03 / January 2017

Chancery relies on income approach to determine fair value in problematic bank merger

Posted in: Business Valuation Law News Written by: Sylvia Golden
Categories: case law analysis expert testimony fair value proceeding going-concern value income approach market approach public company comps shareholder dissent/oppression statutory appraisal action valuation experts valuation method
Tags: arm's length bank valuations capitalization of income approach comparable companies analysis discount rate discounted net income analysis duff & phelps excess capital going concern growth rate guideline company method market approach merger price mergers and acquisitions (M&A) projections statutory appraisal statutory fair value synergy valuation handbook
Dunmire v. Farmers & Merchants Bancorp of W. Pa.

In a statutory appraisal action, the Delaware Court of Chancery recently found the deal price did not reflect fair value because the sales process was suboptimal. Certain other methods the parties' experts used also were inadequate to the task, the court said.

The dispute arose out of the 2014 merger of two small community banks that the same family controlled. The banks underwent a stock-for-stock transaction at the instance of the controlling shareholder, which stood on both sides of the transaction. There was no outreach to other bidders. The financial advisors received instructions to craft their valuations in a way that ensured a certain exchange ratio.

The court found "the record does not inspire confidence" that an arm's-length transaction took place.

The court also rejected the results of the experts' market-based approaches, pointing to synergy-related and other problems. However, a discounted net income model both experts used was a reliable approach, the Chancery said.

Read more about the court's analysis here.

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