Gilbert Matthews

Sutter Securities Financial Services, San Francisco

The Delaware Court of Chancery's appraisal decision in FairXchange is summarized, and the conclusion is criticized as being inconsistent with the facts described by the Court.

Fairness opinions are not useful to shareholders if they address fairness to the company rather than to equity holders, since a transaction can be unfair to shareholders even if it is fair to to the entity. Also, a transaction can be unfair to outside shareholders even if the consideration is fair; e.g., if the outside shareholders to not receive a...

This article discusses, on a state-by-state basis, the rejection and acceptance of discounts for minority interest and lack of marketability in appraisals and in oppression and voluntary withdrawal cases. Discounts for lack of marketability at the shareholder level are rejected in most jurisdictions, but some states, including California and New Yo...

When analysts estimate a valuation discount for the lack of voting rights in the stock of a private company, they typically look to the public market. Many studies have compared the market prices of publicly traded high-vote shares with the market prices of publicly traded low-vote shares. Since publicly traded high-vote shares rarely impact contro...

A recent Delaware decision in a breach of fiduciary duty case awarded more than triple the amount originally paid to partners who were squeezed out. A key part of the decision is the Court of Chancery conclusion that the damages calculation, which was based on the projected cash flows of the partnership—a pass-through entity— should not be tax-effe...

This article explains why pre–initial public offering (IPO) studies are not a valid basis for determining marketability discounts. They are unsound in concept because the pre-IPO transactions and the subsequent IPO are priced at materially different dates and because the IPO price is not knowable at the earlier date. They are unsound in practice fo...

This article posits that using the arithmetic mean to average multiples is mathematically inferior. A multiple is an inverted ratio with price in the numerator. The harmonic mean is a statistically sound method for averaging inverted ratios. It should be used as a measure of central tendency for multiples, along with the median. Empirically, the ha...

Pre-IPO studies lead to conclusions that are unsound in theory and in practice. This article,discusses six major flaws in the data that, make the pre-IPO studies' conclusions totally unreliable for determining discounts for lack of marketability. According to published surveys, pre-IPO studies by about 40% of practitioners.

The use of arithmetic mean to average multiples is mathematically incorrect. The multiple is an inverted ratio with price in the numerator. Therefore, the harmonic mean should be used as the appropriate measure of central tendency. As a crosscheck, the median should also be considered.

This article discusses current developments in Delaware case law as they relate to valuation. It reviews all relevant Delaware Supreme Court decisions since 2017 and all relevant Court of Chancery decisions since 2019. We discuss the emphasis being placed by the Delaware courts on using DCF for valuations in related party transactions, as well as t...

This article discusses Delaware cases involving corporate valuation from the point of view of an expert witness.

This article discusses apparent conceptual and analytical errors by a North Carolina trial court in a major statutory appraisal case.

Appraisal statutes provide procedures for dissenting shareholders to receive a judicial hearing in which the court appraises the value of their interests. Appraisal rights and fair value assessments are broadly available for shareholders of private companies. However, 38 states now restrict the appraisal rights of shareholders of public companies t...

This article discusses Delaware Supreme Court decisions in 2017-19 regarding corporate valuations, primarily in appraisal cases.

The rights and the value of preferred stock have been the subject of several Delaware court decisions. These decisions are particularly significant for understanding the importance of contractual rights as the defining attribute affecting the valuation of preferred stock. Directors' fiduciary duties are primarily to common shareholders, while oblig...

This presentation summarizes valuation standards for appraisals in Delaware and discusses recent cases in 2018 and 2019.

This article discusses 2019 Delaware Supreme Court and Court of Chancery decisions regarding corporate valuations.

Chinese translation of article that discusses the valuation methods used by fairness opinion providers, expert witnesses, and the Court of Chancery in statutory appraisals. It also posits that the Court should make greater use of the comparable company method, which is used in most investment bankers' fairness opinions but is seldom used by the Cou...

This article considers recent Delaware case law on investment banker liability that has resulted in judgments against bankers and has caused them to make contributions to shareholders when some of these matters settle even when they deny liability.

In determining terminal value in a discounted cash flow (DCF) valuation, it is usually assumed that a mature company will grow at a constant rate in perpetuity. The impact of creative destruction and disruptive innovation interrupts and reverses historical growth patterns. If to the extent that the assumption of constant perpetual growth is invalid...

