The Delaware Court of Chancery recently opined on the matter In Re: Appraisal of Stillwater Mining Company. In a statutory appraisal decision dated August 21, 2019, regarding the fair value of Stillwater Mining Company (“Stillwater” or the “Company”), Vice Chancellor J. Travis Laster ruled that the fair value of Stillwater’s stock was $18.00 per share based on the deal price.
At the time of its reverse triangular merger with Sibanye Gold Ltd. (“Sibanye” or the “Buyer”) on May 4, 2017, Stillwater was engaged in the business of developing, extracting, processing, smelting, and refining of platinum group metals (PGMs) such as palladium, platinum, and rhodium from an orebody in the western United States known as the J-M Reef. The J-M Reef is the only PGM asset in the United States. The other principal sources of PGMs are located in South Africa, Russia, and Zimbabwe. The price of Stillwater’s stock, which traded on the New York Stock Exchange under the symbol “SWC,” was highly sensitive to the commodity price of palladium.
Stillwater and Sibanye had negotiated an agreement and plan of merger dated December 9, 2016, pursuant to which each share of Stillwater common stock was converted to a right to receive $18.00. Petitioners in the matter argued that the sale process was insufficient and that Stillwater’s fair value was $25.91 per share, which they supported with the opinion of an expert who utilized a discounted cash flow model (DCF) to value Stillwater.
Sibanye argued that the fair value of Stillwater was $17.63 per share, a price the Buyer substantiated by relying upon the deal price, Stillwater’s unaffected trading price, and an expert valuation that also relied upon a DCF model.
Vice Chancellor Laster opined that:
“Sibanye proved that the sale process was sufficiently reliable to make the deal price a persuasive indicator of fair value. Although Sibanye argued for a deduction from the deal price to account for value arising from the Merger, Sibanye failed to prove that an adjustment was warranted.
The parties engaged in lengthy debate over whether Stillwater’s adjusted trading price could provide a persuasive indicator of fair value. The reliability of the adjusted trading price depended on the reliability of the unaffected trading price, and both sides engaged experts who conducted analyses and offered opinions about the attributes of the market for Stillwater’s common stock. The evidence demonstrated that Stillwater’s trading price could provide a persuasive indicator of value, but that it was a less persuasive indicator than the deal price. This decision therefore does not use a trading price metric.
Neither side proved that its DCF valuation provided a persuasive indicator of fair value. The experts disagreed over too many inputs, and the resulting valuation swings were too great, for this decision to rely on a
This decision concludes that the deal price is the most persuasive indicator of fair value. Relying on any of the other valuation metrics would introduce error. The fair value of Stillwater on the valuation date was therefore $18.00 per share.”
The Stillwater decision is the second decision in a month (after In Re: Appraisal of Columbia Pipeline Group, Inc.) in which Vice Chancellor Laster has determined that the deal price was the best indicator of the fair value of a business in a major appraisal case. However, Vice Chancellor Laster emphasized that “there is no presumption that the deal price reflects fair value” stating that, “relying on the statutory requirement that the Court of Chancery must consider ‘all relevant’ factors when determining fair value, the Delaware Supreme Court has rejected ‘requests for the adoption of a presumption that the deal price reflects fair value if certain preconditions are met, such as when the merger is the product of arm’s-length negotiations and a robust, non-conflicted market check, and where bidders had full information and few, if any, barriers to bid for the deal.’”
However, Vice Chancellor Laster goes on to recognize that the Delaware Supreme Court has likewise cautioned that ”we have little to quibble with the economic argument that the price of a merger that results from a robust market check, against the back drop of a rich information base and a welcoming environment for potential buyers, is probative of the company’s fair value.”
In this case, Vice Chancellor Laster felt that the Buyer proved by a preponderance of the evidence that the sale process made the deal price a persuasive indicator of fair value. He recognized that the sale process was not perfect (the flaws of which were highlighted by the petitioners), but that the facts of this case, when viewed as a whole compared favorably with the facts in other recent Court of Chancery cases such as DFC Global (“DFC”), Dell, and Aruba, stating that:
“It was an arm’s-length transaction. It was approved by an unconflicted Board and by Stillwater’s stockholders. And it resulted from adversarial price negotiations between Stillwater and Sibanye. Most significantly, no bidders emerged during the post-signing phase, despite a Merger agreement that contained a suite of deal protections that would pass muster under enhanced scrutiny.”
Case precedence in Delaware Court appraisal actions requires the court to discern fair value irrespective of synergies in the merger. This would have served to reduce the fair value by the dollar impact of the synergies in the merger. In this case, Vice Chancellor Laster ruled that Sibanye failed to prove the impact of such synergies on the share price. Their own valuation expert opined that the evidence he reviewed “did not indicate that the transaction resulted in quantifiable synergies” and Sibanye told its stockholders that the price did not reflect any synergies. Accordingly, Vice Chancellor Laster saw no reason to exclude any value from the deal price based on synergies.
With regard to their DCF analyses, the opposing experts not surprisingly had differing perspectives regarding a number of inputs, including: whether to apply a small-company risk premium; the size of the equity risk premium; which set of commodity price forecasts to use to generate cash flows; the treatment of Stillwater’s exploration area; how to account of the resources in mine-adjacent areas; the amount of excess cash; the value of inventory; and the value of a copper-gold-porphyry deposit in Argentina.
As Vice Chancellor Laster reiterated in this opinion, the Delaware Supreme Court decisions in Dell and DFC, cautioned against suing DCF methodology when market-based indicators are available. In Dell, the high court explained that ”although widely considered the best tool for valuing companies when there is no credible market information and no market check, DCF valuation involves 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.” Similarly, in DFC, the Delaware Supreme Court advised that a DCF model should be us in appraisal proceedings“ when the respondent company was not public or was not sold in an open market check…”
Vice Chancellor Laster recognized that there was legitimate debate over DCF inputs and that the large swings in value they create undercut the reliability of the DCF model as a valuation indicator in this matter, concluding that:
“If this were a case where a reliable market-based metric was not available, then the court might have to parse through the valuation inputs and hazard semi-informed guesses about which expert’s view was closer to the truth, In this case, there is a persuasive market-based metric: the deal price that resulted from a reliable sale process.”