The Delaware Court of Chancery recently opined on the matter In Re: Appraisal of Columbia Pipeline Group, Inc. In this statutory appraisal decision dated August 12, 2019, regarding the fair value of Columbia Pipeline Group, Inc. (“Columbia” or the “Company”), Vice Chancellor J. Travis Laster ruled that the fair value of Columbia’s stock was $25.50 per share based on the all cash merger price, and against the petitioners’ proposed valuation of $32.47 per share. At the time of its merger with TransCanada Corp. (“TransCanada” or the “Buyer”) in July 2016, Columbia operated a network of gas pipelines and other midstream gathering assets running between New York and the Gulf of Mexico. Columbia had recently been spun-off from NiSource in July 2015 at $30.34 per share on its opening trading day. In July and August 2015, a potential strategic buyer expressed interest in buying the Company at between $32.50 and $35.50 per share (half cash and half stock). By the end of August, the market started changing, with gas prices falling, the stock market becoming more volatile, and the strategic buyer walking away.
As an independent growth company, Columbia relied heavily on sources of debt and equity financing in the backdrop of declining gas prices and asset values, and market disarray. In the fall of 2015, Columbia needed capital when its stock price had dropped to around $18.00 per share. Thus, it sought equity financing and simultaneously engaged in merger discussions with various potential strategic buyers, ultimately deciding to raise $1.4 billion of equity at $17.50 per share in December 2015, when its stock price was trading at $19.50 per share. In early 2016, Company management and the Board elected to resume merger discussions with strategic TransCanada (who had previously expressed interest in an all cash deal) and to provide the Buyer exclusivity based a renewed verbal indication of interest in the $25.00 to $28.00 per share range, noting the premium to the then current share price outweighed the cost of exclusivity. TransCanada would eventually offer $24.00 per share, citing concerns with raising capital and a potential drop in its own credit rating to fund an acquisition. After further negotiation, a story in the Wall Street Journal regarding the potential deal, and calls from other potential suiters (without ever receiving a formal proposal), both Buyer and seller ultimately agreed on a price of $25.50 per share. After receiving fairness opinions from two well-known banks indicating value ranges from $18.64 to $25.50 per share, and noting the risk of TransCanada withdrawing its offer if it bought time to negotiate with other potential buyers, Columbia’s board approved the merger, which subsequently was approved by the affirmative vote of 95% of Columbia’s shareholders, and closed July 1, 2016.
In an appraisal proceeding, the legislative process is intended to provide a limited remedy to dissenting shareholders in a merger on the grounds of an inadequate price. In this case, the petitioners were arguing for $32.47 per share. The court’s job is to determine the fair value of the shares exclusive of any value arising from the merger, and in doing so can take into account all relevant factors including the valuation opinions submitted by the parties, and its own analysis and adjustments. The burden of proof resides with both parties to the action. Vice Chancellor Laster referenced language from Tri-Continental Corporation v. Battye, 74 A.2d 71 (Del. 1950), which explained the concept of value in an appraisal proceeding as:
“…..the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder’s proportionate interest in the corporate enterprise is meant the true and intrinsic value of the stock which has been taken by the merger….the courts must take into consideration all factors and elements which reasonably might enter into fixing value.
In the case at hand, the parties proposed three valuations indicators: the deal price less synergies and Columbia’s unaffected trading price, proposed by TransCanada; and a value based on a discounted cash flow (DCF) analysis proposed by the petitioners.
Use of the deal price is predicated on the strength of the deal process. In evaluating the deal process, Vice Chancellor Laster looked to the Delaware appraisal decisions of DFC Global (“DFC”), Dell, and Aruba. The ultimate decisions in each case supported the merger prices based largely on the robustness of the competitive bidding processes. Each of the aforementioned cases involved an initial competitive bidding process, an exclusivity period, some post-due diligence re-negotiation of price, and a relatively open post-signing phase. In the DFC and Aruba cases, the respective deal prices were below values suggested in the initial buyers’ indications of interest. With regard to this case, Vice Chancellor Laster noted the following attributes of this transaction: an arm's-length transaction with a third party, lack of board conflicts of interest, widely disbursed shareholder ownership, an open pre-signing where other potential buyers were contacted, and the fact that no bidders emerged in the post-signing phase. Vice Chancellor Laster also stated there was no evidence supporting management conflicts given their respective roles in the negotiation and alignment of incentives via significant equity stakes in Columbia. Although there were certain deficiencies in the proxy materials, the terms of the deal and deal protections did not preclude or impermissibly impede a post-signing market check. Vice Chancellor Laster further indicated that although the sale process was not perfect, TransCanada proved such process made the deal price a persuasive indictor of fair value.
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 TransCanada failed to prove the impact of such synergies on the share price. Further, he ruled that the pre-merger trading price and deal price are independent, and an unreliable trading price does not undermine the ability to use the deal price. Petitioners argued that the deal price should be adjusted for the increase in value between the merger signing date and the closing date, roughly three months. However, Vice Chancellor Laster found that the petitioners failed to satisfy their burden of proof by not presenting a persuasive mechanism to adjust such value. With regard to the petitioners’ expert’s DCF analysis, Vice Chancellor Laster cited Dell and DFC, which cautioned against use of a DCF methodology when reliable market indicators are available. In addition, he noted the large disparity in value produced by the DCF as compared to the deal price, Columbia’s unaffected trading price, and interest from other strategic acquirers. Finally, he noted the DCF analysis produced very wide swings in value based on relatively small changes in assumptions such as the discount rate and the growth rate. For example, reducing the terminal growth rate of 3.0% used by the petitioners’ expert to approximately 1% to 2% as supported by DCF analyses performed by the financial advisors of TransCanada and Columbia reduced the $32.47 per share DCF value by nearly 50%. Thus, Vice Chancellor Laster ruled the DCF a “second-best method” in this case.