As Chanccellor Chandler
observed in a corporate appraisal that lasted
more than 20 years in the Delaware courts:
"Experience in the adversarial battle
of the experts' appraisal process under Delaware
law," he continued, "teaches one lesson
very clearly: valuation decisions are impossible
to make with anything approaching complete confidence.
Valuing an entity is a difficult intellectual
exercise, especially when business and financial
experts are able to organize data in support
of wildly divergent valuations for the same
entity. For a judge who is not an expert in
corporate finance, one can do little more than
try to detect gross distortions in the experts'
opinions. This effort should, therefore, not
be understood, as a matter of intellectual honesty,
as resulting in the fair value of a corporation
on a given date. The value of a corporation
is not a point on a line, but a range of reasonable
values, and the judge's task is to assign one
particular value within this range as the most
reasonable value in light of all of the relevant
evidence and based on considerations of fairness."
Cede & Co. v. Technicolor Inc., Del. Ch.,
Civil Action No. 7129, 12/31/03.
Other courts, responding to the “battle
of experts,” have simply disregarded the
parties' experts. In a Minnesota appraisal following
a thrid-party merger, the dissenter’s expert
testified that $6.10 per share was fair and the
company’s expert testified for $3.00 per
share. Rainforest Café Inc. v. State of
Wisconsin Investment Board, – N.W.2d –
(Minn. Ct. App. 2004). The trial court concluded
the conflicting testimony - one overly optimistic,
the other overly pessimistic - was useless and
gave no weight to the experts. Using its own methodology,
from market-based and transactional evidence,
the trial court gave dissenters $3.25 per share.
The appeals court affirmed on the ground the appraisal
statute does not require the court to use either
party’s valuation.
Preferred stock appraisal
"Fair value" of preferred stock in appraisal turns on company's certificate of designation. In re Appraisal of Metromedia International Group, Del. Ch., C.A. No. 3351-CC, 4/16/09.
A “preferred stockholder's rights are defined either in the corporation's certificate of incorporation or in the certificate of designation, which acts as an amendment to a certificate of incorporation. Thus, rights of preferred shareholders are contractual in nature and the ‘construction of preferred stock provisions are matters of contract interpretation for the courts.' ”
Two-step merger. Bidder acquired in a tender offer approximately 77% of MIG's outstanding common shares. After the tender offer, Bidder exercised option to obtain additional common shares raising its stake to 90%.
A short-form merger under 8 Del. C. §253 followed in which the remaining common shares were cashed out, and which led to this appraisal proceeding.
MIG asserted that the preferred holders should receive $18.07 for each preferred share. The petitioners argued that the value is between $67.50 to $79.76 per share.
Court said, “the most critical question in this action is whether the certificate of designation, which establishes the rights of MIG's preferred shares, contractually establishes the metric for valuing the preferred shares in the event of a merger.” The court declared “that it does, which effectively renders irrelevant many of the underlying disputes among the testifying experts over the competing valuation models.”
Unlike common stock, the court said, “the value of preferred stock is determined solely from the contract rights conferred upon it in the certificate of designation.”
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Example
Steiner Corporation was a privately-held
family business that supplied linen and rental
uniforms in the lucrative Las Vegas market.
Most of Steiner's stock was in family hands
(93%), but over time some company employees
had acquired minority holdings.
In July 1994,
facing the possibility of an IRS accumulated
earnings tax for not distributing its munificent
profits to shareholders, the Steiner family
bought out the company's minority shareholders
in a cash-out merger for $1200/share.
Although a majority of the minority approved
the merger, a group of minority shareholders
(the Benninghoffs) dissented from the merger
and sought payment of "fair value" under Nevada's
appraisal statute.
The Nevada statute
called for the company to pay its estimate of
"fair value" and then negotiate if the dissenters
wanted more. After being paid $840/share,
the dissenters claimed their shares were worth
at least $1950/share, but the company refused
to budge. Faced with this impasse, the
company (as required by the appraisal statute)
sought a judicial determination of the “fair
value” of its common stock as of the date of
the merger.
The Benninghoff’s,
believing the value was more, elected dissenters’
rights and voted against the merger. They
retained David Nolte to perform a valuation.
Steiner then retained another expert, Dr. Kleidon,
who examined Nolte’s work for flaws.
The district
judge, a former accountant, decided he would
show off his virtuosity. (More>>)
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5.6.1 Business valuation in estate tax