ArticlePDF Available

Fairness Opinions, Experts, and the Courts: A Comparison of Valuation Methods in Delaware Appraisals

  • Sutter Securities Financial Services, San Francisco


This article discusses the valuation methods used by fairness opinion providers, expert witnesses, and the Court of Chancery in statutory appraisals. It also posits that the Court should make greater use of the comparable company method, which is used in most investment bankers' fairness opinions but is seldom used by the Court.
A review of all Delaware appraisal
decisions since 1998 shows that the val-
uation approaches commonly used in
fairness opinions differ materially
from those used by expert witnesses
and by the C ourt of Chancery.
In this study, we looked at all
Delaware appraisal decisions valuing
companies for which descriptions of
the fairness opinions were publicly
available in S E C filings. We also
included appraisal cases for private
companies where a description of a
fairness opinion or valuation was
included in the Court’s opinion.
The information as to which primary
valuation methods (comparable com-
panies,1comparable transactions, and
discounted cash flow) were used by
investment bankers, petitioners’ and
respondent’s experts, and the C ourt
are summarized in Table 1 on page 15.
In addition to these methods, transac-
tion price was used as a valuation stan-
dard in some arm’s-length deals by the
Court and by some respondents’
experts. (Transaction price obviously
cannot be in a fairness opinion, as it is
the subject of that analysis, nor was
transaction price used in any petition-
ers’ experts’ reports, since it is the num-
ber being challenged.)
The most important difference
in the methodologies used is that the
fairness opinions and valuations,
which necessarily are issued prior to
the transactions, utilized comparable
companies in more than three-quarters
of the analyses, while expert witnesses
relied on comparable companies about
half as often, and the Court applied it
in only 20 percent of its opinions. T he
Court’s more recent decisions have sel-
dom accepted comparable company
analyses; as a result, experts have been
using it less often.
Continued on next page
tiple (usually of EBITD A ), expert wit-
nesses and the C ourt of Chancery pri-
marily followed the academic
approach of using a growth model.
Since multiples are usually derived
from comparable companies and com-
parable transactions, the Court’s
approach is consistent with its fre-
quent rejection of the market
The C ourt of Chancery stated in 1997
that the “discounted cash flow model
[is] increasingly the model of choice for
valuations in this Court.”2In the ensu-
ing years, the Court has used D C F as
its primary means for determining fair
value. Indeed, since 2012, the Court of
Chancery has used D C F as its sole val-
uation standard in more than a dozen
appraisal cases.
The Court of Chancery has fre-
quently criticized the wide spreads
FVLE Issue 75 October/November 2018 Page 14
A similar pattern can be seen in
the use of comparable transactions.
More than 60 percent of the opinions
and valuations used this approach,
about a quarter of the experts applied
it, but it was applied in less than 10
percent of the Court decisions. Since
the prices paid in comparable transac-
tions often include synergies that
Delaware appraisals must exclude, the
Court of C hancery usually rejects this
approach when the results are not
adjusted for the impact of synergies on
the acquisition prices.
In contrast, the income
approach, primarily DC F, was utilized
in almost all fairness opinions and val-
uations, in almost all expert reports,
and in almost all of C ourt of C hancery
appraisal decisions in related-party
In arm’s-length transactions, the
Court has often concluded that the
transaction price (usually adjusted for
synergies) was the appropriate meas-
ure of value; in some of these cases, the
Court used DCF as a confirmatory
More than half of the decisions
since 2013 have relied on the deal
price. T hat increase is attributable to
the increase in appraisal demands in
arm’s-length deals due to merger arbi-
trage; only two of the decisions in both
the 1998-2004 period and the 2005-2012
period were in arm’s-length deals, in
contrast to 13 of the 19 in 2013-2018.
