The Delaware Court of Chancery on Feb. 23 said AOL Inc.'s $4.4 billion sale to Verizon Communications Inc. overvalued the once-powerful media technology company by more than $1.30 per share, in another blow to holdout shareholders looking to exercise their appraisal rights in Delaware.

The ruling, from Vice Chancellor Sam Glasscock III, was the second this month to find the fair value below the deal price in light of two recent decisions by the state Supreme Court. However, both reflected the differences in reasoning and valuation methods that judges employ at a time when the very nature of appraisal in Delaware is in flux.

In a 51-page memorandum opinion, Glasscock said the AOL merger did not qualify as a robust and open sale process that would give the $50-per-share deal price particular weight under the high court's rulings last year in the appraisals of Dell Inc. and DFC Global Corp.

Certain built-in deal protections and “unusually preclusive” statements from AOL's CEO, Glasscock said, had limited market participation on the back end of the transaction, making deal price an unreliable indicator of fair value.

Instead, Glasscock toggled between divergent valuations from petitioners and the company, using the deal price as a “check” on his own discounted cash flow analysis. The end result was a 2.6 percent reduction in the amount that dissident investors would receive for their shares.

“I conclude that, under the unique circumstances of this case, the sales process was insufficient to this task, and the deal price is not the best evidence of fair value,” Glasscock wrote.

The ruling came on the heels of Vice Chancellor J. Travis Laster's Feb. 15 finding that Hewlett-Packard Co. had also overpaid to acquire Aruba Networks Inc. in May 2015. In that case, Laster set fair value at Aruba's unaffected market price of $17.13 per share, even though the merger qualified as an arm's-length transaction under Dell and DFC. 

According to Laster, not even Aruba had argued for a result so far below the $24.67-per-share deal price.

Stuart M. Grant, attorney for the Aruba petitioners, called Laster's opinion “theater of the absurd,” saying that it was likely intended to force a showdown between the Chancery and Supreme Courts over the recent guidance in Dell and DFC.

“It shows how foolish the Delaware Supreme Court's opinions in Dell and DFC are when applied to other cases,” Grant, managing director of Grant & Eisenhofer, said in a statement at the time.

The AOL case, however, involved a completely different set of factors that presented a “close question” of whether the firm's sale fit the Dell and DFC criteria.

According to Glasscock's opinion, the AOL board opted not to conduct a presale auction and instead chose to deal with potential buyers individually. On the back end, the merger agreement included a no-shop provision and gave Verizon unlimited three-day matching rights, which limited further competition.

Glasscock was also troubled by public comments from chairman and CEO Tim Armstrong that he had ”committed to doing the deal with Verizon” and had given his “word” that the deal would happen.

“I find the unusually preclusive statements by the CEO, in light of the other attributes of this transaction, such that I cannot be assured that a less restrictive environment was unlikely to have resulted in a higher price for AOL,” he said. “Accordingly, I am unable to ascribe fair value solely to market price.”

Glasscock ultimately accepted AOL's discounted cash flow analysis of $44.85 per share of AOL stock adjusted the price upward by $3.85 per share to reach a fair value of $48.70.

Grant, who also represented the AOL investors, was not available Monday to comment on the case, and an attorney for the company did not return a call seeking comment on the ruling.

Attorneys for companies in appraisal cases argue that the high court's rulings in Dell and DFC were needed to stem the rising tide of appraisal arbitrage, where firms would buy up large amounts of companies' stock on news that a sale was imminent in order to exercise appraisal rights under the Delaware General Corporation Law. They point to a steep decrease in such cases as evidence that the Supreme Court has struck the proper balance in Dell and DFC.

Counsel for appraisal petitioners, on the other hand, said that the rulings encourage judges to find fair value below the deal price, which would effectively strip dissident investors of a statutory remedy available under state law.

Grant was joined by fellow Grant & Eisenhofer attorneys Mary S. Thomas and Laina Herbert in representing the petitioners.

AOL was represented by William Savitt, Ryan A. McLeod, Andrew J.H. Cheung, Nicholas Walter and Courtney L. Shike of Wachtell, Lipton, Rosen & Katz and Kevin R. Shannon, Berton W. Ashman Jr. and Christopher N. Kelly of Potter Anderson & Corroon.

The case is captioned In re Appraisal of AOL.