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In re Appraisal of Columbia Pipeline Group, Inc.

Court of Chancery of Delaware

August 12, 2019

IN RE APPRAISAL OF COLUMBIA PIPELINE GROUP, INC.

          Date Submitted: May 16, 2019

          Stephen E. Jenkins, Andrew D. Cordo, Marie M. Degnan, ASHBY & GEDDES, P.A., Wilmington, Delaware; Marcus E. Montejo, Kevin H. Davenport, John G. Day, PRICKETT, JONES & ELLIOTT, P.A., Wilmington, Delaware; Mark Lebovitch, Jeroen van Kwawegen, Christopher J. Orrico, Alla Zayenchik, BERNSTEIN LITOWITZ BERGER & GROSSMANN LLP, New York, New York; Attorneys for Petitioners.

          Martin S. Lessner, James M. Yoch, Jr., Paul J. Loughman, YOUNG CONAWAY STARGATT & TAYLOR, LLP, Wilmington, Delaware; Brian J. Massengill, Michael A. Olsen, Linda X. Shi, MAYER BROWN LLP, Chicago, Illinois; Attorneys for Respondent.

          MEMORANDUM OPINION

          LASTER, V.C.

         The petitioners brought this statutory appraisal proceeding to determine the fair value of the common stock of Columbia Pipeline Group, Inc. The valuation's effective date is July 1, 2016, when TransCanada Corporation completed its acquisition of Columbia (the "Merger"). Pursuant to an agreement and plan of merger dated March 17, 2016 (the "Merger Agreement"), each share of Columbia common stock was converted into the right to receive $25.50 in cash, subject to each stockholder's right to eschew the consideration and seek appraisal. This post-trial decision finds that the fair value of Columbia's common stock on the effective date was $25.50 per share.

         I. FACTUAL BACKGROUND

         The evidentiary record is vast.[1] After an initial spat during the pre-trial process, the parties agreed to 716 stipulations of fact, which were a welcome contribution. During a five-day trial, the parties submitted 1, 472 exhibits, including twenty-one deposition transcripts.[2] Nine fact witnesses and five experts testified live. The following factual findings represent the court's effort to distill this record.

         A. Columbia

         At the time of the Merger, Columbia was a Delaware corporation whose common stock traded actively on the New York Stock Exchange under the ticker symbol "CPGX." Columbia developed, owned, and operated natural gas pipeline, storage, and other midstream assets. As a midstream company, Columbia did not own or sell the commodities that it transported or stored. Columbia's success depended on its contracts with shippers and producers.

         Columbia's primary operating asset consisted of 15, 000 miles of interstate gas pipelines running from New York to the Gulf of Mexico. The pipelines served the strategically important Marcellus and Utica natural gas basins in Pennsylvania, Ohio, and West Virginia. Columbia's growth-oriented business plan sought to exploit a production boom in the Marcellus and Utica basins by expanding its pipeline network and selling the additional capacity. See PTO ¶ 248. The plan required billions of dollars in capital expenditures, which in turn required large amounts of low-cost financing.

         Columbia itself was a holding company. Its principal asset was an 84.3% interest in Columbia OpCo LP ("OpCo"), which owned Columbia's operating assets. Columbia's largest business divisions operated interstate pipelines. Smaller divisions operated gas-gathering and processing systems.

         Columbia also owned a 100% general partner interest and a 46.5% limited partner interest in Columbia Pipeline Partners, L.P. ("CPPL"), a master limited partnership ("MLP") whose common units traded on the New York Stock Exchange. CPPL owned the other 15.7% interest in OpCo.

         Columbia's business plan depended upon using CPPL to raise equity financing for Columbia's growth projects. To raise capital using an MLP, a sponsor like Columbia sells assets to the MLP, receiving cash in return. Because the MLP is a pass-through entity, it can raise capital at a lower cost than the sponsor.[3] Columbia planned to use a variant of the typical method. Rather than having CPPL buy assets from Columbia, CPPL would buy newly issued interests in OpCo, which would use the proceeds to fund Columbia's growth plan.[4] Given the magnitude of Columbia's capital needs, analysts expected that CPPL could own over 60% of OpCo by 2020. See, e.g., JX 258 at 13.

         B. NiSource

         When the process leading to the Merger began, Columbia was not yet a public company. It was a subsidiary of NiSource Inc., a publicly traded utility company that today serves approximately four million customers in seven states.

         In 2005, Robert Skaggs, Jr. became the CEO of NiSource. He also served as chairman of its board of directors. In 2013, Skaggs told the NiSource directors that he wanted to retire in a few years. See Taylor Dep. 93. For planning purposes, Skaggs's financial advisor used a target retirement date of March 31, 2016, and cautioned that "the single greatest risk" to Skaggs's retirement plan was his "single company stock position in NiSource." JX 163.

         Stephen Smith was NiSource's CFO. Smith, who was fifty-two years old in 2013, considered fifty-five to be the "magical age" to retire. Smith Dep. 97-98; see JX 199. He too targeted a retirement date in 2016.

         Since 2008, Lazard Frères & Co. had been evaluating a spinoff of Columbia as part of its regular work for NiSource. See JX 98 at 7-9. Lazard believed that a spinoff could unlock major value for NiSource.[5] In January 2014, Lazard made a presentation to the NiSource board. Consistent with Lazard's advice, Skaggs and Smith pitched forming CPPL as part of the spinoff to provide a financing vehicle for Columbia. See JX 91. For much of 2014, the NiSource board weighed its options.

         In summer 2014, The Deal reported that Dominion Resources Inc. was trying to buy NiSource. The article described Skaggs as "a willing seller" but only in an all-cash deal at a 20% premium. JX 142.

