Delaware Chancery Court Rules in Favor of Hedge Fund in Software Appraisal

The Delaware Chancery Court ruled for a petitioning hedge fund in appraisal litigation stemming from the acquisition of Pivotal Software, Inc. by controlling shareholder VMware, Inc., as the McCarter & English firm reported.

The Delaware Chancery Court corrected its March 2024 decision setting Pivotal’s fair value due to a “squeeze-out merger” that some shareholders alleged undervalued the business and created a buyer windfall at their expense. 

Pivotal, a software and services company, was created through a spin-off of assets held by VMware and EMC Corporation. Dell Technologies, Inc., controlled by Michael Dell, beneficially owned more than 94% of the voting power of both Pivotal’s outstanding common stock classes.

Since Dell also held a controlling interest in VMware, he controlled both the acquirer (VMware) and the target (Pivotal). Pivotal followed procedures intended to be consistent with MFW protections, including establishing a special committee of independent directors to review the transaction.

After negotiating, VMware agreed to pay $15.00 per share, or about $2.7 billion, to acquire Pivotal.

HBK Master Fund LP and associates, holding about 10 million Pivotal shares, argued that $15.00 per share was undervalued.

The petitioner HBK claimed a fair value of $20.00 per share based on a comparable company’s analysis. The court made two adjustments to HBK’s analysis, yielding a value of $14.75 per share.

The respondent argued that the fair value was $12.17 per share based on a discounted cash flow analysis. The court made adjustments to the analysis, resulting in a value of $16.13 per share. The court then averaged the $14.75 and $16.13 per share values to arrive at a $15.44 fair value in the corrected opinion, a 44-cent per share gain for the petitioner.

According to the article, a bigger takeaway from the decision “may be the court’s determination that the appraisal statute does not require deference to the deal price in controller squeeze-outs conditioned on MFW protections.”