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Statutory Fair Value in Dissenting Shareholder Cases: Part II

  • Sutter Securities Financial Services, San Francisco


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 of the value of a company’s equity. This article discusses the approaches used by the Delaware courts’ views to assess fair value. Premiums and discounts are usually not permitted in statutory appraisals in Delaware and most other states, and we discuss the reasoning and the exceptions.
Statutory Fair Value in Dissenting Shareholder Cases: Part II
Gilbert E. Matthews, MBA, CFA
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, 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 article discusses the approaches used by the
Delaware courts’ views to assess fair value. Premiums and discounts are usually not
permitted in statutory appraisals in Delaware and most other states, and we discuss
the reasoning and the exceptions.
IV. Valuation Methods Accepted by the Courts
As a result of numerous fair value cases, a considerable
body of law suggesting various methodologies to arrive at
fair value emerged in the twentieth century. One such
well-known methodology is the Delaware block method.
Midway through the twentieth century, the Delaware
block method was often used for determining value in the
context of appraisal rights
and was relied on almost
exclusively by the Delaware courts until 1983. This
method was also adopted in several other states that
tended to rely on Delaware cases related to corporate law.
The Delaware block method weights a company’s
investment value (based on earnings and dividends), its
market value (usually based on its public trading price,
comparable company information, or comparable trans-
action information), and its asset value (usually the net
asset value based on current value of the underlying
assets). The valuator determines these three values and
then assigns a weight to each component to compute the
fair value.
Practitioners view the Delaware block
method as mechanistic and inconsistent with valuation
methods being employed by market participants.
In 1983 the Delaware Supreme Court’s landmark
Weinberger decision established the foundation for the
use of alternative valuation approaches. This decision
enunciated the concept that, instead of relying on the
Delaware block method, a company could be valued
using methods customarily employed by the financial
Weinberger did not immediately do away with the use of
the Delaware block method, but it now is rarely used in
practice in Delaware and most other states.
allowed widely accepted valuation procedures and indus-
try-appropriate valuation techniques to be used. As
customary techniques have evolved, so has the case law.
The Delaware block method looked only at historical data;
most courts now prefer forward-looking approaches in
determining fair value; therefore, the discounted cash flow
method is now widely used in dissenting shareholder cases.
The ALI’s Principles of Corporate Governance as well
as the ABA’s model statute recommend that fair value be
determined using the customary valuation concepts and
techniques generally employed for similar businesses in
financial markets. As corporations have different under-
lying assets, no universal technique of measurement can
cover all industries. Therefore, it is necessary to allow
flexibility in valuation so that the valuation professional
and the courts can use their best judgment to find
equitable outcomes.
Since the appropriate valuation
method is not the same in every case, a court will use the
most relevant evidence presented to it to determine value.
As a consequence of Weinberger’s directive that all
methods widely accepted by the financial community be
Gilbert E. Matthews, CFA, is Chairman of Sutter
Securities Incorporated in San Francisco, California.
He headed the fairness opinion practice at Bear
Stearns in New York for twenty-five years. He is on
the editorial review board of Business Valuation
In re General Realty & Utilities Corp., 52 A.2d 6, 11 (Del. Ch. 1947).
Matthews and M. Mark Lee, ‘‘Fairness Opinions and Common Stock
Valuations,’’ in The Library of Investment Banking, Vol. IV,R. Kuhn,
ed. (Homewood, IL: Dow Jones Irwin, 1990) at 386.
Weinberger at 713.
A few states continue to require use of the Delaware block method,
e.g., Utah [Utah Resources Intl., Inc. v. Mark Technologies Corp., 342
P.3d 761, 771 (Utah 2014)] and Tennessee [Athlon Sports Communi-
cations, Inc. v Duggan, 2016 Tenn. App. LEXIS 773 (Oct. 17, 2016) at
Principles of Corporate Governance at 318.
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Ó2017, American Society of Appraisers
Business Valuation Review
— Summer 2017 Page 55
Statutory Fair Value in Dissenting Shareholder Cases: Part II
considered, courts now permit the use of a number of
approaches. The primary methods that the courts use are
the following:
Discounted cash flow (the income approach)
Weinberger used the discounted cash flow (DCF)
method in its departure from the standard Delaware
block method. The DCF methodology is widely used
in the determination of fair value, especially in
Delaware. In the 1995 Kleinwort Benson decision,
the Delaware court concluded that DCF was a better
way of determining the value of a corporation than a
market-based approach, and it stated that the DCF
method should have greater weight because it values
the corporation as a going concern, rather than
comparing it to other companies.
In Grimes v.
Vitalink, the Court of Chancery stated that the
‘‘discounted cash flow model [is] increasingly the
model of choice for valuations in this Court,’’
in Gholl v. eMachines, Inc., it pointed out that DCF
‘‘is widely accepted in the financial community and
has frequently been relied upon by this Court in
appraisal actions.’’
Typically, Delaware courts tend to favor a DCF model
over other available methodologies in an appraisal
Comparable companies and comparable transac-
(the market approach)—These methods
involve valuing a privately held company based on
multiples generated from the market prices of
selected public companies’ traded shares (the
guideline or comparable company method) or from
selected transactions involving both public and
private companies (the guideline or comparable
transaction method).
Although courts generally
rely more heavily on DCF, comparable companies
continue to be widely used when the court accepts
the selected companies as reasonable similar to the
subject company. Comparable transactions are
sometimes rejected because the acquisition prices
often include anticipated synergies:
[T]he logical inference supported by case authority and
academic literature that the prices for those [compara-
ble] transactions thus included some amount attribut-
able to expected synergies, it is likely in my view that
the methodology . . . materially overstated the going
concern value.
Other valuation methods that courts have used in a
small number of cases are the following.
Asset value—Asset value is seldom directly used in
appraisals. Paskill prohibited the valuation by using
a net asset value method alone for purposes of an
appraisal of a going concern in Delaware because a
going concern’s liquidation value cannot be consid-
ered in appraisal.
Asset value may be given an
appropriate weight in limited circumstances. For
example, a real estate company was valued primarily
on its asset value in Ng v.Heng Sang Realty Corp.
In applying the comparable company method to
financial institutions, one of the data points com-
monly used is a multiple of tangible net worth, based
on multiples of similar entities. This indirect use of
asset value is accepted by the courts.
Rules of thumb—Rules of thumb are seldom
accepted by courts as a valuation method. There
are rare exceptions: For example, in a Delaware case,
the court accepted value per recoverable ton of coal
reserves as a valuation method;
a Louisiana court
valued an alarm company at a multiple of its monthly
Transaction price—Although consideration of the
transaction price is not a valuation ‘‘method,’’ the
1999 MBCA gives substantial weight to the
transaction price when the transaction was approved
by independent directors: ‘‘[U]nder section 13.01(4),
a court determining fair value should give great
deference to the aggregate consideration accepted or
approved by a disinterested board of directors for an
appraisal-triggering transaction’’ [emphasis add-
In Delaware, the courts commonly gave no weight to
the transaction price in related party transactions
However, in several recent Delaware cases, courts
have appraised companies in relation to the actual
Kleinwort Benson Limited v. Silgan Corp., 1995 Del. Ch. LEXIS 75
(June 15, 1995) at *28.
Grimes v.Vitalink Communications Corp., 1997 Del. Ch. LEXIS 124
(Aug. 26, 1997) at *3.
Gholl v. eMachines, Inc., 2004 Del. Ch. LEXIS 171 (July 7, 2004) at
Longpath Capital v. Ramtron, 2015 Del. Ch. LEXIS 177 at *31.
Although the valuation community usually uses ‘‘guideline,’’ courts
commonly use ‘‘comparable’’ andwedosointhisarticle.
