Posts in Appraisal

Court Of Chancery Allocates Value For Preferred Stcok

In Re: Appraisal Of The Orchard Enterprises Inc., C.A. 5713-CS (July 18, 2012)

One of the more difficult issues in appraisal litigation is how to allocate value between common and preferred stock.  Here the preferred stock was entitled to dividends on an as-converted basis and the Court used that forrmula to allocate the enterprise's value between the preferred and common stock.

The decision is also a primer on how to do a discounted cash flow valuation.

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Court Of Chancery Values Smaller Company

Gearreald v. Just Care Inc., C.A. 5233-VCP (April 30, 2012)

This is an interesting appraisal case because it explains the issues dealing with valuing a smaller company.  As they are riskier, for example, a small company risk premium is proper in determining what its cost of capital should be.

 

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Court Of Chancery Rejects Appraisal Claim

Krieger v. Wesco Financial Corp., C.A.6176-VCP (October 13, 2011)

Some corporate mergers give stockholders of the acquired company an option to take cash or the stock of the acquiror.  If the stockholder fails to chose, then she typically gets the cash.  The appraisal statute only provides for an appraisal claim when the stockholder is required to take cash and not publicly traded stock.  Here the plaintiff who had not made the election to take stock and so got cash argued she was forced to take cash and hence was entitled to appraisal of her shares.

The Court said "no," reasoning that so long as she had a choice she was not forced to take the cash.  Risking the wrath of some members of Congress, the Court cited to a famous French philosopher on why you still have a choice even when you do not decide to act.  That too is your choice.

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Court Of Chancery Explains Valuation Technique Preferences

S. Muoio & Co. v. Hallmark Entertainment Investments Co., C.A. 4729-CC (March 9, 2011)

There are several different ways to value an enterprise.  For a while, discounted cash flow seemed to be the courts' preference.  Then when the markets were thought to be "efficient," market values were given weight.  This opinion is a good example of the current state of flux where the Court is inclined to take into account all approaches, test to see if there are any outliers, look at the business realities involved and thoroughly analyze the parties' contentions before reaching a determination.  In short, it no longer is as simple as it once was and the new business world we live in seems to warrant  that approach.

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Court Of Chancery Explains When Fair Is What You Get

Reis v. Hazelett Strip-Casting Corporation, C.A. 3552-VCL (January 21, 2011)

When a reverse stock split eliminates minority stockholders, they are entitled to be paid the "fair value" of their stock. This decision explains what that means.  In particular, it does not mean they get the same value as if their stock were subject to an appraisal.  While the valuation process is very similar, it is affected by the standard of review involved, particularly if the squeeze out was done unfairly and the intrinsic fairness standard applies.

The opinion is also an excellent review of the overall Delaware law on the standard of review for any transaction.

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Supreme Court Refuses To Adopt Deal Price As Conclusive

Golden Telecom, Inc. v. Global GT LP, C.A. No. 392, 2010 (December 29, 2010)

In the last few years, the Court of Chancery has sometimes expressed confidence that the deal price set after a solid market check and proper deal negotiations may be the "fair value" to be paid to dissenters in a statutory appraisal proceeding.  Here the Delaware Supreme Court firmly rejects that notion and requires the trial court to independently go through the predicable war of the experts and decide what is fair value.  While this result seems dictated by the Delaware statute, the "Great Recession" has no doubt had an impact as well.

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Court of Chancery Upholds Right To Change Your Mind

Roam-Tel Partners v. AT&T Mobility Wireless Operations Holdings Inc., C.A. 5745-VCS (December 17, 2010)

This decision holds that a stockholder who surenders his shares and is sent a check for the merger consideration may still demand appraisal if he returns the check and makes his demand in time.  Thus, he can change his mind if he does it fast enough.

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Court of Chancery Explains Valuation Principles

Berger v. Pubco Corp., C.A. 3414-CC (May 10, 2010)

This decision explains 2 points of appraisal law.  First, when the discounted cash flow approach is used to value a company, no control premium is added to the result.  That sort of premium is only used when the valuation is based on comparable market prices or "comps" that reflect the minority discount inherent in the price of a small block of stock.

Second, at least in this case, there is no deduction for the capital gain tax due on the sale of assets by a holding company.  Instead, those assets are valued on a pre-tax basis.

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Court Of Chancery Rejects Market In Appraisal Determination

Global GT LP v. Golden Telecom Inc., C.A. 3698 (April 23, 2010)

This is an interesting appraisal decision for 2 reasons.  First, the Court declined to use the price set in the market as a strong indicator of value notwithstanding recent decisions in Delaware that had been inclined to do so. The Court was not satisfied that in the case of this company with its dominant stockholders announcing that they would only support the deal on the table that there was a real market check.

