Chancery Provides Appraisal Analysis Pursuant to DGCL Section 262
Laidler v. Hesco Bastion Environmental, Inc., C.A. No. 7561-VCG (Del. Ch. May 12, 2014).
This is an appraisal decision based on DGCL Section 262. The challenge to the Court in this matter included the absence of management financial projections and somewhat unique characteristics of the company involved which had, in essence, one primary product. The product was used to assist in containing flood waters and was therefore subject to the unpredictable number of natural disasters that might occur in the future.
The Court began its analysis with the fundamental principle that the Court may consider “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in Court.”
In this case, due to the lack of comparable transactions and comparable companies’ metrics, the Court determined that the appropriate valuation method should be the direct capitalization of cash flow method of valuation (“DCCF”). The Court described how this method differed from the more common income approach of a discounted cashflow analysis (“DCF”).
The Court distinguished a recent Chancery opinion in which the merger price was adopted in the short form merger as the appraised value of the stock of the target company. In this case, however, there was no arms’ length transaction as in the Chancery decision in Huff Fund Investment Partnership v. CKx Inc., C.A. No. 6844-VCG (Del. Ch. Nov. 1, 2013).
For those interested in the minutiae of the financial considerations addressed by the Court in the nature of terms more commonly used by valuation experts as compared to lawyers, see pages 33 to 40 for reference to tax rates and depreciation, cost of debt, size premium and industry risk premium. For the reference by the Court to Weighted Average Cost of Capital calculation, pages 34 and 39 should be consulted.