Manichean Capital, LLC v. SourceHOV Holdings, Inc., 2020 Del. Ch. LEXIS 38, 2020 WL 496606 (Jan. 30, 2020)
In an appraisal proceeding in which the Delaware Court of Chancery favored the discounted cash flow analysis as the means with which to determine fair value, the court had sharp words for the company expert’s decision to introduce a new way for calculating equity beta. The “admittedly novel process does not survive judicial scrutiny,” the court found.
This case featured a privately held company in which the petitioners held a minority stake. Top executives of the company pursued a number of transactions that culminated in a business combination by which the subject company merged into another company and became a publicly traded company.
Vice Chancellor Slights, who adjudicated the petitioners’ request for appraisal, noted this was not a case in which the court could look to market indicators to determine fair value. The company’s stock was not publicly traded, and there was no proper sales process. The court agreed with the parties’ experts that it was best to rely on “traditional valuation methodologies,” specifically, the DCF, or a variation of it.
As has been common in the Delaware Court of Chancery for a while, the court lamented that, even though the experts generally agreed on methodology, their value conclusions were “solar systems” apart. In terms of inputs, the court said the “most consequential point of disagreement” between the experts was over how to calculate the company’s equity beta. While the petitioners’ expert followed a methodology that was tested and widely accepted in the valuation community, the company’s expert proposed an approach “untethered to accepted methods and generally not credible.”
To find out more about the court’s response to the experts’ proffered valuations, click here.