Delaware’s Surprising and Inexplicable Appraisal of FairXchange
This appraisal decision has echoes of Edgar Allan Poe: a well-written story with a surprise ending. The sale of a private company was negotiated and forced through by a management that had no relevant experience but failed to use any professional financial advisors. The court expressly stated that the sellers left money on the table but nonetheless ruled that fair value was the deal price.
Jacobs v. Akademos, Inc.
The controlling shareholder of this nearly bankrupt company, which operated online bookstores for colleges and universities, finally threw in the towel and accepted a last-ditch merger, which still left it under water. Some common shareholders asked for a fair value valuation of their common shares, which the court determined to be zero dollars per share. The case emphasized the problems with unreliable projections (i.e., forecasts) and criticized the use of 409A valuations in determining fair value. The case is an excellent tutorial of issues to be considered in determining fair value.
Delaware Chancery Court Determines a Zero Value for Common Stock Shares and Determines That the Merger Triggering the Fair Value Determination Was Fair
The controlling shareholder of this nearly bankrupt company, which operated online bookstores for colleges and universities, finally threw in the towel and accepted a last-ditch merger, which still left it under water. Some common shareholders asked for a fair value valuation of their common shares, which the court determined to be zero dollars per share. The case emphasized the problems with unreliable projections (i.e., forecasts) and criticized the use of 409A valuations in determining fair value. The case was an excellent tutorial of issues to be considered in determining fair value.
Matthews critiques Delaware’s surprise-ending opinion in FairX
Edgar Allan Poe was a master of the surprise ending, but Judge Laster of the Delaware Chancery Court is giving him a run for his money in his recent decision in the FairXchange (FairX) case.
FairX valuation: from bad to worse
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.
Hyde Park Venture Partners Fund III L.P. v. FairXchange, LLC
This was a case that, once again, adopted the deal price in a shareholders’ dissent appraisal proceeding. The judge was not satisfied with the experts’ methodologies. He noted the difficulty in valuing a startup in a business model that had not been tried before. Absent compelling evidence of value from either side, the court fell back on the deal price.
Chancery Court (Delaware) Adopts Deal Price—Deplores Valuation Methodologies
This was a case that, once again, adopted the deal price in a shareholders’ dissent appraisal proceeding. The judge was not satisfied with the experts’ methodologies. He noted the difficulty in valuing a startup in a business model that had not been tried before. Absent compelling evidence of value from either side, the court fell back on the deal price.
Thoughts From Stacy Collins on the Stout Acquisition of FRA
We recently posted the news that Stout has acquired Financial Research Associates (FRA). Jay Fishman is the founder and leader of FRA, but there are other very talented people in FRA who are also making the move.
BV News and Trends May 2024
A monthly roundup of key developments of interest to business valuation experts.
FactSet Review 2024 PDF now available
The PDF version of the 2024 edition of the FactSet Review (formerly known as the FactSet Mergerstat Review) is now available.
Preorder alert: FactSet Review 2024
The 2024 edition of the FactSet Review (formerly known as the FactSet Mergerstat Review) is now available for preorder.
Palkon v. Maffei
Two minority shareholders challenged the conversion of two Delaware corporations into Nevada corporations with the intent to reduce potential liability for directors and officers, with the controlling shareholder casting the deciding vote. The business rule did not apply since the controller received a nonratable benefit.
Delaware Chancery Court Determines That Reducing Potential Personal Liability Exposure Through a Change in Corporate Domicile Constituted a Nonratable Benefit
Two minority shareholders challenged the conversion of two Delaware corporations into Nevada corporations with the intent to reduce potential liability for directors and officers, with the controlling shareholder casting the deciding vote. The business rule did not apply since the controller received a nonratable benefit.
Lone dissenter of medical merger challenges share valuation
In a California case, a physician was a nonexclusive provider to a physician network and was one of 75 shareholders.
Internal billings trigger M&A damages; GPCM prevails
A case in Delaware Chancery Court shows that the court will not award damages from an M&A transaction gone bad when the calculations are based on speculative lost synergies.
BV News and Trends August 2023
A monthly roundup of key developments of interest to business valuation experts.
Chancery Court Determines Value of Shares by Applying Average of GPCM and DCF Methodologies
In a long and complex opinion, the Delaware Court of Chancery determined the value per share of stock in a former stockholder’s appraisal action. The per-share value was reached by ascribing equal weight to adjusted versions of the comparable companies analysis (GPCM) the stockholder advanced and the discounted cash flow analysis the company advanced. The other methodologies were rejected. The use of the GPCM represented the first use of that method in some years.
HBK Master Fund L.P. v. Pivotal Software, Inc.
In a long and complex opinion, the Delaware Court of Chancery determined the value per share of stock in a former stockholder’s appraisal action. The per-share value was reached by ascribing equal weight to adjusted versions of the comparable companies analysis (GPCM) the stockholder advanced and the discounted cash flow analysis the company advanced. The other methodologies were rejected. The use of the GPCM represented the first use of that method in some years.
NetApp, Inc. v. Cinelli
The defendant hid improper recording of revenue from use of internal software in unaudited financial statements that were represented to be GAAP-compliant. The defendant was held to have breached the merger/sale contract in a manner that resulted in fraud. The plaintiff was awarded damages. The court accepted the expert’s GPCM as the most “responsible estimate” of the private company’s value as it was presented to the plaintiff.
Seller Breached Terms of Merger Agreement Including That Statements Were GAAP-Compliant—Expert’s GPCM Accepted
The defendant hid improper recording of revenue from use of internal software in unaudited financial statements that were represented to be GAAP-compliant. The defendant was held to have breached the merger/sale contract in a manner that resulted in fraud. The plaintiff was awarded damages. The court accepted the expert’s GPCM as the most “responsible estimate” of the private company’s value as it was presented to the plaintiff.
Physician Shareholder Asserts Transaction Bonuses Breach Board’s Fiduciary Duties—Appeals Court Finds Them Just and Reasonable
A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.
Ghaly v. Riverside Cmty. Healthplan Med. Grp.
A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.
New name for FactSet Mergerstat Review
FactSet Review is the new name for the FactSet Mergerstat Review, and the 2023 edition is now available in both print and PDF format.
In re Tesla Motors Stockholder Litig.
At issue was a 2016 acquisition of Solar City Corp. by Tesla. Some Tesla shareholders claimed that Musk caused Tesla to overpay for Solar through his alleged domination and control of Tesla’s board. The primary focus of the shareholders was that Solar was insolvent at the time of the acquisition. The court applied the “entire fairness” standard. The Court of Chancery found the acquisition to be “entirely fair.” The Delaware Supreme Court affirmed the Court of Chancery decision.
Delaware Supreme Court Upholds ‘Entire Fairness’ of a Tesla Acquisition
At issue was a 2016 acquisition of Solar City Corp. by Tesla. Some Tesla shareholders claimed that Musk caused Tesla to overpay for Solar through his alleged domination and control of Tesla’s board. The primary focus of the shareholders was that Solar was insolvent at the time of the acquisition. The court applied the “entire fairness” standard. The Court of Chancery found the acquisition to be “entirely fair.” The Delaware Supreme Court affirmed the Court of Chancery decision.