55.85 per share was fair,
from a financial point of view, to Solera stockholders.149 Later in the day on
September 12, the Special Committee accepted Vista’s offer after receiving
Centerview’s fairness opinion, and the Board approved the transaction.150 On
September 13, the Company and Vista entered into a definitive merger agreement
(the “Merger Agreement”).151
L. The Go-Shop Period Expires and the Merger Closes
On September 13, 2015, Solera announced the proposed Merger.152 The press
release stated that the purchase price valued Solera at approximately $6.5 billion,
including net debt, “represent[ing] an unaffected premium of 53% over Solera’s
closing share price of $36.39 on August 3, 2015.”153
In advance of the press release, Baron sent a celebratory email to his
colleagues, in which he noted “we were the architects with the CEO from the
beginning as to how to engineer the process from start to finish.”154 The next
148
PTO ¶ 339.
149
Id. ¶ 341; Tr. 807-08 (Yarbrough); JX0661.0001-04.
150
Id. ¶¶ 346-47.
151
Id. ¶ 348.
152
JX0681.
153
JX0681.0001.
154
JX0670.0002.
28
morning, an internal email of the Fir Tree petitioners praised the transaction as
yielding a “Good price!”155
The Merger Agreement provided for a 28-day go-shop period during which
the termination fee would be 1% of the equity value for any offer made by IHS, a
reduction from the 3% termination fee applicable to any other potential buyer.156
The Special Committee reached out to IHS the day after signing the Merger
Agreement and gave IHS nearly full access to the approximately 12,000-document
data room that the private equity firms had been given access to during the pre-
signing sales process.157
On September 29, 2015, with two weeks left in the go-shop, IHS informed
Solera that it would not pursue an acquisition of the Company. IHS noted that it
“was appreciative of the go-shop provisions negotiated in the merger agreement . . .
and the fact that [Solera] had provided equal access to information in order for IHS
to consider a bid.”158 On October 5, 2015, Solera issued its preliminary proxy
155
JX0683.0001.
156
PTO ¶ 350.
157
Id. ¶ 351; Tr. 811 (Yarbrough). Solera withheld six documents. Four of the six
documents concerned Digital Garage, a strategically sensitive new smartphone application,
and the other two concerned personnel matters. Tr. 811 (Yarbrough); PTO ¶ 139-44.
158
PTO ¶ 354.
29
statement, which disclosed a summary of the Hybrid Case Projections.159 The go-
shop expired on October 11, without Solera receiving any alternative proposals.160
On October 15, 2015, Vista sent Aquila a proposed compensation package,
offering Aquila the opportunity to obtain up to 6% of Solera’s fully-diluted equity.161
This amount was later revised up, with Vista offering Aquila up to 10% of the fully-
diluted equity. Under the revised plan, Aquila would invest $45 million in the deal—
$15 million worth of his shares of Solera and $30 million borrowed from Vista.162
Vista’s proposal positioned Aquila to earn up to $969.6 million over a seven-year
period if Vista achieved a four-times cash-on-cash return.163
On October 30, 2015, Solera issued its definitive proxy statement concerning
the proposed Merger, which also included a summary of the Hybrid Case
Projections.164 On December 8, Solera’s stockholders voted to approve the Merger.
Of the Company’s outstanding shares, approximately 65.4% voted in favor,
approximately 10.9% voted against, and approximately 3.4% abstained.165 The
159
Id. ¶ 355.
160
Id. ¶ 356.
161
JX0744.0001, 03; Tr. 611-614 (Aquila).
162
PTO ¶¶ 382-387; JX0760.0004.
163
JX0760.0004, 09-10.
164
PTO ¶ 5; JX0756.0069.
165
PTO ¶¶ 6-7.
30
Merger closed on March 3, 2016.166 The next day, Aquila signed a new employment
agreement with Solera.167
II. PROCEDURAL POSTURE
On March 7 and March 10, 2016, petitioners filed their petitions for appraisal.
The court consolidated the petitions on March 30, 2016. A five-day trial was held
in June 2017, and post-trial argument was held on December 4, 2017.
At the conclusion of the post-trial argument, the court asked the parties to
confer to see if they could agree on an expert the court might appoint to opine on a
significant issue of disagreement concerning the methods the parties’ experts used
to determine the terminal period investment rate in their discounted cash flow
analyses. On December 19, 2017, the parties advised the court that they were unable
to reach agreement on a suggested expert and each submitted two candidates for the
court’s consideration.
On February 22, 2018, Solera filed a motion requesting the opportunity to
submit supplemental briefs to address the implications of certain appraisal decisions
issued after the post-trial argument. The court granted this motion on February 26,
2018, noting in its order that it had “made no decision about whether to proceed with
166
Id. ¶ 1.
167
JX0855.0001.
31
an independent expert” and would “revisit the issue after reviewing the supplemental
submissions.”168 Supplemental briefing was completed on April 6, 2018.169
III. ANALYSIS
A. Legal Standard
Petitioners request appraisal of their shares of Solera under 8 Del. C. § 262.
“An action seeking appraisal is intended to provide shareholders who dissent from a
merger, on the basis of the inadequacy of the offering price, with a judicial
determination of the fair value of their shares.”170 Respondent has not disputed
petitioners’ eligibility for an appraisal of their shares.
In an appraisal action, the court has a statutory mandate to:
[D]etermine the fair value of the shares exclusive of any element of
value arising from the accomplishment or expectation of the merger or
consolidation, together with interest, if any, to be paid upon the amount
determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors.171
Appraisal excludes any value resulting from the merger, including synergies that
may arise,172 because “[t]he 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.,
168
Dkt. 122.
169
Dkt. 125.
170
Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989) (citation omitted).
171
8 Del. C. § 262(h).
172
See M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 797 (Del. 1999).
32
his proportionate interest in a going concern.”173 In valuing a company as a “going
concern” at the time of a merger, the court must take into consideration the
“operative reality”174 of the company, viewing the company as “occupying a
particular market position in the light of future prospects.”175 A dissenting
stockholder is then entitled to his proportionate interest in the going concern.176
In using “all relevant factors” to determine fair value, the court has significant
discretion to use the valuation methods it deems appropriate, including the parties’
proposed valuation frameworks, or one of the court’s own fashioning.177 This court
has relied on a number of different approaches to determine fair value, including
comparable company and precedent transaction analyses, a discounted cash flow
model, and the merger price.178 “This Court may not adopt at the outset an ‘either-
or’ approach, thereby accepting uncritically the valuation of one party, as it is the
173
Tri-Cont’l Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950).
174
M.G. Bancorporation, Inc. v. Le Beau, 737 A.2d 513, 525 (Del. 1999).
175
Matter of Shell Oil Co., 607 A.2d 1213, 1218 (Del. 1992).
176
Cavalier Oil, 564 A.2d at 1144.
177
In re Appraisal of Ancestry.com, Inc., 2015 WL 399726, at *15 (Del. Ch. Jan. 30, 2015)
(citing Glob. GT LP v. Golden Telecom, Inc. 11 A.3d 214, 218 (Del. 2010)).
178
See Laidler v. Hesco Bastion Envtl., Inc., 2014 WL 1877536, at *6 (Del. Ch. May 12,
2014) (compiling authorities); see also In re Lane v. Cancer Treatment Ctrs. of Am., Inc.,
1994 WL 263558, at *2 (Del. Ch. May 25, 1994) (“[R]elevant factors to be considered
include ‘assets, market value, earnings, future prospects, and any other elements that affect
the intrinsic or inherent value of a company’s stock.’”) (quoting Weinberger, at 711).
33
Court’s duty to determine the core issue of fair value on the appraisal date.” 179 “In
an appraisal proceeding, the burden to establish fair value by a preponderance of the
evidence rests on both the petitioner and the respondent.”180
B. DFC, Dell, and Recent Court of Chancery Appraisal Decisions
Over the past year, the Delaware Supreme Court has issued two decisions
providing important guidance for the Court of Chancery in appraisal proceedings:
DFC Global Corporation v. Muirfield Value Partners, L.P.181 and Dell, Inc. v.
Magnetar Global Event Driven Master Fund Ltd.182 Given their importance, a brief
discussion of each case is appropriate at the outset.
In DFC, petitioners sought appraisal of shares they held in a publicly traded
payday lending firm, DFC, that was purchased by a private equity firm.183 This court
attempted to determine the fair value of DFC’s shares by equally weighting three
measures of value: a discounted cash flow model, a comparable company analysis,
and the transaction price.184 The court gave equal weight to these three measures of
179
In re Appraisal of Metromedia Int’l Gp., Inc., 971 A.2d 893, 899-900 (Del. Ch. 2009)
(citation omitted).
180
Laidler, 2014 WL 1877536, at *6 (citing M.G. Bancorporation., Inc., v. Le Beau, 737
A.2d at 520).
181
172 A.3d 346 (Del. 2017).
182
177 A.3d 1 (Del. 2017).
183
DFC, 172 A.3d at 348.
184
In re Appraisal of DFC Glob. Corp., 2016 WL 3753123, at *1 (Del. Ch. July 8, 2016),
rev’d, DFC, 172 A.3d 346.
34
value because it found that each similarly suffered from limitations arising from the
tumultuous regulatory environment that was swirling around DFC during the period
leading up to its sale.185 The court’s analysis resulted in a fair value of DFC at
approximately 8% above the transaction price.186
The Delaware Supreme Court reversed and remanded to the trial court.187
Based on its own review of the trial record, the Supreme Court held that the Court
of Chancery’s decision to afford only one-third weight to the transaction price was
“not rationally supported by the record,”188 explaining:
Although there is no presumption in favor of the deal price . . .
economic principles suggest that the best evidence of fair value was the
deal price, as it resulted from an open process, informed by robust
public information, and easy access to deeper, non-public information,
in which many parties with an incentive to make a profit had a chance
to bid.189
185
See id. at *21 (“Each of these valuation methods suffers from different limitations that
arise out of the same source: the tumultuous environment in the time period leading up to
DFC’s sale. As described above, at the time of its sale, DFC was navigating turbulent
regulatory waters that imposed considerable uncertainty on the company’s future
profitability, even its viability. Some of its competitors faced similar challenges. The
potential outcome could have been dire, leaving DFC unable to operate its fundamental
businesses, or could have been very positive, leaving DFC’s competitors crippled and
allowing DFC to gain market dominance. Importantly, DFC was unable to chart its own
course; its fate rested largely in the hands of the multiple regulatory bodies that governed
it. Even by the time the transaction closed in June 2014, DFC’s regulatory circumstances
were still fluid.”).
186
DFC, 172 A.3d at 360-61.
187
Id. at 351.
188
Id. at 349.
189
Id.