         C. The Spinoff

         On September 28, 2014, NiSource announced that it would spin off Columbia as a separate public company. NiSource also announced the formation of CPPL as the "primary funding source" for Columbia's growth capital. JX 182 at 15. CPPL would go public in early 2015. Columbia would follow later that year.

         Columbia's post-spinoff business plan contemplated "a potential capital investment opportunity of $12-15 billion over the next 10 years, positioning the company to provide enhanced earnings and dividend growth driven by its projected net investment growth." JX 174. The largest components were pipeline expansion and modernization. JX 182 at 14. If all went according to plan, then Columbia would triple in size. See PTO ¶ 291. The plan envisioned funding the growth by having CPPL issue equity over a sustained period.[6]

         In December 2014, the NiSource board signed off on Skaggs and Smith leaving NiSource and joining Columbia. Skaggs would become CEO and chairman of the board for Columbia and CPPL; Smith would become CFO of both entities. Skaggs and Smith made the move partly because they did not "want to work forever." JX 208. By this time, two investment banks had told Smith that Columbia would "trade too rich to sell," and Smith sought a third view from Goldman Sachs & Co. See id. Goldman believed Skaggs and Smith were eyeing "a sale in near term." Id.

         On February 11, 2015, CPPL closed its initial public offering, generating net proceeds of approximately $1.17 billion. Under Columbia's business plan, CPPL did not plan to raise additional equity until 2016. JX 304 at 28. In the meantime, Columbia planned to draw over $500 million from a revolving credit facility. Id.

         As part of the spinoff, Columbia borrowed $2.75 billion through a private placement of debt securities. Columbia used the proceeds to make a $1.45 billion cash distribution to NiSource and to refinance its existing debt. See id. Moody's Investors Service rated Columbia's debt at Baa2, one notch above non-investment grade. PTO ¶ 262. Columbia's debt level meant that it could not borrow additional capital to fund its business plan and would have to rely on CPPL. See JX 466; JX 1339.

         Columbia anticipated that it would become an acquisition target after the spinoff. As part of its pre-transaction planning, Columbia engaged Lazard as its financial advisor.[7]As of May 2015, Lazard categorized the potential acquirers into four tiers, ranked by their ability to pay and likelihood of interest. The first tier consisted of Kinder Morgan, Inc. and Energy Transfer Equity, L.P. The second tier included TransCanada, Berkshire Hathaway Energy, Dominion, Spectra Energy Corp., NextEra Energy, Enbridge Inc., and The Williams Companies. See JX 300 at 35; Mir Dep. 136-48.

         On May 28, 2015, Lazard contacted TransCanada and mentioned that Columbia might be for sale after the spinoff. JX 311. A contemporaneous memorandum from Skaggs's financial advisor made the point directly: "[Skaggs] noted that [Columbia] could be purchased as early as Q3/Q4 of 2015. I think they are already working on getting themselves sold before they even split. This was the intention all along. [Skaggs] sees himself only staying on through July of 2016." JX 324.

         In June 2015, Lazard advised TransCanada against "opening a dialogue" until after the spinoff. JX 335. Doing so could jeopardize the spinoff's tax-free status, which required that NiSource not spin off Columbia in anticipation of a sale. See JX 311. Internally, TransCanada discussed that "absent a knock out offer, [Columbia] will likely go for a market check (to maximize proceeds), which we should be prepared for." JX 335.

         On July 1, 2015, NiSource completed the spinoff. On its first day of trading, Columbia's stock closed at $30.34 per share.

         From the spinoff until the Merger, Columbia's board of directors (the "Board") consisted of Skaggs and six outside directors. The lead independent director was Sigmund Cornelius, an oil and gas veteran who had worked in the pipeline industry and as the CFO of ConocoPhillips. The other directors were Marty Kittrell, Lee Nutter, Deborah Parker, Lester Silverman, and Teresa Taylor. Most had served as directors of NiSource before the spinoff.

         D. Early Interest From Possible Buyers

         On July 2, 2015, Columbia engaged Goldman to advise on any unsolicited acquisition proposals. JX 347. Over the next two weeks, Dominion and Spectra contacted Skaggs to discuss potential strategic transactions. See PTO ¶¶ 391-93. Skaggs viewed the Spectra outreach as trivial, but thought Dominion was worth exploring. See JX 359 (Skaggs classifying Spectra outreach as "casual pass" and Dominion as "notable/substantive").

         On July 20, 2015, Dominion expressed interest in buying Columbia for $32.50 to $35.50 per share, half stock and half cash. Lazard's contemporaneous discounted cash flow ("DCF") analysis valued Columbia at $30.75 per share, 5% higher than the trading price. See PTO ¶ 395. After discussing the expression of interest with the Board and receiving advice from Lazard and Goldman, Skaggs asked Dominion to raise its price to the "upper-$30s." See id. ¶¶ 397-98.

         On August 12, 2015, Columbia and Dominion entered into a non-disclosure agreement (an "NDA"). PTO ¶ 400; see JX 416. The parties began due diligence, but on August 31, Dominion disengaged. Citing a decline in Columbia's stock price amid general stock market volatility, Dominion indicated that even its floor of $32.50 per share had become too high. See PTO ¶ 406.

         By the end of August 2015, Columbia's stock price had fallen to around $25 per share. By late September, it had fallen to around $18 per share.

         Meanwhile, TransCanada continued to examine Columbia as an acquisition target. See JX 458. TransCanada's Senior Vice President for Strategy and Corporate Development, François Poirier, was friends with Smith and asked him to dinner on October 26. See JX 487. It seems likely that other companies were studying Columbia as well, but it is unclear to what extent other firms were included in the scope of discovery. The petitioners issued subpoenas to Spectra, Berkshire, Dominion, and NextEra. See Dkts. 132, 170, 176, 217. They also obtained discovery from Goldman and Lazard.

