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Delaware Appraisal Litigation-Non-Arm's-Length Transactions, Arm's-Length Transactions and the Anna Karenina Principle

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  • Sutter Securities Financial Services, San Francisco

Abstract and Figures

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 appraisal litigation; (ii) observe and comment on the fact that, in transactions where independent fairness opinions or valuations are provided, the median premium over the transaction price in appraisals in non-arm's-length transactions is materially greater than is the case with arm's-length transactions; (iii) describe how the Delaware Court of Chancery picks and chooses among the methodologies selected by the parties' experts to arrive at its fair value conclusions and; (iv) conclude with observations concerning what the case law tells us are the principle do's and don'ts in the preparation of financial analyses and testimony by which to determine fair value.
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Delaware Appraisal Litigation: Non-Arm’s-Length
Transactions, Arm’s-Length Transactions and
the Anna Karenina Principle
Posted by Arthur H. Rosenbloom (Consilium ADR) and Gilbert E. Matthews (Sutter Securities), on
Sunday, March 11, 2018
Arthur H. Rosenbloom is Managing Director of Consilium ADR LLC, and Gilbert E. Matthews is Senior
Managing Director and Chairman of the Board of Sutter Securities, Inc. This post is part of the Delaware
law series.
1
Delaware Appraisal Litigation – Non-Arm’s-Length Transactions,
Arm’s-Length Transactions and the Anna Karenina Principle
Arthur H. Rosenbloom and Gilbert E. Matthews
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 appraisal litigation; (ii) observe and comment on the fact that, in
transactions where independent fairness opinions or valuations are provided, the
median premium over the transaction price in appraisals in non-arm’s-length
transactions is materially greater than is the case with arm’s-length transactions;
(iii) describe how the Delaware Court of Chancery picks and chooses among the
methodologies selected by the parties’ experts to arrive at its fair value
conclusions and; (iv) conclude with observations concerning what the case law
tells us are the principle do’s and don’ts in the preparation of financial analyses
and testimony by which to determine fair value.
Fair Value Defined
In relevant part, Section 262(h) of the Delaware General Corporation Law
provides that dissenting shareholders in all-cash transactions, and any other
mergers in which the shareholders receive any consideration other than listed
stock, who have otherwise complied with the statute, shall be entitled to obtain a
judicial determination of the “fair value” of their shares in the Court of Chancery.
In determining fair value, “the Court shall take into account all relevant factors.”
Section 262(h) provides that fair value shall exclude any element of value arising
from the accomplishment or expectation of the merger, although the
characterization of what value does or does not arise from the accomplishment or
2
expectation of the merger is highly fact-sensitive. Dissenters receive fair value
plus interest from the date of the transaction.
1
Under Weinberger, all valuation methods customarily accepted in the
financial community may be employed.
2
In Cavalier, the Delaware Supreme
Court ruled that a minority discounts and discounts for lack of marketability were
impermissible because “fair value” requires that petitioners receive the value taken
away from them, i.e., petitioner’s proportionate interest in a going concern.
3
In appraisal proceedings, each side has the burden of proof of fair value,
4
recognizing that the “value of a corporation is not a point on a line but a range of
reasonable values.”
5
Finally, fair value appraisal proceedings may be coupled
with claims for breach of fiduciary duty in which plaintiffs allege the absence of
fair process or fair price in the transaction in question. That said, the amount of
damages chargeable against individual defendants in such cases typically does not
vary from the fair value figure determined in the appraisal portion of the case.
6
1
“Unless the Court in its discretion determines otherwise for good cause shown, interest from the
effective date of the merger through the date of payment of the judgment shall be compounded
quarterly and shall accrue at 5% over the Federal Reserve discount rate.” Del Corp. Code
§262(h).
2
Weinberger v UOP, Inc., 457 A.2d 701, 713 (Del. 1983).
3
Cavalier Oil v Harnett, 564 A.2d 1137, 1145 (Del. 1989), citing Tri-Continental v. Battye, 74
A.2d 71, 72 (Del. 1950).
4
"In a statutory appraisal proceeding, both sides have the burden of proving their respective
valuation positions by a preponderance of evidence." M.G. Bancorporation, Inc. v. Le Beau, 737
A.2d 513, 520 (Del. 1999).
5
ACP Master, Ltd. Sprint Corp., 2017 Del. Ch. LEXIS 125 (July 21, 2017) at *51, citing Cede &
Co. v Technicolor, Inc. 2003 Del. Ch. LEXIS 146 (Del Ch., Dec. 31, 2003) at *6, aff’d in part,
rev’d on other grounds, 884A.2d 26 (Del, 2005).
6
E.g., see In re Emerging Communications, Inc. Sh’holders Litig., 2004 Del. Ch. LEXIS 70 (Del.
Ch. May 3, 2004) at *155, where the appraised value was $38.05 per share and Vice Chancellor
ordered certain defendants to pay $27.80 per share in damages ($38.05 less $10.25 previously
paid to shareholder in the squeeze-out).
3
The Anna Karenina Principle
In his classic novel, Anna Karenina, Leo Tolstoy observes that “[h]appy
families are all alike; every unhappy family is unhappy in its own way.” In
statistics, this principle is used to describe significance tests: there are many ways
in which a dataset may violate the null hypothesis and only one in which all the
assumptions are satisfied.
The appraisal cases we present illustrate the presence of the Anna Karenina
principle, but also many commonalities. The Anna Karenina characteristics
include alleged appropriation of corporate opportunities and director exculpation
in breach of fiduciary duty cases, as well as questions re collateral estoppel,
7
and
whether post-hoc adjustments to management’s projections are permissible.
8
These Anna Karenina principles notwithstanding, there are far more
instances of themes that get repeated through most of the cases. These include the
acceptance or rejection of the discounted cash flow (DCF) approach and the
distinctly second-fiddle role generally played by other valuation methodologies, as
well as common tropes such as whether a transaction price is an element of value
to be considered in determining fair value (in general, yes if there has been a
“robust” auction with a diverse universe of prospective buyers, no if not). The
same squabbles in applying DCF analysis found in Chancery decisions generally
are also found in fair value disputes. These include which cash flow projections to
use (if any); elements affecting the discount rate including equity risk premium,
small stock adjustments, company-specific risk premiums, beta (or its absence
when using the build-up method); terminal value calculations (perpetuity versus
exit multiple); and adjustments to the subject company’s net cash; and value of
non-operating assets.
7
M.G. Bancorp., Inc. v. LeBeau, 737 A.2d 513, 519-521 (Del. 1999).
8
In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS 81 (May 31, 2016) at *153, rev'd on other
grounds, Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd, 2017 Del. LEXIS 518
(Del. Dec. 14, 2017). The Supreme Court wrote, “The Court of Chancery had logic for its
adjustment to the projections, and this adjustment did not amount to an abuse of discretion.” (pp.
*85-*86).
4
The Imprecision of DCF
In fair value litigation, the inherent sensitivity of the components of DCF
analyses to small changes in projected cash flows, discount rates, and/or terminal
values can result in major deviations in appraised values.
As an example, we calculated the DCF values as of December 31, 2017, of
a hypothetical company with projected revenues in 2018 of $100 million, an
EBITDA margin of 25%, depreciation of $10 million, capital expenditures of
115% of depreciation, working capital of 10% of revenues, 5% annual growth
through 2022, annual growth of 3% or 4% thereafter, and no net debt (debt minus
excess cash). Table 1 below shows the wide variances brought about by
differences in the discount rate or the perpetual growth rate.
Table 1
DCF Valuation – No Net Debt
Discount Rate
Long
-
Term
Growth Rate
% Difference for
Higher Growth Rate
($ millions)
8.0% 891 1,124 26%
10.0% 541 637 18%
% Difference for
Higher Discount Rate
65% 76%
Without leverage. the difference between the calculated value using a 3% growth
rate and a 10% discount rate and using a 4% growth rate and an 8% discount rate
is 108%.
The variances increase substantively with leverage. Table 2 shows the
calculated values assuming $300 million of net debt.
Table 2
DCF Valuation – $300 Million Net Debt
Discount Rate
Long
-
Term
Growth Rate
% Difference for
Higher Growth Rate
($ millions)
8.0% 591 824 39%
10.0% 241 337 40%
% Difference for
Higher Discount Rate
145% 145%
5
In this leveraged example, the difference between the calculated value using a 3%
growth rate and a 10% discount rate and using a 4% growth rate and an 8%
discount rate is 242%!