35
The Supreme Court further explained that the purpose of appraisal “is not to make
sure that the petitioners get the highest conceivable value,” but rather “to make sure
that they 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.”190
According to the Supreme Court, “[m]arket prices are typically viewed
superior to other valuation techniques because, unlike, e.g., a single person’s
discounted cash flow model, the market price should distill the collective judgment
of the many based on all the publicly available information about a given company
and the value of its shares.”191 The “collective judgment of the many” may include
that of “equity analysts, equity buyers, debt analysts, [and] debt providers.” 192 The
Supreme Court cautioned that “[t]his, of course, is not to say that the market price is
always right, but that one should have little confidence she can be the special one
able to outwit the larger universe of equally avid capitalists with an incentive to reap
rewards by buying the asset if it is too cheaply priced.”193
Several months after deciding DFC, the Supreme Court reiterated the same
appraisal thesis in Dell, where the trial court had reached a determination of fair
190
Id. at 370-71.
191
Id. at 369-70.
192
Id. at 373.
193
Id. at 367.
36
value at approximately 28% above the transaction price.194 In Dell, the Supreme
Court found that the Court of Chancery erred by relying completely on a discounted
cash flow analysis and affording zero weight to market data, i.e., the stock price and
the deal price, because “the evidence suggests that the market for Dell’s shares was
actually efficient and, therefore, likely a possible proxy for fair value.”195 With
respect to the company’s stock price, the Supreme Court explained:
Dell’s stock traded on the NASDAQ under the ticker symbol DELL.
The Company’s market capitalization of more than $20 billion ranked
it in the top third of the S&P 500. Dell had a deep public float and was
actively traded as more than 5% of Dell’s shares were traded each week.
The stock had a bid-ask spread of approximately 0.08%. It was also
widely covered by equity analysts, and its share price quickly reflected
the market’s view on breaking developments.196
The Supreme Court thus held that “the record does not adequately support the Court
of Chancery’s conclusion that the market for Dell’s stock was inefficient and that a
valuation gap in the Company’s market trading price existed in advance of the
lengthy market check, an error that contributed to the trial court’s decision to
disregard the deal price.”197
194
In re Appraisal of Dell Inc., 2016 WL 3186538, at *1, 18 (Del. Ch. May 31, 2016),
rev’d, Dell, 177 A.3d 1.
195
Dell, 117 A.3d at 6.
196
Id. at 7.
197
Id. at 27.
37
With respect to the deal price, the Supreme Court said that “it is clear that
Dell’s sale process bore many of the same objective indicia of reliability” as the one
in DFC, which “included that ‘every logical buyer’ was canvassed, and all but the
buyer refused to pursue the company when given the opportunity; concerns about
the company’s long-term viability (and its long-term debt’s placement on negative
credit watch) prevented lenders from extending debt; and the company repeatedly
underperformed its projections.”198 Given leaks in the press that Dell was exploring
a sale, moreover, the world was put on notice of the possibility of a transaction so
that “any interested parties would have approached the Company before the go-shop
if serious about pursuing a deal.”199
Dell’s bankers canvassed the interest of 67 parties, including 20 possible
strategic acquirers during the go-shop, and the go-shop’s overall design was
relatively open and flexible.200 The special committee had the power to say “no,”
and it convinced the eventual buyer to raise its bid six times.201 The Supreme Court
thus found that “[n]othing in the record suggests that increased competition would
have produced a better result. [The financial advisor] also reasoned that any other
198
Id. at 28 (citing DFC, 172 A.3d at 374-77); see also id. (“[The financial advisor] did not
initially solicit the interest of strategic bidders because its analysis suggested none was
likely to make an offer.”).
199
Id.
200
Id. at 29.
201
Id. at 28.
38
financial sponsor would have bid in the same ballpark as [the buyer].”202
Significantly, the Court did not view a dearth of strategic buyer interest as negatively
impacting the reliability of the deal price, explaining:
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. The
Court of Chancery ignored an important reality: if a company is one
that no strategic buyer is interested in buying, it does not suggest a
higher value, but a lower one.203
In sum, the Supreme Court held that “[o]verall, the weight of evidence shows
that Dell’s deal price has heavy, if not overriding, probative value.”204 It
summarized its decision as follows:
In so holding, we are not saying that the market is always the best
indicator of value, or that it should always be granted some weight. We
only note that, when the evidence of market efficiency, fair play, low
barriers to entry, outreach to all logical buyers, and the chance for any
topping bidder to have the support of Mr. Dell’s own votes is so
compelling, then failure to give the resulting price heavy weight
because the trial judge believes there was mispricing missed by all the
Dell stockholders, analysts, and potential buyers abuses even the wide
discretion afforded the Court of Chancery in these difficult cases.205
202
Id.
203
Id. at 29 (citation omitted).
204
Id. at 30. See also id. at 23 (“In fact, the record as distilled by the trial court suggests
that the deal price deserved heavy, if not dispositive, weight.”).
205
Id. at 35.
39
Shortly after Dell was decided, the Court of Chancery rendered appraisal
decisions in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.206 and In
re Appraisal of AOL Inc.207
In Aruba, the court observed that the Supreme Court’s decisions in DFC and
Dell “endorse using the deal price in a third-party, arm’s-length transaction as
evidence of fair value” and “caution against relying on discounted cash flow
analyses prepared by adversarial experts when reliable market indicators are
available.”208 The court further observed that DFC and Dell “recognize that a deal
price may include synergies, and they endorse deriving an indication of fair value
by deducting synergies from the deal price.”209 Rather than hold that the deal price
less synergies represented fair value, however, the Aruba court determined that fair
value was “the unaffected market price” of petitioners’ shares, which was more than
30% below the transaction price.210 The court identified “two major shortcomings”
of its “deal-price-less-synergies figure” that supported this conclusion and explained
its rationale for using the “unaffected market price” as follows:
206
2018 WL 922139 (Del. Ch. Feb. 15, 2018), reargument denied, 2018 WL 2315943 (Del.
Ch. May 21, 2018).
207
2018 WL 1037450 (Del. Ch. Feb. 23, 2018).
208
2018 WL 922139 at *1-2 (citations omitted).
209
Id. at *2 (citation omitted).
210
Id. at *1, 4.
40
First, my deal-price-less-synergies figure is likely tainted by human
error. Estimating synergies requires exercises of human judgment
analogous to those involved in crafting a discounted cash flow
valuation. The Delaware Supreme Court’s preference for market
indications over discounted cash flow valuations counsels in favor of
preferring market indications over the similarly judgment-laden
exercise of backing out synergies.
Second, my deal-price-less-synergies figure continues to incorporate an
element of value derived from the merger itself: the value that the
acquirer creates by reducing agency costs. A buyer’s willingness to pay
a premium over the market price of a widely held firm reflects not only
the value of anticipated synergies but also the value created by reducing
agency costs. The petitioners are not entitled to share in either element
of value, because both arise from the accomplishment or expectation of
the merger. The synergy deduction compensates for the one element of
value arising from the merger, but a further downward adjustment
would be necessary to address the other.
Fortunately for a trial judge, once Delaware law has embraced a
traditional formulation of the efficient capital markets hypothesis, the
unaffected market price provides a direct route to the same endpoint, at
least for a company that is widely traded and lacks a controlling
stockholder. Adjusting down from the deal price reaches, indirectly,
the result that the market price already provides.211
In AOL, the court similarly construed DFC and Dell to mean that where
“transaction price represents an unhindered, informed, and competitive market
valuation, the trial judge must give particular and serious consideration to transaction
price as evidence of fair value” and that where “a transaction price is used to
determine fair value, synergies transferred to the sellers must be deducted.”212 In
211
Id. at *2-4 (internal citations, quotations, and alterations omitted).
212
2018 WL 1037450, at *1.
41
doing so, the court coined the phrase “Dell Compliant” to mean a transaction “where
(i) information was sufficiently disseminated to potential bidders, so that (ii) an
informed sale could take place, (iii) without undue impediments imposed by the deal
structure itself.”213 The court found that the sales process did not satisfy this standard
and ultimately determined the fair value of petitioners’ shares based on its own
discounted cash flow analysis ($48.70 per share), which was about 2.6% less than
the deal price ($50 per share).214
C. The Parties’ Contentions
Petitioners contend that the fair value of their shares is $84.65 per share—
approximately 51.6% over the deal price. Their sole support for this valuation is a
discounted cash flow model prepared by their expert, Bradford Cornell, Visiting
Professor of Financial Economics at the California Institute of Technology.215
Cornell also performed a multiples-based comparable company analysis “as a
reasonableness check” but gave it no weight in his valuation.216
213
Id. at *8.
214
Id. at *21. Just last week, the Court of Chancery similarly found in another case that
flaws in a sales process leading to a merger undermined the reliability of the merger price
as an indicator of fair value. Blueblade Capital Opportunities LLC v. Norcraft Cos., Inc.,
2018 WL 3602940, at *1-2 (Del. Ch. July 27, 2018).
215
JX0898.0094-95, 200.
216
JX0898.0098.
42
Respondent’s expert was Glenn Hubbard, the Dean and Russell L. Carson
Professor in Finance and Economics at the Graduate School of Business of Columbia
University, as well as Professor of Economics at Columbia University. He
concluded that the “best evidence of Solera’s value is the market-generated Merger
price [$55.85], adjusted for synergies [$1.90] to $53.95.”217 Hubbard also conducted
a valuation based on a discounted cash flow model, which resulted in a valuation of
$53.15 per share, but found the methodology to be less reliable in this instance.218
Hubbard further considered, as a “check,” Solera’s historical valuation multiples,
analysts’ stock price targets, and valuation multiples from comparable companies
and precedent transactions.219
This sharp divide of $31.50 per share between the experts’ DCF models is the
result of a number of disagreements regarding the proper inputs and methods to use
in the analysis. The most significant disagreements are explained later.
Throughout trial and post-trial briefing, respondent consistently maintained
that the best evidence of Solera’s value at the time of the Merger was the deal price
minus synergies. Seizing on the Aruba decision, respondent changed course during
217
Resp’t’s Post-Trial Opening Br. 1 (Dkt. 106); see also JX0894.0125-26.
218
JX0894.0126.
219
Id.
43
supplemental briefing, arguing that “[i]n light of recent cases, the best evidence of
Solera’s fair value is its unaffected stock price of $36.39 per share.”220
D. Determination of Solera’s Fair Value
I now turn to my own independent determination of the fair value of Solera’s
shares with the guidance from DFC and Dell in mind. Those decisions teach that
deal price is “the best evidence of fair value”221 when there was an “open process,”222
meaning that the process is characterized by “objective indicia of reliability.” 223
Such “indicia” include but, consistent with the mandate of the appraisal statute to
consider “all relevant factors,”224 are not limited to:
 “[R]obust public information,”225 comprised of the stock price of a company
with “a deep base of public shareholders, and highly active trading,”226 and
220
Resp’t’s Suppl. Post-Trial Br. 5 (Dkt. 123).
221
DFC, 172 A.3d at 349.
222
Id.
223
Dell, 177 A.3d at 28.
224
8 Del. C. § 262(h) (“In determining such fair value, the Court shall take into account all
relevant factors.”); see also DFC, 172 A.3d at 364 (affirming Golden Telecom and restating
that Ҥ 262(h) gives broad discretion to the Court of Chancery to determine the fair value
of the company’s shares, considering ‘all relevant factors’”).
