Chancery declines to meddle in parties' valuation agreement

Investors in a company committed themselves to having a nationally recognized valuation firm determine the value of their units in accordance with a specified formula. But, dissatisfied with the resulting price, they challenged the value determination. The court refused to meddle with the parties' contractual arrangement.

The plaintiff owned an equity interest in a company that rented pallets to manufacturers for the shipping of groceries and consumer goods. The defendants owned preferred units of the plaintiff. The parties agreed the plaintiff would purchase all of the defendants’ units following notice that the defendants wanted to exercise their put rights. The contract required the plaintiff to retain a reputable appraiser that would determine the fair market value of the defendants’ preferred units.

In terms of valuation methodology, the agreement provided that “there shall be no minority or non-marketability discount applied.” Also, “fair market value” meant an arm’s-length sale to an unrelated third party. And, for purposes of calculating the “total equity value,” the value of the assets would be subject to an EBITDA collar to ensure that the value of the assets was at least 6.5x but no more than 7.5x the company’s “EBITDA less maintenance capex” for year-end 2013. The resulting number was to be reduced by the company’s obligations and liabilities. Most important in terms of the ensuing litigation, the parties agreed to be bound by the appraiser's calculation of the price of the put units. The contract did not allow for judicial or any other form of review of the appraiser's valuation.

The plaintiff followed the script, but the defendants refused to transfer their units to the plaintiff. Consequently, the plaintiff asked the Delaware Court of Chancery for a declaration that it had complied with the agreement’s valuation provisions and that the defendants were bound by the value determination. The defendants, in turn, attacked certain decisions—judgment calls—the appraiser made to arrive at the fair market value.

The Delaware Court of Chancery (Chancellor Bouchard) saw no reason to “second-guess” the valuator’s work product.

To find out more about the court's ruling on the case, click here.