When guideline transactions are utilized, adjustments are necessary to
eliminate the effect of premiums based on synergies.
Dunmire v.Farmers & Merchants Bancorp of Western Pa., Inc., 2016
Del. Ch. LEXIS 167 (Nov. 10, 2016) at *28.
Paskill v.Alcoma, 747 A.2d 549, 554.
Ng v.Heng Sang Realty Corp., 2004 Del. Ch. LEXIS 69.
Neal v.Alabama By-Products, 1990 Del. Ch. LEXIS 127 at *36.
Yuspeh v.Klein, 840 So.2d 41, 53 (La. App. 2003).
Official Comments to MBCA, §13.01 (2008).
Golden Telecom, 11 A.3d 214, 218.
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Business Valuation Review
prices arrived at through negotiations in arm’s-length
It is common for courts to consider more than one
method. Delaware has explicitly used weighting in some
cases as well. For example, the court in Andaloro
weighted DCF at 75% and comparable companies at
in U.S. Cellular, the weighting was 70% to DCF
and 30% to comparable acquisitions;
and in Mont-
gomery Cellular, a 65% weight was given to comparable
acquisitions, 30% to DCF and 5% to comparable
In the U.S. District Court’s Steiner
decision (applying Nevada law),
the court gave a
52.5% weight to DCF, 25% weight to comparable
companies, and 22.5% to comparable transactions.
Courts tend to prefer analyses that use more than one
valuation approach. A valuation supported by several
independent indicia of value is considered more reliable
than one by an expert who ‘‘ does not even attempt to
perform reasonableness checks upon his valuation.’’
Criticizing an expert in Hanover Direct who used only
DCF, the court wrote, ‘‘If a discounted cash flow analysis
reveals a valuation similar to a comparable companies or
comparable transactions analysis, I have more confidence
that both analyses are accurately valuing a company.’’
In 2013 the court reiterated:
Generally speaking, ‘‘it is preferable to take a more robust
approach involving multiple techniques—such as a DCF
analysis, a comparable transactions analysis (looking at
precedent transaction comparables), and a comparable
companies analysis (looking at trading comparables/multi-
ples)—to triangulate a value range, as all three methodol-
ogies individually have their own limitations.’’
The court accepts the comparable company method
when the selected companies are reasonably comparable
to the company being appraised:
The burden of establishing that companies used in the
analysis are actually comparable rests upon the party seeking
to employ the comparable method. The selected companies
need not be a perfect match; however, to be useful the
methodology must employ ‘‘ a good sample of actual
However, several cases have relied solely on DCF after
the court rejected the selected comparable companies as
being insufficiently comparable
or the experts relied
solely on DCF.
When DCF could not be utilized because adequate
projections were not available, courts have often used the
comparable company method. The court in Borruso
utilized multiple of comparable companies’ revenues
because there was insufficient information to apply any
other approach.
The Doft court rejected both experts’
DCF analyses because the projections were unreliable
and relied on the EBITDA (earnings before interest,
taxes, depreciation, and amortization) multiples and P/E
ratios of comparable companies.
The U.S. District
Court, applying Delaware law in Connector Service,
concluded that a multiple of EBITDA was a better
method than DCF because the EBITDA multiple was
based on the multiples used by the subject company itself
in two prior acquisitions.
V. Fair Value Normally Excludes Discounts and
A. Levels of value
Levels of value have been presented and explained by
two leading valuation authorities in recent editions of
their books: Shannon Pratt’s Valuing a Business
Chris Mercer’s Business Valuation: An Integrated
Pratt’s levels-of-value chart shows five levels
of value for publicly traded companies: synergistic
(strategic) value, value of control shares, market value
of freely traded minority shares, value of restricted stock,
See ‘‘Arm’s-length price may be fair value’’ in Part I, page 21 and
‘‘Recent Developments’’ below.
Andaloro v.PFPC Worldwide, Inc., 2005 Del. Ch. LEXIS 125 (Aug.
19, 2005) at *78.
U. S. Cellular, 2005 Del. Ch. LEXIS 1 at *77.
Dobler v.Montgomery Cellular, 2004 Del. Ch. LEXIS 139 at *73.
Steiner Corp. v. Benninghoff, 5 F. Supp. 2d 1117 (D. Nev. 1998).
Technicolor 2003 at *13-*14.
In re Hanover Direct, Inc. Sh’holders Litig., 2010 Del. Ch. LEXIS
201 (Sept. 24, 2010) at *6.
Merion Capital, L.P. v. 3M Cogent, Inc., 2013 Del. Ch. LEXIS 172
(July 8, 2013) at *17–18, quoting Muoio & Co. v. Hallmark Entm’t Invs.
Co., 2011 Del. Ch. LEXIS 43 (Mar. 9, 2011) at *83–*84.
SWS Group, Inc., 2017 Del. Ch. LEXIS 90 at ’30, quoting In Re:
Appraisal of The Orchard Enterprises, Inc., 2012 Del. Ch. LEXIS 165
(July 18, 2012) at *36.
E.g., Global GT LP v. Golden Telecom, Inc. 993 A.2d 497; 498 (Del.
Ch. 2010); aff’d, Golden Telecom,11A.3d214;Just Care at *19, fn. 29;
Laidler v.Hesco Bastion, 2014 Del. Ch. LEXIS 75 at *26–*27.
E.g., Orchard Enterprises,88A.3d1,42-43;Towerview LLC v. Cox
Radio, Inc., 2013 Del. Ch. LEXIS 159 (June 13, 2013) at *47; Owen v.
Cannon, 2015 Del. Ch. LEXIS 165 at *49, fn. 194, *50, fn. 201.
Borruso v.Communications Telesystems Intl., 753 A.2d 451, 455
(Del. Ch. 1999).
Doft & Co. v., Inc., 2004 Del. Ch. LEXIS 75 (May
21, 2004) at *21.
Id. at *44.
Connector Service Corp. v. Briggs, 1998 U.S. Dist. LEXIS 18864
(N.D. Ill., Oct. 30, 1998) at *4 *7.
Shannon P. Pratt, Valuing a Business: The Analysis and Appraisal of
Closely Held Companies, 5th ed. (New York: McGraw Hill, 2008), p.
Z. Christopher Mercer and Travis W. Harms, Business Valuation: An
Integrated Theory, 2d ed. (New York; John Wiley & Sons, 2007), pp.
Business Valuation Review
— Summer 2017 Page 57
Statutory Fair Value in Dissenting Shareholder Cases: Part II
and value of nonmarketable shares.
Mercer describes
the levels of value as strategic control value,financial
control value,marketable minority value,andnon-
marketable minority value.
Discounts and premiums should be viewed in light of the
type of valuation methodology used and the resultant level
of value arrived at based on that method. If indeed
shareholder-level discounts (or premiums) are applicable,
they should be applied after the valuation of the corporation
itself, including any applicable entity-level discounts.
The levels of value are described as follows:
Synergistic value or strategic control value—This is
the highest value that would be paid for control shares
by a buyer who expects to benefit from synergies.
Value of control shares or financial control value
This value does not include anticipated synergies but
includes ‘‘the ability of a specific buyer to improve
the existing operations or run the target company
more efficiently.’’
Marketable minority value—The next level of value
is minority shares that may be publicly traded in a
free and active market. Although lacking control, a
marketable minority share is easily liquidated. For
example, shares traded on the New York Stock
Exchange are marketable minority shares. For a
private company, marketable minority value is the
level at which the company’s shares would trade if
there were a free and active market.
Nonmarketable minority value—The lowest level of
value is the nonmarketable minority share of a
privately held company. This share does not have
control over management, the board of directors, a
company’s direction, or its dividend policy without
cooperation from the majority. The nonmarketable
minority share is not traded on a public exchange
and, therefore, is not easily liquidated.