Moreover, DCF valuations are subject to the vagaries of the underlying
projections, which can be material. Cases in which competing experts use the
same projections for their DCF calculations are rare.
It appears that the Delaware courts favor DCF because it can yield a precise
number. Many decisions arrive at DCF values calculated to four significant
figures. Unfortunately, DCF suffers from the fact that it merely gives the illusion
of precision.
It’s a fact of life that Court of Chancery judges and others have railed at the
often-dramatic differences between the fair value determinations of the dueling
experts in a given case. Equally true, experts should want to avoid getting
skewered in a deposition or cross examination, or by the court. Notwithstanding,
adversarial proceedings being what they are, critics should not be shocked when
experts come in with fair value conclusions they believe to be within the range of
fair values but appear skewed to one end of the range or the other. This is
especially true because, as noted, even small changes to inputs in a DCF analysis
can dramatically affect calculated values. Similarly, differences in the
components of comparable company or comparable transaction analyses, such as
which companies to include or which outliers to exclude, can likewise make major
(albeit usually smaller) differences in the conclusions reached.
Characteristics of Arm’s-Length and Non-Arm’s-Length Transactions
Arm’s-length transactions are those in which the buyer is not related to the
seller and in which controllers and/or officers of the seller receive the sane
consideration as other shareholders (other than pre-existing commitments such as
severance payments and stock options).
There are at least four factors that characterize non-arm’s-length
transactions:
(i) in its most extreme form, where buyer is on both sides of the
transaction, where buyer controls both parties to the transaction;
(ii) situations in which the majority acquires at least 90% of a company
and later squeezes out the minority in a short-form merger;
(iii) management buyouts (MBOs), and;
6
(iv) transactions in which controllers and/or officers of the seller receive
substantially different consideration than other shareholders, such as
generous employment contracts, non-compete agreements, or equity in
the surviving entity.
The Data
Exhibit I contains, among other elements, summaries of the Delaware
appraisal decisions in the 25 non-arm’s-length transactions in our survey. We have
included all relevant decisions from 1998 through February 2018 in which an
independent fairness opinion or valuation was rendered. Exhibit I includes the
relevant citation, the appraisal awards compared to the transaction prices, the form
of each transaction, the firm rendering an opinion, and whether that firm was
engaged by the board of directors, a special committee, or a control party. Exhibit
II contains the same data for the 16 arm’s-length transactions with fairness
opinions in the same period.
9
The premiums of the appraisal awards over that the transaction prices in the
non-arm’s-length deals include seven with premiums over 100% and three with
discounts. The median premium was 29.2% and the trimmed mean (excluding the
highest and lowest data points) was 58.5%. The arm’s-length deals have a narrow
range with a median of 0.0% and a trimmed mean of minus 3.1%.
Issues in Non-Arm’s-Length Transactions
Exhibit III contains snapshot details of valuation methods used by the Court
and by investment banks in the fairness opinions or independent valuations in the
25 non-arm’s-length transactions. Exhibit IV discusses some of the issues
discussed by the Court in these transactions. The cases we present illustrate the
presence of the Anna Karenina principle, but also many commonalities.
9
We include the Dell case in the arm’s-length category. The Supreme Court said:
[T]his was not a buyout led by a controlling stockholder. Michael Dell
only had approximately 15% of the equity. He pledged his voting power
would go to any higher bidder, voting in proportion to other shares.
Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd, 2017 Del.
LEXIS 518 (Del. Dec. 14, 2017) at *55.
7
Exhibit III shows Delaware’s overwhelming preference for DCF
methodology. In only three of these 25 appraisals was the income approach not
employed by the Court. Conversely, in 16 out of the 25, DCF (or another form of
the income approach
10
) was the only methodology used. Five used both the
income method and the market approach (comparable companies and/or
comparable transactions
11
) and one used capitalized earnings and book value.
It is interesting to contrast the methods used by the Court of Chancery with
those used by the investment banks. Of the 25 opinions and valuations for which
information was available,
12
17 used both the income method and the market
method. Five apparently used the income method only,
13
two used DCF and asset
value, and one used a single comparable company (the Court did the same in that
case).
Exhibit IV contains case descriptions of Anna Karenina issues as well as
more common ones. Anna Karenina issues include collateral estoppel, exculpation
of directors, whether the entire fairness doctrine can be invoked absent a
controlling shareholder, when a controlling shareholder’s duty to disclose ceases,
tax liability of Sub Chapter S corporations, the treatment of excess regulatory
capital, whether preferred stockshould be valued at its liquidation preference or on
an as-converted basis, the dilutive effect of long-term stock options, adjustments
for misappropriated corporate opportunities, and whether 9/11-related facts should
be used to reduce value.
The more quotidian themes spread over many cases include, inter alia,
which valuation methods to employ, the transaction price as evidence of value,
cost of capital issues (e.g., debt/equity ratios, beta, quantification of small stock
premiums, applicability of company-specific risk premiums), which projections to
10
One used direct capitalization of cash flow and one used capitalized earnings.
11
The Court of Chancery generally uses “comparable” rather than “guideline.”
12
Two transactions had two fairness opinions; no information was available for one
fairness opinion for a private company.
13
In two decisions for private companies, the Court noted that the fairness opinions used
DCF and did not say whether or not any other methods were used.
8
employ, growth rates in terminal value calculations, and present value of net
operating loss carryforward.
Research Results – Premiums or Discounts to Transaction Prices
We observe that of the 25 non-arm’s-length transactions studied, 13 sought
appraisal relief only, and 12 combined an appraisal request with an allegation of
breach of fiduciary duty. In five cases, the Court found no breach of fiduciary
duty. Exhibit V shows the premiums awarded in each of these 18 pure appraisal
decisions and in the seven that combined an appraisal with a successful breach of
fiduciary duty claim. The median premium in the first group was only 19.7%, but
the median was 132.5% where appraisal was coupled with a finding of breach of
fiduciary duty. The trimmed means were 28.8% and 127.3%, respectively.
Did the courts’ disapproval of respondents/defendants’ conduct cause it to
award higher premiums to transaction prices versus the appraisal-only cases?
Although the small sample size in the breach of fiduciary duty cases does not
allow for a definitive conclusion on this matter, we note then-Vice Chancellor
Strine’s observation in a joint appraisal/fiduciary duty case:
Because of the relationship between the appraisal and equitable
actions, I have, at the margins, in fact resolved doubts in favor of the
plaintiffs. In other words, the valuation I set forth is more optimistic
than is strictly justified.
14
We question the concept that fair value should be determined differently in
breach of fiduciary actions than in pure appraisal cases. Fair value should be the
same regardless of either the flaws in the transaction or the behavior of any party.
If there are damages from an egregious breach of fiduciary duty, exemplary
(punitive) damages over and above fair value may lie.
Issues in Arm’s-Length Transactions
Exhibit VI contains snapshot details of valuation methods used by the
Court of Chancery (and, in two cases, by the Supreme Court) and in investment
banks’ 20 fairness opinions in the 16 arm’s-length transactions (four of these
14
Andaloro v. PFPC Worldwide, 2005 Del. Ch. LEXIS 125 (Del. Ch., Aug. 19, 2005) at
*32. In joint fiduciary duty/appraisal cases, it is customary to award damages for breach
of fiduciary duty at the appraised value net of any amount previously received by
plaintiffs.
9
transactions had two fairness opinions). Exhibit VII discusses some of the issues
discussed by the Court in these transactions.
Exhibit VI summarizes valuation approaches employed by fairness opinion
providers or appraisers. It shows Delaware’s strong preference for relying on the
transaction price in arm’s-length deals. In nine of these 16 appraisals, the Court of
Chancery based its appraisal solely or primarily on the transaction price. Six
Chancery decisions were based on DCF, but two 2017 Supreme Court rulings
reversed lower court decisions that had used DCF and instructed the Court of
