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Cede & Co. v. Technicolor, Inc., Delaware’s oldest valuation case

Authors:
  • Sutter Securities Financial Services, San Francisco
Article

Cede & Co. v. Technicolor, Inc., Delaware’s oldest valuation case

Abstract

Cede v. Technicolor is the longest-lasting litigation in Delaware. This statutory appraisal case began in 1983. It was heard by three successive Chancellors, and the last Court of Chancery decision was rendered on December 31, 2003. It had previously been the subject of six Delaware Supreme Court decisions. [A 7th Supreme Court decision closed the case in 2005.]
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UPDATE
Timely news, analysis and resources for defensible valuations Excerpt from Vol. 10, No. 6, June 2004
Guest Article: Cede & Co. v. Technicolor, Inc.,
Delaware’s oldest valuation case
By Gilbert E. Matthews*
This article provides a quick summary of an incredibly long-running case. I thought that our
readers would nd this brief chonology of interest. – SP
Cede v. Technicolor, the longest-lasting litigation in Delaware, continues to move toward its conclusion. This
statutory appraisal case began in 1983, and the latest Court of Chancery decision was rendered on December
31, 2003.1 Technicolor has been the subject of six Delaware Supreme Court decisions, and has been heard
by three successive Chancellors (Brown, Allen and Chandler).2
Continued to next page...
*Gilbert E. Matthews is Chairman and Se-
nior Managing Director, Sutter Securities
Incorporated.
1 2003 Del. Ch. LEXIS 146 (Del. Ch. Decem-
ber 31, 2003).
2 Some of the decisions are captioned
Cede v. Technicolor and some are cap-
tioned Cinerama v. Technicolor.
Gil Matthews
Background
MacAndrews & Forbes Group, Inc.
(MAF) agreed to acquire Technicolor,
Inc. (Technicolor) for $23 per share
pursuant to an October 29, 1982, merg-
er agreement. The friendly tender offer
that followed closed late in November,
with MAF purchasing more than 90%
of Technicolor’s 4.8 million shares.
The remaining Technicolor shares,
other than dissenters’ shares, were
acquired in a short-form squeeze-out
merger that closed on January 24, 1983.
Cinerama, Inc. (Cinerama), which
owned 4.4% of Technicolor’s shares,
dissented. In March 1983, Cinerama
demanded appraisal of the 201,200
shares that it held in the name of Cede
& Co. (Cede).
In October 1984, Chancellor Brown
permitted Cinerama to broaden the
scope of discovery. Based on its post-
merger discovery, Cinerama then also
asserted fraud claims with respect to
certain actions of Technicolor’s Board
of Directors. In addition, it challenged
the entire fairness of the transaction.
In January 1987, Chancellor Al-
len (who had succeeded Chancellor
Brown) opined that Cinerama had to
elect either to challenge the merger or
to seek appraisal, but it could not pursue
both actions together. In June 1988, the
Supreme Court reversed the Chancery
Court, allowing Cinerama to seek ap-
praisal of its shares and to pursue its
other claims simultaneously.
In October 1990, Chancellor Allen
rejected Cinerama’s position that Tech-
nicolor should be valued based on the
acquiror’s plan (the “Perelman Plan”).
He stated that management’s pre-merg-
er plan (the “Kamerman Plan”) was
applicable for appraisal purposes. He
reviewed the “elaborate valuations of
dueling experts,” both of whom relied
on DCF in the trial in 1989.
$62.75 versus $13.14
John Torkelsen, CFA, valued Tech-
nicolor at $62.75 per share, whereas
Professor Alfred Rappaport of North-
western valued the shares at $13.14.
Allen decided that the appraisal value
was $21.60 per share. He pointed to two
factors that he believed corroborated
his valuation: (a) sophisticated insiders
had agreed to tender their shares, and
(b) the $23 acquisition price had been
materially above the unaffected market
price. Chancellor Allen observed that
the market price from June through
September 1982 ranged between $8
and $11 per share, and that it moved
from $11.875 on October 8 to $17.375
on October 27.
In June 1991, Chancellor Allen
decided that the Technicolor directors
had acted in good faith. He added
that even if the directors had failed to
Reprinted with permission from Business Valuation Resources, LLC.
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RONALD D. AUCUTT, Esq.
McGuireWoods LLP—McLean, Va.
JOHN A. BOGDANSKI, JD
Lewis & Clark Law School—Portland, Ore.
HON. WILLIAM A. CHRISTIAN
N.C. 11th Judicial District Court—Sanford, N.C.