         E. The Equity Overhang

         During fall 2015, the energy markets deteriorated, and the market for issuances of equity by MLPs was "effectively closed." JX 466; see, e.g., Kittrell Tr. 1053-54 (citing "sea change" in MLP market that "has continued to this day"). The new market dynamics meant that Columbia could no longer use CPPL to raise equity. See JX 466. With $1 billion in short-term funding needs and no capacity to take on more debt, Columbia had to consider issuing equity itself, even though its cost of equity had spiked too.[8]

         The confluence of problems created an "equity overhang." JX 466. If investors feared that Columbia could not obtain the capital to achieve anticipated growth rates, then they would bid down the stock. The lower price would force Columbia to issue more equity to raise the same amount of capital, and Columbia could become "mired in a vicious cycle of issuing more and more equity at lower and lower prices."[9]

         In a memorandum to the Board dated October 16, 2015, Skaggs summarized Columbia's situation, identifying both problems and potential solutions:

• "[T]he latest intrinsic value studies (which assume that we're able to fully manage CPG's financing, project execution, and counter-party risks) would suggest that CPG's value has dropped roughly 30%."
"Required Equity Financing: We've raised almost $4 billion of capital (CPPL equity and CPGX debt) - at a very attractive cost of capital - during the first half of '15 to launch CPG as a standalone company. Recall: because of our investment grade credit rating commitments, CPG cannot issue long-term debt until 2018. Consequently, to support CPG's committed growth program AND maintain our investment grade credit ratings, CPG or CPPL still must issue between $3 billion and $4 billion of equity (i.e., 65% of CPG's current equity market capitalization) over the next three years (i.e., $1 billion of equity per year)."
"Track 1 - 'Stay the Course'. Prepare to issue ~$1.0 billion (~15% of CPG) of CPGX equity at $18/share by mid-January.... The current thinking is that we would need to execute the transaction prior to our YE earnings disclosure (2/15) -when we are set to announce yet another increase (~$500 million) in our annual Cap-Ex plan (i.e., a near-term expansion of the equity overhang). Downside: if this approach doesn't alleviate the equity overhang (and rather than a positive reaction, CPGX/CPPL languishes), we face the real threat of ongoing value erosion."
•" Track 2 - 'Seek a Balance Sheet'. Explore whether Dominion or a select group of blue chip strategic players (e.g., MidAmerican ([Berkshire Hathaway Energy]), Sempra, Enbridge, TransCanada, and perhaps Spectra) would have a legitimate interest in CPG - at a price that's within CPG's intrinsic value range. . . . This approach would be an attempt to capture/optimize CPG's intrinsic value (i.e., avoid selling 15% of CPGX at a deep discount); position shareholders to participate in the potential growth of the combined enterprise; fully fund our growth plan, and exert a measure of control over the fate of our employees and other key stakeholders. Downside: We believe there is no downside in 'soft' overtures to any or all of these potential counterparties. This approach shouldn't 'put us in play.'"

JX 466.

         At a Board meeting held on October 19 and 20, 2015, Skaggs recommended a dual-track strategy in which Columbia would prepare for an equity offering while engaging in exploratory talks with potential strategic or financing partners. PTO ¶ 422. The Board agreed.

         F. Renewed Talks With Possible Buyers

         On October 26, 2015, Skaggs renewed talks with Dominion. Skaggs offered exclusivity in return for a prompt offer of approximately $28 per share, but he expected Dominion to respond "in the 20-25% premium zip code ($24-$25)."[10] That night Smith met with Poirier, who said that TransCanada wanted to buy Columbia. PTO ¶ 426; JX 487.

         On October 29, 2015, the Board decided to wait to hear from Dominion before responding to TransCanada. JX 1399 at 2. The Board determined that Columbia would have to sell substantial public equity unless it received a merger proposal for "around $28 per share." PTO ¶ 428.

         On November 2, 2015, Dominion indicated that it could not offer $28 per share. Dominion proposed either (i) an all-stock merger with Dominion and its partner NextEra at an undefined "modest premium" or (ii) a Dominion equity investment in certain Columbia subsidiaries or joint ventures. See id. ¶ 430. That day, Columbia's stock closed at $21.12. Goldman believed that at this point, Columbia was trading "very close to 'dcf' value, against a backdrop of having traded at a discount to dcf value." JX 505.

         On November 7, 2015, Skaggs followed up with Dominion about the Dominion/NextEra structure. PTO ¶ 436. On November 9, Columbia and TransCanada entered into an NDA. Id. ¶ 437. Over the next week, Columbia entered into additional NDAs with Dominion, NextEra, and Berkshire Hathaway Energy, and the NDA counterparties began conducting due diligence.[11]

         Each NDA contained a standstill provision that prohibited the counterparty from making any offer to buy Columbia securities without the Board's prior written invitation. Most of the standstills lasted eighteen months. Each contained a feature colloquially known as a "don't-ask-don't-waive" provision (a "DADW"), which prohibited the counterparty from "making a request to amend or waive" the standstill or the NDA's confidentiality restrictions. E.g., JX 526 § 3.

         Although due diligence was getting off the ground, Columbia management did not think they could delay an equity offering beyond early December 2015. And waiting until the last possible minute to raise equity exposed Columbia to risk. On November 17, 2015, the Board authorized management to proceed with the equity offering as early as the week of November 30. PTO ¶ 456.