This article discusses the valuation methods used by fairness opinion providers, expert witnesses, and the Court of Chancery in statutory appraisals. It also posits that the Court should make greater use of the comparable company method, which is used in most investment bankers' fairness opinions but is seldom used by the Court.

This article criticizes the Delaware Court of Chancery’s use of unaffected market price in appraising Aruba Networks.

It is common practice for proxy statements to contain fairness opinions that are dated weeks (or months) prior to the mailing date. If a fairness opinion is no longer valid when a proxy statement is sent to shareholders, the proxy statement becomes misleading. Directors and special committees in related party transactions would be better protected,...

Introduction In this article, we explore a variety of issues related to statutory rights of appraisal in Delaware, and the search by which to determine the sometimes elusive concept of fair value. In the course of so doing, we: (i) discuss the statutory definition of fair value and some of the case law doctrines surrounding its application in appra...

This presentation discusses (i) the relationship between capital expenditures and depreciation; (ii) the appropriate treatment of amortization and other limited life items in a terminal value calculation; and (iii) how changes in the Tax Cuts and Jobs Act of 2017 regarding tax rates, net operating losses, interest deductions, and depreciation write...

This presentation discusses (i) the relationship between capital expenditures and depreciation; (ii) the appropriate treatment of amortization and other limited life items in a terminal value calculation; and (iii) how changes in the Tax Cuts and Jobs Act of 2017 regarding tax rates, net operating losses, interest deductions, and depreciation write...

Topics: 1. The perpetual growth rate and firm mortality 2. The relationship between capital expenditures and depreciation 3. The appropriate treatment of amortization 4. Projections, normalization, and steady state growth 5. The trend toward using lower long-term growth rates 6. The relevance of multiples for terminal value

Topics: 1. The perpetual growth rate and firm mortality 2. The relationship between capital expenditures and depreciation 3. The appropriate treatment of amortization 4. Projections, normalization, and steady state growth 5. The trend toward using lower long-term growth rates 6. The relevance of multiples for terminal value

Valuations of high-vote and low-vote shares are a subset of valuations applying control premiums, minority discounts, and marketability discounts. The premium for voting control should not be calculated on a per-share basis but instead should be determined as a percentage of the value of the entire company allocated to the class of high-vote shares...

In the customary determination of terminal value in a discounted cash flow analysis, it is assumed that a mature company will grow at a constant rate in perpetuity. This article explains why the perpetual growth concept is flawed and needs to be reexamined. It also discusses proposals to recognize the risks of corporate decline and corporate mortal...

This article continues the discussion of statutory appraisal that was presented in Part I in the prior issue of Business Valuation Review. Fair value, the predominant standard of value employed by state courts to value dissenters’ shares in appraisal cases, is determined by state law. In most states, fair value is the shareholder’s pro rata portion...

The predominant standard of value employed by state courts to determine the value of minority shares in appraisal cases is fair value, which is determined by state law. In most states, fair value is the shareholder’s pro rata portion of the value of a company’s equity. This measure of value differs from fair market value, third-party sale value, an...

This presentation examines several factors that impact terminal value and how to address them: (i) the final year of the projection, (ii) the trend toward using lower long-term growth rates, (iii) the “perpetual” growth rate and firm mortality, (iv) the use of multiples for terminal value, (v) the relationship between capital expenditures and depre...

This study asks which valuation approaches and analyses are currently being used as the foundation for fairness opinions in stock-for-stock mergers involving US companies. An examination of the SEC's EDGAR database for the years 2009 through 2014 identified 146 proxy statements for stock-for-stock mergers containing 290 fairness opinions and descri...

This presentation discusses dual class shares, their increasing use in the U.S, and the trend toward unifying dual class structures in Europe. It proposes an approach to valuing American dual class shares, giving consideration not to relative trading prices but to premiums over economic vale paid to high-vote shares as a class in past transactions.

This presentation discusses ”fair value,’ which is the standard of value in statutory appraisals. Ir focuses primarily on determination of fair value by the Delaware Court of Chancery.

This presentation discusses the fallacy of assuming that depreciation should equal capital expenditures and the appropriate treatment of amortization in a perpetual growth model.