S. STACY EASTLAND, Esq.
The Goldman Sachs Group, Inc.—Houston, Texas
BARNES H. ELLIS, Esq.
Stoel Rives LLP—Portland, Ore.
JAY E. FISHMAN, ASA, CBA
Kroll Lindquist Avey—Philadelphia, Pa.
OWEN G. FIORE, JD, CPA
Fiore-Ramsbacher LLP—San Jose, Calif.
LARRY WELDON GIBBS, JD
Gibbs Professional Corporation—San Antonio, Texas
LYNNE Z. GOLD-BIKIN, Esq.
Wolf, Block, Schorr & Solis-Cohen, LLP—Norristown, Pa.
LANCE S. HALL
FMV Opinions, Inc.—Irvine, Calif.
JARED KAPLAN, Esq.
McDermott, Will & Emery—Chicago, Ill.
MAURICE KUTNER, Esq.
Maurice Jay Kutner & Associates, P.A.—Miami, Fla.
GILBERT E. MATTHEWS, CFA
Sutter Securities Incorporated—San Francisco, Calif.
JAMES J. PODELL, Esq.
Podell & Podell—Milwaukee, Wis.
JOHN W. PORTER
Baker & Botts, LLP—Houston, Texas
JAMES S. RIGBY, ASA, CPA/ABV
Financial Valuation Group—Los Angeles, Calif.
ARTHUR D. SEDERBAUM, Esq.
Patterson, Belknap, Webb & Tyler—New York, N.Y.
DONALD S. SHANNON, Ph.D., CPA
School of Accountancy, DePaul University—Chicago, Ill.
BRUCE SILVERSTEIN, Esq.
Young, Conaway, Stargatt & Taylor, LLP—Wilmington, Del.
GEORGE S. STERN, Esq.
Stern & Edlin—Atlanta, Ga.
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UPDATE
Cede & Co. v. Technicolor, Inc.,
Delaware’s oldest valuation case
...continued from front page
Continued to next page...
exercise due care, Cinerama had the
burden to show injury, and that it had
failed to do so. He also concluded that
disclosure had been full and complete.
Allen stated that the record, including
the appraisal, did not support a claim
that the $23 price was unfair.
The case continues
In October 1993, the Supreme Court
reversed Chancellor Allen and decided
there was a breach of the duty of care
and perhaps also a breach of the duty of
loyalty. It remanded the case, directing
that the “entire fairness” standard—a
more demanding standard than the
business judgment standard—should
be applied. The Supreme Court held
that the appraisal was moot until other
issues were decided, and clari ed its
decision in February 1994.
In October 1994, Chancellor Allen
again concluded that the transaction
was fair and that there was no breach
of the directors’ duty of loyalty. The
Supreme Court af rmed this decision
in July 1995. The only remaining issue
was the appraisal. In October 1995,
Chancellor Allen reaf rmed his 1990
conclusion and again opined that the
appraisal value was $21.60 per share,
based on the Kamerman Plan.
In October 1996, the Supreme
Court reversed the appraisal decision
and remanded the case. The Supreme
Court concluded that the Perelman
Plan, which contemplated the dives-
ture of several money-losing opera-
tions, should have been used for the
valuation. Ronald Perelman of MAF
planned to run Technicolor differently
from the pre-merger management of
Technicolor. The Court reasoned that
the Perelman Plan, not the Kamer-
man Plan, was the operating plan as
of the date of the squeeze-out merger,
since the buyer had taken control of
Technicolor after the tender offer
had closed.
Proposed use of neutral master
In early 1999, Chancellor Chandler,
who had succeeded Chancellor Allen,
selected a neutral master to create an
appraisal report to be based on the re-
cord of the 1990 trial. He stated that af-
ter the two sides raised their exceptions
to the neutral expert’s report, he would
arrive at his own ndings. Cinerama
appealed on the grounds that Delaware
law does not permit the use of a neutral
expert in an appraisal case.
The Supreme Court agreed with
Cinerama in a July 2000 decision. It
again reversed and remanded, ruling
that the neutral expert could not play
a quasi-judicial role. It directed that a
new trial be held.
A new trial is scheduled
In February 2001, Chancellor Chandler
ordered a new trial. He limited each
side to two days and to one expert
witness. Six weeks later, he denied
Cinerama’s motion for reargument.
Cinerama then moved for certi cation
of an interlocutory appeal against the
strictures on the new trial. The Chan-
cellor denied certi cation in May 2001.
The trial took place in May 2003.