Chancery to give predominant weight to the transaction price. A February 2018
Chancery decision cited the Supreme Court decisions and based its appraisal on
unaffected market price prior to announcement of the transaction.
15
In light of this
decision, in future cases counsel may choose to engage experts to perform event
studies with respect to stock volume, bid-ask spreads, and other such measures to
determine whether the efficient market hypothesis applies in the fact pattern at bar.
The fairness opinions rendered prior to these transactions were each
opining as to the fairness of the negotiated price of the proposed transaction. Of
the 20 fairness opinions, 18 explicitly considered both DCF and comparable
companies; 14 of these also considered comparable transactions. The other two
decisions noted that the fairness opinions (which were for private companies) had
employed DCF but did not discuss whether or not they had used any other method.
In Exhibit VII, Anna Karenina issues include whether a dissenter can
withdraw some but not all its shares from its appraisal demand, the admissibility
of valuation treatises not entered into evidence, impact on appraisal of taxes and
expenses relating to sale of a business that was contingent on sale of the
continuing company, and whether a financial buyer’s target IRR affects whether
the price it is willing to pay is a meaningful indication of fair value.
Other issues include, in addition to those in Exhibit IV, the relevance of
synergies that were not unique to the buyer, treatment of stock-based
compensation in DCF analyses, the use of Barra betas, and whether cash held
abroad should be adjusted for taxes payable upon repatriation.
15
Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 LEXIS 52 (Del. Ch.
Feb. 15, 2018),
10
Conclusions
1. The Court of Chancery will almost always favor management’s ex ante
projections made in the ordinary course of business for corporate planning
purposes over projections made for marketing the company or post ante
projections made in connection with litigation.
2. Transaction price is a major factor in appraisal if there has been a robust
market check. The absence of an adequate market check in many non-arm’s-
length transactions has resulted in appraisal valuations materially higher than the
deal price.
3. Delaware seldom awards a premium over the transaction price in
appraisals of arm’s-length transactions.
4. The Court of Chancery has shown a strong preference for the income
approach (primarily DCF) over the market approach.
a. The capital asset pricing model (CAPM) is preferred to the build-up
method, as the latter is more subjective.
b. For calculating terminal value, a growth model is preferred, both
because it is preferred by academics and because the multiples used
by experts (usually EBITDA) are commonly based on current
market multiples without regard for what multiples might be at the
end of the projection period.
c. The Court had developed a preference for a supply side equity risk
premiums (ERP) rather than an historical ERP.
5. In future cases, experts may be asked to perform event studies to
determine whether the efficient market hypothesis applies in the fact pattern at bar.
6. The Anna Karenina principle is alive and well in the Delaware courts.
The authors thank Ira T. Kay, a Managing Partner of Pay Governance, LLC, for his
suggestion that an article comparing transaction price to the court-adjudicated value in an
appraisal proceeding might be a useful contribution to valuation literature. We also
appreciate information supplied by Charles Nathan, a Senior Advisor to the Finsbury
subsidiary of WPP plc.
Page
1
EXHIBIT I
Delaware Appraisal Cases – Non-Arms'-Length Transactions with Fairness Opinions, 1997 – 2017
Citation Company
appraised
Deal price
(a)
Court's
value Increase Transaction Fairness opinion
or valuation by: Engaged by:
Le Beau v. M.G. Bancorp., 1998 Del. Ch. LEXIS 9
(Del. Ch. Jan. 29, 1998); aff’d, M.G. Bancorp. v.
Le Beau, 737 A.2d 513 (1999)
M.G.
Bancorporation $41.00 $85.00 107.3% Short-form
merger
Alex Sheshunoff
[Fair market
value]
Board
ONTI, Inc. v. Integra Bank, 751 A.2d 904 (Del.
Ch. 1999) ONTI, Inc. $6,040,000 $16,195,258
168.1% Merger with
affiliated co.
Hempstead & Co.
[Valuation]
Control
shareholder
Gray v. Cytokine Pharmasciences, Inc., 2002 Del.
Ch. LEXIS 48 (Apr. 25, 2002)
PharmaSciences,
Inc. $1,114.00 $1,114.00 0.0% Merger with
affiliated co.
Merrill Lynch
[Valuation] Board
Gentile v. SinglePoint Financial, Inc., 2003 Del.
Ch. LEXIS 21 (Del. Ch. Mar. 5, 2003)
SinglePoint
Financial $0.04 $5.51 13,675%
Merger with
affiliated co.
Harman Group Controller
Cede & Co. v. JRC Acquisition Corp., 2004 Del.
Ch. LEXIS 12 (Del. Ch. Feb. 10, 2004) 800-JR Cigar $13.00 $13.58 4.5% Going
private Merrill Lynch Special
Committee
In re Emerging Communications, Inc.
Shareholders Litig., 2004 Del. Ch. LEXIS 70 (Del.
Ch. May 3, 2004)
Emerging
Communications $10.25 $38.05 271.2% Going
private Houlihan Lokey Special
Committee
Doft & Co. v. Travelocity.com, Inc., 2004 Del. Ch.
LEXIS 75 (Del. Ch. May 21, 2004); 2004 Del. Ch.
LEXIS 84 (Del. Ch. June 10, 2004)
Travelocity.com $28.00 $30.43 8.7% Short-form
merger
Salomon Smith
Barney
Special
Committee
Gholl v. eMachines, Inc., 2004 Del. Ch. LEXIS 171
(Del. Ch. Nov. 24, 2004); aff'd, 2005 Del. LEXIS
220 (Del. June 14, 2005)
eMachines $1.06 $1.64 54.7% Short-form
merger
Credit Suisse
First Boston Board
In re U. S. Cellular Operating Co., 2005 Del. Ch.
LEXIS 1 (Del. Ch. Jan. 6, 2005)
Janesville Cellular
Telephone Co. $43.85 $54.00 23.1% Squeeze-out
merger
Duff & Phelps
[Fair market
value]
Board
Sheboygan Cellular
Telephone Co. $21.45 $30.13 40.5% Squeeze-out
merger Board
Andaloro v. PFPC Worldwide, Inc., 2005 Del. Ch.
LEXIS 125 (Del. Ch. Aug. 19, 2005) PFPC Worldwide $34.26 $32.81 (4.2%) Going
private
Salomon Smith
Barney Board
Gesoff v. IIC Industries Inc., 902 A.2d 1130 (Del.
Ch. 2006) IIC Industries $10.50 $14.30 36.2% Going
private Jesup & Lamont Special
Committee
In Re PNB Holding Co. Sh’holders Litig., 2006
Del. Ch. LEXIS 158 (Del. Ch. Aug. 16, 2006)
PNB Holding $41.00 $52.34 27.7% Squeeze-out
merger
Prairie Capital
[Valuation] Board
Crescent/Mach I Partnership, L.P. v. Turner,
2007 Del. Ch. LEXIS 63 (Del. Ch May 2, 2007) (b)
Dr Pepper Bottling
Co. of Texas $25.00 $32.31 29.2% Squeeze-out
merger
Donaldson,
Lufkin & Jenrette Board
In re Sunbelt Beverage Corp. Shareholder Litig.,
2010 Del. Ch. LEXIS 1 (Del. Ch. Jan. 5, 2010)
Sunbelt Beverage $45.83 $114.04 148.8% Squeeze-out
merger
Hempstead &
Co. Board
Page
2
Citation Company
appraised
Deal price
(a)
Court's
value Increase Transaction Fairness opinion by: Engaged
by:
Global GT LP v. Golden Telecom, Inc. 993 A.2d
497 (Del. Ch. 2010); aff’d, Golden Telecom v.
Global GT LP, 11 A.3d 214 (Del. 2010)
Golden Telecom $105.00 $125.49 19.5%
Sale to
affiliated
company
Credit Suisse Special
Committee
In re Hanover Direct, Inc. Sh’holders Litig., 2010
Del. Ch. LEXIS 201 (Del. Ch. Sept. 24, 2010) Hanover Direct $0.25 $0.25 0.0% Going
private
Goldsmith, Agio,
Helms & Lynner
[valuation]
Board
Reis v. Hazelett Strip-Casting Corp., 28 A. 3d 442
(Del. Ch. 2011)
Hazelett
Strip-Casting $1,595.17 $3,752.19 135.2% Reverse
split
Sheldrick, McGehee
& Kohler
[valuation]
Board
In Re: Appraisal of The Orchard Enterprises, Inc.,
2012 Del. Ch. LEXIS 165 (Del. Ch. July 18, 2012)
Orchard
Enterprises $2.05 $4.67 127.8% Going
private
Fesnak &
Associates
Special
Committee
Towerview LLC v. Cox Radio, Inc., 2013 Del. Ch.
LEXIS 159 (Del. Ch. June 13, 2013) Cox Radio $4.80 $5.75 19.8% Merger
with parent Gleacher Special
Committee
Laidler v. Hesco Bastion Environmental, Inc.,
2014 Del. Ch. LEXIS 75 (May 12, 2014)
Hesco Bastion
Environmental $207.50 $364.24 75.5% Squeeze-
out merger
Willamette Mgt.
[Fair market value] Company
Owen v. Cannon, 2015 Del. Ch. LEXIS 165 (Del.
Ch. June 17, 2015)
Energy Services
Group $19.95 $31.94 60.1% Squeeze-
out merger
Grant Thornton
[Fair market value]
Board
Dunmire v. Farmers & Merchants Bancorp of
Western Pa., Inc., 2016 Del. Ch. LEXIS 167 (Nov.
10, 2016)
Farmers & Mer-
chants Bancorp
of Western
Pennsylvania
$83.00 $91.90 10.7%
Merger with
affiliated
company
Ambassador
Financial
Special
Committee
In Re Appraisal of SWS Group, Inc., 2017 Del. Ch.
LEXIS 90 (Del. Ch. May 30, 2017); aff'd, Merlin
Partners, L.P. v. SWS Group, Inc., 2018 Del. LEXIS
77 (Del. Feb. 23, 2018)
SWS Group $7.79 (c) $6.38 (18.1%)
Sale to
major
lender
Sandler O'Neill Special
Committee
ACP Master, Ltd. v. Sprint Corp., 2017 Del. Ch.
LEXIS 125 (Del. Ch. July 21, 2017) Clearwire Corp. $5.00 $2.13 (d) (57.4%)
Merger
with 50.2%
shareholder
Evercore Board
Centerview
Partners
Special
Committee
Trimmed Mean [excluding high & low] 58.5%
Median 29.2%
(a) Per share (except for ONTI, Inc.)
(b) modified, Crescent/Mach I P'ship, L.P. v. Dr Pepper Bottling Co., 2008 Del. Ch. LEXIS 68 (Del. Ch., June 4, 2008);
modification rev'd, 962 A.2d 205, 2008 Del. LEXIS 541 (Del. 2008)
(c) The consideration at closing was worth $6.92 per share because the market price of the acquiror’s stock declined.
(d) This case has been appealed.
Page 1
EXHIBIT
II
Delaware Appraisal Cases
Arm's
-
Length Transactions with Fairness Opinions, 1997
2017
Citation Company
appraised Deal price (a) Court's value Increase Transaction Fairness
opinion by:
Engaged
by:
Opinion
date
Union Ill. 1995 Investment LP v. Union
Financial Group, Ltd