225
DFC, 172 A.3d at 349.
226
Id. at 373.
44
the views of “equity analysts, equity buyers, debt analysts, debt providers and
others.”227
 “[E]asy access to deeper, non-public information,”228 where there is no
discrimination between potential buyers and cooperation from management
helps address any information asymmetries between potential buyers.229
 “[M]any parties with an incentive to make a profit had a chance to bid,”230
meaning that there was a “robust market check”231 with “outreach to all logical
buyers”232 and a go-shop characterized by “low barriers to entry”233 such that
there is a realistic possibility of a topping bid.
 A special committee, “composed of independent, experienced directors and
armed with that power to say ‘no,’”234 which is advised by competent legal
and financial advisors.
227
Id.
228
Id. at 349.
229
Dell, 177 A.3d at 32-34.
230
DFC, 172 A.3d at 349.
231
Id. at 366.
232
Dell, 177 A.3d at 35.
233
Id.
234
Id. at 28.
45
 “[N]o conflicts related to the transaction,”235 with the company purchased by
a third party in an arm’s length sale236 and “no hint of self-interest.”237
If the process was open, then “the deal price deserve[s] heavy, if not
dispositive, weight.”238 This is not to say that the market is always correct: “In some
cases, it may be that a single valuation metric is the most reliable evidence of fair
value and that giving weight to another factor will do nothing but distort that best
estimate. In other cases, it may be necessary to consider two or more factors.”239
Whichever route it takes, however, the Court of Chancery is required to “justify its
methodology (or methodologies) according to the facts of the case and relevant,
accepted financial principles.”240
1. The Deal Price Less Synergies Deserves Dispositive Weight
For the reasons explained below, I find that the Merger was the product of an
open process that, although not perfect, has the requisite objective indicia of
reliability emphasized in DFC and Dell. Thus, I conclude that the deal price, minus
synergies, is the best evidence of fair value and deserves dispositive weight in this
235
DFC, 172 A.3d at 373.
236
Id. at 349.
237
Id.
238
Dell, 177 A.3d at 23.
239
DFC, 172 A.3d at 388.
240
Dell, 177 A.3d at 22 (citation omitted).
46
case. My consideration of the evidence supporting this conclusion follows in three
parts focusing on (i) the opportunity many potential buyers had to bid, (ii) the Special
Committee’s role in actively negotiating an arm’s-length transaction, and (iii) the
evidence that the market for Solera’s stock was efficient and well-functioning.
a. Many Heterogeneous Potential Buyers Had a
Meaningful Opportunity to Bid
Appraisal decisions have placed weight on the deal price when the process
“involved a reasonable number of participants and created credible competition”
among bidders.241 Here, Solera reached out to nine large private equity funds in May
and June 2015 during the “test the waters” period.242 Then, after Thoma Bravo
submitted an indication of interest on July 19, 2015,243 the Special Committee
engaged with 18 potential bidders, 11 financial and 7 strategic firms.244 As Hubbard
testified, a “broad range of sophisticated buyers,” both financial and strategic, had
the chance to bid for Solera.245 Petitioners’ own expert offered no opinion “that more
bidders should have been contacted.”246
241
Merion Capital L.P. v. Lender Processing, 2016 WL 7324170, at *18 (Del. Ch. Dec.
16, 2016).
242
PTO ¶¶ 268, 271-78.
243
Id. ¶ 285.
244
Id. ¶¶ 295, 307-09.
245
Tr. 1029-31, 1036-37 (Hubbard).
246
Id. at 132 (Cornell).
47
Not only were the 18 potential bidders directly contacted and aware that
Solera could be acquired at the right price, but “the whole universe of potential
bidders was put on notice,”247 with increasing specificity over time, that the
Company was considering strategic alternatives.248 Aquila publicly presaged the
sales process during the Company’s earnings call on the May 6, 2015,249 and the
Company confirmed it had formed a Special Committee and was contemplating a
sale on August 20, 2015,250 the day after Bloomberg reported that Solera was
“exploring a sale that has attracted interest from private equity firms.”251
The press revealed not only the identities of potential buyers, but also the
approximate amounts of their bids. On August 20, 2015, for example, the Financial
Times reported that Vista was “considering a bid of $63 per share,” with Thoma
Bravo and Pamplona “considering separate bids for $62 per share.”252 On September
247
In re Appraisal of PetSmart, Inc., 2017 WL 2303599, at *28 (Del. Ch. May 26, 2017);
see also Tr. 1036 (Hubbard) (“Once a sales process became public in the Bloomberg story,
anyone who wished to bid on this asset could certainly have jumped in.”); Dell, 177 A.3d
at 28 (“[G]iven leaks that Dell was exploring strategic alternatives, record testimony
suggests that [Dell’s banker] presumed that any interested parties would have approached
the Company before the go-shop if serious about pursuing a deal.”).
248
Tr. 789 (Yarbrough) (“And then an upside of that is that everybody in the world knew
that we were looking at strategic alternatives at that point.”).
249
JX0214.0014-15.
250
PTO ¶ 306.
251
Id. ¶ 305.
252
JX0499.0002.
48
9, 2015, Bloomberg reported that Solera had received bids from Vista and Thoma
Bravo, and that the Company was “nearing a deal to sell itself for about $53 a
share.”253 Two days later, Reuters wrote that Vista and Thoma Bravo “had made
offers that failed to meet Solera’s valuation expectations,” and that the Company
was “trying to sell itself to another company”—IHS—“rather than an investment
firm.”254 The visible threat of other buyers made the sales process more
competitive.255 Given these public disclosures, any potential bidder knew in
essentially real time that Solera was exploring a sale and the approximate price levels
of the offers.256 Yet no one else ever seriously showed up to make a topping bid.
Petitioners point out that Advent and Providence were excluded from the
sales process, but whether either would have bid competitively is unknown.
Notably, when Advent and Providence expressed interest to Solera’s bankers,
neither provided any indication as to their ability to pay or their sources of financing;
rather, their introductory emails were perfunctory, suggesting to me that they were
253
JX0644.0001.
254
JX0651.0001.
255
Lender Processing, 2016 WL 7324170, at *18 (“Importantly, however, if bidders
perceive a sale process to be relatively open, then a credible threat of competition can be
as effective as actual competition.”).
256
Leaks of the amounts of the bids theoretically could have functioned to anchor the
bidding process, but Solera never publicly confirmed the validity of these reports and
petitioners have never argued that these leaks had any impact on the competitive dynamic
among bidders.
49
just “kicking the tires.” 257 There also is no evidence that either of them followed up
to express any further interest in Solera, either before or during the go-shop period.258
The fact that only one potential strategic bidder—IHS—made a bid does not
undermine the reliability of the sales process as a price discovery tool. That six
potential strategic acquirers declined to explore a transaction involving Solera shows
that six sophisticated, profit-motivated actors were offered the opportunity to
participate in a sales process to acquire the Company, yet none was interested
enough to even sign a non-disclosure agreement.259 As noted above, our Supreme
Court forcefully made this point in Dell:
The Court of Chancery stressed its view that the lack of competition
from a strategic buyer lowered the relevance of the deal price. But its
assessment that more bidders—both strategic and financial—should
have been involved assumes there was some party interested in
proceeding. Nothing in the record indicates that was the case. Fair
value entails at a minimum a price some buyer is willing to pay—not a
price at which no class of buyers in the market would pay. The Court
of Chancery ignored an important reality: if a company is one that no
257
See JX0497; JX0556.
258
As petitioners acknowledge, it also is doubtful whether including more financial
sponsors in the sales process (beyond the eleven that the Special Committee contacted)
would have meaningfully increased competition between the bidders. Pet’rs’ Post-Trial
Opening Br. 27-28 (Dkt. 105). See also Lender Processing, 2016 WL 7324170, at *17
(citation omitted) (“Financial sponsors . . . predominately use the same pricing models, the
same inputs, and the same value-creating techniques.”).
259
See DFC, 172 A.3d at 349 (“Any rational purchaser of a business should have a targeted
rate of return that justifies the substantial risks and costs of buying a business. That is true
for both strategic and financial buyers.”).
50
strategic buyer is interested in buying, it does not suggest a higher
value, but a lower one.260
The record shows, furthermore, that the mere presence in the sales process of IHS,
as a strategic bidder that was one of Solera’s key competitors, incentivized the
financial sponsors to put forth more competitive bids.261
The record also reflects that the Company provided all seriously interested
bidders access to deeper, non-public information after they signed non-disclosure
agreements. Although the Special Committee initially excluded IHS from the
process due to competitive concerns and doubts about its ability to finance a deal,262
once news of the sales process leaked out, the Special Committee worked promptly
to accommodate IHS. After IHS contacted Centerview on August 21, 2015 to
express interest,263 representatives of Solera and IHS held a management meeting by
August 26,264 and Solera provided IHS with the Hybrid Case Projections by August
260
177 A.3d at 29 (citing DFC, 172 A.3d at 375 n.154 (“[T]he absence of synergistic buyers
for a company is itself relevant to its value.”)).
261
See Tr. 973-74 (Sowul) (“And so that party, that IHS, that strategic, could, in theory,
pay a lot more than we could. And we knew they were interested. . . . So we would have
to pay as little as we can to maximize our returns but pay as much as we can so that we can
be competitive against a strategic.”); see also PetSmart, 2017 WL 2303599, at *29 (citation
omitted) (“Importantly, the evidence reveals that the private equity bidders did not know
who they were bidding against and whether or not they were competing with strategic
bidders. They had every incentive to put their best offer on the table.”).
262
Tr. 780-82 (Yarbrough).
263
PTO ¶ 307.
264
Id. ¶ 312.
51
27.265 And, after IHS’s CEO failed to attend the management meeting on August
26, Aquila traveled separately to meet him.266 IHS ultimately declined to make a
topping bid during the go-shop period, but it was not for lack of access to
information. Solera gave IHS nearly full access to the approximately 12,000-
document data room,267 and IHS specifically commented that it “was appreciative of
. . . the fact that [Solera] had provided equal access to information in order for IHS
to consider a bid.”268
Finally, I am not persuaded by petitioners’ argument that “[t]he sale of Solera
took place against the backdrop of extraordinary market volatility,” such that it “was
not the product of a well-functioning market.”269 According to petitioners, the court
should not rely on the Merger price as evidence of fair value because there was
macroeconomic volatility, “evidenced by the VIX spiking to an [sic] historic high
[on August 24, 2015] and sharp declines in global equity markets,”270 which
constrained potential bidders’ ability to finance and willingness to enter a deal.271 In
265
Id. ¶ 313.
266
Id. ¶ 312; Tr. 442-43 (Aquila).
267
PTO ¶ 351; Tr. 811 (Yarbrough).
268
PTO ¶ 354.
269
Pet’rs’ Post-Trial Opening Br. 28.
