WFU Law School
Law & Valuation
5.6.1 Business valuation in estate tax

5.6.2 Business valuation in corporate appraisal

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.”



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>>)

Student papers

Lisa Bartle discusses whether fairness should be taken into consideration when conducting an appraisal after a minority shareholder dissents to a merger. Lisa Bartle, Steiner Corporation v. Benninghoff: An Analysis of the Court's Valuation Process.

On a related topic, Jeffrey Leonard's paper discusses the impact of a "fairness" determination such as the consideration of an acquirer's strategic plan in "cashing out" minority shareholders. Jeffrey Leonard, ONTI, Inc. v. Integra Bank: The Consideration of the Benefits of Merger plans in Appraisals Proceeding.


5.6.1 Business valuation in estate tax

©2003 Professor Alan R. Palmiter

This page was last updated on: May 5, 2009