    
   
Cede & Co., Inc. v. MedPointe Healthcare,
Inc

   



P
  
Highfields Capital, Inc. v. AXA Financial,
Inc     


  
Gearreald v. Just Care, Inc
     
   
Merion Capital, L.P. v. 3M Cogent, Inc


    
   
Huff Investment Fund v. CKx, Inc

aff’d

    
   
In Re Appraisal of Ancestry.com, Inc


    
   
Merlin Partners LP v. AutoInfo, Inc

    
  
 
Longpath Capital, LLC v. Ramtron Intl.
Corp




   
   
Merion Capital LP v. BMC Software, Inc


    




 
 
Page 
Citation Company
appraised Deal price Court's value Increase Transaction Fairness
opinion by:
Engaged
by: 
In re Appraisal of Dell Inc

rev'd, Dell Inc. v. Magnetar
Global Event Driven Master Fund
Ltd

 






P



 

 
Merion Capital LP v. Lender
Processing Servicing, Inc



P

   




 
In Re Appraisal of PetSmart, Inc


Pe    
 P  
In re Appraisal of DFC Global
Corp
modified

rev'd
DFC Global Corp. v. Muirfield
Value Partners, L.P


 




  
 

 
Verition Partners Master Fund
Ltd. v. Aruba Networks, Inc


    


Pa  
In re Appraisal of AOL Inc


   
   
Trimmed Mean (3.3%)
Median 0.0%
 Pe
 

 

