The Delaware Court of Chancery (“Court”) has a longstanding tradition as one of the nation’s leading venues of jurisprudence for the resolution of business disputes. Drawing on the expansive base of public companies that are incorporated in Delaware, the Court has developed unparalleled expertise in issues of valuation and appraisal rights of shareholders in firms that experience corporate actions – i.e., activities in the market for corporate control. As a result, the Court has established general guidelines regarding acceptable valuation methods and practices over time, and its opinions provide a wealth of insight about the Court’s thinking on such issues. A good understanding of the Court’s opinions can be invaluable to legal counsel dealing with valuation related matters to be litigated before the Court.
In this publication, Managing Director Torben Voetmann, Principal Gary Stahlberg, Principal Ioannis Gkatzimas, and Manager Bryan Plotts focus on several issues that have prominently featured in recent valuation decisions by the Court. In particular, they summarize four selected decisions issued by the Court during 2012, all of which involve disputes regarding the fair value of an enterprise that had been targeted for acquisition or merger.
For each opinion, they highlight and provide commentary regarding the essential topics considered by the Court concerning valuation. Chief among these are the following:
– Estimation of the “fair value” of an enterprise by application of the discounted cash flow (“DCF”) model and other methods (including valuation multiples and comparable companies or transactions);
– Conflicts of interest among officers, directors, and/or outside financial advisors;
– Reliance on and materiality of financial projections made by management;
– An alleged fiduciary duty of “candor” to disclose information;
– Estimation of a firm’s cost of equity under the Capital Asset Pricing Model (“CAPM”) and other methods;
– Application of a small company size premium adjustment to a firm’s cost of equity;
– Alternative approaches to estimation of an equity risk premium in the CAPM; and
– Selection of an appropriate discount rate.