         On November 24, 2015, TransCanada expressed interest in an all-cash acquisition at $25 to $26 per share. Berkshire expressed interest in an all-cash acquisition at $23.50 per share. Both expressions of interest were conditioned on further diligence. Berkshire warned that an equity offering would "kill [its] conversation" with Columbia. Id. ¶ 477.

         On November 25, 2015, the Board decided to terminate merger talks and proceed with the equity offering. Columbia sent letters to Dominion, NextEra, Berkshire, and TransCanada instructing them to destroy the confidential information they had received under their NDAs. NextEra was disappointed to lose the opportunity, but Dominion was happy to go elsewhere. Dominion had already reached out to Questar Corporation, and in February 2016, Dominion announced that it was buying Questar for $4.4 billion, effectively ending any prospect for a Columbia-Dominion merger. See, e.g., PTO ¶ 478; JX 890.

         Skaggs called TransCanada and Berkshire personally to reject their offers. TransCanada's CEO, Russell Girling, asked if Columbia would forego the equity offering if TransCanada "close[d] the gap between $26 and $28 and we get it done before Christmas." JX 588; see also JX 575 at 4. Skaggs said no. He explained that Columbia could not risk a failed deal followed by a more expensive equity offering in 2016. See PTO ¶ 476; Skaggs Tr. 875-77; see also JX 594.

         The same day, Smith told Poirier that Columbia "probably" would want to pick up merger talks "in a few months." JX 588; accord Poirier Tr. 384. Poirier believed that Columbia could have delayed its equity raise until January, but that Columbia went ahead to improve its bargaining position. Poirier also doubted whether Columbia's directors shared management's enthusiasm for a deal. JX 594.

         G. The Equity Offering

         After the market closed on December 1, 2015, Columbia announced an equity offering at $17.50 per share. PTO ¶ 480. Columbia's stock had closed that day at $19.05. Id. ¶ 481. The below-market offering was oversubscribed and raised net proceeds of $1.4 billion. At trial, Skaggs described the offering as "an unmitigated disaster" because Columbia had "sold 25 percent of the company at 17.50." Skaggs Tr. 890. Columbia had solved its short-term funding needs, but the overhang would persist without a long-term solution. See JX 1060 at 6; Poirier Tr. 450; Skaggs Dep. 139.

         After the equity offering, Skaggs met with Columbia's directors individually to pitch them on selling the company. He emphasized that the business plan involved a "significant amount of execution risk (both financial and operational)." JX 646.

         In mid-December 2015, Poirier called Smith to reiterate TransCanada's interest in a deal. They scheduled a meeting for January. Smith Tr. 236-37. Smith involved Skaggs and Goldman, but no one told the Board that Smith was continuing talks with TransCanada.[12] Internally, TransCanada believed that the equity offering had made a deal "more challenging from a valuation standpoint," but regarded Columbia as a "very strategic" target. Poirier Tr. 445; accord Marchand Tr. 482.

         H. The Poirier Meeting

         On January 5, 2016, Smith emailed Columbia's draft 2016 management projections to Poirier. JX 680. Goldman prepared talking points for Smith to use with Poirier, and Skaggs approved them. See JX 679 (talking points advising that TransCanada could "avoid an auction process" with a "preemptive" price because "every dollar matters a lot to our Board"); Smith Tr. 248. The talking points were tailored to respond to positions TransCanada had taken during negotiations in November 2015, including TransCanada's stance that it was "not inclined to participate in an auction process" because it would take "resources to get[] fully comfortable with the growth projects." JX 575 at 4; see JX 589; JX 590. TransCanada had signaled that it would pay extra for exclusivity, and internally it was describing its price strategy as "preemptive." See JX 575 at 4.

         On January 7, 2016, Smith met with Poirier. Smith literally handed him the list of talking points. Smith Tr. 247-48. Smith stressed that TransCanada was unlikely to face competition from major strategic players, telling TransCanada in substance that Columbia had "'eliminated' the competition."[13] By doing so, Smith contravened Goldman's advice from 2015 to the effect that "[c]ompetition (real or perceived) is the best way to drive bidders to their point of indifference." JX 505.

         Poirier and Smith portrayed these unusual tactics as a good-faith effort to entice TransCanada to bid by assuring TransCanada that it would be worthwhile to engage in due diligence.[14] But TransCanada was going to bid anyway, as it had before. It seems intuitive that Smith's assurance about TransCanada not facing competition would have undermined Columbia's bargaining leverage. At the same time, it is not clear how much of an effect the disclosure had, because TransCanada already knew about the company-specific problems that its competitors faced. See Poirier Tr. 435-36 (referring to "other potential suitors being distracted" as "public knowledge").

         Regardless, on January 25, 2016, Girling called Skaggs to express interest in an all-cash acquisition in the range of $25 to $28 per share, similar to what TransCanada had proposed in November 2018. PTO ¶ 516. That day, Columbia's stock closed at $17.25.

         I. TransCanada Obtains Exclusivity.

         In the weeks leading up to Girling's indication of interest, Skaggs had held a second round of one-on-one meetings with the Columbia directors, "priming them for a TC bid." JX 1466; see id. (Goldman indicating that Skaggs was "getting questions from the Board 'would you take $26 per share' - he said every day it gets harder to say no"). Lazard had advised Columbia's management that "[w]hile your valuation has swung widely, the $25- 28 range is a sensible one given what we have concluded is your DCF value right now." JX 742.

