Submitted: January 23, 2014
Samuel T. Hirzel Dawn Kurtz Crompton Procter Heyman LLP
Stephen P. Lamb Justin Shuler Paul, Weiss, Rifkind, Wharton & Garrison LLP
The Respondent asks me to order the Petitioner in this appraisal action to accept a payment of what the Respondent considers the undisputed portion of the value of its stock, in order to stop, in part, the running of interest at the legal rate. For the reasons that follow, and despite the potential utility of such an approach, I must decline.
On November 1, 2013, I issued a Memorandum Opinion in this appraisal action, in which I determined that, under the particular circumstances of this case, the best indicator of fair value of the Petitioner's shares was the merger price generated by an arm's length sales process. However, in that Memorandum Opinion, and in a supplemental bench decision on the Petitioner's Motion for Reargument dated January 13, 2014, I permitted the parties to supplement the record with additional argument regarding whether the merger price included synergies that should be excluded from going-concern value, and whether the merger price failed to account for opportunities that should be included in going-concern value.
In light of the ongoing proceedings, on November 27, 2013, the Respondents filed a Motion to Stop the Accrual of Interest. The Respondent requests that I order the Petitioner to accept an unconditional tender of $3.63 per share, which represents its expert's base case scenario for valuing CKx, plus accrued interest. In other words, the Respondent agrees that under no circumstances could CKx be valued at less than $3.63 per share, and it is willing to tender that amount to stop the accrual of interest on that payment, which interest is currently accruing at five and three-quarters percent, five percent above the Federal Reserve discount rate. In effect, the Respondent seeks the equitable analog of an offer-of-judgment rule, which allows Superior Court, but not Chancery, litigants the ability to limit the adverse effects of a verdict. In addition to agreeing that the Petitioner would not be required to return the tendered amount to the Respondent, the Respondent has offered to indemnify the Petitioner for any negative tax consequences incurred as a result of accepting a partial payment—an offer conditioned on the Petitioner turning over certain tax decisions to the discretion of the Respondent. Despite those concessions, the Petitioner continues to reject the Respondent's offer, and for the reasons explained below, I deny the Respondent's request for an order requiring the Petitioner to accept it.
The Delaware General Assembly has codified, in Section 262(h) of the DGCL, the approach this Court must take in determining interest awards in appraisal actions. Prior to its 2007 amendments, that Section provided in part:
After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. . . . In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding.
Accordingly, prior to 2007, the Court of Chancery exercised a significant amount of discretion to determine the interest to which a petitioner was entitled.
In 2007, the General Assembly revised its views on interest, and Section 262(h) now provides, in part:
Unless the Court in its discretion determines otherwise for good cause shown, interest from the effective date of the merger through the date of payment of the judgment shall be compounded quarterly and shall accrue at 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period ...