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.
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.
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.
evidentiary record is vast. 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. Nine fact witnesses and five
experts testified live. The following factual findings
represent the court's effort to distill this record.
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.
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.
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.
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.
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. 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. 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.
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.
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
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.
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. 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.
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.
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.
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
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.
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.
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.
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.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.
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.
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.
1, 2015, NiSource completed the spinoff. On its first day of
trading, Columbia's stock closed at $30.34 per share.
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.
Early Interest From Possible Buyers
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
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.
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.
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.
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
The Equity Overhang
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.
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
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
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.
Renewed Talks With Possible Buyers
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)." That night Smith met with Poirier, who
said that TransCanada wanted to buy Columbia. PTO ¶ 426;
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.
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.
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
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.
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
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.
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.
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.
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.
The Equity Offering
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.
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.
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. 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.
The Poirier Meeting
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.
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." 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.
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. 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
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.
TransCanada Obtains Exclusivity.
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.
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).
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
(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
(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]
(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
(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).
TransCanada Conducts Due Diligence.
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
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.
Columbia Demands A Price.
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.
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.
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
The Wall Street Journal Leaks The Merger
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. ¶¶
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
March 10, 2016, the Board convened to discuss
TransCanada's proposal.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.
Spectra Reaches Out.
seeing the article, Spectra emailed Skaggs to propose merger
talks. 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.
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
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.
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").
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.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.
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.
TransCanada Changes Its Offer.
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.
telephonic meeting held the same day, the Board acknowledged
that TransCanada was pushing Columbia to act before Spectra
could make an offer. 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%.
The Board Approves The Merger Agreement.
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. 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.
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,
Columbia's Stockholders Approve the
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.
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
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).
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
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).
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).
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 . . . .
Delaware Supreme Court decisions have adhered consistently to
this definition of value. 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).
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).
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
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.
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
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.
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.
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.
Guidance Regarding How To Approach The Deal
three recent decisions, the Delaware Supreme Court has
endorsed using the deal price in an arm's-length
transaction as evidence of fair value. 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