         On January 28 and 29, 2016, the Board met with senior management, Goldman, and Columbia's legal counsel from Sullivan & Cromwell LLP. TransCanada had indicated that it would not proceed unless granted exclusivity. The Columbia team considered whether to solicit alternative suitors like Dominion or Spectra. The Board determined that TransCanada's indicative range offered a significant premium that outweighed the costs of exclusivity. See PTO ¶ 519; Kittrell Tr. 1061-62 (citing Goldman and Lazard's recommendation); Taylor Tr. 1273-74 (citing high odds of closing and "great" premium).

         On February 1, 2016, Columbia granted TransCanada exclusivity through March 2, 2016, which they later extended by six days (the "Exclusivity Agreement"). PTO ¶¶ 523, 551. In simplified terms, Columbia could not accept or facilitate an acquisition proposal from anyone but TransCanada, except that in response to a "bona fide written unsolicited Transaction Proposal that did not result from a breach of" the Exclusivity Agreement, Columbia could engage with another party upon notice to TransCanada. In long form, the Exclusivity Agreement provided that Columbia could not

(a) solicit, initiate, encourage or accept any proposals or offers from any third person, other than [TransCanada], (i) relating to any acquisition or purchase of all or any material portion of the assets of [Columbia] or any of its subsidiaries, (ii) to enter into any merger, consolidation, reorganization, recapitalization, share exchange or other business combination transaction with [Columbia] or any subsidiary of [Columbia], (iii) to enter into any other extraordinary business transaction involving or otherwise relating to [Columbia] or any subsidiary of [Columbia], or (iv) relating to any acquisition or purchase of all or any material portion of the capital stock of [Columbia] or any subsidiary of [Columbia] (any proposal or offer described in any of clauses (i) through (iv) being a "Transaction Proposal"), or
(b) participate in any discussions, conversations, negotiations or other communications regarding, furnish to any other person any information with respect to, or otherwise knowingly facilitate or encourage any effort or attempt by any other person to effect a Transaction Proposal;
provided that in response to a bona fide written unsolicited Transaction Proposal that did not result from a breach of this letter agreement (an "Unsolicited Proposal") [Columbia] may, after providing notice to [TransCanada] as required by this letter agreement,
(1) enter into or participate in any discussions, conversations, negotiations or other communications with the person making the Unsolicited Proposal regarding such Unsolicited Proposal,
(2) furnish to the person making the Unsolicited Proposal any information in furtherance of such Unsolicited Proposal (provided that to the extent such information has not been previously provided to [TransCanada], [Columbia] shall promptly provide such information to [TransCanada]) or
(3)approve, recommend, declare advisable or accept, or propose to approve, recommend, declare advisable or accept, or enter into an agreement with respect to, an Unsolicited Proposal or any subsequent Transaction Proposal made by such person as a result of the discussions, conversations and negotiations or other communications described in clause (1), if the Board of Directors of [Columbia] determines in good faith, after consultation with its outside legal counsel, that the failure to do so would reasonably be expected to be a breach of its fiduciary duties under applicable law.

JX 832 (formatting altered). The Exclusivity Agreement further provided that

[Columbia] immediately shall cease and cause to be terminated all existing discussions, conversations, negotiations and other communications with all third persons conducted heretofore with respect to any of the foregoing. [Columbia] shall
(x) notify [TransCanada] promptly (and in any event within 24 hours) if any Unsolicited Proposal, or any substantive inquiry or contact with any person with respect thereto, is made and
(y) in any such notice to [TransCanada], indicate the material terms and conditions of such Unsolicited Proposal, inquiry or contact, in the case of clause (y), except to the extent the Board of Directors of [Columbia] determines in good faith, after consultation with its outside legal counsel, that providing such information would not be in the best interests of [Columbia] and its stockholders.

Id. (formatting altered).

         J. TransCanada Conducts Due Diligence.

         On February 4, 2016, Columbia sent TransCanada a draft of the Merger Agreement. By February 5, TransCanada had sixty-nine personnel accessing Columbia's data room. JX 784. A subset of the personnel comprised a clean team that received access to Columbia's customer contracts, enabling TransCanada to assess Columbia's counterparty risk by examining its customers' creditworthiness. See Poirier Tr. 401-03. The parties have referred to these important contracts as "precedent agreements."[15]

         TransCanada had indicated that it would submit a bid by February 24, 2016, with the caveat that it needed backing from credit rating agencies. On February 19, the credit rating agencies warned TransCanada that acquiring Columbia could result in a downgrade. One said that TransCanada was "buying a BBB-mid asset and adding leverage." JX 827. The other "observed that the resulting leverage from the transaction would be high in a difficult market with heightened counterparty concerns." PTO ¶ 535. On February 24, Girling told Skaggs that TransCanada needed more time to develop a financing plan that allowed it to pay $25 to $28 per share without hurting its credit rating. Id. ¶ 544. Meanwhile, Columbia and TransCanada continued to exchange drafts of the Merger Agreement.

         K. Columbia Demands A Price.

         On March 4, 2016, the Board directed management to demand a merger proposal from TransCanada. On March 5, TransCanada offered $24 per share, below the low end of the range it had cited to secure exclusivity. Smith told Poirier that he could not recommend $24 per share to the Board, but could recommend $26.50. See PTO ¶ 563. TransCanada came back at $25.25, which it characterized as its best and final offer. Id. When Skaggs called Girling to reject the offer, Girling said: "I guess that's it." JX 901. Skaggs told the Board that TransCanada was unlikely to reengage and that "[i]n the meantime, we have stopped all deal-work." Id. Poirier told Smith that TransCanada lacked room to move on price. PTO ¶ 566.