Page 1
EXHIBIT III
Valuation Methods – Non-Arms'-Length Transactions
Company
appraised Transaction
Fairness
opinion or
valuation by:
SEC
filing
Valuation Methods
Used in Fairness
Opinion or Valuation
Discount
Rate
Terminal Value
Valuation Methods
Used by Court
Discount
Rate
Terminal Value
Multiple
Growth
Multiple
Growth
M.G.
Bancorporation
Short-form
merger
Alex Sheshunoff
[fair market
value, not
fairness]
N
DCF; comparable
companies (EPS and
book value); comparable
transactions (EPS and
book value)
10.0% 4%
Comparable
transactions (EPS
and book value)
DCF not used
ONTI, Inc. Merger with
affiliated co.
Hempstead
[Valuation,
not fairness]
N DCF only
22.2% 3% DCF only 18.35
% 3%
PharmaSciences Merger with
affiliated co.
Merrill Lynch
[Valuation,
not fairness]
N
DCF; comparable
companies (revenues)
40%-50% 4x-6x
revenues
DCF (50%);
comparable
companies
(revenues)(50%)
40% 4x
revenues
SinglePoint
Financial
Merger with
affiliated co.
Harman Group
N The court noted that
DCF was used
not disclosed
Comparable
transactions
(revenues)
DCF not used
800-JR Cigar Going
private Merrill Lynch
Y
DCF; comparable
companies (EBITDA and
EPS); comparable
transactions (revenues,
EBITDA and EBIT); PV of
future stock price; LBO
analysis; premiums paid
in going-private
transactions
13%-14% 4x-6x
EBITDA DCF only 13% 3.5%
Emerging
Communications
Going
private
Houlihan
Lokey
Y
DCF; comparable
companies (revenues,
EBITDA and EBIT);
comparable transactions
(revenues, EBITDA and
EBIT)
not disclosed DCF only 8.69% not
disclosed
Page 2
Company
appraised Transaction
Fairness
opinion or
valuation by:
SEC
filing
Valuation Methods
Used in Fairness
Opinion or Valuation
Discount
Rate
Terminal Value Valuation Methods
Used by Court
Discount
Rate
Terminal Value
Multiple Growth Multiple Growth
Travelocity.com
Short-form
merger
Salomon
Smith Barney
Y
Comparable company
(EBITDA, EBIT and EPS);
premiums paid in going-
private transactions;
maximum price payable
by purchaser without
dilution
DCF not used Comparable
company DCF not used
eMachines Short-form
merger
Credit Suisse
First Boston
Y
DCF; liquidation
analysis; premiums
paid in other
transactions
15%-
25%
15x-25x
EPS DCF only 18.50% 5%
Janesville
Cellular
Telephone Co.
& Sheboygan
Cellular
Telephone Co.
Squeeze-
out
mergers
Duff &
Phelps
[fair market
value, not
fairness]
N
Capitalized earnings;
comparable
transactions (value per
POP)
12% not disclosed
Capitalized
earnings (70%);
comparable
transactions (value
per POP) (30%)
11.82% 10.0x
EBITDA
PFPC
Worldwide
Going
private
Salomon
Smith Barney
N
The court noted that
DCF and comparable
companies were used
not disclosed
DCF (75%);
comparable
companies
(EBITDA) (25%)
13.5% 5%
IIC Industries Going
private
Jesup &
Lamont
Y
Sum of the parts, using
DCF to value each part
not disclosed Sum of the parts
using DCF not disclosed
PNB Holding Squeeze-
out merger
Prairie
Capital
[valuation]
N
Discounted dividend
model; comparable
companies;
comparable
transactions
not disclosed DCF only 12% 5%
Dr Pepper
Bottling Co. of
Texas
Squeeze-
out merger
Donaldson,
Lufkin &
Jenrette
N
DCF; comparable
companies;
comparable
transactions
9%-
11% not disclosed
DCF only 9.75% 4%
Page 3
Company
appraised Transaction
Fairness
opinion or
valuation by:
SEC
filing
Valuation Methods
Used in Fairness
Opinion or Valuation
Discount
Rate
Terminal Value Valuation
Methods Used by
Court
Discount
Rate
Discount Rate
Multiple Growth Multiple Growth
Sunbelt
Beverage
Squeeze-
out merger
Hempstead
& Co.
N
DCF; transactions in
company's stock;
asset value
not disclosed DCF only DCF only
Golden
Telecom
Sale to
affiliated
company
Credit Suisse
Y
DCF; comparable
companies (EBITDA);
comparable
transactions (EBITDA)
10.5%-
12.5% 2%-4% DCF only
12.3%
cost of
equity
5%
Hanover Direct Going private
Goldsmith,
Agio, Helms
& Lynner
[valuation]
Y
DCF; comparable
companies (EBITDA,
EBIT, total assets):
comparable
transactions (EBITDA,
EBIT)
20.4% -
22.4%
6.5x-8.0x
EBITDA
DCF; comparable
companies;
comparable
transactions
not disclosed
Hazelett
Strip-Casting Reverse split
Sheldrick,
McGehee &
Kohler
[valuation]
N
Capitalized earnings
21% NA
Capitalized
earnings (80%);
book value (20%)
17% Net
income NA
Orchard
Enterprises Going private
Fesnak &
Associates
Y
DCF; comparable
companies (revenues
and EBITDA);
comparable transactions
(revenues)
20.0% not disclosed DCF only 15.3% not disclosed
Cox Radio Merger with
parent Gleacher Y
DCF; comparable
companies (revenues
and EBITDA); premiums
paid for minority
interests
9%-12% 1%-3% DCF only 8% 2.25%
Hesco Bastion
Environmental
Squeeze-out
merger
Willamette
[fair market
value, not
fairness]
N
DCF;
comparable
companies (revenues
and EBITDA);
comparable transaction
s
(revenues and EBITDA);
not
disclosed 4%
DCCF (direct
capitalization of
cash flow)
21.83% 4%
Page 4
Company
appraised Transaction
Fairness
opinion or
valuation by:
SEC
filing
Valuation Methods
Used in Fairness
Opinion or Valuation
Discount
Rate
Terminal Value Valuation
Methods Used
by Court
Discount
Rate
Terminal Value
Multiple Growth Multiple Growth
Energy Services
Group
Squeeze-
out merger
Grant Thornton
[fair market
value, not
fairness]
N
The court noted that DCF
was used
16% 2.5% DCF only 14.13% 3%
Farmers &
Merchants
Bancorp of
Western
Pennsylvania
Merger
with
affiliated
company
Ambassador
Financial
N No information
available
not disclosed Capitalized
earnings only 11.07% 3%
SWS Group
Sale to
major
lender
Sandler
O'Neill
Y
DCF; comparable
companies (EPS, yield,
book value, and
tangible book value)
10%-15%
10x-15x
EPS;
1.0x-1.8x
TBV
DCF only 12.76% 3.35%
Clearwire Corp.
Merger
with 50.2%
shareholder
Evercore
Y
DCF; comparable
companies (MHz-POP);
comparable
transactions (MHz-
POP); analysts' target
stock prices; premiums
paid in large cash
acquisitions
12%-
17.5% 2%-4%
DCF only 12.44% 3.35%
Centerview
Partners
DCF; comparable
acquisitions (MHz-
POP);
analysts' target stock
prices; premiums paid
in other acquisitions
10%-
17.5% 1%-3%
Page 1
EXHIBIT IV
Selected Issues Discussed by the Court – Non-Arms'-Length Transactions
Company
Appraised Transaction
Valuation Issues Discussed by the Court Other Issues
M.G.
Bancorporation
Short-form
merger
a) Whether to use DCF only or comparable transactions as well;
b) Whether control premium should be accepted;
c) Whether capital market approach should be used versus market/book value.
Collateral estoppel given to pre-merger
valuation opinion based on fair market
value rather than fair value.
ONTI, Inc.
Cash
merger with
affiliated
company
a) Whether merger that created potential value to minority, in place at time of
cash out merger, is an element of value;
b) Whether control premium should be applied;
c) Use of company-specific risk premium and small stock premium;
d) Market price as evidence of value;
e) Should comparable company approach be used;
f) Management fee adjustment.
Defendants liable for breach of fiduciary
duty – damages assessed at Court’s
appraised price
PharmaSciences
Merger
with
affiliated
company
a) Whether to adjust DCF to include interest income on cash or expense on debt;
b) Whether to accept comparable company analysis;
c) Whether to adjust for share repurchases;
d) Whether petitioner’s expert was conflicted;
e) Whether respondent’s expert’s projections should be rejected.
SinglePoint
Financial
Merger with
affiliated
company
a) Whether share dilution was a justiciable issue;
b) Whether comparable transaction analysis or DCF alone should be used or
whether DCF alone should govern.
800-JR Cigar Going
private
a) The perpetuity rate to be used to determine terminal value or whether an exit