Private company discounts are due to company-specific factors such as size, diversification, dependence on key man, supplier and/or customer, and quality of earnings, management and financial statements. A marketability discount should not be added to these factors, but should only be applied for specific factors that impact marketability, such as...

Most states generally do not permit discounts for lack of marketability in statutory appraisals. New York, however, generally permits such discounts. This article discusses and criticizes the NY approach and contrasts it with the common practice in other jurisdictions of barring DLOMs in appraisal cases.

This presentation reviews valuation methods used in 352 fairness opinions in 315 U.S. cash acquisitions during 12-month periods in 2007-08 and 2010-11 and in stock-for-stock mergers in 2009-2014, as disclosed in publicly available documents filed with the S.E.C. It also critiques some of the methods and analyses that were used.

This article criticizes the application of a marketability discount in a major N.Y. fair value decision.

Part I of this article criticizes that the tax-effecting of an S corp in a major New York fair value decision. Part II criticizes the application of a marketability discount in this case.

Shareholders of public companies are denied appraisal rights in 13 states and, under certain circumstances, in 24 other states. The article summarizes the limitations on appraisal rights under the "market exception." Note: Since the article was written, the appraisal statute in Louisiana has changed to conform to the Model Business Corporation Act...

This presentation discusses the use of dual class structures in various countries and the premiums paid to high-vote shares in acquisitions and recapitalizations in which high-vote shares received a premium.

This presentation discusses court decisions, primarily in Delaware, regarding the various components of WACC (the weighted average cost of capital) and related issues.

This article discusses two common errors when calculating terminal value using the Gordon growth model – overstating depreciation in relation to capital expenditures, and overlooking amortization's time limits. For a growing company, normalized capital expenditures must be materially higher than depreciation. Amortization of intangible assets is wo...

This chapter (condensed from Lawyers' Guide to Cost of Capital) primarily discusses Delaware Court of Chancery opinions involving the discounted cash flow (DCF) method and its crucial component, the cost of capital. The cost of capital is a central issue in judicial business valuations in statutory appraisal and “entire fairness” cases. Importantly...

This article discusses the appropriate treatment of amortization in a perpetual growth model.

This chapter primarily discusses Delaware Court of Chancery opinions involving the discounted cash flow (DCF) method and its crucial component, the cost of capital. The cost of capital is a central issue in judicial business valuations in statutory appraisal and “entire fairness” cases. Importantly, the Delaware courts’ treatment of cost of capital...

This presentation addresses fair value, which is the predominant standard of value employed by state courts to determine the value of minority shares in appraisal cases. Fair value for appraisal is determined by state law. In most jurisdictions, fair value is the shareholder's pro rata portion of the value of a company's equity. It differs from fai...

State courts employ fair value as the predominant standard to determine the value of minority shares in both appraisal (also known as dissent) and oppression cases. When the courts determine the minority's share price in an appraisal or order the buy-out of an oppressed minority shareholder, the price of the award or buyout is critical for both par...

This presentation discusses (i) levels of value and three meanings of the phrase “control premium”, (ii) statistical bias in acquisition premium studies, (iii) misuse of control premiums, (iv) how to quantify a control premium, (v) control premiums for private companies, and vi) control premiums for high-vote shares.

This study examined empirically which valuation methods are currently being used in fairness opinions in cash acquisitions and how they are applied. A search of the SEC's EDGAR database for two 12-month periods identified 315 cash acquisitions with 352 fairness opinions containing descriptions of their methods and analyses. The findings showed the...

This article discusses how investment bankers treat cash in defining enterprise value.

This article discusses fairness opinions in affiliated party transactions and focuses on the following topics: what fairness opinions address, what “fairness” means, criticism of fairness opinions, Delaware law’s impact on their content and use, FINRA and SEC requirements, and valuation methods employed.

This article discusses fairness opinions in affiliated party transactions and focuses on the following topics: what fairness opinions address, what “fairness” means, criticism of fairness opinions, Delaware law’s impact on their content and use, FINRA and SEC requirements, and valuation methods employed.

The cost of capital is a central issue in judicial business valuations in statutory appraisal, stockholder oppression, and “entire fairness” cases. The Delaware courts have effectively set the standards for valuations related to corporate disputes because Delaware law is widely accepted on corporate legal issues. This article primarily discusses De...