         With merger talks on hold, TransCanada's management debated how to justify paying more. Id. ¶ 568; JX 912; see JX 907. Its CFO, Don Marchand, thought a deal "at $26 would be off-the-charts in terms of premium paid and the market reaction could be quite tepid." PTO ¶ 568. He believed the transaction was "priced close to perfection at the $25.25 offer level." Id. TransCanada's COO thought Columbia was "playing . . . poker to see where our barf price is." JX 911 at 3. Poirier suggested floating a number like $25.75 or $26, then asking Columbia for another month to find capital and sort out credit rating issues. JX 905 at 3. To fund the Merger, TransCanada ultimately would sell more than $7 billion in assets and raise over $3 billion through the largest subscription receipts offering in Canadian history. JX 939; JX 1008 at 8, 13-14.

         On March 6, 2016, TransCanada's management conveyed that they could support a price above $25.25 per share if Columbia's management would support a price below $26.50. See PTO ¶ 569. After consulting with Skaggs and Cornelius, Smith asked Poirier to offer $26 per share. Id. ¶¶ 570-71. Poirier replied that TransCanada's board needed until March 9 to make a decision.

         L. The Wall Street Journal Leaks The Merger Talks.

         On March 8, 2016, Columbia learned that the Wall Street Journal was preparing a story about TransCanada being in advanced discussions to acquire Columbia. TransCanada's exclusivity expired that night. Id. ¶¶ 579-81.

         On March 9, 2016, TransCanada made a revised offer at $26 per share, with 90% of the consideration in cash and 10% in TransCanada stock. The offer was subject to market conditions and feedback from credit rating agencies and TransCanada's underwriters.

         On March 10, 2016, the Board convened to discuss TransCanada's proposal.[16]Skaggs reminded the Board that TransCanada's exclusivity had expired. JX 1399 at 13. The Board discussed that the news story could lead to inbound offers. After the meeting, the Wall Street Journal broke the story.[17]

         M. Spectra Reaches Out.

         After seeing the article, Spectra emailed Skaggs to propose merger talks.[18] On March 11, 2016, the Board decided to renew TransCanada's exclusivity through March 18, subject to further evaluation of Spectra. The Board also instructed management to waive the standstills with Berkshire, Dominion, and NextEra. See JX 1399 at 15; see also JX 950. The next day, management sent emails waiving the standstills. PTO ¶¶ 603-05.

         On the morning of March 12, 2016, the Board determined that Spectra was unlikely to propose a deal superior to TransCanada's latest offer. See JX 1399 at 15-16. Around this time, everyone at Columbia acted as if TransCanada's exclusivity had already been renewed. The Board approved a script "to use with Spectra and other inbounds." JX 964. It stated: "We will not comment on market speculation or rumors. With respect to indications of interest in pursuing a transaction, we will not respond to anything other than serious written proposals." JX 1399 at 15-16.

         Based on advice from Goldman and Sullivan & Cromwell, Skaggs proposed to send the script to TransCanada. He described this move as a way to reassure TransCanada that its deal remained on track, and to pressure TransCanada to agree to an "expedited" closing. See JX 964. After the Board met on March 12, Columbia's in-house counsel asked TransCanada to approve the script:

[O]ur board has agreed to the renewal of the EA for one week subject to your agreement that this scripted response would not violate the terms of the EA (both in terms of the inbound received in the EA's gap period and going forward until signing, which unfortunately, given the leak, there is a potential that we will receive additional inquiries). Please confirm via response to this email that [TransCanada] is in agreement with this condition/interpretation and we will send over the new EA.

JX 968 at 2. Asking TransCanada whether the script violated the Exclusivity Agreement made no sense. Exclusivity had expired days before. Columbia's in-house counsel also conveyed to TransCanada that Columbia had received "an inbound from a credible, large, midstream player," without saying who it was. JX 973.

         The Board had instructed Goldman to screen Spectra's calls so that Spectra could not talk directly with management. See JX 957; JX 1399 at 15-16. On March 12, Spectra's CFO called Goldman, and Goldman read the script. See JX 974 (Spectra's CFO: "[The Goldman banker] said he had to read from a script that had two messages."). The Spectra CFO told Goldman that "any indication of interest would have to be conditioned on further due diligence." Id. Spectra said it could "move quickly" and "be more specific subject to diligence," but the script did not allow for that option. JX 970. As one Goldman banker put it: "Does [Spectra] 'get it' that they aren't going to get diligence without a written proposal?" Id. The inverted approach effectively shut out Spectra. TransCanada had not bid without due diligence, and no one else was going to either. See, e.g., JX 1399 at 3 (discussing TransCanada's need for "30 to 45 days of due diligence in order to firm up the potential offer").

         Later on March 12, Spectra's head of M&A made a follow-up call. He said to expect a written offer in the "next few days" absent a "major bust." JX 992. The banker who took the call found Spectra's assurance credible, but Skaggs and Smith were not interested.[19]The Board-approved script meant that Columbia could only entertain a "serious written proposal," which Smith defined as

a bona fide proposal that says I will pay you X for your company. Hard and fast. No outs. No anything. No way to wiggle out of anything. This is going to happen. You're going to pay whatever you're going to pay per share and we're going to sign that agreement and we're done. I don't know of any company that would do that in that short of a timeframe.

         Smith Tr. 272. Spectra never made a written offer, and TransCanada never faced competition or a meaningful threat of competition from the anonymous yet "credible, large" industry player that Columbia's management had described. See Poirier Tr. 417-18.

         N. TransCanada Changes Its Offer.

         On March 14, 2016, Columbia renewed TransCanada's exclusivity through March 18, making it retroactive to March 12. PTO ¶ 617; see JX 978. After the renewal, Skaggs learned that TransCanada was revising its offer. See JX 1005; JX 1006. Citing execution risk with the stock component, TransCanada reduced its offer from $26 per share to $25.50, all cash. PTO ¶ 618. TransCanada threatened that if Columbia did not accept its reduced offer, then TransCanada would "issue a press release within the next few days indicating its acquisition discussions had been terminated." Id. Exclusivity terminated automatically upon receipt of TransCanada's reduced offer. See JX 978.