270
Id. at 28-29. VIX stands for the CBOE Volatility Index, which Buckberg described as
“a measure of market expectations of near-term volatility conveyed by S&P 500 stock
index option prices.” JX0895.0012 (Buckberg expert report).
271
Pet’rs’ Post-Trial Opening Br. 28-33.
52
support of this theory, petitioners called Dr. Elaine Buckberg as an expert on market
volatility.272
Buckberg testified that “investors are less willing to proceed with investments
in the face of substantial uncertainty and volatility,” and that when investors “do
decide to proceed with an investment in the face of such uncertainty, they would
expect to be compensated for the additional risk with a lower price.”273 In that vein,
Yarbrough, the Chairman of the Special Committee, candidly acknowledged that
market volatility impacted “the financing side, [it] was making it more difficult on
the debt financing side, and I think it also trickled over into the equity piece, too.”274
As an initial factual matter, it is questionable whether the level of market
volatility during the sales process was as extraordinary as petitioners suggest. On
August 24, 2015, the VIX closed at 40.74.275 Although petitioners describe this as
the VIX’s “highest point since January 2009” and “a level exceeded only six times
in the VIX’s twenty-seven year history,”276 that assertion appears to be an
exaggeration. As Hubbard testified, the August 24 closing VIX has been exceeded
272
Tr. 250 (Buckberg).
273
Id. at 253 (Buckberg).
274
Id. at 852 (Yarbrough).
275
JX0895.0026.
276
Pet’rs’ Post-Trial Opening Br. 15.
53
on 157 days in the VIX’s history.277 The August 24 spike also was relatively short-
lived. By August 28, just four days after closing at 40.74, the VIX had fallen back
to “about 26,” and had fallen further by September 11, the last trading day before
the Special Committee accepted Vista’s $55.85 bid.278 Including the spike on
August 24, the “average VIX was 19.4 in August 2015 and 24.4 in September, as
compared to an average of 19.7 since 1990.”279
Even accepting that market volatility impacted the sales process by increasing
financing costs and decreasing the price that financial sponsors were willing to pay,
petitioners’ argument is unavailing in my opinion for two reasons. First, Buckberg
made no attempt to quantify the impact of volatility on the Merger price.280 Second,
and more importantly, petitioners’ position ignores that they are only entitled to the
fair value of Solera’s stock at the time of the Merger, not to the best price
theoretically attainable had market conditions been the most seller-friendly.281 As
the Supreme Court pointedly explained in DFC:
277
Tr. 1042-43 (Hubbard).
278
Id. at 337-38 (Buckberg).
279
JX0899.0027.
280
See Tr. 295-96 (Buckberg); see also DFC, 172 A.3d at 350 (“[T]he fact that a financial
buyer may demand a certain rate of return on its investment in exchange for undertaking
the risk of an acquisition does not mean that the price it is willing to pay is not a meaningful
indication of fair value.”).
281
DFC, 172 A.3d at 370.
54
Capitalism is rough and ready, and 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; rather, it is to make sure that they 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.282
The record demonstrates that the Merger price “resulted from an open process,
informed by robust public information, and easy access to deeper, non-public
information, in which many parties with an incentive to make a profit had a chance
to bid.”283 Thus, consistent with our high court’s recent teachings, economic
principles suggest that the Merger price is what petitioners “deserve to receive” for
their shares.
b. A Fully-Empowered Special Committee Actively
Negotiated the Merger
Reliance on the deal price as evidence of fair value is strengthened when
independent representatives of a target company actively negotiate with potential
buyers and demonstrate a real willingness to reject inadequate bids.284 Here, the
record indicates that Solera’s Special Committee was both competent and effective.
282
Id. at 370-71.
283
Id. at 349.
284
See Dell, 177 A.3d at 28 (“The Committee, composed of independent, experienced
directors and armed with the power to say ‘no,’ persuaded [the bidder] to raise its bid six
times. Nothing in the record suggests that increased competition would have produced a
better result.”); PetSmart, 2017 WL 2303599, at *30 (“Had the auction not generated an
offer that the Board deemed too good to pass up, I am satisfied that the Board was ready to
pursue other initiatives as a standalone company.”); Lender Processing, 2016 WL
55
 On July 20, 2015, the day after receiving an indication of interest from Thoma
Bravo, the Board delegated to the Special Committee the “full power and authority
of the Board” to review, evaluate, negotiate, recommend, or reject any proposed
transaction or strategic alternative.285 The authorizing resolution further provided
that Solera could not do a deal without the Special Committee’s approval.286 All
three directors on the Special Committee were independent and experienced.287
Yarbrough, the Chairman of the Special Committee, testified knowledgeably and
forthrightly at trial about the process undertaken by the Special Committee, which
was aided by reputable legal and financial advisors.288 Petitioners tellingly make no
effort to impugn the motives of any of the members of the Special Committee.
The record also demonstrates that the Special Committee actively engaged
with the bidders, did not favor any one in particular, and expressed a willingness to
walk away from bids that it did not find satisfactory. The Special Committee twice
rejected bids that it considered inadequate—Vista’s bid at $53 per share289 and
7324170, at *19 (“Reinforcing the threat of competition from other parties was the realistic
possibility that the Company would reject the [] bid and pursue a different alternative.”).
285
JX0359.0002.
286
Id.
287
Tr. 754-56, 771-72 (Yarbrough).
288
Id. at 776-78 (Yarbrough).
289
PTO ¶ 334.
56
Thoma Bravo’s bid at $54 per share290—each time without the safety net of another
offer.291 The Special Committee’s initial decision to defer inviting IHS into the sales
process was reasonable, given its concerns about protecting Solera’s competitively
sensitive information and about IHS’s ability to finance a transaction.292 In any
event, that decision became academic after news of the sales process leaked in the
press, at which point the Company promptly engaged with IHS for over two weeks
before signing a deal with Vista. Critically, as a condition of that deal, the Special
Committee extracted the right to conduct a go-shop and for a reduced 1% termination
fee for IHS (as opposed to 3% for other bidders) to facilitate continued discussions
with IHS.293 And, for reasons explained below, the negotiations with all bidders
were not skewed by an artificially low stock price, since the market for Solera’s
stock before the Merger appears to have been efficient.294
290
Id. ¶ 338.
291
Tr. 806-07 (Yarbrough).
292
See PetSmart, 2017 WL 2303599, at *28 (emphasis in original) (“I note that the Board
considered inviting the most likely strategic partner . . . into the process, but made the
reasoned decision that, without a firm indication of interest from [the competitor], the risks
of providing [the company’s] most direct competitor with unfettered access to [the
company’s] well-stocked data room outweighed any potential reward. Nevertheless, the
evidence revealed that the Board held the door open for [the competitor] to join the auction
if it expressed serious interest in making a bid.”).
293
PTO ¶¶ 325, 339, 350.
294
See infra Section III.D.1.c.
57
Finally, the evidence shows that the Special Committee made a thoughtful,
reasoned decision to accept Vista’s “last and final” offer at $55.85 after countering
with $56 and being rejected.295 Before the Special Committee did so, Centerview
counseled the Special Committee that “[i]t is uncertain whether extending the
process will result in higher and fully financed offers, or will lead to further
deterioration in Vista’s bid” and that the “Vista bid can act as a pricing floor while
IHS is given a further opportunity to bid at a reduced termination fee pursuant to the
go-shop negotiated by the Committee.”296 As Yarbrough testified, with that advice
in mind, the Special Committee unanimously decided to accept Vista’s offer after
comparing it to the Company’s stand-alone prospects:
We then asked for Centerview to go through a presentation analysis of
[Vista’s bid], with the preliminary steps to their fairness opinion. And
then we ultimately had a vote on it, discussed stand-alone, decided that
we preferred the 55.85 and moving forward with an all-cash, riskless
deal. And so we had a unanimous vote on the special committee, and
then we had a board meeting shortly thereafter where Centerview again
presented to the board. We made our recommendation to the board and
then the board unanimously accepted the recommendation.297
In response to this evidence, petitioners advance essentially two arguments
challenging the integrity and quality of the sales process. I address each in turn.
295
Tr. 807-08 (Yarbrough).
296
JX0633.0013.
297
Tr. 807-08 (Yarbrough).
58
Petitioners’ primary challenge is that Aquila’s conflicts of interest tainted the
sales process through meetings he (with Baron’s assistance) held with private equity
firms before, and on one notable occasion after, the Special Committee was formed.
Although Solera’s Board could have done a better job of monitoring Aquila and his
interactions with potential buyers, particularly after the Special Committee was in
place, those interactions did not compromise the integrity or effectiveness of the
sales process in my opinion.
The reality is that Aquila’s participation in a transaction was a prerequisite for
a financial sponsor to do a deal. As petitioners put it, “Aquila is Solera.”298
Consistent with that reality, all of the private equity firms that later submitted bids
made clear that those bids depended on Aquila continuing to lead the Company.299
In other words, a go-private transaction never would have been a possibility without
buyers becoming personally acquainted and comfortable with Aquila. Thus, Aquila
engaging in one-on-one conversations with private equity firms before the Special
Committee was formed had the utility of gauging interest in the Company to see if
298
Pet’rs’ Post-Trial Opening Br. 4 (emphasis in original).
299
JX0340.0003 (“We are contemplating this deal solely in the context of being able to
partner with Tony Aquila and his management team.”) (Thoma Bravo); JX0464.0005 (“We
have been impressed by the high caliber of the management team we have met, and look
forward to forming a successful and productive partnership with them and the other
members of the Solera management team.”) (Vista); JX0464.0008 (“Our team is ecstatic
about the opportunity to partner with Tony and other members of senior management.”)
(Pamplona).
59
undertaking a formal sales process made sense. Critically, there is no indication in
the record that any of those contacts predetermined or undermined the process when
the Special Committee took charge.
That said, once the Company had received an indication of interest and put
the Special Committee in place, the Special Committee should have monitored
Aquila’s contacts with potential bidders more carefully. Petitioners justifiably
criticize Aquila’s private two-hour meeting with Vista in August, shortly after which
Vista began to model a larger option pool for post-Merger Solera executives.300
Although Aquila and Sowul (a principal at Vista) both testified that compensation
was not discussed during that meeting or at any time before the deal with Vista was
signed301—and there is no direct evidence that it was—the timing is certainly
suspicious and casts doubt on whether Aquila abided by the “Rules of the Road”
advice the Special Committee’s counsel provided, i.e., to refrain from discussing
post-Merger employment and compensation during the sales process.302 If best
practices had been followed, a representative of the Special Committee would have
accompanied Aquila to the August meeting with Vista as a precaution.303
300
JX0525; JX0541.
301
Tr. 452 (Aquila), 971-73 (Sowul).
302
Tr. 782-83 (Yarbrough); JX0380.0003-05.
303
See In re Lear Corp. S’holder Litig., 926 A.2d 94, 117 (Del. Ch. 2007) (Strine, V.C.)