The levels of value represent a conceptual framework,
and the levels can in fact overlap. For example, unless the
controller can extract more cash flow, the marketable
minority shares may be trading at or close to control
value. As discussed below, many commentators believe
that actively traded minority shares often trade at or close
to financial control value. Indeed, Mercer’s book presents
a levels-of-value diagram that shows marketable minority
value overlapping financial control value,
as does a
widely cited article by Mark Lee.
Applications of
discounts and premiums are fact-specific and should be
applied on a case-by-case basis.
B. Why minority and marketability discounts and
control premiums are widely rejected
A major issue in many fair value cases is whether
shareholder-level discounts are applicable at all. The
debate for the courts is whether minority shares should be
valued at a pro rata portion of enterprise value or should
be discounted based on their minority status or lack of
marketability. The use of discounts or their nonuse can
result in the enrichment of one of the parties at the
expense of the other.
Were the standard of value to be what the investor
could reasonably realize in the market for a minority
position (fair market value), then discounts for lack of
control and lack of marketability would be considered.
The argument for the use of fair market value is that if
minority shareholders were to sell in the open market,
they would receive a discounted price for their shares and
that, in fact, these shareholders were aware of the
minority status of their shares when they initially acquired
them. The advocates of discounts assert that failing to
consider marketability and minority discounts unfairly
enriches minority shareholders.
The primary argument against discounts for minority
shareholders involves the original purpose of appraisal,
which is to compensate minority shareholders for what
was taken from them. Because the appraisal statutes
were created to protect minority shareholders from
controlling and/or opportunistic shareholders, a minority
discount would be contrary to logic, as the controlling
shareholders would obviously benefit from a reduction in
the amount they would have to pay the minority after a
For fair value, the issue centers on the definition of
what the minority shareholders had prior to the valuation
date and what they have lost because of the transaction.
Since this standard of value focuses on what was lost (i.e.,
a pro rata share of enterprise value), shareholder-level
discounts are inappropriate.
An argument for not applying a discount for lack of
marketability (DLOM) is that the judicial proceeding itself
creates a market for the shares, making a marketability
discount moot. If the minority shareholders were to lose a
pro rata portion of the corporation because they were
Pratt, Valuing a Business at 384. The restricted stock level (which is
not shown separately by Mercer) is for shares that are not currently
marketable but will become marketable with the passage of time.
Mercer and Harms, Business Valuation at 71.
DavidLaroandPratt,Business Valuation and Taxes: Procedure,
Law and Perspective (Hoboken, NJ: John Wiley & Sons, 2005), p. 266.
Mercer and Harms, Business Valuation at 73.
Restricted stock moves from nonmarketable to marketable when the
restriction is lifted.
Mercer and Harms, Business Valuation at 83.
M. Mark Lee, ‘‘Control Premiums and Minority Discounts: The
Need for Economic Analysis,’’ 7Business Valuation Update, August
2001: 1, 4.
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Business Valuation Review
forced out, penalizing the minority would reward rather
than deter the controller. Indeed, controllers would be
encouraged to engage in freeze-outs if by doing so they
could buy out the minority at a diminished price and
thereby receive a premium for mistreating the minority.
On the other hand, adding control premiums to
valuations of minority shares would enrich the minority
at the expense of the majority. As Hamermesh and
Wachter explain:
Control value does not exist in a corporation owned by a
fluid, disaggregated mass of shareholders. Rather, it is
created by the aggregation of shares. Such aggregation of
shares entails a reduction in agency costs, resulting in the
creation of value that fairly belongs to the entity aggregating
the shares [emphasis added].
Excluding value associated with control from the
measurement of fair value does not impose a ‘‘minority
discount’’: it simply denies shareholders value that does
not inhere in the firm in which they are invested. Thus,
third-party strategic sale value is an inappropriate
standard for determining the fair value of dissenting
shares because it incorporates elements of value—
associated with acquisitions of control by third par-
ties—that do not belong to the acquired enterprise or to
shares of stock in that enterprise.
C. Valuation adjustments at the entity level
Depending on the facts of the case, the valuator and the
court may consider adjustments that could impact the
valuation of the entity as a whole, such as a portfolio
(nonhomogeneous assets) discount, built-in capital gains,
contingent liabilities, or a key-man discount—sometimes
described as ‘‘entity-level discounts.’’
discounts affect all shareholders equally. The Delaware
courts have historically understood the necessity of such
adjustments in a fair value determination.
In Tri-Continental, the company being valued was a
closed-end investment company. Because of this struc-
ture, shareholders of the company had no right at any
time to demand their proportionate share of the
company’s assets. For this reason and due to the
company’s various leverage requirements, the market
value of the corporation as a whole was lower than its net
asset value. The court therefore applied a valuation
adjustment at the entity level before valuing the minority
The Washington Court of Appeals remanded a decision
that rejected consideration of built-in gains, asking the
trial court to review the facts, stating: ‘‘[D]iscounts for
built-in capital gains . . . might be appropriate, at the
corporate level, if the business of the company is such
that appreciated property is scheduled to be sold in the
foreseeable future, in the normal course of business.’’
In Hodas v.Spectrum Technology, a 1992 Delaware
appraisal action, the court accepted the 20% key-man
discount determined by the company’s expert, concluding
that the founder’s ‘‘departure would mean the demise of
the company.’’
The Hodas court rejected a 40% entity-
level DLOM applied by the appraiser because of the
purported lack of a readily available market for the
company as a whole.
D. Minority discounts are impermissible
Minority discounts are inconsistent with the basic
concept of fair value. Many state appraisal statutes
expressly bar minority discounts. Since the courts
generally view appraisals as protecting the right of
shareholders to a pro rata share of equity value,
particularly in transactions initiated by control sharehold-
ers, the courts have rejected the concept of discounting
shares in fair value cases because of minority status.
The Delaware Supreme Court stated in Tri-Continental
(1951) that ‘‘under the appraisal statute . . . the stock-
holder is entitled to be paid . . . his proportionate interest
in a going concern,’’ and it explicitly rejected minority
discounts in Cavalier in 1989.
The Iowa Supreme
Court cited Tri-Continental in its 1965 Woodward v.
Quigley decision when it concluded that there should be
no minority discount in an appraisal.
Woodward also
cited a 1942 Iowa decision that said, ‘‘ [E]ach share is
worth the figure found by dividing the net value of the
corporate property by the total shares outstanding at the
time of the arbitration.’’
In the same vein, the Missouri
appellate court stated in 1979, ‘‘The statute does not . . .
intend that a minority stockholder be in any way
penalized for resorting to the remedy afforded thereun-
Hamermesh and Wachter, ‘‘Rationalizing Appraisal Standards’’ at
Id. at 1038.
Laro and Pratt, Business Valuation and Taxes at 266.
Tri-Continental at 76.
Matthew G. Norton Co. v. Smyth, 51 P.3d 159, 168 (Wash. App.
2002). See discussion of Paskill in Part I in ‘‘Taxes are considered only
if they are ‘operative reality,’’’ p. 28.
Hodas v.Spectrum Technology, 1992 Del. Ch. LEXIS 252 at *14.
See ‘‘Fair value is proportionate share of equity value’’ in Part I of
this paper.
Woodward v.Quigley, 133 N.W.2d. 38, 44–45 (Iowa 1965).
First National Bank v. Clay, 2 N.W.2d 85, 92–93 (Iowa 1942).
Dreiseszun v.FLM Industries, Inc., 577 S.W.2d 902, 906 (Mo. App.
Business Valuation Review
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Statutory Fair Value in Dissenting Shareholder Cases: Part II
E. Marketability discounts are impermissible in
most states
Delaware rejected DLOMs in Cavalier, and most states
now concur. Some states prohibit discounts in their
statutes, and others leave the decision on discounts to the
judgment of the courts. In the past twenty years, several
state appellate courts have reversed earlier decisions that
had permitted the application of marketability discounts,
and many states have amended their appraisal statutes to
reject marketability discounts.