         At a telephonic meeting held the same day, the Board acknowledged that TransCanada was pushing Columbia to act before Spectra could make an offer.[20] The Board decided to proceed with TransCanada as long as the termination fee in the Merger Agreement did not exceed 3% of equity value. See id. On March 15, 2016, Columbia and TransCanada agreed to a termination fee of 3%.

         O. The Board Approves The Merger Agreement.

         On March 16 and 17, 2016, the Board convened to consider the Merger. Sullivan & Cromwell reviewed the Merger Agreement. Goldman and Lazard opined that the consideration was fair to Columbia's stockholders. Goldman presented a DCF analysis that valued Columbia's stock at $18.64-$23.50 per share. JX 1016 at 107. Lazard's DCF ranges valued the stock at $18.88-$24.38 per share on a sum-of-the-parts basis and at $20.00- $25.50 per share on a consolidated basis. Id. at 80; JX 1136 at 75-76. Other valuation methods generated higher and lower ranges.[21] The Board determined that there was a serious risk that TransCanada would withdraw its offer if Columbia delayed signing to buy time for Spectra. The Board also determined that Spectra was unlikely to make a competitive offer, if it made one at all.[22]

         At the conclusion of the meeting, the Board unanimously approved the Merger Agreement. Its terms provided for (i) a $309 million termination fee equal to 3% of the Merger's equity value, (ii) a no-shop provision, and (iii) a fiduciary out that the Board could exercise after giving TransCanada four days to match any superior proposal. JX 1025 §§ 4.02, 7.02(b).

         P. Columbia's Stockholders Approve the Merger.

         Columbia held a special meeting of stockholders on June 22, 2016, to consider the Merger. Holders of 73.9% of the outstanding shares voted in favor of the Merger. Holders of 95.3% of the shares present in person or by proxy at the meeting voted in favor of the Merger. PTO ¶¶ 5-6. The Merger closed on July 1, 2016.

         II. LEGAL ANALYSIS

         "An appraisal proceeding is a limited legislative remedy intended to provide shareholders dissenting from a merger on grounds of inadequacy of the offering price with a judicial determination of the intrinsic worth (fair value) of their shareholdings." Cede & Co. v. Technicolor, Inc. (Technicolor I), 542 A.2d 1182, 1186 (Del. 1988). Section 262(h) of the Delaware General Corporation Law states that

the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, 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.

8 Del. C. § 262(h). The statute thus places the obligation to determine the fair value of the shares squarely on the court. Gonsalves v. Straight Arrow Publ'rs, Inc., 701 A.2d 357, 361 (Del. 1997).

         Because of the statutory mandate, the allocation of the burden of proof in an appraisal proceeding differs from a traditional liability proceeding. "In a statutory appraisal proceeding, both sides have the burden of proving their respective valuation positions . . . ." M.G. Bancorp., Inc. v. Le Beau, 737 A.2d 513, 520 (Del. 1999). "No presumption, favorable or unfavorable, attaches to either side's valuation . . . ." Pinson v. Campbell-Taggart, Inc., 1989 WL 17438, at *6 (Del. Ch. Feb. 28, 1989). "Each party also bears the burden of proving the constituent elements of its valuation position . . ., including the propriety of a particular method, modification, discount, or premium." Jesse A. Finkelstein & John D. Hendershot, Appraisal Rights in Mergers and Consolidations, Corp. Prac. Series (BNA) No. 38-5th, at A-90 (2010 & 2017 Supp.) [hereinafter Appraisal Rights].

         As in other civil cases, the standard of proof in an appraisal proceeding is a preponderance of the evidence. M.G. Bancorp., 737 A.2d at 520. A party is not required to prove its valuation conclusion, the related valuation inputs, or its underlying factual contentions by clear and convincing evidence or to exacting certainty. See Triton Constr. Co. v. E. Shore Elec. Servs., Inc., 2009 WL 1387115, at *6 (Del. Ch. May 18, 2009), aff'd, 2010 WL 376924 (Del. Jan. 14, 2010) (ORDER). "Proof by a preponderance of the evidence means proof that something is more likely than not. It means that certain evidence, when compared to the evidence opposed to it, has the more convincing force and makes you believe that something is more likely true than not." Agilent Techs., Inc. v. Kirkland, 2010 WL 610725, at *13 (Del. Ch. Feb. 18, 2010) (internal quotation marks omitted).

         "In discharging its statutory mandate, the Court of Chancery has discretion to select one of the parties' valuation models as its general framework or to fashion its own." M.G. Bancorp., 737 A.2d at 525-26. "The Court may evaluate the valuation opinions submitted by the parties, select the most representative analysis, and then make appropriate adjustments to the resulting valuation." Appraisal Rights, supra, at A-31 (collecting cases). The court also may "make its own independent valuation calculation by . . . adapting or blending the factual assumptions of the parties' experts." M.G. Bancorp., 737 A.2d at 524. It is also "entirely proper for the Court of Chancery to adopt any one expert's model, methodology, and mathematical calculations, in toto, if that valuation is supported by credible evidence and withstands a critical judicial analysis on the record." Id. at 526. "If neither party satisfies its burden, however, the court must then use its own independent judgment to determine fair value." Gholl v. eMachines, Inc., 2004 WL 2847865, at *5 (Del. Ch. Nov. 24, 2004).