(“I believe it would have been preferable for the Special Committee to have had its
chairman or, at the very least, its banker participate with [the CEO] in negotiations with
60
Even if it is assumed that compensation discussions did occur during this
meeting, nothing in the record indicates that any of Aquila’s (or Baron’s) actions
before or during the sales process compromised or undermined the Special
Committee’s ability to negotiate a deal.304 The record is devoid of any evidence, for
example, that Aquila participated in price discussions with any of the bidders or
influenced the outcome of a competitive sales process. Indeed, petitioners do not
contend that Aquila ever discussed price with the Special Committee or any bidder,
nor do they contend that he played any role in the deliberations or decision-making
process of the Special Committee more generally.
Further, the record does not show that structural issues inhibited the
effectiveness of the go-shop.305 To the contrary, IHS indicated that it appreciated
that the Company was transparent and facilitated its diligence. There also was a
lower termination fee if IHS submitted a topping bid. In short, IHS had a realistic
pathway to success,306 but it ultimately decided not to submit a topping bid.
[the buyer]. By that means, there would be more assurance that [the CEO] would take a
tough line and avoid inappropriate discussions that would taint the process.”).
304
I view Baron’s statement in an email to his colleagues at Rothschild that “we were the
architects with the CEO from the beginning as to how to engineer the process from start to
finish” to be puffery. The email completely ignores Centerview’s role in the sales process,
and Baron’s statement that he is “excited to . . . market the heck out of this for future
business” betrays his motivation for exaggerating his involvement in the transaction.
Notably, three recipients of Baron’s email were his superiors at Rothschild. JX0670.0002.
305
Dell, 177 A.3d at 31-32.
306
Id.
61
As a secondary matter, petitioners advance a one-paragraph argument that the
Merger was a de facto MBO (management buyout) because the Special Committee
“knew” that if Solera was to be sold, it was going to be sold to a private equity firm,
and all the private equity firms made clear that they “only wanted Solera if Aquila
was part of the deal.”307 Petitioners thus contend that the Merger warrants
“heightened scrutiny.” 308 This argument fails for essentially two reasons.
First, contrary to petitioners’ characterization of the transaction, the Merger
did not have the requisite characteristics of an MBO. Petitioners’ own expert
(Cornell) agreed that the common definition of an MBO is a transaction “where,
when it was negotiated, senior management was a participant in the transaction as
an acquirer,” but then conceded that the Merger was not an MBO because “it was
not a joint purchase between management and another party.”309 During the sales
process, Aquila did not have an agreement with Vista or any other bidder to
participate as a buyer in a particular transaction.310 To the contrary, he expressed a
willingness to invest $15 million in a transaction with any of the potential buyers,
307
Pet’rs’ Post-Trial Opening Br. 26.
308
Id. at 27.
309
JX0902.0005; see also Tr. 148-49 (Cornell).
310
JX0899.0011.
62
not just Vista.311 Further, Aquila was a not an “acquirer” in the Merger312 because,
before the transaction, Aquila’s holdings at the $55.85 per share were worth
approximately $55 million,313 and after the Merger, Aquila invested $45 million into
the post-Merger company.314 In short, as Cornell admitted, the Merger was not even
“similar to an MBO.”315
Second, petitioners contend that MBOs should be subject to “heightened
scrutiny” but fail to explain why. As the Supreme Court stated in Dell, even though
there may be “theoretical characteristics” of an MBO that could “detract[] from the
reliability of the deal price,”316 the deal price that results from an MBO is not
inherently suspect or unreliable per se.317 Here, to repeat, the Special Committee
had the full authority to control the sales process, and exercised that authority by
deciding which bidders to contact, how to respond to bids, and ultimately whether
to approve the Merger.
311
Tr. 589 (Aquila).
312
Tr. 1034 (Hubbard) (“Q. Was Mr. Aquila a net buyer in this transaction? A. Not the
way economists would use that term, no. Q. And how do you understand that term? A.
Actually, the economic definition is pretty much as the plain English. It would mean
contributing new cash as a net buyer. That did not happen.”).
313
JX0899.0009.
314
PTO ¶¶ 382-387.
315
Tr. 148-49 (Cornell).
316
Dell, 177 A.3d at 31.
317
See id. at 6 (noting that the features of an MBO transaction that may render the deal
price unreliable “were largely absent” in the Dell MBO).
63
c. The Equity and Debt Markets Corroborate that the
Best Evidence of Solera’s Fair Value was the Merger
Price
In DFC, the Supreme Court endorsed the economic proposition that the “price
at which [a company’s] shares trade is informative of fair value” in an appraisal
action when “the company had no conflicts related to the transaction, a deep base of
public shareholders, and highly active trading,” because “that value reflects the
judgments of many stockholders about the company’s future prospects, based on
public filings, industry information, and research conducted by equity analysts.”318
The Court in Dell reiterated the same point, explaining that in an efficient market “a
mass of investors quickly digests all publicly available information about a
company, and in trading the company’s stock, recalibrates its price to reflect the
market’s adjusted, consensus valuation of the company.”319 My inference from
DFC and Dell is that the Supreme Court has emphasized this point because the price
318
DFC, 172 A.3d at 373.
319
Dell, 177 A.3d at 25 (citation omitted); see also JX0894.0034 (Hubbard expert report)
(“In a well-functioning stock market, a company’s market price quickly reflects publicly
available information. A market price balances investors’ willingness to buy and sell the
shares in light of this information, and thus represents their consensus view as to the value
of the equity of the company. As a result, finance academics view market prices as an
important indicator of intrinsic value absent evidence of frictions that impede market
efficiency.”).
64
of a widely dispersed stock traded in an efficient market may provide an informative
lower bound in negotiations between parties in a potential sale of control.320
Here, the record supports the conclusion that the market for Solera’s stock
was efficient and well-functioning, since: (i) Solera’s market capitalization of about
$3.5 billion placed it in the middle of firms in the S&P MidCap 400 index;321 (ii) the
stock was actively traded on the New York Stock Exchange, as indicated by weekly
trading volume of 4% of shares outstanding;322 (iii) the stock had a relative bid-ask
spread of approximately 0.06%, in line with a number of S&P MidCap 400 and S&P
500 companies;323 (iv) the Company’s short interest ratio indicated that, on average,
investors who had sold the stock short would be able to cover their positions in about
two days, which was faster than about three-quarters of S&P 400 MidCap companies
and about half of S&P 500 companies;324 (v) at least eleven equity analysts covered
320
See Dell, 177 A.3d at 27 n.131 (“This is evident as the court observed that the stock
price anchors negotiations and, if the stock price is low, the deal price necessarily might be
low.”).
321
JX0894.0035. The S&P MidCap 400 contains 400 firms that are generally smaller than
those in the S&P 500 but “capture a period in the typical enterprise life cycle in which
firms have successfully navigated the challenges inherent to small companies, such as
raising initial capital and managing early growth.” Mid Cap: A Sweet Spot for
Performance, S&P DOW JONES INDICES 1 (September 2015),
https://us.spindices.com/documents/education/practice-essentials-mid-cap-a-sweet-spot-
for-performance.pdf.
322
JX0894.0035, 137.
323
Id.
324
Id.
65
Solera during the year before the Merger; 325 and (vi) Solera’s stock price moved
sharply as rumor of the sales process leaked into the market.326
The proxy statement for the Merger identified August 3, 2015 as the
unaffected date for purposes of calculating a premium. 327 As of that date, a well-
informed, liquid trading market determined, before news of a potential transaction
leaked into the market, that the Company’s stock was worth $36.39.328 Significantly,
research analysts’ price targets had been declining in the months before news of a
potential transaction, and these targets remained below the deal price through
announcement of the Merger.329 As Hubbard put it, the takeaway from these two
objective indications of value is that “market participants playing with real money,
looking at the information that they have, don’t think that the stock is worth $55.85
during that period.”330
325
JX0894.0035.
326
See JX0842-43 (observing that Solera’s stock rose more than ten percent on multiple
times its normal daily trading volume on August 4 and 5, 2015, and concluding that “this
trading activity is consistent with trading on rumors of a transaction”).
327
PTO ¶ 363.
328
Id. ¶ 364 & Ex. A.
329
Tr. 1052-53 (Hubbard); JX0894.0047-48.
330
Tr. 1053 (Hubbard). See also DFC, 172 A.3d at 369 (quoting Applebaum v. Avaya,
Inc., 812 A.2d 880, 889-90 (Del. 2002)) (“[A] well-informed, liquid trading market will
provide a measure of fair value superior to any estimate the court could impose.”).
66
Despite these market realities, petitioners contend that Solera was worth
$84.65 per share—more than double its unaffected stock price of $36.39 per share
as of August 3.331 Although one would expect a control block to trade at a higher
price than a minority block,332 petitioners are unable to explain such a gaping
disconnect between Solera’s unaffected market price and the Merger price.
Petitioners argue that the pre-Merger stock price was artificially low because
the market for Solera was not efficient due to asymmetric information. More
specifically, petitioners contend that Solera was “poised to ‘harvest returns’” 333 from
acquisitions it made between 2012 and 2015, but management struggled to disclose
sufficient information, due to competitive concerns, to allow the market to value the
Company properly.334 This argument ignores evidence that many equity investors
and analysts actually did understand Solera’s long-term plans, with some approving
of management’s strategy but others not buying the story.335 Consider the following
331
Pet’rs’ Post-Trial Opening Br. 4.
332
See, e.g., DFC, 172 A.3d at 369 n.117 (“One of the reasons, of course, why a control
block trades at a different price than a minority block is because a controller can determine
key issues like dividend policy.”); IRA Tr. v. Crane, 2017 WL 7053964, at *7 n.54 (Del.
Ch. Dec. 11, 2017) (“That control of a corporation has value is well-accepted.”).
333
Pet’rs’ Post-Trial Opening Br. 6.
334
See, e.g., PTO ¶¶ 243-44.
335
Dell, 177 A.3d at 26-27; see also id. at 24 (“[A]nalysts scrutinized [the company’s]
long-range outlook when evaluating the Company and setting price targets, and the market
was capable of accounting for [the company’s] recent mergers and acquisitions and their
prospects in its valuation of the Company.”).