The latest decision
In his December 31, 2003, decision,
Chancellor Chandler pointed out that
the differences between the Perelman
Plan and the Kamerman Plan affected
only the businesses that the buyer in-
tended to discontinue. He concluded
that there were no changes in the values
of the continuing operations under the
Perelman Plan, since they had no syn-
ergies with the buyer. He commented
as well on the “uncanny accuracy” of
management’s forecasts.
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At the retrial in 2003, Torkelsen,
testifying again for Cinerama, used
DCF as his only methodology. He
increased his valuation to $63.77,
offsetting a higher discount rate by
increasing his perpetuity growth rate
from 5% to 7.35% and changing his
depreciation forecasts. The Court noted
that Torkelsen’s higher discount rate,
taken alone, would have reduced his
valuation by $12.12. Torkelsen rejected
management’s forecasts and created
his own, using regression analysis.
The Court found Torkelsen’s forecasts
to be “erroneous and unreasonable.”
Chancellor Chandler also concluded
that Torkelsen’s methodology “cast
serious doubt on the integrity and reli-
ability of his expert report,” and found
that his testimony was unreliable.
Technicolor’s expert in the retrial
was Professor Peter Easton of Ohio
State University, who used DCF to ar-
rive at a value of $22.62. Easton used
management forecasts, and the Court
concluded that his extrapolations were
rational. Easton also used the “residual
operating income method,” which the
Court chose not to use. The court em-
phasized that contemporary pre-merger
management projections, as opposed
to litigation-driven projections, are
particularly useful in the appraisal
context because management projec-
tions, by de nition, are not tainted by
post-merger hindsight and are usually
created by an impartial body. Chandler
found Easton to be “more reliable and
persuasive.” Neither expert used com-
parable companies, most likely because
Cede & Co. v. Technicolor, Inc., Delaware’s oldest valuation case
...continued
of the lack of publicly traded companies
similar to Technicolor.
The 142-page decision valued each
of the businesses separately, valued
the businesses to be sold based on the
present value of expected proceeds,
and deducted the capitalized corporate
expenses (excluding the parent’s man-
agement fee) and debt. Chancellor
Chandler decided that the appraisal
value was $23.22 per share, far below
Torkelsen’s $63.87 and minimally more
than Allen’s $21.60 (in 1990 and 1994,
based on the Kamerman Plan), Easton’s
valuation of $22.62, and the $23.00
paid in the merger.3
Valuation is not a precise art
Chancellor Chandler emphasized the
fact that it is impossible to arrive at a
precise valuation of a company. He
wrote, “Experience in the adversaria1
battle of the experts’ appraisal process
under Delaware law teaches one les-
son very clearly: valuation decisions
are impossible to make with anything
approaching complete confidence.”
Elaborating further, he added, “The
value of a corporation is not a point on
a line, but a range of reasonable values,
and the judge’s task is to assign one
particular value within this range as
the most reasonable value in light of
all of the relevant evidence and based
on considerations of fairness.”
Interest issue dominates valuation
Chancellor Allen had awarded com-
pound interest on the judgment at
10.32% (compounded annually) from
the merger date to August 2, 1991, the
date of his order. Chancellor Chandler
stated in a brief decision in April 2002
that Allen’s decision as to pre-judgment
interest was the law of the case. How-
ever, Chancellor Chandler awarded
only simple interest at 7.0% from Au-
gust 2, 1991, until payment. Moreover,
he limited the simple interest only to
the $23.22 principal amount, not to the
interest compounded on $23.22 from
the merger date in 1983 to 1991.
Chancellor Chandler explained his
decision to apply simple interest as
“the only way to achieve neutrality
with respect to the length of the appeal
process.” He reasoned, “Compound
interest would award the petitioner
[Cinerama] for the delay caused by the
appeals process, and punish respondent
[Technicolor] for defending the original
judgment.”
It appears to me, however, that the
award of simple interest materially
punishes the dissenter, especially when
no interest is applied to the compound
interest previously accrued. If we as-
sume that the judgment had been paid
in February 2004, the amount would
have been about $74 per share. If the
7% were compounded on the principal
and the interest accrued to 1991, the
amount would have been about $125
per share.
Could this case go to the Delaware
Supreme Court yet again? We have
been advised that the petitioner is likely
to appeal both the judgment and the
interest award. The longest running
case still has legs. BVU
Reprinted with permission from Business Valuation Resources, LLC.
3 Both sides have subsequently informed the Court that they believe that there are mathematical errors in some of its calculations.
However, if the opinion is revised, it seems unlikely that the valuation will change by more than 5%.
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