This presentation discusses court decisions, primarily in Delaware, regarding the various components of WACC (the weighted average cost of capital) and related issues.

This presentation discuss fairness opinions in transactions between related parties. Its addresses the need for independent advisors, valuation methods, regulatory requirements, relevant Delaware court cases, and the lack of industry standards.

The cost of capital is a central issue in judicial business valuations in statutory appraisal, stockholder oppression, and “entire fairness” cases. The Delaware courts have effectively set the standards for valuations related to corporate disputes because Delaware law is widely accepted on corporate legal issues. This article primarily discusses De...

This presentation discusses and critiques court decisions in Delaware that applied the now-rejected assumption that market prices of shares always include a minority discount.

This article discusses how the comparison of acquisition multiples (adjusted for synergies and market conditions) and market multiples can be used for determining minority discounts.

In statutory appraisal cases, Delaware Courts sometimes apply premiums that are based on questionable reasoning. They commonly adjust guideline company valuations for an ‘‘implicit minority discount’’, they apply acquisition premiums to subsidiaries, and they often rely upon average premiums in acquisitions as a basis for calculating control premiu...

This article discusses why harmonic means are statistically superior to arithmetic means in averaging data with price in the numerator.

This article discusses the differing legal standards that were applied in Delaware courts to one-step and two-step mergers.

This articles points out errors in the Delaware Court of Chancery's decision in the appraisal of Dr Pepper Bottling Co. of Texas. Based on this article, the Court of Chancery corrected its opinion, but the Delaware Supreme Court ruled that the correction was loo late because the parties had entered into a settlement agreement.

The Delaware Court of Chancery decided an unusually high number of appraisal cases during 2004 and 2005. In an appraisal, the Court looks at a company as it exists at the date of the transaction— the ‘‘operative reality.’’ Actions planned by a third-party acquiror before a change of control are normally excluded in a Delaware appraisal, but should...

This article discusses why harmonic means are statistically superior to arithmetic means in averaging data with price in the numerator.

This article discusses the appropriate treatment of built-in capital gains in valuation cases. We recommend that the deferred tax liability be present-valued and demonstrate why this is mathematically correct.

Cede v. Technicolor is the longest-lasting litigation in Delaware. This statutory appraisal case began in 1983. It was heard by three successive Chancellors, and the last Court of Chancery decision was rendered on December 31, 2003. It had previously been the subject of six Delaware Supreme Court decisions. [A 7th Supreme Court decision closed the...

Fairness opinions almost always involve an assessment of the value of a company. The question in most fairness opinions is whether a merger or acquisition offer is within an objectively determined range of values for the company or for its shares. In evaluating the fairness of an offer, the analyst is required by law to use valuation methods that a...

This article discusses the fallacy of assuming that depreciation should equal capital expenditures in a perpetual growth model.

This article discusses the reversal of the Tax Court’s Simplot decision and its impact on the valuation of shares of dual-class companies.

This chapter discusses standards of financial fairness, the process of preparing a fairness opinion, and common errors in preparing fairness opinions.

This article discusses numerous common errors made by practitioners in valuations for fairness opinions.

A fairness opinion is a special form of valuation report, usually a letter, that is often viewed as a "shield" against potential legal damages. It states that, in the view of the investment banker, based upon certain procedures followed and assumptions made, a specific transaction at a specific price is fair, from a financial point of view, to spec...

This article discusses a Tax Court opinion regarding the premium applied to a class of voting shares that had 100% of the vote but were less than 1% of the outstanding shares.

This article discusses a Tax Court opinion regarding the premium applied to a class of voting shares that had 100% of the vote but were less than 1% of the outstanding shares.

This article discusses the Delaware Court of Chancery’s decision in this case and criticizes its application of a control premium to a wholly-owned subsidiary.

This article discusses and critiques the Delaware Court of Chancery’s valuation methodology and conclusion in this statutory appraisal case.

A fairness opinion is a special form of valuation report, usually a letter, that is often viewed as a "shield" against potential legal damages. It states that, in the view of the investment banker, based upon certain procedures followed and assumptions made, a specific transaction at a specific price is fair, from a financial point of view, to spec...