FairX valuation: from bad to worse

BVWireIssue #263-3
August 21, 2024

statutory appraisal action
early stage companies, fair value, appraisal, dissenting shareholder, merger, projections, deal price, startups

In a statutory appraisal case, the Delaware Court of Chancery rejected two valuation approaches in favor of its own method, which had “seriously flawed” underpinnings. The court even acknowledged that by calling it the “least bad” of all the methods presented (it could be argued that it was the worst). The case involved the 2022 acquisition of FairXchange (FairX) by Coinbase Global for $330 million in which the petitioner challenged the merger price.

Tough nut: This was a particularly hard-to-value company because not only was it a private startup with no track record and no cash flow, but it also was banking on plans to disrupt a new industry (crypto trading). The company would either be a huge success or a total flop—a real roll-of-the-dice setup. The petitioner’s DCF analysis of about $500 million was based on projections FairX did for financing purposes, but the court rejected the analysis because the projections were “too speculative.” Also, the court noted that the company’s shareholders (sophisticated investors) effectively rejected the projections when they voted for the merger. The other side’s analysis came up with a value of about $150 million, based on past valuations done for financing rounds. But the court rejected that methodology also because the most recent round had failed and prior rounds were done too long ago to be relevant.

So the court decided it was better equipped than the experts to opine on value and chose the deal price of $330 million—even though the court detailed many flaws in the sale process. Plus, no evidence of synergies was presented, so no adjustment was made.

So what valuation method would have passed muster in this case? The court likened the company to a rare treasure that’s worth whatever someone is willing to pay, but that’s not much help. This was more like sunken treasure—maybe you’ll find it and maybe you won’t. It’s like valuing a game of chance or an option of some sort. Maybe Damodaran’s methodology that includes a specific “failure risk” factor would be appropriate here. Well, we’ll see what happens the next time this situation comes up.

The case is Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC, 2024 Del. Ch. LEXIS 270; 2024 WL 3579932, and a case analysis and full court opinion will appear on the BVLaw platform.

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