Second, the Court's analysis of how to do a discounted cash flow valuation again illustrates its preference for expert opinion based on a knowledge of the industry involved.

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Court Of Chancery Retreats From Efficient Market Theory

In re Sunbelt Beverage Corp. Shareholder Litigation, C.A. 16089-CC (January 5, 2010, revised February 15, 2010)

This is an interesting appraisal case for at least 2 reasons.  First, it illustrates what not to do in getting a fairness opinion.  A rush job with no intent to reach a fair result is doomed to be rejected. Second, the Court for the first time in recent memory notes that criticism of the efficient market theory may be justified and did not accept an arguably arms length sale as solid evidence of share value. In the past the Court was moving toward acceptance of market values as setting the "fair value" required by the Delaware appraisal statute.

The case does involve an unusual set of facts and in the long run may not mark a great shift in approach, but it is worth noting for the usual careful analysis of the facts to reach the right result free of a formulaic approach.

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Court of Chancery Limits When a Stockholder May Claim Appraisal

DiRienzo v. Steel Partners Holdings L.P., C.A. 4506-CC (December 08, 2009)

While it is well known that appraisal rights are limited to stockholders of record, sometimes stockholders do not really understand what it means to be "of record." They think if their name is on a brokerage statement, they are a "stockholder of record." Wrong! They must be listed on the records of the company to be "of record," and most stock in public entities is held by nominees, such as Cede & Co., to facilitate trading.

Here, the Court examines when the corporation is estopped by its conduct from denying appraisal rights and finds that the elements of waiver or estoppel are hard to establish and not present in this case.

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Court of Chancery Holds That Statutory Right to Fair Value May Be Arbitrable

Julian v. Julian, C.A. 4137-VCP (September 9, 2009).

For a number of reasons, a plaintiff may seek to litigate his claim in the Court of Chancery rather than trust his case to arbitration.  This decision illustrates how hard it is to avoid arbitration when the arbitration clause in the parties' contract is broadly drafted.  Thus, this decision holds that the statutory right to fair value for a retiring member of an LLC may be subject to arbitration, if the LLC agreement so provides.

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Supreme Court Establishes New Remedy For Disclosure Violation

Berger v. Pubco Corporation, Del Supr. C.A. 509, 2008 (July 9, 2009)

In this precedent setting decision, the Supreme Court holds that stockholders who are cashed out in a short-form merger may bring a class action for damages when there are violations of the duty of disclosure in the materials sent to them notifying them of the merger. In prior decisions, the Court of Chancery had reached somewhat inconsistent results in such cases, granting a quasi-appraisal remedy, but sometimes requiring stockholders to opt-in to be part of the stockholder group obtaining appraisal rights and also requiring an escrow of the merger consideration.

Here, the Supreme Court rejected both of those limits on the remedy. Instead, it held that all the minority stockholders had the right to be part of a class entitled to appraisal rights, subject to a right to opt-out of the class. In addition, stockholders do not have to escrow any of the merger consideration while the action is pending.

This result creates a "free rider" issue as there is little incentive for stockholders to opt-out. While it is possible the trial court will decide the fair value of their stock in the appraisal proceedings is less than the merger consideration, for smaller stockholders, the amounts in question may not justify the company enforcing any right to a refund.

Of course, the way out of this dilemma is to provide fair disclosure in the first place.

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Court of Chancery Upholds Appraisal Demand

Andrew And Suzanne Schwartz 2000 Family Trust v. AM Apparel Holdings, Inc., C.A. 3172-VCS (Del. Ch. July 28, 2008)

The Delaware law has long been that the statutory requirements to obtain appraisal rights must be met, exactly. However, this decision is another example of when the Court will uphold appraisal rights when the company itself fails to comply with the statutory obligation of notice or has issued a confusing notice of the right to demand appraisal.

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Court of Chancery Explains Quasi Appraisal Remedy

Berger v. Pubco Corp., C.A. 3414-CC (Del. Ch. May 30, 2008)

More often than we may expect, Delaware corporations commit errors in notifying stockholders of their right to an appraisal after a merger. For some reason, on several occasions the wrong version of the appraisal statute was sent to the stockholders, violating the statutory requirement that a current version accompany the notice of appraisal rights. More commonly there is a disclosure problem, often a failure to provide enough information to permit the stockholders to decide if they should seek appraisal rights. This case involves both using the wrong version of the statute and failing to tell the stockholders of a closely held company how the merger price was set. Both those errors called for the Court to grant quasi appraisal rights.

The decision is particularly interesting for its explanation of how quasi appraisal proceedings should work. Basically, it involves starting all over again by sending out a corrected notice with the right statute attached and giving stockholders another chance to seek appraisal. Note that this is more favorable to the company than simply holding that the case may proceed as a class action for all minority stockholders.

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