In a memorandum opinion in the case of In re Appraisal of Panera Bread Company, C.A. No. 2017-0593-MTZ (Del. Ch. Jan. 31, 2020), the Delaware Court of Chancery ruled that deal price, minus the value of synergies, was the correct metric to value the stock of Panera Bread Company (“Panera”), because the process that yielded the deal price bore sufficient objective indicia of reliability. The Court found that under this metric, the dissenting stockholders received more than fair value for each share of Panera stock but that nonetheless, because Panera prepaid the entire deal price to dissenting stockholders without deducting any value for synergies, and did not negotiate a clawback, Panera had no right to a refund under the appraisal statute, Delaware General Corporation Law (“DGCL”) § 262.

In 2017, JAB Holdings B.V. (“JAB”) acquired Panera in a cash-out merger for $315 per share. In the wake of the acquisition, multiple dissenting stockholders filed an appraisal action under DGCL § 262 asserting that the fair value of Panera stock was $361 per share. In order to reduce the amount of interest that could otherwise accrue under DGCL § 262, Panera prepaid 29 of the dissenting stockholders the deal price of $315 per share of Panera stock, along with statutory interest accrued through the payment date.

The dissenting stockholders supported their valuation with a discounted cash flow model, a comparable companies analysis, and a precedent transaction analysis, all prepared by a professor of finance and economics whom the dissenting stockholders engaged as an expert. The Court rejected the discounted cash flow model because the dissenting stockholders failed to prove its reliability and persuasiveness when compared to deal price, and rejected the comparable companies and precedent transactions analyses because there were no suitable peer groups or sufficient comparable transactions to generate reliable valuation metrics. JAB argued that deal price minus synergies should be dispositive for purposes of determining fair value, and sought a refund of any difference between its prepayment of $315 per share and fair value.

The Court held that deal price minus synergies was the best evidence of fair value because the JAB acquisition process was sufficiently reliable to make deal price persuasive evidence of fair value. The Court noted that in an appraisal proceeding under DGCL § 262(h), a court is required to perform an independent assessment of “fair value” at the time of the transaction and that a price produced by an efficient market is generally more reliable than the view of a single expert witness. The Court held that the persuasiveness of deal price as fair value depends on the reliability of the sale process. Citing several prior Delaware court holdings, the Court listed factors that could be considered indicia of reliability, including parties’ arm’s-length negotiations, board deliberation without conflicts of interest, buyer due diligence and receipt of confidential information regarding target value, and seller extraction of multiple price increases. The Court commented that in prior cases it had particularly stressed the absence of post-signing bidders as an indicator of an objective and reliable sale process probative of fair value. The Court also noted that it would consider whether any weaknesses in the sale process undermined the persuasiveness of the deal price.

In this case, the Court found that the sale process gave the deal price indicia of reliability. Those indicia included the parties’ negotiation at arm’s-length, the disinterested and independent board of directors of Panera (the “Board”), JAB’s extensive due diligence regarding Panera’s public and confidential information, and a series of price increases during negotiations that raised the merger price from $286 to $315 per share. In addition, no other parties bid on Panera either before or after the announcement of the merger, including during the three-and-a-half months between signing and closing. The Court particularly observed that Starbucks, Chipotle, and Restaurant Brands International Inc. — the three parties identified as the most likely potential bidders by Morgan Stanley, Panera’s financial adviser — did not show interest in bidding, and that Panera had in addition reached out to all other parties that had been identified as logical prospective buyers by the Board, which possessed impeccable knowledge concerning the market and Panera’s business.

The Court found that the dissenting stockholders’ claimed weaknesses in the sale process were insufficient to undermine deal price reliability. The stockholders argued that the Board was apathetic and ignorant, but the Court found that the Board exercised active oversight, was diligent in negotiating the terms of the merger and approving the merger agreement, and reviewed and authorized the actions of the Panera CEO in relation to the acquisition. The stockholders argued that the Board negotiated without a formal valuation, but the Court found that the Board possessed a deep knowledge of the internal metrics of Panera’s value, analyzed seven different valuation metrics with Morgan Stanley, and had repeatedly reviewed Panera’s five-year strategic and financial plans. The stockholders argued that the speed and confidentiality of the transaction undermined the process, and the Board failed to negotiate less restrictive deal protections. The Court found that the speed and confidentiality of the transaction benefited both parties, and that the Board did in fact negotiate for a lower termination fee and other terms that were customary for transactions of the same size and type. The stockholders argued that Panera’s CEO wished to retire and was thus conflicted and insufficiently committed to negotiating a higher price. The Court disagreed, finding that the record amply demonstrated the CEO’s commitment to Panera and to achieving the best possible price in the sale. Lastly, the stockholders argued that Morgan Stanley’s prior representation of JAB resulted in divided loyalties that undermined the quality of Morgan Stanley’s representation of Panera, but the Court found that Morgan Stanley had disclosed its prior JAB work to the Board, that Morgan Stanley’s financial incentives in the transaction were commonplace and unremarkable, and that its advice was not inadequate.

The Court found that the dissenting stockholders were entitled to payment of $303.44 per share as fair value because JAB had shown that the merger would result in $11.56 in cost savings synergies and tax synergies. The Court noted that DGCL § 262 requires that the determination of fair value in a judicial appraisal proceeding exclude any synergy value or other value the buyer expects from changes it plans to make to the target company after the acquisition. JAB adequately demonstrated that incremental cost savings would result from planned changes to the working capital structure, store-level efficiency, SG&A optimization, and supply chain of Panera. JAB also adequately demonstrated that incremental leverage tax benefits would be gained through use of financing and tax deductions. However, the Court rejected JAB’s claimed revenue synergies, holding that JAB’s assertions regarding its valuation of such synergies as part of the deal price were contradicted by its own financial modeling and rejected by its own expert.

Panera prepaid dissenting stockholders the deal price of $315 per share without including in the prepayment agreement a clawback provision requiring that, if the price the Court determined to be fair value was less than the deal price, stockholders refund the excess. The Court noted that DGCL § 262 itself does not explicitly provide for any such refund, and found that the legislative history of the statute demonstrated that the omission of a refund mechanism from the statute was intentional. The Court concluded that it therefore had no authority to order a refund of the $11.56 amount by which the prepaid price per share exceeded fair value.