Sometimes Silence is Golden: 'Dell Compliance' Following Aruba III
20 Pages Posted: 30 May 2019
Date Written: May 25, 2019
Speculation that interpersonal conflicts among Delaware judges influenced the adjudication of Verition Partners v. Aruba Networks has unfortunately chilled a more productive discussion of the three judicial opinions in this case – decisions whose subtext is key to interpreting the Delaware Supreme Court’s final determination on the case rendered last month. That opinion, “Aruba III”, simultaneously elevated the importance of the “Dell Compliance” standard – that threshold of M&A process adequacy above which the Chancery Court should lend weight to deal price in appraisal proceedings – while saying almost nothing about how that standard should be administered. Aruba III concluded a rich colloquy between Vice Chancellor Travis Laster and the Delaware Supreme Court that began with Dell in which both courts utilize reductionist arguments to debate the appropriate implications of modern ECMH theory for the adjudication of appraisal fair value in public company M&A. While often used to normatively criticize reasoning, reductionism – the practice of analyzing complex phenomenon by reference to simplified abstractions held to represent more fundamental principles –is simply used in its descriptive sense here (for want of a better term). While not inherent, reductionist reasoning in judicial opinions yields tricky precedent because the assumptions that underlie its abstractions are often poorly defined and evaluated for materiality, reducing confidence in how well they track reality. In the Dell and three Aruba decisions, reductionism in the translation of ECMH “principles” to economic reality is used so frequently and with such lax tracking of assumptions that analysis of the literal reasoning in these decisions provides little guidance on how the Chancery Court should determine Dell Compliance. Conversely, a review of their styles of argumentation is more illuminating. When evaluated in this light, Aruba III clarifies that, while couched in terms of the deference to “ECMH principles”, the bounds on the Chancery Court’s discretion found in Dell and DFC were motivated by the desire to focus public-company appraisal on atypically poor and transaction-specific process defects to avoid the categorical application of de novo valuation to broad categories of M&A transactions. By casting Dell and DFC as outlier cases in which identified process defects were simply too generically relevant and non-specific to the case record, Aruba III liberates the Chancery Court, should it so choose, to continue to utilize public company appraisal to police fiduciary misfeasance under a flexible “all relevant factors” standard, but only when process defects fall outside structural failings of “run-of-the-mill” processes and are linked to the deal price based on record evidence. By remaining silent on Dell Compliance beyond these requirements of atypicality and specificity, this bounded but consciously undefined standard appears designed to frustrate both the attempts of transaction attorneys to circumvent functional process review via formalism and the attempts of petitioners to indiscriminately pursue claims based on categorical case theories. Rather than an oversight, such silence may strike the perfect balance of preserving a useful role for public-company appraisal to improve the increasingly feckless state of post-Corwin fiduciary law, while discouraging unfettered appraisal “arbitrage”.
Keywords: Appraisal, Efficient Capital Markets Hypothesis, Dell, Aruba, Chancery
JEL Classification: G30, G34, K22
Suggested Citation: Suggested Citation