Delaware Chancery rejects partnership valuation in a freeze-out

BVWireIssue #236-2
May 11, 2022

shareholder dissent/oppression
breach of fiduciary duty, buyout, cash flow, entire fairness, minority shareholder, projections, growth rate, burden of proof, distributions

In a coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, the court found that AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review, and AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation, awarding more than triple the amount originally paid to partners who were squeezed out.

The case is In Re Cellular Tel. P’ship Litig., 2022 Del. Ch. LEXIS 56. This is a long case opinion that involves many issues of interest to valuation professionals. The June 2022 issue of Business Valuation Update will have a case digest as well as commentary by Gil Matthews (Sutter Securities) and BVR legal editor Jim Alerding (Alerding Consulting).

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