67
varied perspectives that analysts (and one of the petitioners) expressed within just a
few months before news of the sales process leaked to the press:
Positive Negative
“After years of M&A, [Solera] is “Solera’s story remains more complicated
confident the various pieces it has been than most investors would like, we see
putting together are finally starting to more downside risk to estimates in the
make more sense. More financial short term, and there are some valid
disclosures (started); a renewed IR push concerns and criticisms of the story
and new branding efforts . . . are all efforts presently.” (William Blair, July 13,
to help investors better understand Tony’s 2015)339
vision.” (Barclays, April 13, 2015)336
“Since hitting a peak equity value in early
“While we acknowledge some shareholder calendar year 2014 at $4.8 billion, the
angst over share price performance negative effect of sub-par returns from
relative to the market and the group, we acquisitions, increased leverage and
believe there is inherent franchise value in growth in interest expense has reduced
this collection of assets and businesses. shareholder value by over $2.2 billion to
Tony Aquila, Solera’s CEO, should be $2.6 billion. . . . A frequent complaint
instrumental in optimizing its competitive from investors regarding a potential
position and generating shareholder value. investment in [Solera] is a lack of
As a result, [Solera] remains an attractive confidence in both management and the
risk/reward, in our view, for patient Board of Directors.” (Barrington
investors whose risk profile can tolerate Research, July 20, 2015)340
elevated financial leverage.” (SunTrust
Robinson Humphrey, July 17, 2015)337 “With significantly higher leverage, down
earnings over the next 12 months, and
“We appreciate Solera’s strategy of recent inconsistent performance, we are
moving into tangential markets that align stepping to the sidelines until we get
with the company’s core business while increased clarity into either accelerating
still providing diversification away from revenue growth or a return to sustainable
auto claims. Recent acquisitions and earnings growth.” (Piper Jaffray, July 20,
investments show progress on 2015)341
336
JX0202.0001.
337
JX0328.0001.
339
JX0312.0002.
340
JX0348.0002.
341
JX0344.0002.
68
Positive Negative
management’s long-term strategy to The Fir Tree petitioners “decide[d] to
capture more of a household’s auto and throw in the towel on [Solera]” and sold
insurance related decisions by leveraging their shares in mid-2015 because, in part,
[Solera’s] existing assets into attractive the Company was “taking margins down,”
adjacencies and horizontal products.” (J.P. “will pay anything for an asset they like,”
Morgan, July 21, 2015)338 and leverage reached “5.5x-6x” after its
most recent acquisition. (Fir Tree email to
Bloomberg, July 15, 2015)342
These reviews suggest that there was disagreement in the financial community
over Solera’s strategy, not that the market as a whole did not understand it. Given
the many factors indicating that the market for the Company’s stock was efficient,
the market presumably would have digested all of these sentiments and incorporated
them into Solera’s stock price. Yet Solera’s pre-Merger unaffected stock price as of
August 3 was still only $36.39.
The debt market further corroborates that, given its operative reality, Solera
was not as valuable as petitioners contend. Petitioners do not dispute that the debt
market had run dry for Solera as a public company as of the Merger. With its
leverage already rising, the Company made an acquisition in November 2014,
financing the deal with a $400 million notes offering.343 Moody’s promptly
downgraded the Company’s credit rating from Ba2 to Ba3.344 In July 2015, after
338
JX0350.0002.
342
JX0319.0001.
343
Tr. 393-96 (Aquila).
344
JX0140.0003.
69
Solera issued $850 million of senior unsecured notes to finance another acquisition
and retire outstanding debt, Moody’s downgraded Solera again, from Ba3 to B1.345
Further exemplifying Solera’s challenges in taking on additional debt to finance
acquisitions, the July 2015 debt offering fell short, and Goldman Sachs had to absorb
$11.5 million of notes that it was unable to syndicate into the market.346
By July 2015, “despite the lucrative fees that investment bankers make from
refinancing a large tranche of public company debt and syndicating a new issue,”347
Solera had run “out of runway” in the debt market.348 “In other words, participants
in the public bond markets weren’t convinced they would get their money back if
they gave it to [Solera], and [Solera] was not offering enough interest to compensate
investors for the risk they saw in the company.”349 Petitioners’ own expert admitted
that the acquisition debt market for Solera was tight at equity values greater than the
Merger price.350 In short, the debt market, like many equity market participants,
345
JX0310.0004.
346
Tr. 413-14 (Aquila); JX0318.0001.
347
DFC, 172 A.3d at 355.
348
Tr. 399-401 (Aquila).
349
DFC, 172 A.3d at 374.
350
See Tr. 114 (Cornell) (“[I]n this market condition, for whatever reason, there wasn’t a
lot of cheap debt available, and that limited what a private equity firm’s going to be able
to pay and satisfy itself and its shareholders.”); see also DFC, 172 A.3d at 375 (“As is the
case with refinancings, so too do banks like to lend and syndicate the acquisition debt for
an M&A transaction if they can get it done. That is how they make big profits. That
lenders would not finance a buyout of DFC at a higher valuation logically signals weakness
in its future prospects, not that debt providers and equity buyers were all mistaken. So did
70
viewed Solera skeptically and perceived its growth-by-acquisition strategy as laden
with risk.351
*****
To summarize, the Merger was the product of a two-month outreach to large
private equity firms in May and June, a six-week auction by an independent Special
Committee that solicited eleven private equity and seven strategic firms, and public
announcements that put a “For Sale” sign on the Company. The Special Committee
had competent advisors and the power to say no to an underpriced bid, which it did
twice. The Merger price of $55.85 proved to be a market-clearing price through a
28-day go-shop and a three-month window-shop. No one was willing to pay more.
Thus, as this court once put it, the “logical explanation . . . is self-evident”: Solera
“was not worth more” than $55.85 per share.352
the fact that DFC’s already non-investment grade debt suffered a downgrade in 2013 and
then was put on a negative credit watch in 2014.”).
351
See DFC, 172 A.3d at 349 (“Like any factor relevant to a company’s future
performance, the market’s collective judgment of the effect of . . . risk may turn out to be
wrong, but established corporate finance theories suggest that the collective judgment of
the many is more likely to be accurate than any individual’s guess. When the collective
judgment involved, as it did here, not just the views of the company stockholders, but also
those of potential buyers of the entire company and those of the company’s debtholders
with a self-interest in evaluating the regulatory risks facing the company, there is more, not
less, reason to give weight to the market’s view of an important factor.”).
352
Highfields Capital. Ltd. v. AXA Fin., Inc., 939 A.2d 34, 60 (Del. Ch. 2007).
71
2. Merger Fees Should not be Added to the Deal Price
Petitioners argue that, “if deal price is an indicator of fair value,” the court
should add nearly $450 million—or $6.51 per share—to the Merger price.
According to petitioners, this is the amount of transaction costs Vista incurred in
connection with the Merger for buyer fees and expenses, seller fees, debt fees, and
an “early participation premium” to retire debt in connection with the transaction.353
Petitioners offer no precedent or other legal support for this request. They simply
contend that these costs should be added because the court’s “focus should be on
what Vista was actually willing to spend to buy the Company.” 354 This argument
fails for two independent reasons.
First, petitioners’ argument cannot be squared with the definition of “fair
value” in the appraisal context that our Supreme Court recently articulated in DFC
when explaining the purpose of appraisal:
[F]air value is just that, “fair.” It does not mean the highest possible
price that a company might have sold for had Warren Buffet negotiated
for it on his best day and the Lenape who sold Manhattan on their worst.
. . . [T]he purpose of 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; rather, it is to make
sure that they 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.355
353
Pet’rs’ Post-Trial Opening Br. 34-35.
354
Id. at 35.
355
DFC, 172 A.3d at 370-71 (emphasis added).
72
The Merger price was the result of arm’s-length bargaining between the Special
Committee and Vista. Perhaps Vista would have been willing to pay more than
$55.85 for the Company, but that is irrelevant to the court’s independent
determination of fair value as that term was explained in DFC.356
Second, policy concerns counsel against adding transaction fees to the deal
price in determining Solera’s fair value. If stockholders received payment for
transaction fees in appraisal proceedings, then it would compel rational stockholders
in even the most pristine deal processes to seek appraisal to capture their share of
the transaction costs (plus interest) that otherwise would be unavailable to them in
any non-litigated arm’s-length merger. This incentive would undermine the
underlying purpose of appraisal proceedings as explained in DFC.
3. Deduction for Merger Synergies
The appraisal statute provides 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.”357 Thus, the “appraisal award excludes synergies in
356
The Supreme Court also made clear that a deal price arrived at by using an LBO model
can be the most reliable evidence of fair value of a target company. See DFC, 172 A.3d at
350 (“[T]he fact that a financial buyer may demand a certain rate of return on its investment
in exchange for undertaking the risk of an acquisition does not mean that the price it is
willing to pay is not a meaningful indication of fair value.”).
357
8 Del. C. §262(h).
73
accordance with the mandate of Delaware jurisprudence that the subject company in
an appraisal proceeding be valued as a going concern.”358
Synergies do not only arise in the strategic-buyer context. It is recognized
that synergies may exist when a financial sponsor is an acquirer.359 As of trial, Vista
owned 40 software businesses, three of which (EagleView, Omnitracs, and
DealerSocket) Vista believed had significant “touch points” with Solera from which
synergies could be realized.360
Vista modeled out four different categories of synergies in its financial
analysis of the Company during the bidding process.361 Respondent’s expert
presented evidence at trial concerning three of those categories: portfolio company
revenue synergies, private company cost savings, and the tax benefits of incremental
leverage.362 In total, he calculated total expected synergies of $6.12 per share.363
From there, respondent’s expert made a “conservative” estimate that 31% of the
358
Union Ill. 1995 Inv. Ltd. P’ship v. Union Fin. Gp., Ltd., 847 A.2d, 340, 343 (Del. Ch.
2004) (Strine, V.C).
359
See, e.g., PetSmart, 2017 WL 2303599, at *31 n.364 (citation omitted) (noting
“synergies financial buyers may have with target firms arising from other companies in
their portfolio”); Lender Processing, 2016 WL 7324170, at *17 n.14 (noting that “a source
of private value” to a financial buyer is “a synergistic portfolio company”).
360
Tr. 908-16 (Sowul); JX0613.0033.
361
Id. at 908-09 (Sowul).
362
Id. at 1045-48 (Hubbard); JX0894.0066-71.
363
Id. at 1045-46 (Hubbard); JX0894.0070-71.
74
value of the synergies—equating to $1.90 per share—remained with the seller by
using the lowest percentage identified in one of three empirical studies.364
I find this evidence, which petitioners made no effort to rebut, convincing.365
Deducting $1.90 from the Merger price of $55.85 leads to a value of $53.95 per
share. For all the reasons discussed above, and based on my lack of confidence in
the DCF models advanced by the parties (as discussed next), I conclude that this
amount ($53.95 per share) is the best evidence of the fair value of petitioners’ shares
of Solera at the time of the Merger.
4. The Dueling Discounted Cash Flow Models
Consistent with the court’s duty to consider “all relevant factors” in
determining Solera’s fair value,366 I consider next the DCF models the parties’
364
Tr. 1047-48 (Hubbard); JX0894.0070-71. This 31% figure is the “median portion of
synergies shared with the seller” as determined by a 2013 Boston Consulting Group study
of 365 deals. JX0894.0070-71. Although the appraisal statute mandates excision of
synergies specific to the merger at issue, this court has used general estimates of the
percentage of synergies shared, as provided by experts, to derive appraisal value from deal
price. See Union Ill., 847 A.2d at 353 & n.26 (relying on a “reasonable synergy discount”
propounded by a party’s expert).
365
See DFC, 172 A.3d at 371 (“Part of why the synergy excision issue can be important is
that 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.”).