We also reviewed the approaches used
by the opinion providers, the experts,
and the Court for determining termi-
nal value in a D CF calculation. The
data is summarized in Table 2 on page
15. (There were no significant differ-
ences by time period.) While about
half of the fairness opinion analyses
calculated terminal value using a mul-
The income approach, primarily
DCF, was utilized in almost all
fairness opinions and valuations,
in almost all expert reports, and
in almost all of Court of Chancery
appraisal decisions in related-party
Fairness Opinions, Experts, and the Courts:
A Comparison of Valuation Methods
in Delaware Appraisals
Sutter Securities Incorporated
San Francisco, CA
FVLE Issue 75 October/November 2018 Page 15
1998 - 2004 8 70% 60% 100% NA
2005 - 2012 9 55% 55% 91% NA
2013 - 2018 23(b) 91% 70% 100% NA
Total 40 77% 64% 98%
Number of
DCF or
Similar (a)
Valuation Methods Used in Delaware Appraisal Cases
Fairness Opinion or Valuation
1998 - 2004 10 80% 40% 100% NA
2005 - 2012 11 36% 36% 82% NA
2013 - 2018 19 16% 16% 100% NA
Total 40 38% 28% 95%
Petitioners’ Expert
1998 - 2004 8(c) 60% 25% 90% 13%
2005 - 2012 11 55% 36% 91% 0%
2013 - 2018 19 26% 16% 95% 5%
Total 38 43% 23% 93% 5%
Respondent’s Expert
1998 - 2004 10 40% 10% 80% 10%
2005 - 2012 11 27% 18% 91% 9%
2013 - 2018 19 5% 0% 53% 63%
Total 40 20% 8% 70% 35%
Court of Chancery
Multiple Growth
Opinion/valuation 53% 47%
Petitioner’s expert 16% 84%
Respondent’s expert 11% 89%
Court 9% 91%
Basis for Terminal Value
(a) In two transactions, capitalization of earnings was used in all valuations.
(b) Four transactions had two fairness opinions.
(c) Two respondents relied on the valuation by the opinion provider.
between opposing experts’ D CF valu-
ations. These differences stem from
differences in the inputs: the projec-
tions used, the discount rate, the
growth rate, etc. The Court recognizes
that DCF “is only as reliable as the
inputs relied upon and the assump-
tions underlying those inputs.”3As
the Supreme Court recently acknowl-
DCF valuations involve many
inputs—all subject to disagree-
ment by well-compensated and
highly credentialed experts—and
even slight differences in these
inputs can produce large valuation
Projections almost always show a con-
tinuing upward trend and the terminal
value is usually based on the fifth year.
In more than 50 years as an investment
banker, the authors experience is that
most firms fall short of their Year 5
forecasts. Also, the growth model
assumes continuing growth and does
not consider the risk of corporate mor-
tality. D CF is a useful tool for valua-
tors, but it is not a precision tool. Dis-
counted cash flow is an imprecise
method that needs to be confirmed by
alternate methods, such as comparable
The Court has frequently explained its
rejection of comparables because of
differences between the comparables
and the subject company. C omparable
company analyses have been rejected
for various reasons—for example, the
sample was too small; the companies
were materially larger than the subject
company; the companies were not pri-
marily in the subject company’s busi-
ness; the companies had different
growth prospects. With respect to rela-
tive size, it has noted:
The Court may reject comparable
companies analyses based on pur-
ported comparables that differ sig-
nificantly in size from the compa-
ny being appraised. . . . A lthough
there may be little theoretical basis
for discriminating comparables
based on size, doing so has empir-
ical support and is common both
in practice and in this Court.5
A 2012 decision gave a detailed expla-
nation of the C ourt’s position:
For obvious reasons, the utility of
a market-based method depends
on actually having companies that
are sufficiently comparable that
their trading multiples provide a
relevant insight into the subject
company’s own growth prospects.
When there are a number of corpo-
rations competing in a similar
industry, the method is easiest to
deploy reliably. For example, fast
food restaurant chains, commer-
cial banks, and automobile manu-
facturers might be seen as indus-
tries with a number of recogniza-
ble players who compete in the
same markets. B y generating a
good set of comparables, one can
obtain a sense of how the market
perceives the growth prospects of
the industry to be, and one can
apply the resulting multiples to the
relevant metric of the subject com-
pany to make a judgment about its
When, by contrast, it is difficult to
find companies that actually do
the same thing as the subject com-
pany, the comparables method is
less reliable. Reliance on a compa-
rable companies or comparable
transactions approach is improper
where the purported “compara-
bles” involve significantly differ-
ent products or services than the
company whose appraisal is at
issue, or vastly different multiples.
At some point, the differences
become so large that the use of the
comparable company method
becomes meaningless for valuation
The Court is willing to apply the com-
parable company method when it
deems the selected companies to be
reasonably comparable to the compa-
ny being appraised, provided that it is
supported by expert testimony:
The burden of establishing that
companies used in the analysis are
actually comparable rests upon the
party seeking to employ the com-
parables method. The selected
companies need not be a perfect
match; however, to be useful the
methodology must employ “a
good sample of actual compara-
Continued on next page
FVLE Issue 75 October/November 2018 Page 16
There have been 20 appraisal decisions
since 2011 in cases where fairness opin-
ions are publicly available. In 19 of
them, the opinions used comparable
companies as one of the methodolo-
gies. Experts for one side or the other
(but not both) used comparable com-
panies in 11 of the cases.