         In Tri-Continental Corporation v. Battye, 74 A.2d 71 (Del. 1950), the Delaware Supreme Court explained in detail the concept of value that the appraisal statute employs:

The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents the true or intrinsic value, . . . the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value. Thus, market value, asset value, dividends, earning prospects, the nature of the enterprise and any other facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholder's interest, but must be considered . . . .[23]

         Subsequent Delaware Supreme Court decisions have adhered consistently to this definition of value.[24] Most recently, the Delaware Supreme Court reiterated that "[f]air value is . . . the value of the company to the stockholder as a going concern," i.e. the stockholder's "proportionate interest in a going concern." Verition P'rs Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128, 132-33 (Del. 2019).

         The trial court's "ultimate goal in an appraisal proceeding is to determine the 'fair or intrinsic value' of each share on the closing date of the merger." Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd., 177 A.3d 1, 20 (Del. 2017) (quoting Cavalier Oil, 564 A.2d at 1142-43). To accomplish this task, "the court should first envisage the entire pre-merger company as a 'going concern,' as a standalone entity, and assess its value as such." Id. (quoting Cavalier Oil, 564 A.2d at 1144). When doing so, the corporation "must be valued as a going concern based upon the 'operative reality' of the company as of the time of the merger," taking into account its particular market position in light of future prospects. M.G. Bancorp., 737 A.2d at 525 (quoting Cede & Co. v. Technicolor, Inc. (Technicolor IV), 684 A.2d 289, 298 (Del. 1996)); accord Dell, 177 A.3d at 20. The concept of the corporation's "operative reality" is important because "[t]he underlying assumption in an appraisal valuation is that the dissenting shareholders would be willing to maintain their investment position had the merger not occurred." Technicolor IV, 684 A.2d at 298. Consequently, the trial court must assess "the value of the company . . . as a going concern, rather than its value to a third party as an acquisition." M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999).

         "The time for determining the value of a dissenter's shares is the point just before the merger transaction 'on the date of the merger.'" Appraisal Rights, supra, at A-33 (quoting Technicolor I, 542 A.2d at 1187). Put differently, the valuation date is the date on which the merger closes. Technicolor IV, 684 A.2d at 298; accord M.G. Bancorp., 737 A.2d at 525. If the value of the corporation changes between the signing of the merger agreement and the closing, then the fair value determination must be measured by the "operative reality" of the corporation at the effective time of the merger. See Technicolor IV, 684 A.2d at 298.

         The statutory obligation to make a single determination of a corporation's value introduces an impression of false precision into appraisal jurisprudence.

[I]t is one of the conceits of our law that we purport to declare something as elusive as the fair value of an entity on a given date . . . . [V]aluation decisions are impossible to make with anything approaching complete confidence. Valuing an entity is a difficult intellectual exercise, especially when business and financial experts are able to organize data in support of wildly divergent valuations for the same entity. For a judge who is not an expert in corporate finance, one can do little more than try to detect gross distortions in the experts' opinions. This effort should, therefore, not be understood, as a matter of intellectual honesty, as resulting in the fair value of a corporation on a given date. The value of a corporation is not a point on a line, but a range of reasonable values, and the judge's task is to assign one particular value within this range as the most reasonable value in light of all the relevant evidence and based on considerations of fairness.[25]

         Because the determination of fair value follows a litigated proceeding, the issues that the court considers and the outcome it reaches depend in large part on the arguments advanced and the evidence presented.

An argument may carry the day in a particular case if counsel advance it skillfully and present persuasive evidence to support it. The same argument may not prevail in another case if the proponents fail to generate a similarly persuasive level of probative evidence or if the opponents respond effectively.

Merion Capital L.P. v. Lender Processing Servs., L.P., 2016 WL 7324170, at *16 (Del. Ch. Dec. 16, 2016). Likewise, the approach that an expert espouses may have met "the approval of this court on prior occasions," but may be rejected in a later case if not presented persuasively or if "the relevant professional community has mined additional data and pondered the reliability of past practice and come, by a healthy weight of reasoned opinion, to believe that a different practice should become the norm . . . ." Global GT LP v. Golden Telecom, Inc. (Golden Telecom Trial), 993 A.2d 497, 517 (Del. Ch.), aff'd, 11 A.3d 214 (Del. 2010).

         In this case, the parties proposed three valuation indicators: (i) the deal price minus synergies, (ii) Columbia's unaffected trading price, and (iii) a DCF analysis. The petitioners relied on the DCF analysis. The respondent relied on the other two metrics. Although technically the respondent in an appraisal proceeding is the surviving company, the acquirer is typically the real party in interest on the respondent's side of the case. In this case, that party is TransCanada. Reflecting this reality, this decision refers to the respondent's arguments as TransCanada's.

         A. Deal Price

         TransCanada contends that the deal price of $25.50 per share is a reliable indicator of fair value if adjusted downward to eliminate elements of value arising from the Merger. The petitioners argue that the deal price should receive no weight, but that if it does receive weight, then it should be adjusted upward to reflect improvements in value that Columbia experienced between signing and closing. As the proponent of using the deal price, TransCanada bore the burden of establishing its persuasiveness. Each side bore the burden of proving its respective adjustments.

         1. Guidance Regarding How To Approach The Deal Price

         In three recent decisions, the Delaware Supreme Court has endorsed using the deal price in an arm's-length transaction as evidence of fair value.[26] In each decision, the Delaware Supreme Court weighed in on aspects of the sale process that made the deal price a reliable indicator of fair value, both by describing guiding principles and by applying them to the facts of the case. These important decisions illuminate what a trial court should consider when assessing the deal price as a valuation indicator.

         a.D ...


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