The Maine Supreme Judicial Court cited Cavalier in
and explained why it rejected discounts:
In the statutory appraisal proceeding, the involuntary change
of ownership caused by a merger requires as a matter of
fairness that a dissenting shareholder be compensated for the
loss of his proportionate interest in the business as an entity.
The valuation focus under the appraisal statute is not the
stock as a commodity, but rather the stock only as it
represents a proportionate part of the enterprise as a whole
[emphasis added]. The question for the court becomes simple
and direct: What is the best price a single buyer could
reasonably be expected to pay for the firm as an entirety? The
court then prorates that value for the whole firm equally
among all shares of its common stock. The result is that all of
those shares have the same fair value.
Our view of the appraisal remedy is obviously inconsistent
with the application of minority and nonmarketability
The Utah Supreme Court recently wrote, ‘‘Because
dissenting shareholders are unwilling sellers with no
bargaining power, it would be unfair to penalize them for
the lack of marketability of their shares or their lack of
When a court awards fair value to the
dissenting shareholder, other discounts that are custom-
arily weighed in determining fair market value, such as
discounts for restricted stock, for limitations pursuant to
shareholder agreements, or for nonvoting or low-vote
shares, become irrelevant and are not applied.
Some states explicitly reject discounts when share-
holders are squeezed out by means of a reverse stock
split. Kansas held in 1999 that discounts should not be
applied when the fractional share resulted from a 1-for-
400 reverse stock split intended to eliminate a minority
shareholder’s interest in the corporation.
Iowa took the
same position in 2011.
Applying Delaware law, the
U.S. District Court for the Northern District of Illinois
decided in Connector Service Corp. v. Briggs that the
Delaware language governing reverse split cash-outs was
similar to the language governing cash-out mergers and
ordered the fair value of the oppressed shareholder’s
stock to be determined without discounts.
conclusion is consistent with the Delaware decision in
Metropolitan Life v. Aramark, which granted a quasi-
appraisal remedy in a reverse split.
1. The MBCA and the ALI
Both the MBCA and the ALI’s Principles of Corporate
Governance reject minority and marketability discounts
with de minimis exceptions. As discussed in ‘‘Fair value
as defined by various authorities and statutes’’ in Part I of
this paper, fair value is determined under the MBCA
‘‘without discounting for lack of marketability or minority
status except, if appropriate, for amendments to the
certificate of incorporation’’
and, according to the ALI,
‘‘without any discount for minority status or, absent
extraordinary circumstances, lack of marketability.’’
2. Most states now reject marketability discounts
Most states now generally bar marketability discounts
in appraisals by statute or case law. Sixteen states have
explicitly barred marketability discounts in their appraisal
In 2007, Illinois, which had commonly
applied discounts in prior years, amended its statute to
prohibit discounts. The legislature may have been
influenced by a law journal article by a professor who
had drafted the 1983 Illinois Business Corporation Act,
who explained why Illinois should change its position
and follow the ‘‘overwhelming majority’’ of other
Several states whose case law had previously
permitted marketability discounts have subsequently
reversed their positions. For example, the Georgia Court
McLoon at 1005.
Id. at 1004.
Utah Resources Intl., Inc. v. Mark Technologies Corp., 2014 Utah
LEXIS 216 (Utah, Dec. 23, 2014) at *33.
Arnaud v.Stockgrowers State Bank, 992 P.2d 216, 217 (Kan. 1999).
Rolfe State Bank v. Gunderson, 794 N.W.2d 561, 569 (Iowa 2011).
Connector Service Corp. v. Briggs, 1998 U.S.): st. LEXIS 18864 at
*18. Because appraisal cases are under state law, federal courts follow
state statutes and case law.
Metropolitan Life Ins. Co. v. Aramark Corp., 1998 Del. Ch. LEXIS
70 (Feb. 5, 1998). Delaware differentiates between reverse splits that are
intended to squeeze out minority shareholders, as in the cited cases
above, and reverse splits that serve to eliminate odd-lot shareholders in
publicly traded companies, where appraisal is not permitted. Applebaum
v.Avaya, Inc., 805 A.2d 209 (Del. Ch. 2002); aff’d, 812 A.2d 880 (Del.
MBCA §1301.4(c).
Principles of Corporate Governance §7.22.
Connecticut, Idaho, Illinois, Indiana, Iowa, Louisiana, Maine,
Mississippi, Nevada, New Hampshire, North Carolina, South Dakota,
Texas, Virginia, West Virginia, and Wyoming, as well as the District of
Charles W. Murdock, ‘‘Squeeze-Outs, Freeze-Outs and Discounts:
Why Is Illinois in the Minority in Protecting Shareholder Interests?’’ 35
Loyola U. Chicago L.J. 737 (2004).
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of Appeals in 1984 had permitted minority and
marketability discounts;
the same court in 2000
changed its position and reversed a lower court decision
that permitted these discounts:
[T]he majority of other jurisdictions with similar [appraisal]
statutes have held that minority and marketability discounts
should not be applied when determining the fair value of
dissenting shareholders’ stock. These courts have reasoned
that using discounts injects speculation into the appraisal
process, fails to give minority shareholders the full
proportionate value of their stock, encourages corporations
to squeeze out minority shareholders, and penalizes the
minority for taking advantage of the protection afforded by
dissenters’ rights statutes.
The Colorado Supreme Court reversed precedent in 2001,
ruling that marketability discounts could no longer be
applied in appraisal cases.
Similarly, although a 1982
Kentucky appellate decision had permitted a DLOM,
KentuckySupreme Court decision overruled this precedent,
ruling in 2011, ‘‘Once the entire company has been valued as
a goingconcern,. . . the dissenting shareholder’s interest may
not be discounted to reflect either a lack of control or alackof
marketability [emphasis added].’’
Connecticut, Florida, Minnesota, Missouri, New Mex-
ico, Oregon, and Wisconsin bar minority discounts but
permit DLOMs at the court’s discretion. Idaho permits
both discounts at the court’s discretion.
Seven states
have no relevant case law or statutory provision.
York bars minority discounts but applies DLOM in most
cases. California and Ohio use a fair market value
standard in appraisals. The OCC, which regulates
appraisals of national banks, accepts DLOMs.
3. New York generally accepts marketability
The New York courts rely on a long history of judicial
interpretation of §623(h)(4) of its Business Corporation
Law, which makes no reference to discounts in its text. It
In fixing the fair value of the shares, the court shall consider
the nature of the transaction giving rise to the shareholder’s
right to receive payment for shares and its effects on the
corporation and its shareholders, the concepts and methods
then customary in the relevant securities and financial
markets for determining fair value of shares of a corporation
engaging in a similar transaction under comparable
circumstances and all other relevant factors.
In the 1995 Beway case, New York’s Court of
confirmed that although minority discounts
are unacceptable in New York fair value cases, a
marketability discount at the shareholder level is not
only permitted, but must considered in all fair value
Beway cited the 1985 Blake appellate decision,
which said:
[A] minority interest in closely held corporate stock should
not be discounted solely because it is a minority interest.
However, a discount recognizing the lack of marketability of
the shares of Blake Agency, Inc., is appropriate. . . . A
discount for lack of marketability is properly factored into
the equation because the shares of a closely held corporation
cannot be readily sold on a public market [emphasis added].
Such a discount bears no relation to the fact that the
petitioner’s shares in the corporation represent a minority
The 2014 Ferolito decision spoke to the continued
strength of these precedents when it noted that ‘‘ nearly all
courts in New York that have considered the question
A few New York trial courts have declined to apply
marketability discounts. In re Walt’s Submarine Sand-
wiches, a 1990 decision denying a DLOM, was upheld on
In 2000, Academe Paving rejected the 30%–
35% DLOM proposed by respondents’ expert and ruled
that no discount should be applied.