366
See 8 Del. C. § 262(h) (“In determining such fair value, the Court shall take into account
all relevant factors.”); DFC, 172 A.3d at 388 (“But, in keeping with our refusal to establish
a ‘presumption’ in favor of the deal price because of the statute’s broad mandate, we also
conclude that the Court of Chancery 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.”).
75
experts prepared. Compared with a market-generated transaction price, “the use of
alternative valuation techniques like a DCF analysis is necessarily a second-best
method to derive value.”367
In this action, both parties’ experts created “three-stage” DCF models
consisting of (i) the five-year Hybrid Case Projections (fiscal years 2016 through
2020), (ii) a five-year transition period (fiscal years 2021 through 2025), and (iii) a
terminal period beginning in fiscal year 2026.368 The outcome of these models
nonetheless resulted in widely divergent DCF valuations—$84.65 per share for
petitioners, and $53.15 per share for respondent.
As a preliminary matter, I find comfort that respondent’s DCF analysis is in
the same ballpark as the deal price less estimated synergies.369 On the other side of
the ledger, given my conclusions about the quality of the sales process for Solera,
petitioners’ DCF analysis strikes me as facially unbelievable as it suggests that, in a
transaction with an equity value of approximately $3.85 billion at the deal price,370
potential buyers left almost $2 billion on the table by not outbidding Vista. Our
367
Union Ill., 847 A.2d at 359.
368
JX0894.0075 (Hubbard); JX0898.0098, 0124 (Cornell).
369
See S. Muio & Co. LLC v. Hallmark Entm’t Invs. Co., 2011 WL 863007, at *20 (Del.
Ch. Mar. 9, 2011) (quoting Hanover Direct, Inc. S’holders Litig., 2010 WL 3959399, at
*2-3 (Del. Ch. Sept. 24, 2010)) (noting that the court “gives more credit and weight to
experts who apply ‘multiple valuation techniques that support one another’s conclusions’
and that ‘serve to cross-check one another’s results.’”), aff’d, 35 A.3d 419 (Del. 2011).
370
JX0835.
76
Supreme Court has acknowledged that a DCF that results in a valuation so
substantially below the transaction price may indeed lack “credibility on its face.”371
“Delaware courts must remain mindful that ‘the DCF method is [] subject to
manipulation and guesswork [and that] the valuation results that it generates in the
setting of a litigation [can be] volatile.”372 “[E]ven slight differences in [a DCF’s]
inputs can produce large valuation gaps.”373 A number of factors explain the gaping
difference between petitioners’ and respondent’s DCF analyses, and, notably, many
of these disagreements relate to how to value Solera into perpetuity. Such
assumptions about Solera’s business in the terminal period, i.e., ten-plus years into
the future, are unavoidably tinged with a heavy dose of speculation.
371
See Dell, 177 A.3d at 36 (citations omitted) (“As is common in appraisal proceedings,
each party—petitioners and the Company—enlisted highly paid, well-credentialed experts
to produce DCF valuations. But their valuation landed galaxies apart—diverging by
approximately $28 billion, or 126%. . . . The Court of Chancery recognized that ‘[t]his is
a recurring problem,’ and even believed the ‘market data is sufficient to exclude the
possibility, advocated by the petitioners’ expert, that the Merger undervalued the Company
by $23 billion.’ Thus, the trial court found petitioners’ valuation lacks credibility on its
face. We agree.”); PetSmart, Inc., 2017 WL 2303599, at *2 (“Moreover, the evidence does
not reveal any confounding factors that would have caused the massive market failure, to
the tune of $4.5 billion (a 45% discrepancy).”); Highfields, 939 A.2d at 52 (citation
omitted) (disregarding analysis that was “markedly disparate from market price data for
[the company’s] stock and other independent indicia of value”).
372
PetSmart, 2017 WL 2303599, at *40 n.439 (quoting William T. Allen, Securities
Markets as Social Products: The Pretty Efficient Capital Market Hypothesis, 28 J. CORP.
L. 551, 560 (2003)).
373
Dell, 177 A.3d at 38.
77
I highlight below some of the major areas of disagreement between the parties.
This discussion is meant to be illustrative and not exhaustive. All of these
disagreements predictably result in a higher asserted valuation by petitioners and a
lower asserted valuation by respondent.
The most significant point of contention in the DCF models concerns the
estimated amount of cash that Solera would need to reinvest over the terminal
period.374 This “plowback” rate is the percentage of after-tax operating profits that
the Company would need to invest to grow at a specified rate into perpetuity.375
Using the method identified in “many leading valuation texts including Damodaran
(2012) and Koller, Goedhart and Wessels (2015),” which petitioners’ expert has
called the “traditional model,”376 respondent argues that the required reinvestment
rate is 37.1%.377 Petitioners, on the other hand, argue that the inflation plowback
formula published in articles written by Bradley and Jarrell should be used, resulting
in a required reinvestment rate of only 16.4%.378 According to petitioners, holding
374
JX0899.0004.
375
JX0899.0045.
376
JX1419.0002, 0007.
377
JX0894.0082; Tr. 1067-68, 1189 (Hubbard).
378
JX0900.0027; Tr. 64-66, 77-81 (Cornell). Respondent not only argues that it is incorrect
to apply Bradley/Jarrell, but that petitioners also misapplied the formula. Specifically,
respondent argues that petitioners erred by applying their Bradley/Jarrell-derived
investment rate to net operating profit after tax (NOPAT) instead of net cash flow (NCF).
According to respondent, this mistake resulted in improperly assuming away Solera’s
78
all else constant in respondent’s DCF analysis, the difference between using these
two reinvestment rates yields a huge $23.90 per share difference in Solera’s
valuation.379
Another notable area of disagreement in the DCF models is Solera’s return on
invested capital (“ROIC”) in the terminal period. Respondent assumed, consistent
with “a theory this court has repeatedly cited with approval,”380 that in the long run
the present value of Solera’s growth opportunities would disappear due to increased
competition, so the Company’s ROIC would gradually converge with its weighted
average costs of capital (“WACC”).381 Petitioners disagree with applying the
convergence model to Solera. They contend that the Company possesses “moats”
around its business, such as barriers to entry, competitive advantages, and market
required maintenance investment into perpetuity. Resp’t’s Post-Trial Opening Br. 47, 51-
52.
379
Tr. 103; JX0900.0007-08.
380
PetSmart, 2017 WL 2303599, at *39; see also In re John Q. Hammons Hotels Inc.
S'holder Litig., 2011 WL 227634, at *4 n.16 (Del. Ch. Jan. 14, 2011) (stating that the
convergence model is “a reflection of the widely-accepted assumption that for companies
in highly competitive industries with no competitive advantages, value-creating investment
opportunities will be exhausted over a discrete forecast period, and beyond that point, any
additional growth will be value-neutral,” leading to “return on new investment in perpetuity
[that] converge[s] to the company's cost of capital”); Cede & Co. v. Technicolor, Inc., 1990
WL 161084, at *26 (Del. Ch. Oct. 19, 1990) (discussing that “profits above the cost of
capital in an industry will attract competitors, who will over some time period drive returns
down to the point at which returns equal the cost of capital”), aff'd in part and rev'd in part
on other grounds, 634 A.2d 345 (Del. 1993).
381
Tr. 1085-87 (Hubbard).
79
dominance, that will give it perpetual advantages over potential competitors.382
Petitioners thus argue that Solera will earn a return of 4.5% above its WACC in
perpetuity during the terminal period.383 When the court asked petitioner’s expert
how he landed on 4.5%, his response was candid: “It’s a little bit of a finger in the
wind.”384
The parties also disagree about how to account for stock-based compensation
(“SBC”) in their DCF models, both for the discrete period and the terminal period.
Respondent applied the “cash basis” method to stock-based compensation expense,
using the cash amount that the Company would have to spend to account for SBC as
a normalized percentage of revenue.385 Petitioners did not independently calculate
SBC and instead used the Company’s projections.386 These projections were
calculated on a book basis, benchmarked to Solera’s actual stock price, and assumed
to grow at 5% annually.387
The parties also handled the contingent tax liability attached to Solera’s
foreign earnings very differently. As of the Merger, the Company had earned
382
JX0900.0028, 32.
383
JX0900.0031.
384
Tr. 242-43 (Cornell).
385
Id. at 1059-60 (Hubbard); JX0899.0043-44.
386
Id. at 57 (Cornell).
387
Id. at 1060 (Hubbard).
80
approximately $1.2 billion in foreign profits, for which it had only paid taxes where
those profits were earned.388 Solera historically designated these profits as
permanently reinvested earnings (“PRE”). Before these earnings can be repatriated
to the United States or paid to stockholders, the Company must pay the residual tax,
i.e., the marginal amount between the U.S. tax rate and the amount already paid
internationally.389 Respondent assumed that $350 million of foreign earnings that
had been de-designated as PRE would be repatriated as of the Merger had there not
been a deal, and that the rest of Solera’s foreign profits, both past and future, would
be repatriated on a rolling basis following a five-year deferral period.390 This
repatriation would cause Solera to pay more in taxes, decreasing the Company’s
value. Petitioners, by contrast, assumed that such taxes would never be paid because
they contend the timing of repatriation is unknown and thus these tax liabilities are
speculative.391
Finally, the parties disagreed about the amount of cash to be added back to
Solera’s enterprise value in order to convert it to equity value. This court has
repeatedly held that only “excess cash” is to be added back.392 Solera had
388
Id. at 692-93 (Giger).
389
Id. at 1094-97 (Hubbard).
390
Id. at 1094-98 (Hubbard).
391
Id. at 70-75 (Cornell); JX0900.0040-42.
392
See, e.g., In re Appraisal of SWS Grp., Inc., 2017 WL 2334852, at *15 (Del. Ch. May
30, 2017) (citation omitted) (“It is true as a matter of valuation methodology that non-
81
approximately $480 million of cash at closing.393 During the sales process, the
Company’s CFO did a country-by-country analysis and determined that Solera
needed $160 million to $165 million to fund its operations.394 Respondent used that
analysis to deduct $165 million from the Company’s $480 million of cash at closing
and added back the difference, i.e., $315 million.395 Petitioners, on the other hand,
added back all of the $480 million, reasoning that “with modern computer
technology, a good CFO doesn’t need any wasting cash,” and that “it would require
an incompetent corporate treasurer for a big chunk of the cash balance to be wasting
cash.”396
*****
There are other points of disagreement in the parties’ DCF models, but it is
not necessary to detail them here. As explained above, the Merger price was the
product of “an open process, informed by robust public information, and easy access
to deeper, non-public information, in which many parties with an incentive to make
a profit had a chance to bid.”397 Given the huge gap between petitioners’ DCF
operating assets—including cash in excess of that needed to fund the operations of the
entity—are to be added to a DCF analysis.”).
393
Tr. 229 (Cornell).
394
Id. at 695 (Giger).
395
JX0894.0103; Tr. 1092-94 (Hubbard).
396
Tr. 67-68 (Cornell).
397
DFC, 172 A.3d at 349.