However, in
only one (D F C Global9)
did the Court
consider comparable companies in
arriving at its decision. Nonetheless,
the Court sometimes uses comparable
companies as a basis for beta in cases
where it rejects a comparable company
analysis, most recently in July 2018.10
The comparable company
approach is a valuable arrow in the
valuator’s quiver. The declining use of
the method in Delaware appraisals
appears to reflect, to some degree, the
limited use of this method by expert
witnesses. Expert witnesses have been
stressing D CF because of the Court’s
demonstrated preference for it and
have limited their use of comparable
companies. N onetheless, the continu-
ing use of comparable companies in
investment bankers’ fairness opinions
illustrates the widespread acceptance
of (and reliance on) this approach in
the investment community.
Despite its limited acceptance of
comparable companies, the C ourt of
Chancery has pointed out that it is
helpful to use more than one method-
ology in valuations. The C ourt of
Chancery has expressed its desire to
consider multiple valuation methods,
saying in 2010:
Although there is no single pre-
ferred or accepted valuation
methodology under D elaware law
that establishes beyond question a
company's value, there are com-
monly accepted methodologies
that a prudent expert should use in
coordination with one another to
demonstrate the reliability of its
valuation. I f a discounted cash
flow analysis reveals a valuation
similar to a comparable companies
or comparable transactions analy-
sis, I have more confidence that
both analyses are accurately valu-
ing a company.11
FVLE Issue 75 October/November 2018 Page 17
1Delaware decisions customarily use “comparable”
rather than “guideline.”
2Grimes v. Vitalink Communications Corp., 1997 Del.
Ch. LEXIS 124 (Aug. 26, 1997) at *3.
3In re Appraisal of SWS Group, Inc., 2017 Del. Ch.
LEXIS 90 (May 30, 2017) at *31.
4Dell Inc. v. Magnetar Global Event Driven Master Fund
Ltd, 177 A.3d 1 (Del. 2017).
5Merlin Partners LP v. AutoInfo, 2015 Del. Ch. LEXIS
128 (Del. Ch. Apr. 30, 2015) at *26-*27.
6In re Orchard Enters., Inc., 2012 Del. Ch. LEXIS 165
(Del. Ch. July 18, 2012) at *31
7Id. at *32, quoting In re Radiology Assocs., Inc. Litig.,
611 A.2d 485, 490 (Del. Ch. 1991).
8SWS 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.
9In re Appraisal of DFC Global Corp., 2016 Del. Ch.
LEXIS 103 (Del. Ch. July 8, 2016); rev'd on other
grounds, DFC Global Corp. v. Muirfield Value Partners,
L.P., 172 A.3d 346 (Del. 2017).
10 Blueblade Capital Opportunities LLC v. Norcroft Cos.,
Inc., 2018 WL 3602940 (Del. Ch. July 27, 2018) at *34.
11 In re Hanover Direct, Inc. Sh’holders Litig., 2010 Del.
Ch. LEXIS 201 (Sept. 24, 2010) at *5-*6.
12 Merion Capital, L.P. v. 3M Cogent, Inc., 2013 Del. Ch.
LEXIS 172 (July 8, 2013) at *17-18, quoting Muoio &
Co. v. Hallmark Entertainment Investments Co., 2011
Del. Ch. LEXIS 43 (Mar. 9, 2011) at *83-*84.
In 2013, it wrote:
Generally speaking, “it is prefer-
able to take a more robust
approach involving multiple tech-
niques— such as a DCF analysis, a
comparable transactions analysis
(looking at precedent transaction
comparables), and a comparable
companies analysis (looking at
trading comparables/multiples)—
to triangulate a value range, as all
three methodologies individually
have their own limitations.”12
Experts should expressly consider
comparable companies in their valua-
tions and be prepared to explain to the
Court why their selected companies
are valid comparables. Otherwise,
they should explain why they are
unable to use the method (especially if
the relevant fairness opinion used it).
When they are able to demonstrate
that their analysis has employed “a
good sample of actual comparables,”
perhaps the C ourt of C hancery will be
more likely to utilize this useful and
widely accepted valuation method. c
ResearchGate has not been able to resolve any citations for this publication.
Magnetar Global Event Driven Master Fund Ltd, 177 A
  • Dell Inc
Dell Inc. v. Magnetar Global Event Driven Master Fund Ltd, 177 A.3d 1 (Del. 2017).
  • Merlin Partners
  • Lp V Autoinfo
Merlin Partners LP v. AutoInfo, 2015 Del. Ch. LEXIS 128 (Del. Ch. Apr. 30, 2015) at *26-*27.
LEXIS 90 at *30, quoting In re: Appraisal of The Orchard Enterprises
  • Sws Group
  • Inc
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.
  • L P Merion Capital
  • 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 Entertainment Investments Co., 2011
  • Del
  • Ch
Del. Ch. LEXIS 43 (Mar. 9, 2011) at *83-*84.