More recently, the
Appellate Division, while reversing some parts of the
2012 Chiu decision, did not reverse the trial court’s ruling
Atlantic States Construction, Inc. v. Beavers, 314 S.E.2d 245 (Ga.
App. 1984).
Blitch v.Peoples Bank, 540 S.E.2d 667, 669 (Ga. App. 2000).
Pueblo Bancorp. v. Lindoe, Inc., 63 P.3d 353 (Colo. 2003).
Ford v.Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky.
App. 1982).
Shawnee Telecom Resources, Inc. v. Brown, 354 S.W.3d 542, 564
(Ky. 2011).
Wagner v. Wanooka Farms, Inc., 2016 Ida. LEXIS 128 (Ida. 2016) at
Alaska, Hawaii, Maryland, Michigan, North Dakota, Pennsylvania,
and Tennessee.
‘‘The OCC also may apply a market discount due to the lack of
marketability for stock that is closely held or has a limited trading
history’’ (OCC, Business Combinations, Comptroller’s Licensing
Manual, Dec. 2006, p. 38).
N.Y.B.C. § 623(h)(4).
In New York, the trial court is called the Supreme Court, and the
highest court is the Court of Appeals.
Beway at 166.
Blake at 149. A 2009 decision noted that ‘‘Blake is considered the
seminal New York case in upholding the use of DLOM.’’ Application of
Jamaica Acquisition, Inc., 901 N.Y.S.2d 907, 2009 N.Y. Misc. LEXIS
2773 (N.Y. Supr. 2009) at *17. The sole case cited in Blake supporting a
DLOM was Ford v.Courier-Journal Job Printing, 639 S.W.2d 553. In
2011, the Kentucky Supreme Court overruled that 1982 Kentucky
appellate decision in Shawnee Telecom, 354 S.W.3d 542.
Ferolito v.AriZona Beverages, 2014 N.Y. Misc. LEXIS 4709 at *46.
In re Walt’s Submarine Sandwiches, Inc., 173 A.D.2d 980 (N.Y.
App. 1991).
O’Brien v. Academe Paving, Inc., No. 99-2594 (Supr. Ct. Broome
Co., N.Y., Sept. 25, 2000), slip op. at 12–14.
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that no DLOM should be applied.
In the 2012
Zulkofske decision, the judge awarded a 50% shareholder
half of the value of the corporation, rejecting the
respondent’s argument that there should be a 30%
liquidity discount at the shareholder level.
In the 2015 Zelouf case, the judge considered the facts
of the case and rejected the respondents’ argument for a
DLOM on the petitioner’s shares. She opined:
In effect, applying a DLOM here would be the economic
equivalent of imposing a minority discount—that is, [the
petitioner] realizing less for her shares because she is being
forced to sell while [the controller] gets to realize their full
value by staying in control. It is well settled that minority
discounts are not permitted under New York law. Indeed, it
is the tension between the application of a DLOM, which is
done in most cases but is not legally required [emphasis
added], and the practical effect of a DLOM here serving as a
minority discount, repugnant to New York courts and never
allowed, that drives the court’s ruling.
The Zelouf court acknowledged that it would be
incompatible with New York precedent to decide that a
DLOM was ‘‘legally inappropriate,’’ but commented that
‘‘no New York appellate court has ever held that a DLOM
must be applied to a fair value appraisal of a closely held
In the 2016 La Verghetta decision, the trial court
declined to apply any marketability discount, rejecting the
specific factors that the respondents’ expert relied on in
support of a DLOM.
The court stated:
While the Court would have given consideration to an
entity-level discount for lack of marketability based upon the
transfer restrictions imposed by the Franchisor [a right of
first refusal and a requirement that a transfer of ownership be
approved], [the expert] . . . does not set forth how much
discounting would be appropriate solely by reason of the
transfer restrictions. Indeed, he testified that he did not even
attempt to quantify such a discount.
In any event, the trial court ‘‘conclude[d] that no
discount for lack of marketability is appropriate in this
situation’’ because the respondents ‘‘made clear in their
testimony that they did not intend to sell [the company]
and that no amount of money would tempt them to do
The New York Court of Appeals has not addressed the
DLOM issue since Beway, other than ruling in 2001 that
the DLOMs for two minority shareholders should be
F. Control premiums at the entity level
Most states reject control premiums in appraisals.
Although several decisions discuss applying control
premiums, a careful reading of most of these decisions
leads to the conclusion that the courts were not actually
adding a control premium to their valuations, but rather
were merely making an adjustment to eliminate a
perceived impermissible minority discount.
Only three states (Vermont, New Jersey, and Iowa)
have actually applied control premiums at the entity level
in appraisals, and then only in certain cases. These cases
effectively used third-party value.
Vermont courts have applied control premiums in two
cases. In Trapp Family Lodge, the Vermont Supreme
Court ruled: ‘‘[T]o find fair value, the trial court must
determine the best price a single buyer could reasonably
be expected to pay for the corporation as an entirety and
prorate this value equally among all shares of its common
The control premium that was applied was
based on comparable acquisitions of other hotels and
motels. Another Vermont decision cited Trapp Family
Lodge when it approved a control premium
and noted
that ‘‘the projected cash flow . . . was not adjusted to
reflect decisions by a controlling purchaser.’’
The New Jersey Superior Court supported a limited
control premium in Casey v.Brennan, concluding that ‘‘in
a valuation proceeding[,] a control premium should be
considered in order to reflect market realities, provided it
is not used as a vehicle for the impermissible purpose of
including the value of anticipated future effects of the
The 2007 Iowa Supreme Court decision in Northwest
Investment permitted a control premium in a bank
appraisal ‘‘[b]ecause the minority shareholders presented
credible evidence the corporation could obtain a signif-
icant control premium in the event of a sale.’’
court affirmed a control premium applied by the lower
court. Interestingly, none of the other six appraisal
decisions by the Iowa Supreme Court in the past thirty
years discussed control premiums.
Man Choi Chiu v. Chiu, 125 A.D.3d 824 (N.Y. App. 2015).
Application of Zulkofske, 2012 N.Y. Misc. LEXIS 3088 (N.Y. Supr.,
June 28, 2012) at *7, *11.
Zelouf Intl. Corp. v. Zelouf, 999 N.Y.S.2d 731, 735 (N.Y. Supr.
Id. at 737.
La Verghetta v. Lawlor, 2016 N.Y. Misc. LEXIS 845 (N.Y. Supr.,
March 9, 2016) at *58–*61.
Id. at *62.
Id. at *62–*63.
Matter of Penepent Corp., 750 N.E.2d 47, 49 (N.Y. App. 2001).
Trapp Family Lodge, 725 A.2d 927, 931.
In re Shares of Madden, Fulford and Trumbull, 2005 Vt. Super.
LEXIS 112 (May 16, 2005) at *35.
Id. at *25.
Casey v.Brennan, 780 A.2d 553, 571 (N.J. Super. 2001).
Northwest Investment Corp., 741 N.W.2d 782, 784.
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The New Mexico Court of Appeals, in a decision
affirmed by the state’s Supreme Court, stated that a
control premium is a question of fact to be determined on
a case-by-case basis assessment.
However, no reported
New Mexico appraisal has applied a control premium.