82
valuation and the Merger price, which I have found to be a reliable indicator of value
in accordance with the teachings of DFC and Dell, I find petitioners’ DCF valuation
not to be credible on its face and accord it no weight.398
My decision to do so is corroborated by the fact that nearly 88% of petitioners’
enterprise valuation is attributable to periods after the five-year Hybrid Case
Projections.399 In other words, petitioners’ DCF valuation is largely a prediction
about the Company’s operations many years into the future. Such predictions, even
when informed, are unavoidably speculative, where small variances in a DCF’s
inputs can lead to wide valuation swings.400
I also give no weight to respondent’s DCF valuation, but for a different reason.
Although that valuation is close to my Merger price less synergies calculation,
respondent’s own expert opined that his DCF valuation is “less reliable” than the
398
See Dell, 177 A.3d at 35 (“When . . . an appraisal is brought in cases like this where a
robust sale process [involving willing buyers with thorough information and the time to
make a bid] in fact occurred, 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.”); DFC, 172 A.3d at 379
(“Simply given the Court of Chancery’s own findings about the extensive market check,
the value gap already reflected in the court’s original discounted cash flow estimate of
$13.07 should have given the Court doubts about the reliability of its discounted cash flow
analysis.”).
399
JX0898.0124.
400
See Dell, 177 A.3d at 37-38 (“Although widely considered the best tool for valuing
companies when there is no credible market information and no market check, DFC
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.”).
83
Merger price minus synergies valuation “given the uncertainties . . . surrounding
several inputs to the DCF valuation.”401 I agree, and will accord the value of the
Merger price minus synergies dispositive weight in this case.402
5. Respondent’s Unaffected Stock Price Argument is
Unavailing
In the wake of our Supreme Court’s decisions in DFC and Dell, the Court of
Chancery determined in Aruba that the fair value of petitioners’ shares in an
appraisal proceeding was the thirty-day average unaffected market price of the
company’s shares, i.e., $17.13 per share.403 In reaching this conclusion, Vice
Chancellor Laster declined to adopt his deal price ($24.67 per share) less synergies
figure of $18.20 per share because of his concerns that this figure (i) “likely was
tainted by human error,” and (ii) “continues to incorporate an element of value
derived from the merger itself: the value that the acquirer creates by reducing agency
costs.”404
In its supplemental brief, respondent argues that, “in light of recent cases, the
best evidence of Solera’s fair value is its unaffected stock price of $36.39 per
401
JX0894.0126.
402
Given my conclusion to accord no weight to either side’s DCF model, there is no need
to retain a court-appointed expert to resolve the parties’ disagreement concerning the
appropriate method to determine the investment rate for the terminal period.
403
Aruba, 2018 WL 922139, at *1, 4.
404
Id. at *2-3.
84
share.”405 This argument, which advocates for a fair value determination about 35%
below the deal price, reflects a dramatic change of position that I find as facially
incredible as petitioners’ DCF model. Before, during, and after trial (until Aruba
was decided), respondent and its highly credentialed expert—a former chairman of
the President’s Council of Economic Advisors406—consistently asserted that the
“market-generated Merger price, adjusted for synergies” of $53.95 per share is the
“best evidence of Solera’s value” as of the date the Merger.407 For the reasons
explained above, the court independently has come to the same conclusion.
Notably, nothing prevented respondent from advancing at trial the “unaffected
market price” argument the Aruba court embraced. The scholarship underpinning
the notion that both synergies and agency costs are elements of value derived from
a merger that should be excluded under Section 262(h) has been in the public domain
for many years and was readily available when this case was tried.408 Yet respondent
405
Resp’t’s Suppl. Post-Trial Br. 5.
406
Tr. 1023 (Hubbard).
407
Resp’t’s Post-Trial Opening Br. 1 (emphasis added).
408
Aruba, 2018 WL 922139, at *3 n.16 (citing 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, 861–66 (2003); Lawrence A. Hamermesh & Michael
L. Wachter, Rationalizing Appraisal Standards in Compulsory Buyouts, 50 B.C. L. REV.
1021, 1023–24, 1034–35, 1044, 1046–54, 1067 (2009); 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, 30–36, 49, 52, 60 (2007); Lawrence A.
Hamermesh & Michael L. Wachter, The Fair Value of Cornfields in Delaware Appraisal
Law, 31 J. CORP. L. 119, 128, 132–33, 139–42 (2005)).
85
made no effort to advance this theory at trial and, thus, petitioners were afforded no
opportunity to respond to it. In this respect, I agree with the sentiment Vice
Chancellor Glasscock expressed in a similar situation that “the use of trading price
to determine fair value requires a number of assumptions that . . . are best made or
rejected after being subject to a forensic and adversarial presentation by interested
parties.”409
As an example, even if one were to accept the legal theory that agency costs
represent an element of value derived from the merger itself, little exists in the record
to give the court any comfort about Solera’s true unaffected market price. The
$36.39 per share figure on which the Company relies represents the closing price on
a single day, August 3, 2015.410 Although the Company used that date in its proxy
statement as the unaffected date for purposes of calculating a premium, 411 and I have
referenced it in this opinion a number of times for context, the parties never litigated
the issue of Solera’s unaffected market price and the court is in no position based on
the trial record to reliably make such a determination.
With respect to the merits of the theory that agency costs represent an element
of value derived from the merger itself, the Aruba court explained that the “concept
409
AOL, 2018 WL 1037450, at *10 n.118.
410
PTO ¶ 79 & Ex. A.
411
Id. ¶ 363.
86
of reduced agency costs is the flipside of the benefits of control,” with the “key
point” being that “control creates value distinct from synergy value.” 412 This is
because, as Professors Hamermesh and Wachter explain, “the aggregation of the
shares is value-creating because a controller can then exercise the control rights
involving directing the strategy and managing the firm.”413 They go on to argue that
the “normative justification for awarding the value of control to the controller
parallels the rationale for awarding the value of synergies to the bidder. Efficiency
requires that those who create an efficient transaction—either through creating
synergies or eliminating agency costs—should receive the value that they create.”414
Significantly, however, a number of this court’s appraisal decisions, one of
which was affirmed in relevant part on appeal, suggest that the value of control is
properly part of the going concern and not an element of value that must be excised
under Section 262(h).415 In Le Beau v. M.G. Bancorporation., Inc., for example,
respondent used a “capital market” approach that “involved deriving various pricing
multiples from selected publicly-traded companies, and then applying those
412
Aruba, 2018 WL 922139, at *3 n.17 (citations omitted).
413
Lawrence A. Hamermesh & Michael L. Wachter, Rationalizing Appraisal Standards in
Compulsory Buyouts, 50 B.C. L. REV. 1021, 1052 (2009).
414
Id.
415
See id. (“Finally, do minority shareholders receive the value of control that is created
by the aggregation of the shares and the creation of a new controller? . . . Embracing the
concept of an ‘implicit minority discount,’ the courts would award the dissenters [the value
of control], on the theory that fair value should not be reduced for lack of control.”).
87
multiples to MGB,” the target corporation.416 Then-Vice Chancellor Jacobs rejected
the methodology because it “results in a minority valuation.”417 The Supreme Court
affirmed this determination, explaining that the trial court’s conclusion that the
“capital market approach contained an inherent minority discount that made its use
legally impermissible in a statutory appraisal proceeding [was] fully supported by
the record evidence that was before the Court of Chancery and the prior holdings of
this Court construing Section 262.”418
Similarly, in Borruso v. Communications Telesystems International, Vice
Chancellor Lamb held that “a control premium should be added to adjust the market
value of the equity derived from the comparable company method.”419 The court
explained it reasoning as follows:
[T]he comparable company method of analysis produces an equity
valuation that inherently reflects a minority discount, as the data used
for purposes of comparison is all derived from minority trading values
of the comparable companies. Because that value is not fully reflective
of the intrinsic worth of the corporation on a going concern basis, this
court has applied an explicit control premium in calculating the fair
value of the equity in an appraisal proceeding.420
416
1998 WL 44993, at *7 (Del. Ch. Jan. 29, 1998), aff’d in part and remanded in part, 737
A.2d 513.
417
Id. at *8.
418
M.G. Bancorporation., Inc., v. Le Beau, 737 A.2d at 523 (citation omitted).
419
753 A.2d 451, 452 (Del. Ch. 1999).
420
Id. at 458.
88
More recently, then-Vice Chancellor Strine took the same approach in
Andaloro v. PFPC Worldwide, Inc.421 There, the court approved adjusting a
comparable companies analysis by adding a control premium where “[w]hat is being
corrected for is the difference between the trading price of a minority share and the
trading price if all the shares were sold.”422
Our Supreme Court held long ago that the going concern value of a company
must be determined in an appraisal case “irrespective of the synergies involved in a
merger.”423 DFC and Dell both make the same point.424 Although DFC and Dell
are transformative decisions in my view in their full-throated endorsement of
applying market efficiency principles in appraisal actions,425 I do not read those
decisions—both of which unmistakably emphasize the probative value of deal
price426—to suggest that agency costs represent an element of value attributable to a
421
2005 WL 2045640 (Del. Ch. Aug. 19, 2005).
422
Id. at *18 (citing Borruso, 753 A.2d 451).
423
See Gilbert, 731 A.2d at 797 (“[S]ection 262(h) requires that the Court of Chancery
discern the going concern value of the company irrespective of the synergies involved in a
merger.”).
424
Dell, 177 A.3d at 21; DFC, 172 A.3d at 371.
425
See Aruba., 2018 WL 2315943, at *8 & n.61 (reargument decision) (comparing DFC
and Dell to how past “Supreme Court decisions had treated the unaffected trading price as
a valuation indicator”).
426
Dell, 177 A.3d at 30 (“Overall, the weight of evidence shows that Dell’s deal price has
heavy, if not overriding, probative value.”); DFC, 172 A.3d at 349 (“[E]conomic principles
suggest that the best evidence of fair value was the deal price.”).
89
merger separate from synergies that must be excluded under Section 262(h). Had
that been the Supreme Court’s intention, I believe it would have said so explicitly.
Accordingly, I reject respondent’s newly-minted argument that Solera’s
closing price on August 3, 2015 of $36.39 is the best evidence of Solera’s fair value
as of the date of the Merger.
IV. CONCLUSION
For the reasons explained above, petitioners are entitled to $53.95 per share
as the fair value of their shares of Solera, plus interest accruing from the date the
Merger closed, March 3, 2016, at the rate of 5% percent over the Federal Reserve
discount rate from time to time, compounded quarterly.427
The parties should confer and submit a form of implementing order for the
entry of final judgment consistent with this opinion within ten business days. It is
the court’s intention to unseal the expert reports in this case in their entirety upon
entry of a final judgment. If, however, a party believes good cause exists to maintain
any portion of any of the expert reports under seal, that party must file a motion
within ten business days identifying the specific part that warrants further
confidential treatment and explaining the basis for continuing such treatment.
IT IS SO ORDERED.
427
8 Del. C. § 262(h).
90