multiple should be used;
b) The proper debt/equity ratio;
c) Disputes over the Ibbotson equity risk premium;
d) Appropriate tax rate;
e) Whether offer prices for subject company could be utilized;
f) Whether comparable transaction analysis could be used.
Emerging
Communications
Going
private
a) Which projections should be used;
b) Elements comprising the discount rate;
c) Relationship between capex and depreciation;
d) Evidentiary value of stock price;
e) Add-ons for misappropriated corporate opportunities.
Defendants liable for breach of fiduciary
duty – damages awarded (appraisal value
less amount paid in cash-out merger).
Travelocity.com Short-form
merger
a) Probative value of projections of very young company;
b) Whether a single comparable company, Expedia, could be used;
c) If so, what discount from its trading multiple should be taken;
d) Weighting of EBITDA and EPS multiples.
On reargument, use security analysts’
projections and add back net cash
because it was already included in EPS.
Page 2
Company
Appraised Transaction
Valuation Issues Discussed by the Court Other Issues
eMachines Short-form
merger
a) CAPM vs. build-up method;
b) Terminal value (perpetuity or exit multiple);
c) Addback of excess cash;
d) Transaction price as evidence of value (whether auction was too limited);
e) Whether addbacks to value from alleged management unfair practices
justiciable in an appraisal proceeding;
f) Whether comparable companies analysis was usable;
g) Which projections should be used;
h) Discount rate issues, including whether company-specific risk premium should
be included and size of small stock premium.
Janesville &
Sheboygan
Cellular Telephone
Squeeze-
out mergers
a) Whether capital gains tax can be deducted from terminal value;
b) Whether cellular phone company should be valued per subscriber or per POP.
PFPC Worldwide Going
private
a) Projected cash flow growth;
b) Use of perpetuity model for terminal value;
c) Proper debt equity ratio;
d) Basis for determining beta;
e) Whether to use two or three step DCF model;
f) Backing out cash flow from company to be sold but adding back its profits;
g) Weighting of DCF vs. comparable companies.
Defendants liable for breach of fiduciary
duty – damages assessed at Court’s
appraised price
IIC Industries Going
private
a) Whether company-specific risk premium should be used;
b) Amount of small stock premium;
c) Probative value of prior real property appraisals;
d) Probative value of management projections;
e) Whether 9/11-related facts should be held to decrease value.
a) Whether independent directors
entitled to exculpation,
b) Whether breach of fiduciary duty
claim would lie (yes),
c) Damages awarded at appraisal value.
PNB Holding Squeeze-
out merger
a) The acceptable capital ratio for the bank;
b) Whether the discounted dividend model arrives at fair value or includes a
minority discount.
Whether entire fairness can be invoked
when there is no control shareholder.
Dr Pepper Bottling
Co. of Texas
Squeeze-
out merger
a) Valuation of net operating loss in a change of control transaction;
b) Appropriate projected depreciation and capital expenditures.
Fiduciary duties of control shareholder
who is selling control but retaining an
equity participation.
Sunbelt Beverage Squeeze-
out merger
a) Relevance of formula used to determine price in prior transaction;
b) Impact on value of post-merger conversion to S corp;
c) Applicability of company-specific risk premium.
Whether to award rescissory damages
Page 3
Company
Appraised Transaction
Valuation Issues Discussed by the Court Other Issues
Golden Telecom
Sale to
affiliated
company
a) Whether merger price was an element of value;
b) Whether comparable company analysis should be considered;
c) How terminal value should be calculated;
d) Company’s tax rate;
e) Amount of equity risk premium;
f) How beta should be calculated and whether Barra beta should be used.
Hanover Direct Going
private
"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."
"The issue of fair process is secondary to
the ultimate import of fair price; and fair
value under a statutory appraisal is
tantamount to fair price in an entire
fairness action."
Hazelett
Strip-Casting
Reverse
split
a) Earnings base for capitalizing net income should be normalized;
b) Whether a business strategy of retaining employees rather than laying them off
during a business downturn represents the company's operative reality;
c) Whether losses for a money-losing subsidiary unrelated to the company's
business should be excluded when normalizing.
"In cases like this one, . . . the fair price
analysis and remedial determination
coincide."
Orchard
Enterprises
Going
private
a) Whether preferred stock should be valued at its liquidation preference or on an
as-converted basis when determining fair value;
b) Whether DCF should be the sole methodology;
c) As to DCF, whether build up methodology was usable versus capital asset
pricing model;
d) Probative value of management’s projections and weight to be given to base
case versus aggressive case projections;
e) Present value of tax benefit of net operating losses;
f) Terminal value computations;
g) Whether supply side or historical equity risk premium should be used;
h) Whether a company-specific risk premium should be included.
Cox Radio Merger
with parent
a) Whether DCF should be the only methodology;
b) Which projections best reflect recovery from recession;
c) Whether long term incentive plan options should be used in calculating
outstanding shares;
d) Calculation of net debt;
e) Whether to add back a retained earnings cushion;
f) How to treat deferred taxes;
g) Relationship between capital expenditures and depreciation;
h) How to calculate terminal value.
Page 4
Company
appraised Transaction
Valuation Issues Discussed by the Court Other Issues
Hesco Bastion
Environmental
Squeeze-
out merger
a) How to value company whose revenues are very irregular;
b) Use of industry risk premium;
c) Amount of size premium.
Energy Services
Group
Squeeze-
out merger
a) Whether valuation should be by DCF only;
b) What projections to use;
c) Tax liability for subchapter S companies;
d) Terminal value computations;
e) Amount of working capital;
f) Amount of Texas Use and Sales Tax;
g) Whether to recognize dilution from stock-related performance units.
Defendants liable for breach of fiduciary
duty – damages assessed at Court’s
appraised price
Farmers &
Merchants
Bancorp of
Western
Pennsylvania
Merger
with
affiliated
company
a) How to deal with fact that company had no long-term projections;
b) Methods to be used (comparable transactions with DCF as a cross check or
equally weighted DCF, comparable company and comparable transactions);
c) Supply side versus historical equity risk premium;
d) Adjustments for cash.
Procedurally flawed with no auction or
majority of the minority provisions – both
companies controlled by one family.
SWS Group
Sale to
major
lender
a) Extent to which SWS’ financial performance was improving;
b) Weighting of DCF vs. comparable companies or whether DCF should be only
approach used;
c) Appropriateness of management’s three-year projections;
d) Whether warrants issued to respondent should be included as if exercised
before merger;
e) How to deal with excess regulatory capital;
f) How to deal with interest on debt subsequent to warrant exchange;
g) Methods for calculating terminal value;
h) Whether to use supply side equity risk premium;
i) How to compute beta;
j) Quantification of size premium.
Clearwire
Merger
with 50.2%
shareholder