Delaware does not apply control premiums at the parent
company level. However, in its anomalous 1992 Rapid-
American decision, the Delaware Supreme Court ruled
that control premiums should be applied to the valuations
of the holding company’s subsidiaries.
can was a holding company whose three subsidiaries
operated in widely different industries. The Delaware
Supreme Court concluded that since the Court of
Chancery had used comparable companies to value the
subsidiaries, it had ‘‘treated Rapid as a minority
shareholder in its wholly-owned subsidiaries.’’ The
Supreme Court stated that comparable market prices ‘‘do
not reflect a control premium,’’ but the inherent value of
the parent included the control value of its subsidiaries.
On remand, the Court of Chancery applied control
premiums to each subsidiary based on petitioners’ expert’s
testimony as to ‘‘the average p/e ratios of companies in the
industry as well as the average p/e ratios of all companies
and the average control premium applicable to companies
in the industry and to all companies.’’
During the
1990s, control premiums were twice again applied to
Delaware valuations of subsidiaries.
However, there is no apparent reason for the value of
an operating business to be higher if it operates as a
subsidiary rather than as a division. This distinction
elevates form over substance.
In 2001, then–Vice
Chancellor Strine (now Chief Justice) discussed ex-
pressed concern about this discrepancy, commenting, ‘‘It
seems a fine point to conclude that the value of the entity
as a going concern includes the potential to sell controlled
subsidiaries for a premium but not the potential to sell the
entity itself.’’
Hamermesh and Wachter criticized the discrepancy in a
2007 article:
It takes little imagination to see that this rationale, carried to
its logical conclusion, compels the inclusion of a control
premium, measured by a hypothetical third-party sale value,
in all share valuation cases, not just in situations in which the
corporation owns its operating assets through controlled
subsidiaries. A corporation’s control of directly owned
assets is at least as great as it would be if those assets were
held through controlled subsidiaries.
Since 1998 there have been no cases that have
explicitly applied a control premium to a subsidiary,
even though several subsequent Delaware appraisal cases
have valued holding companies. Indeed, no control
premiums were added to subsidiary values even in cases
where subsidiaries were separately valued by the court in
a sum-of-the-parts analysis.
VI. States Using a Standard Other than Fair Value
California uses the term fair market value in its dissent
even though it uses fair value in its oppression
Its dissent statute states:
The fair market value shall be determined as of the day
before the first announcement of the terms of the proposed
reorganization or short-form merger, excluding any appre-
ciation or depreciation in consequence of the proposed
action, but adjusted for any stock split, reverse stock split, or
share dividend which becomes effective thereafter.
Given this definition, dissent does not appear to be an
attractive option for shareholders in California corpora-
tions, and it is not surprising that there are no reported
California dissent cases.
Ohio uses fair cash value with a definition that is
equivalent to fair market value and thus is unfavorable to
dissenting shareholders:
The fair cash value of a share for the purposes of this section
is the amount that a willing seller, under no compulsion to
sell, would be willing to accept, and which a willing buyer,
under no compulsion to purchase, would be willing to pay,
but in no event shall the amount thereof exceed the amount
specified in the demand of the particular shareholder.
In computing . . . fair cash value, any appreciation or
depreciation in market value resulting from the proposal
submitted to the directors or to the shareholders shall be
New Mexico Banquest Investors Corp. v. Peters Corp., 159 P.3d
1117, 1124 (N.M. App. 2007), aff’d, Peters Corp. v. New Mexico
Banquest Investors Corp., 188 P.3d 1185 (N.M. 2008).
Harris v.Rapid-American Corp., 603 A.2d 796 (Del. 1992).
Id. at 804.
Harris v.Rapid-American Corp., 1992 Del. Ch. LEXIS 75 (Apr. 1,
1992) at *9.
Le Beau, 1998 Del. Ch. LEXIS 9, aff’d, M.G. Bancorp., 737 A.2d
513; Hintmann v.Fred Weber, Inc., 1998 Del. Ch. LEXIS 26 (Feb. 17,
Matthews, ‘‘Delaware Court Adds Premium to Control Valuation,’’ 4
Business Valuation Update (May 1998): 10.
Agranoff v.Miller, 791 A.2d 880, 898 n. 45 (Del. Ch. 2001).
Hamermesh and Wachter, ‘‘The Short and Puzzling Life of the
‘Implicit Minority Discount’ in Delaware Appraisal Law,’’ U.Pa.L.Rev.
1 (2007): 1, 3–4.
E.g., Highfields Capital, 939 A.2d 34; Gesoff v.IIC Industries Inc.,
902 A.2d 1130 (Del. Ch. 2006).
2010 CAL.CORP.CODE, §1300 (a).
2010 CAL.CORP.CODE, §2000 (a).
2010 CAL.CORP.CODE, §1303 (a).
OHIO REV.CODE ANN. §1701.85(b).
OHIO REV.CODE ANN. §1701.85(c).
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Statutory Fair Value in Dissenting Shareholder Cases: Part II
Importantly, fair cash value in Ohio is to be determined
as of the day prior to the shareholders’ vote.
Under the
Ohio statute, if there is an active market for a company’s
shares, the value for an appraisal will be no more than the
market price.
In addition, the Ohio Supreme Court
ruled in the landmark Armstrong case that the market
price must be adjusted to reflect any impact on the market
in reaction to the merger proposal.
In a prior decision
in the same case, the Ohio Court of Appeals conceded
that shareholders seeking appraisal would likely receive
less than shareholders who accepted the merger terms:
[I]t is apparent that [appraisal] is likely to produce a fair
cash value to be paid dissenting shareholders different from
that received by assenting shareholders unless the funda-
mental corporate change is found to have had absolutely no
effect on the market price of the stock, an unlikely
One commentator described the hapless position of an
Ohio dissenting shareholder as follows:
The [Armstrong] court thereby rendered the appraisal
remedy useless to minority shareholders of publicly traded
corporations, and guaranteed that it will not be invoked in
this context in the future. No matter how low the merger
price, it will invariably exceed the prevailing market price
prior to the announcement of the merger; thus no sensible
shareholder would elect to dissent, and the appraisal remedy
in Ohio has been rendered largely impotent by judicial
To make matters worse, the Ohio Supreme Court has held
that the appraisal remedy is the exclusive remedy available
to minority shareholders complaining about the fairness of a
merger price. The appraisal remedy in Ohio is thus both
useless and exclusive [emphasis added]. In effect, as long as
the controlling shareholder pays any amount over the
prevailing market price, it is free to cash out the minority
shareholders and appropriate to itself any value not
accurately reflected in the market price.
Consistent with a willing buyer-willing seller approach,
Ohio has concluded that minority and marketability
discounts are appropriate.
The cases that appellant cites in support of his public policy
argument [in opposition to discounts] are distinguishable
because they all are from foreign jurisdictions where
statutory law provides that a dissenting shareholder is
entitled to the ‘‘fair value’’ of his or her shares. The concept
of ‘‘fair value’’ is far different from the ‘‘ fair cash value’’
Wisconsin uses fair value for most transactions but
uses market value for certain related party transactions
that have been approved by a two-thirds vote of the
unaffiliated shareholders.
It defines market value as
(a) for publicly traded shares, the highest closing price in
the 30 days preceding announcement of the transac-
and (b) for shares that are not traded, fair market
value as determined in good faith by the board of
Louisiana’s appraisal statute, which previously said
fair cash value, was amended as of January 1, 2015.
Louisiana now follows the MBCA and uses fair value.
VII. Valuation Date in Appraisal Cases
The valuation date is a critical component that can
significantly affect a court’s ultimate assessment of value.
In appraisal cases, state statutes instruct the court as to the
appropriate valuation date. Most states either follow the
MBCA in defining the valuation date as the day of, or the
day before, the effectuation of the corporate action from
which the shareholder dissents, or they define the
valuation date as the day of or the day before the
shareholder vote.
