Sometimes Silence is Golden: “Dell Compliance” Following Aruba III

The Harvard Law School Forum on Corporate Governance and Financial Regulation 2019-06-13

Posted by Michael Kass, BlueMountain Capital Management, LLC., on Thursday, June 13, 2019
Editor's Note: Michael Kass [1] is Portfolio Manager at BlueMountain Capital Management, LLC. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

The frequently discussed but generally unwritten story underlying the three judicial opinions in Verition Partners v. Aruba Networks [2] involves a dispute between two luminaries of the Delaware Corporate Law—Vice Chancellor Travis Laster and Chief Justice Leo Strine. [3]

The story goes that Vice Chancellor Laster, fuming over his “rebuke” in Dell, [4] a decision not written but generally attributed to the Chief Justice, sought to force acknowledgement of the faults in that decision by adopting an extreme view of its logic and interpreting it reductio ad absurdum for a “result that no litigant would even ask for”. He did so by (i) finding an odious transaction process involving rampant conflicts of interest, negotiating negligence and selective disclosure to be sufficiently reliable to evidence fair value (“FV”) because its record of defects was, in his view, no worse than the one in Dell, [5] while, nevertheless, (ii) ruling that the cleanest measure of FV was the Company’s so-called unaffected stock price (“USP”), a metric that was neither argued by any party at trial nor particularly well suited to the FV measurement objective, given strong evidence of conflicts of interest and the exploitation of material non-public information found in the trial record. Similar to the first holding, on process sufficiency (or what was subsequently coined by Vice Chancellor Glasscock as “Dell Compliance” in AOL), [6] the latter holding on “USP Relevance” was grounded in the Vice Chancellor’s comparison of the factual record of Aruba against those in Dell and DFC, [7] and the Delaware Supreme Court’s heavy deference to observable market measures of value in those cases. Not to be outdone by this deft, “hoisted on your own petard” tactic by the Vice Chancellor, the Chief Justice returned the favor in a manner that only a superior tribunal can—by (a) reversing the Chancery Court on the USP Relevance holding via a scathing criticism of its reductionist argumentation, (b) affirming its Dell Compliance holding with virtually no discussion on the merits of the Chancery Court’s adjudication of that issue, and (c) directing a verdict in reliance on the Dell Compliance holding—notwithstanding obvious conflicts in the trial record on the quantification of deductible synergies that, absent judicial gloss, would have frustrated such implementation. While motives remain opaque, the twin effects of this directed verdict are to establish finality (i.e., ensure there will be no Aruba IV or, more importantly, Aruba V) and, by implication, to set in stone the Vice Chancellor’s findings of fact that implicitly sanction as “reliable” a very, very dirty deal. [8]