a) Whether to use management projections or buyer's projections;
b) "A merger price resulting from arms-length negotiations where there are no
claims of collusion is a very strong indication of fair value."
c) "In the context of appraisals, it is entirely proper for the Court of Chancery to
adopt any one expert's model, methodology, and mathematical calculations, in
toto, if that valuation is supported by credible evidence and withstands a critical
judicial analysis on the record."
a) When a controller's duty of disclosure
ceases;
b) Differing value standards for breach of
fiduciary duty (value as a range) vs. for
appraisal (need for fixed value),
EXHIBIT V
Premiums Over Transaction Price in Non-Arm’s-Length Transactions:
Appraisal and Breach of Fiduciary Duty versus Appraisal Only
Appraisal and Alleged Breach of Fiduciary Duty – Breach Found
Case Company Appraised Increase
ONTI, Inc. v. Integra Bank ONTI, Inc. 168.1%
In re Emerging Communications Emerging Communications 271.2%
Gesoff v. IIC Industries IIC Industries 36.2%
In re Sunbelt Beverage Sunbelt Beverage 148.8%
Reis v. Hazelett Strip-Casting Hazelett Strip-Casting 132.5%
Laidler v. Hesco Bastion Environmental Hesco Bastion Environmental 74.3%
Owen v. Cannon Energy Services Group 60.1%
Trimmed Mean [excl. high & low] 127.3%
Median 132.5%
Appraisal Only
Case Company Appraised Increase
Le Beau v. M.G. Bancorp. M.G. Bancorporation 107.3%
Gray v. Cytokine Pharmasciences PharmaSciences 0.0%
Gentile v. SinglePoint Financial SinglePoint Financial 13,675%
Cede & Co. v. JRC Acquisition Corp. 800-JR Cigar 4.5%
Doft & Co. v. Travelocity.com Travelocity.com 8.7%
Gholl v. eMachines eMachines 54.7%
Andaloro v. PFPC Worldwide
*
PFPC Worldwide (4.2%)
In re U. S. Cellular Operating Co. Janesville Cellular Telephone Co. 23.1%
Sheboygan Cellular Telephone Co. 40.5%
PNB Holdings
*
PNB Holdings 27.7%
Crescent/Mach I P'ship v. Turner
*
Dr Pepper Bottling Co. of Texas 29.2%
Global GT LP v. Golden Telecom Golden Telecom 19.5%
In re Hanover Direct
*
Hanover Direct 0.0%
Appraisal of Orchard Enterprises Orchard Enterprises 127.8%
Towerview LLC v. Cox Radio Cox Radio 19.8%
Dunmire v. Farmers & Merchants Bancorp Farmers & Merchants Bancorp of Western Pa. 10.7%
Appraisal of SWS Group SWS Group (7.8%)
ACP Master v. Sprint Corp.
*
Clearwire (57.4%)
Trimmed Mean [excl. high & low] 28.8%
Median 19.7%
* Breach of fiduciary duty alleged but not found.
Page 1
EXHIBIT VI
Valuation Methods – Arms'-Length Transactions
Company
appraised Transaction
Fairness
opinion by:
SEC
filing
Valuation Methods Used in
Fairness Opinion or Valuation
Discount
Rate
Terminal Value Valuation Methods Used by
Court
Discount
Rate Growth
Multiple Growth
Union
Financial
Group
Sale to
third
party
Stifel
Nicolaus N
The Court noted that Stifel's DCF
value was below the transaction
price; no other information
available
not disclosed
NPV of transaction price
assuming that contingent
payments were earned
(rejected DCF value that was
materially lower than
transaction price)
13.53% NA
Carter-
Wallace
Merger
with and
asset sale
to third
parties
J. P.
Morgan
Y
DCF; comparable companies
(EBITDA); comparable
transactions (revenues for
consumer products, EBITDA for
healthcare); LBO analysis
8%-10%
(consumer
products);
10%-12%
(healthcare)
1%-
3% DCF, cross-checked against
comparable companies,
historical trading prices, and
"desperate sales effort"
leading to transaction.
10.0% 3.35%
Houlihan
Lokey
DCF; comparable companies
(revenues and EBITDA);
comparable transactions
(revenues and EBITDA)
12%-14%
(consumer
products);
14%-16%
(healthcare)
1%-
3%
MONY Group
Sale to
third
party
Credit
Suisse First
Boston
Y
DCF; comparable companies
(EPS and book value);
comparable transactions (EPS
and book value); premiums paid
in other insurance acquisitions
10%-12%
0.7x-0.9x
EPS;
1x-1.2x
book
value
75% weight to transaction
price less synergies; 25%
weight to sum-of-the-parts
analysis (life insurance:
actuarial valuation; broker-
dealer: comparable
companies; asset
management: DCF and
comparable companies)
not disclosed
Just Care
Sale to
third
party
Harris
Williams N DCF; no other information
available not disclosed
DCF, with no value assigned
to speculative expansion
viewed as unlikely and one-
third haircut to expansion
with "high degree of risk"
18.71% 5.5%
Page 2
Company
appraised Transaction
Fairness
opinion by:
SEC
filing
Valuation Methods Used in
Fairness Opinion or Valuation
Discount
Rate
Terminal Value Valuation Methods Used by
Court
Discount
Rate Growth
Multiple
Growth
Cogent Sale to
third party
Credit
Suisse Y
DCF; comparable companies
(EBITDA and EBIT); comparable
transactions (revenues and
EBITDA)
11%-15%
5.5x-
7.5x
EBITDA
DCF only 11.954% 4.5%
CKx, Inc. Arm's-
length LBO Gleacher Y
DCF; comparable companies
(EBITDA); historical multiples of
EBITDA.
13%-15%
(0.5%
)-
0.5%
"[I]n this case, where no
comparable companies,
comparable transactions,
or reliable cash flow
projections exist, that the
merger price is the most
reliable indicator of value."
DCF not used
Ancestry.com Arm's-
length LBO
Qatalyst
Partners Y DCF; comparable companies
(EBITDA) 9%-14% 6x-8x
EBITDA
Transaction price, which
was close to Court-
calculated DCF value.
10.7% 3%
AutoInfo Arm's-
length LBO Stephens N
DCF; comparable companies
(EBITDA and EPS); comparable
transactions (EBITDA); LBO
analysis; premiums paid in other
acquisitions
18%-20% 5x-7x
EBITDA Transaction price with zero
adjustment for synergies. DCF not used
Ramtron Intl.
Corp.
Sale to
hostile
third party
Needham Y
DCF; comparable companies
(revenues, EBITDA and non-
GAAP EPS); comparable
transactions (revenues and
EBITDA); premiums paid in other
technology acquisitions
20%-23% 5x-7x
EBITDA
Adjusted for synergies,
approximately 99% of
transaction price
DCF not used
BMC Software
Arm's-
length LBO
BofA
Merrill
Lynch
Y
[both] DCF; comparable
companies (EBITDA and non-
GAAP EPS); comparable
transactions (revenues and
EBITDA); PV of future stock
price; analysts' target stock
prices; premiums paid in other
software acquisitions
9% 7x-9x
EBITDA
Transaction price, which
was close to Court-
calculated DCF value
10.5% 3.25%
Morgan
Stanley 9% 7x-9x
EBITDA
Page 3
Company
appraised
Transaction
Fairness
opinion by:
SEC
filing
Valuation Methods Used in
Fairness Opinion or Valuation
Discount
Rate
Terminal Value Valuation Methods Used by
Court
Discount
Rate Growth
Multiple
Growth
Dell
LBO by
group
including
CEO, a 15%
shareholder
Evercore
Y
DCF; comparable companies
(EBITDA, FCF per share and EPS);
PV of future stock price;
analysts' target stock prices; LBO
analysis; share buyback analysis;
premiums paid in other large
transactions
10%-
12%
3x-5x
EBITDA
Court of Chancery: DCF only
9.46% 2.0%
Supreme Court: On remand,
Vice Chancellor must
consider deal price and may
consider DCF
Not addressed
J.P. Morgan
DCF; comparable companies
(EBITDA and EPS)
9.5%-
13.5%
9.5%-
13.5%
EBITDA
DFC Global
Corp.
Arm's-
length LBO
Houlihan
Lokey Y
DCF; comparable companies
(EBITDA and EPS); comparable
transactions (EBITDA)
10%-
11%
5x-6x
EBITDA
Court of Chancery: equal
weight to DCF, comparable
companies (EBITDA) and
transaction price
10.72% 4%
Supreme Court: Remanded,
asking for more weight to
transaction price, lower
discount rate, and
explanation of weighting
Not
address
ed
4% too
high –
remande
d
Lender
Processing
Services
Sale to third
party
Credit
Suisse
Y
DCF; comparable companies
(EBITDA); comparable
transactions (EBITDA); analysts'
target stock prices
8%-
10%
5.5x-7.5x
EBITDA
Transaction price, which
was close to Court-
calculated DCF value
9.56% 3.4%
Goldman
Sachs
