SS M&A Litigation Outlook - Flipbook - Page 14
ln re. Appraisal of Panera Bread Co.,
C.A. No. 2017-0593-MTZ (Del. Ch. Jan. 31, 2020)
Why it is important
In another appraisal valuation decision following the
Delaware Supreme Court’s ruling in Dell v. Magnetar
Global Event Driven Master Fund Ltd., the Court of
Chancery found that deal price minus synergies was
the proper way to measure the fair value of Panera
Bread Company’s (Panera) shares. The court rejected
the plaintiffs’ arguments that the company was worth
more than the buyer paid based on comparables
or a discounted cash flow analysis, finding that,
although some aspects of the sale process were “suboptimal,” the sale process nonetheless contained
sufficient indicia of reliability, including because (1)
the parties negotiated at arm’s length; (2) Panera’s
board consisted of disinterested and independent
directors with “deep knowledge of the market and
of Panera’s value”; (3) the buyer had conducted
extensive due diligence and repeatedly raised its offer
during negotiations; (4) Panera had approached
all other logical buyers; and (5) Panera received no
other offers, either after news of the planned deal
leaked or after the merger agreement was signed.
After subtracting synergies, the court concluded that
the fair value was lower than the deal price, and that
Panera therefore had overpaid the plaintiffs when it
pre-paid the deal price to cut off statutory interest as
permitted by a recent amendment to Section 262(h)
of the Delaware General Corporate Law. As a matter
of first impression, the court held that Panera was not
entitled to a refund because the appraisal statute does
not authorize a refund and because Panera did not
negotiate a clawback (or refund) provision with the
plaintiffs as part of a larger prepayment stipulation,
as some other companies have done. Therefore,
in instances where prepayment is considered,
companies may be more likely to pursue clawback
agreements in the wake of this decision, which
otherwise reinforces the importance of a documented,
robust sale process.
Summary
This appraisal action followed the acquisition of
Panera Bread Company (Panera) by a buyer in
July 2017. The buyer acquired Panera for US$315
per share, and 97 percent of the 80.26 percent
of outstanding shares that voted approved the
acquisition. Dissenting shareholders brought
separate lawsuits under the Delaware appraisal
statute, and those actions were subsequently
consolidated. After Panera prepaid the sale price
and statutory interest through the prepayment
date, certain shareholders withdrew their demands.
The remaining petitioners held a total of 785,108
common shares of Panera, and argued for a
valuation of US$361 per share based on a discounted
cash flow or comparable sale valuation methodology.
The court disagreed and held, after a six day trial,
that the deal price minus synergies was the best
evidence of fair value.
The court based its ruling on objective indicia that
the sale process was reliable. It was an arm’s length
transaction, directed by an independent board
without conflicts of interest. In addition, Panera
was able to increase the buyer’s bid beyond its
stated price ceiling, thereby achieving substantially
greater value for its shareholders, and no other
potential bidders emerged following a pre-signing
leak of the potential deal or in the three month postsigning process, which the court emphasized as a
particularly important fact in light of what the court
found to be the board’s “impeccable knowledge” of
the company and solicitation of all logical alternate
buyers. Other elements of the deal, such as a
three percent termination fee with a fiduciary out,
matching rights, and contingency fee payments for
the financial advisor on the deal, were all considered
routine and unremarkable.
rushed process with no market check; (2) a lack of an
independent valuation of the company until the day
before the board accepted the offer; (3) allegations
that Morgan Stanley, the Board’s financial advisor
for the deal, was conflicted, particularly because
the buyer’s coverage banker was involved in certain
deal-related communications; and (4) allegations
that the CEO’s desire to retire from his role led him
to cede value. Although the court found that the
amount Panera had prepaid to plaintiffs – which
was based on the deal price – was greater than
the fair value of their shares, in an issue of first
impression, the court ruled that the company could
not recoup the difference between the sale price and
the court’s valuation. Panera had not negotiated a
clawback provision as part of a broader prepayment
stipulation with the plaintiffs and, absent such
agreement, recoupment was not authorized by the
Delaware appraisal statute.
In so holding, the court rejected several arguments
plaintiffs raised for why the deal price was not
a reliable indicator of fair value, including: (1) a
14
