In a corrected March 12, 2024 decision in HBK Master Fund LP v. Pivotal Software Inc., Del. Ch., No. 2020-0165, the Delaware Chancery Court ruled in favor of a petitioner hedge fund in an appraisal litigation stemming from the acquisition of Pivotal Software, Inc. (Pivotal) by controlling shareholder VMware, Inc. (VMware).
The first-order issue before the court was, in essence, the fair value of Pivotal in the context of a “squeeze-out merger” that certain shareholders alleged undervalued the business, creating a buyer windfall at their expense. This corrected opinion found Pivotal’s fair value to be $15.44 per share, above the $15.00 per share deal price—and, notably, reversing the court’s August 2023 opinion, which had found the fair value to be $14.83 per share.
Pivotal was a software and services company created in August 2013 through a spin-off of assets held by VMware and EMC Corporation. Dell Technologies, Inc., controlled by Michael Dell, beneficially owned approximately 94.4% of the combined voting power of both classes of Pivotal’s outstanding common stock. Because Dell also held a controlling interest in VMware, Michael Dell in effect controlled both the acquirer (VMware) and the target (Pivotal). Reflecting this governance backdrop, Pivotal followed procedures intended to be consistent with MFW protections, including establishing a special committee of independent directors to review the transaction. Following negotiations, VMware agreed to acquire Pivotal in a 2019 transaction valued at about $2.7 billion, or $15.00 per share of Pivotal.
HBK Master Fund LP (HBK) and associated entities collectively holding about 10 million Pivotal shares argued that $15.00 per share undervalued Pivotal and sought to exercise their appraisal rights.
HBK, the petitioner, presented expert testimony which, based on a comparable companies analysis, asserted the fair value of Pivotal to be $20.00 per share. The court made two adjustments to the petitioner’s analysis: (i) re-weighting the petitioner’s multiplier to “account more properly for Pivotal’s services segment” and (ii) declining to apply an implicit minority discount. These adjustments yielded a value of $14.75 per share.
Relying primarily on a discounted cash flow analysis, the respondent argued that Pivotal’s fair value was $12.17 per share, which respondent posited was bolstered by an unaffected share price of $8.30. The court made a number of adjustments to the respondent’s analysis, resulting in a value of $16.13 per share.
Chancellor McCormick then averaged the $14.75 and $16.13 per share values to arrive at a $15.44 per share fair value in this corrected opinion, yielding a 44 cent per share gain for the petitioner.
A broader 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. Yet, as the court pointed out, “The slightly longer answer is that even as the court independently measures going concern value, companies remain incentivized to deploy strong procedural protections for minority stockholders, as those protections can help reduce exposure to liability in appraisal actions, and they did to a degree in this action.”