DCF; comparable companies
(EBITDA and EPS); comparable
transactions (EBITDA); PV of
future stock price
8.5%-
10%
5.5x-7.5x
EBITDA
PetSmart Arm's-
length LBO J.P. Morgan Y
DCF; comparable companies
(EBITDA and EPS); comparable
transactions (EBITDA)
9%-11% 1.5%-
2.5%
Transaction price
(DCF unreliable because
management projections
were overly aggressive)
DCF not used
Page 4
Company
appraised Transaction
Fairness
opinion by:
SEC
filing
Valuation Methods Used in
Fairness Opinion or Valuation
Discount
Rate
Terminal Value Valuation Methods Used by
Court
Discount
Rate
Growth
Multiple
Growth
Aruba Networks Sale to third
party
Qatalyst
Partners Y
DCF; comparable companies
(EPS); comparable transactions
(revenues and EPS)
10.5%-
14%
11x-16x
net opera-
ting profit
after taxes
Market prices prior to
announcement DCF not used
AOL Sale to third
party Allen & Co. Y
DCF; comparable companies
(EBITDA); comparable
transactions (EBITDA)
10%-12%
6.5x-7.5x
EBITDA – DCF only Not
disclosed
3.5%
Page 1
EXHIBIT VII
Selected Issues Discussed by the Court – Arms'-Length Transactions
Company
appraised Transaction
Valuation Issues Discussed by the Court Other Issues
Union Financial
Group
Sale to third
party
a) Use of management projections vs. higher projections by expert;
b) Appropriate beta;
c) Use of company-specific risk premium
Right of dissenter to withdraw some but
not all its shares from appraisal demand.
Carter-Wallace
Merger
with and
asset sale to
third parties
a) Should appraisal reflect taxes and expenses relating to sale of consumer
products business that was contingent on sale of continuing healthcare
company;
b) Use of management projections vs. higher projections by expert;
c) All components of WACC.
MONY Group Sale to third
party
a) Can DCF be used to value a life insurance company;
b) Validity of comparable company and comparable transaction analyses when
company has materially underperformed its industry.
Just Care Sale to third
party
a) Credibility of management projections made outside of ordinary course of
business;
b) Unlikely or very risky expansion plans; Components of WACC
Cogent Sale to third
party
a) Credibility of management projections made during negotiations;
b) Exclusion of stock-based compensation from cash flow but not from operating
income;
c) Computation of working capital;
d) All components of WACC;
e) Use of growth model rather than multiples for terminal value.
Admissibility of valuation treatises not
entered into evidence.
CKx, Inc. Arm's-
length LBO
a) Credibility of management projections given substantial uncertainties;
b) Relevance of synergies that were not unique to the buyer.
Ancestry.com Arm's-
length LBO
a) Use of three-stage or two-stage growth model;
b) Normalizing margins for terminal value
Since §262 allocates burden of proof to
both sides, the burden effectively falls on
the judge to determine fair value
AutoInfo Arm's-
length LBO
a) Projections prepared solely to paint an optimistic picture for marketing the
company are unreliable;
b) In absence of viable management projections, the court can use projections
prepared by buyer in its due diligence;
c) “The Court may reject comparable companies analyses based on purported
comparables that differ significantly in size from the company being appraised.”
Page 2
Company appraised Transaction Valuation Issues Discussed by the Court Other Issues
Ramtron International
Corp.
Sale to
hostile third
party
a) Projections are unreliable when not in the ordinary course using a methodology
never had before employed by the company, and made after hostile bid;
b) Projections are unreliable when they “suggest a dramatic turnaround in a
company despite no underlying changes that would justify such an improvement
of business.”
c) Transactions are unreliable when there are only two and those two have widely
different multiples.
Dell
LBO by group
including
CEO, a 15%
shareholder
Court of Chancery:
a) Whether merger price is evidentiary;
b) Whether MBO’s are non-arms'-length transactions;
c) Whether, for fair value, a DCF model should consider value to the buyer;
d) Extent to which fair value was a focus of the Special Committee;
e) Whether Dell’s market price reflected only short-term value;
f) Which projections to use;
g) Permissibility of expert's post-hoc adjustments to management projections;
h) Tax rate;
i) Each element of CAPM;
j) Adjustments for cash, deferred taxes, and unrealized tax benefits.
Supreme Court:
a) “[T]he fact that a financial buyer may demand a certain rate of return on its
investment in exchange for undertaking the risk of an acquisition does not mean
that the price it is willing to pay is not a meaningful indication of fair value”;
b) Use of comparable company method was appropriate.
BMC Software Arm's-length
LBO
a) Whether it is appropriate to include a reasonable offset for the tax associated
with repatriating” cash held overseas;
b) Whether it is reasonable to deduct estimated stock-based compensation as an
expense when the company has a history of buying back such stock to prevent
dilution.
“When considering deal price as a
factor – in part or in toto – for
computing fair value, ... [a] two-step
analysis is required: first, were
synergies realized from the deal; and if
so, were they captured by sellers in the
deal price”.
Lender Processing
Servicing
Sale to third
party
a) “The first factor supporting the persuasiveness of the Company's sale process is
the existence of meaningful competition among multiple bidders during the pre-
signing phase”;
b) The court requires expert testimony in order to determine if synergies should be
deducted from the transaction price.
Page 3
Company appraised Transaction Valuation Issues Discussed by the Court Other Issues
PetSmart Arm's-length
LBO
a) “A discounted cash flow analysis does not work in the appraisal context when
the projections reflect the operative reality of the company in the hands of the
acquirer”;
b) “[W]hile it is true that private equity firms construct their bids with desired
returns in mind, it does not follow that a private equity firm's final offer at the
end of a robust and competitive auction cannot ultimately be the best indicator
of fair value for the company.”
DFC Global Corp. Arm's-length
LBO
Court of Chancery:
a) Weighting of valuations using different methods;
b) Two-stage vs. three-stage growth model;
c) Use of Barra beta, two-year vs. five-year data for beta, and method for
unleveraging beta;
d) Impact of financial buyer's IRR on bidding process
Supreme Court:
a) “[T]he fact that a financial buyer may demand a certain rate of return on its
investment in exchange for undertaking the risk of an acquisition does not mean
that the price it is willing to pay is not a meaningful indication of fair value”;
b) Use of comparable company method was appropriate
Aruba Networks Sale to third
party
a) Relevance of unaffected market price prior to announcement of transaction;
b) Whether shares trade in an efficient market;
c) Relevance of transaction price;
d) Difficulties in quantifying synergies;
e) Relevance of DCF analyses.
Impact of Supreme Court decisions in
Dell and DCF Global
AOL Sale to third
party
a) Was sale process sufficiently unconstrained for Court to rely on transaction price;
b) Could DCF analysis use projections made for determining goodwill amortization;
c) Which of the pending deals were part of operative reality;
d) Exclusion of cash required for operations from DCF valuation.
Impact of Supreme Court decisions in
Dell and DCF Global
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