In contrast, California uses the day
before the transaction was announced as the valuation
The general rule is that all information that is known
or knowable as of the valuation date is generally to be
considered. The Tri-Continental case, more than sixty
years ago, stated that ‘‘ facts which were known or which
could be ascertained as of the date of merger’’ must be
considered, as these are essential in determining
In a few cases, events occurring after the valuation date
have been used as a ‘‘sanity test’’ to check the fairness of
the transaction at the valuation date. For example, in Lane
v.Cancer Treatment Centers, the court allowed post-
valuation date discovery for a year after the action to test
the assumptions underlying a premerger discounted cash
flow calculation.
Steven D. Gardner, ‘‘Note: A Step Forward: Exclusivity of the
Statutory Appraisal Remedy for Minority Shareholders Dissenting from
Going-Private Merger Transactions,’’ 54 Ohio St. L.J. 239 (1992): 246.
Armstrong v.Marathon Oil Co., 513 N.E.2d 776, 784 (Ohio 1987).
Armstrong v.Marathon Oil Co., 583 N.E.2d 462, 467 (Ohio App.
Wertheimer, ‘‘Shareholders’ Appraisal Remedy’’ at 656, n. 207.
English v.Artromick Intl., Inc., 2000 Ohio App. LEXIS 3580 (Aug.
10, 2000) at *14.
WIS.STA T. § 180.1301 (1) and § 180.1130 (3).
WIS.STA T. §180.1130 (9) (a), (14) and (15).
WIS.STA T. §180.1130 (9) (b).
Alaska, Maryland, Michigan, Missouri, New Mexico, New York,
Ohio, and Rhode Island.
Tri-Continental at 72.
Lane v.Cancer Treatment Centers of America, Inc., 1994 Del. Ch.
LEXIS 67 (May 25, 1994) at *10–*11.
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In Lawson Mardon Wheaton,
the lower courts
refused to consider a postevent acquisition price. The
dissenter asserted that the trial court’s fair value of $41.50
per share in 1991 was questionable because the company
was acquired for $63 per share five years later. The New
Jersey Supreme Court decided to permit the consideration
of that postevent information, reasoning that a valuation
of $41.50 per share in 1991, when the company was
doing well, should be questioned in light of an actual sale
in 1996 at $63 per share when the company’s
performance was poorer.
VIII. Recent Developments
A. Transaction price in arms’-length transaction
The Delaware Supreme Court overturned the lower
court decision in the DFC Global case, ruling that it had
overvalued the company and remanding the case for a
redetermination of fair value.
Although the Supreme
Court rejected the respondent’s argument that it should
establish a bright-line rule that an arms’-length transac-
tion price with a robust sale process was the best evidence
of fair value, it ruled that ‘‘ the Court of Chancery abused
its discretion by only giving one-third weight to the deal
It also strongly criticized the growth rate used
in the lower court’s DCF terminal value calculation. The
Court commented that ‘‘findings of fact have to be
grounded in the record and reliable principles of corporate
finance and economics.’’
It also rejected the petition-
ers’ assertion that the Court of Chancery’s comparable
companies analysis was not a reliable measure of fair
The Supreme Court rejected the concept that the price
paid by a financial buyer not reflective of fair value
because it is constrained by its target IRR, stating, ‘‘ That a
buyer focuses on hitting its internal rate of return has no
rational connection to whether the price it pays as a result
of a competitive process is a fair one.’’
It explained:
The Court of Chancery also found that it would not give
dispositive weight to the deal price because the prevailing
buyer was a financial buyer that ‘‘focused its attention on
achieving a certain internal rate of return and on reaching a
deal within its financing constraints, rather than on [the
company’s] fair value.’’ To be candid, we do not understand
the logic of this finding. Any rational purchaser of a business
should have a targeted rate of return that justifies the
substantial risks and costs of buying a business. That is true
for both strategic and financial buyers .... The ‘‘private equity
carve out’’ that the Court of Chancery seemed to recognize,
in which the deal price resulting in a transaction won by a
private equity buyer is not a reliable indication of fair value,
is not one grounded in economic literature or th[e] record [in
this case].
The Supreme Court’s view that a financial buyer’s
internal rate of return does not impact fair value could
augur a reversal of the Dell decision on pp. 25-26 in Part I
of this article.
B. An appraisal at less than half of transaction
An appraisal case followed Sprint’s acquisition of the
49.8% minority interest in Clearwire for $5.00 per share.
The transaction price had been impacted by a bidding war
with DISH Network. Based on a DCF analysis that
excluded expected synergies, the Delaware Court of
Chancery awarded the petitioners only $2.13 per share,
41.6% of the transaction price,
No prior decision has
awarded less than 80% of the transaction price.
IX. Summary
Fair market value has evolved to mean the value
arrived at in a hypothetical transaction between willing
participants. In contrast, fair value does not assume a
willing seller and has been created for the purpose of
shareholder dissent to protect minority shareholders and
to compensate them for that which has been taken. The
attempt to establish exactly what has been taken is the
basis for the controversy over fair value. The American
Bar Association, the American Law Institute, state
legislatures, case law, and the valuation profession itself
all provide guidance for the valuation professional. The
valuator should be advised as to the relevant legal
standards and must determine the type of economic
enterprise being valued, the context in which the
valuation arises, and the best methods to perform the
valuation consistent with relevant law.
Although dissenters’ rights have developed throughout
the twentieth century, fair value litigation was infrequent
until Delaware’s 1983 Weinberger decision. That seminal
decision established that discounted cash flow and other
customary valuation techniques, rather than a formula
Lawson Mardon Wheaton, 716 A.2d 550, 556.
Lawson Mardon Wheaton, 734 A.2d 738, 752.
DFC Global Corp. v. Muirfield Value Partners, L.P., 2017 Del.
LEXIS 324 (Del. Aug. 1, 2017), reversing InreAppraisalofDFC
Global Corp., 2016 Del. Ch. LEXIS 103 (July 8, 2016).
Id. at *35.
Id. at *55.
Id. at *61.
Id. at *5 -*7. The lower court also applied a private equity carve out
in Dell, 2016 DEL. Ch. LEXIS 81, which is being appealed.
ACP Master, Ltd. Sprint Corp., 2017 Del. Ch. LEXIS 125 (July 21,
See ‘‘Arm’s-length price may be greater than fair value’’ in Part I of
this article, p. 22.
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Statutory Fair Value in Dissenting Shareholder Cases: Part II
based solely on historic data, should be used for valuing a
business under the relevant statutes. Since the 1980s, fair
value litigation has substantially increased, not only in
Delaware but in many other states as well. In the past
decade, Delaware has seen a further rise due to appraisal
Most states have adopted Delaware’s position that
dissenting shareholders are entitled to a pro rata share of
going-concern value enterprise value with no minority or
marketability discounts and no control premium. Dis-
senters are not entitled to any benefit from cost savings
and synergies that could not be achieved without the
transaction. Definitions and treatments of fair value differ
somewhat, but the Delaware standards are increasingly
accepted in other jurisdictions. Delaware’s courts’
appraisal and other corporate law decisions have
significantly influenced courts in other states. Only two
states do not currently use fair value as a standard, and
only one other state commonly apples DLOMs to
minority shares when determining fair value. State courts
now generally accept and utilize contemporary valuation
techniques in appraisal cases.
Vice Chancellor Laster wrote in 2016:
Because an appraisal decision results from litigation in
which adversarial parties advance arguments and present
evidence, the issues that the court considers and the outcome
that it reaches depend in large part on the arguments that the
advocates make and the evidence they present. An argument
may carry the day in a particular case if counsel advance it
skillfully and present persuasive evidence to support it. The
same argument may not prevail in another case if the
proponents fail to generate a similarly persuasive level of
probative evidence or if the opponents respond effective-
It is imperative when valuation professionals undertake
an assessment based on the fair value standard that they
consult with counsel expert in the jurisdiction. Expert
witnesses should apply customary valuation techniques
that are generally accepted by the business valuation
profession and the investment community. Those tech-
niques should be supported by reasonable facts, clear
testimony, and up-to-date valuation theory. The final
determination of value will be at the court’s discretion
based on the facts and circumstances of a given case.
This article is a continuation of ‘‘Statutory Fair Value
in Dissenting Shareholder Cases: Part I,’’ which appeared
in Business Valuation Review, Volume 36, Issue, 1,
Spring 2017.
This article is materially revised and updated from
Chapter 3 in Standards of Value: Theory and Application,
2nd ed. (New York: Wiley, 2013) and is published with
permission of John Wiley & Sons, Inc. Michelle
Patterson, JD, PhD, assisted with the conceptualization,
organization, and writing.
Merion Capital v. Lender Processing, 2016 Del. Ch. LEXIS 189 at
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Business Valuation Review
The value of an unlisted company is a contentious issue. This is because investors value marketability and liquidity, but vacillate on the appropriate percentage discount that needs to be applied for the valuation of a private company. As more companies find it easier to remain private, a better understanding of this discount is increasingly important. The extant discount studies are mainly derived from financial and transactional data. They provide reliable averages using large sample sizes, but present few determinants to explain the wide ranges in the observations. Our research is based on a unique, alternative data source that complements existing studies by tapping into rich contextual information. Specifically, we examine court decisions that determine the appropriate discount and relate this percentage to an important characteristic of a private company: its “open” character, i.e. its willingness to accept outside shareholders or partners in the venture. We find that open and closed companies differ in value 6.5%. Our conclusions hold after controlling for known determinants of the discount. Our results impact valuation approaches and present real-world application for the owners and managers of private companies who may consider opening ownership to third parties.
As contrasted with Delaware - a supposedly pro-management state - Illinois generally has been considered a pro-shareholder state. Delaware's Corporation Code has been characterized as leading a "race to the bottom," whereas the Illinois Business Corporation Act ("BCA") was the model for the original Model Business Corporation Act and generally is regarded as a balanced statute, containing many protections for shareholders and minority interests. Similarly, as discussed below, Illinois courts generally have been protective of minority shareholders' interests. This Article will first examine the types of situations that give rise to fair value proceedings - cash-out mergers, reverse stock splits, and oppressive conduct - to illustrate the conflicts of interest between those in control and minority shareholders. It will then review the Illinois cases that hold those in control to a high standard of fiduciary duty and contrast this approach with the effect of discounts in fair value cases, noting that the courts did not recognize the fiduciary issues involved in any of the cases accepting discounts. The Article will then summarize the policy arguments against discounts and demonstrate that discounts transfer value from the minority to the majority, thereby rewarding those in control who are not faithful to their fiduciary obligation not to benefit at the expense of the corporation or the other shareholders. It concludes by reviewing the decisions in other jurisdictions that demonstrate conclusively that the Illinois position is inconsistent with the overall trend of these decisions.
This Article makes several contributions to the literature on Delaware appraisal law. We first argue that the "going concern value" standard adopted by the Delaware courts as the measure of "fair value" in share valuation proceedings is superior to its two main competitors, market value and third-party sale value, on grounds of both fairness and efficiency. Application of the going concern value standard has two important consequences. First, it is critical that going concern value be measured in a way that includes not only the present value of the existing assets of the corporation, but also the present value of the reinvestment opportunities available to and anticipated by the firm at the time of merger. Second, going concern value should not include the value of corporate control in a case where the merger creates control through the aggregation of previously dispersed shares. In that case, the benefits created by the aggregation of shares belong to the party that created the increased value.We address differently, however, the situation where a pre-existing controlling shareholder squeezes out the minority. Our concern here is the potential for a controlling shareholder to acquire the minority shares at a price that fails to reflect the firm's going concern value. Where a controller fails to present a valid discounted cash flow analysis and relies instead on a comparable company analysis that is based solely on historical data, the minority shareholders and the court are deprived of access to projections of future free cash flows of the firm. We therefore advocate that in this situation the courts adopt a penalty default in the form of a presumption that fair value includes the value of control as reflected in comparable company acquisitions. Such a presumption is consistent with common law doctrines of fiduciary duty and the entire fairness standard, as well as adverse evidentiary inferences drawn from failure to produce relevant evidence. The controller as faithful fiduciary can avoid the proposed presumption by preparing and submitting to judicial scrutiny a valid discounted cash flow analysis. The opportunistic controller, on the other hand, is subjected to a fair value determination that amounts to third-party sale value minus synergies.
The "implicit minority discount," or IMD, is a fairly new concept in Delaware appraisal law. A review of the case law discussing the concept, however, reveals that it has emerged haphazardly and has not been fully tested against principles that are generally accepted in the financial community. While control share blocks are valued at a premium because of the particular rights and opportunities associated with control, these are elements of value that cannot fairly be viewed as belonging either to the corporation or its shareholders. In corporations with widely dispersed share holdings, the firm is subject to agency costs that must be taken into consideration in determining going concern value. A control block-oriented valuation that fails to deduct such costs does not represent the going concern value of the firm. As a matter of generally accepted financial theory, on the other hand, share prices in liquid and informed markets do generally represent that going concern value, with attendant agency costs factored or priced in. There is no evidence that such prices systematically and continuously err on the low side, requiring upward adjustment based on an "implicit minority discount."Given the lack of serious support for the IMD in finance literature, this Article suggests that the Delaware courts may be relying on the IMD as a means to avoid imposing upon squeezed-out minority shareholders the costs of fiduciary misconduct by the controller. Where either past or estimated future earnings or cash flows are found to be depressed as a result of fiduciary misconduct, however, or where such earnings or cash flows fail to include elements of value that belong to the corporation being valued, the appropriate way to address the corresponding reduction in the determination of "fair value" is by adjusting those subject company earnings or cash flows upward.This approach to the problem of controller opportunism is more direct, more comprehensive in its application, and more in keeping with prevailing financial principles, than the implicit minority discount that the Delaware courts have applied in the limited context of comparable company analysis. The Delaware courts can therefore comfortably dispense with resort to the financially unsupported concept that liquid and informed share markets systematically understate going concern value.
  • Andaloro V Pfpc Worldwide
  • Inc
Andaloro v. PFPC Worldwide, Inc., 2005 Del. Ch. LEXIS 125 (Aug. 19, 2005) at *78.
  • U S Cellular
U. S. Cellular, 2005 Del. Ch. LEXIS 1 at *77.
LEXIS 90 at '30, quoting In Re: Appraisal of The Orchard Enterprises
  • Merion Capital
  • L P Cogent
  • Inc
Merion Capital, L.P. v. 3M Cogent, Inc., 2013 Del. Ch. LEXIS 172 (July 8, 2013) at *17-18, quoting Muoio & Co. v. Hallmark Entm't Invs. Co., 2011 Del. Ch. LEXIS 43 (Mar. 9, 2011) at *83-*84. 171 SWS Group, Inc., 2017 Del. Ch. LEXIS 90 at '30, quoting In Re: Appraisal of The Orchard Enterprises, Inc., 2012 Del. Ch. LEXIS 165 (July 18, 2012) at *36.
at *47; Owen v. Cannon
  • Llc V Towerview
  • Cox Radio
  • Inc
Towerview LLC v. Cox Radio, Inc., 2013 Del. Ch. LEXIS 159 (June 13, 2013) at *47; Owen v. Cannon, 2015 Del. Ch. LEXIS 165 at *49, fn. 194, *50, fn. 201. 174 Borruso v. Communications Telesystems Intl., 753 A.2d 451, 455 (Del. Ch. 1999).
Business Valuation and Taxes at 266
  • Pratt Laro
Laro and Pratt, Business Valuation and Taxes at 266.