In Appraisal Action Chancery Court Finds That Fair Value for Preferred Shares Based on Language in Certificate of Designation
In Re: Appraisal of Metromedia Int’l Group Inc, Del. Ch., No. 3351-CC (April 16, 2009), read opinion here.
Kevin Brady, a highly respected Delaware litigator, provides us with the benefit of his following review of this case.
On April 16, 2009, in a post-trial decision in a consolidated appraisal proceeding, Chancellor Chandler addressed the issue of appraisal of preferred shareholders' stock and the primacy of contract as a measure of fair value.
The Court found that the fair value of respondent Metromedia International Group, Inc.'s (“MIG”) preferred shares on the merger date was $38.92 for each share. While the petitioners sought a valuation in a range from $67.50 to $79.76 per share and the company claimed that the highest value should have been $18.07 per share, the Court found that the rights of MIG’s preferred shareholders in the event of a merger were based in contract and in particular the certificate of designation. As a result, the preferred shareholders were limited in their remedy to the contract price; they were precluded from coming to Court seeking additional consideration through the appraisal process.
Background -- Tender Offer – Merger – Top-Up Option – Short-Form Merger
Pursuant to 8 Del. C. § 262, the petitioners sought a judicial determination of the “fair value” of the 7.25% Cumulative Convertible Preferred Stock of MIG. This appraisal action arose out of the August 22, 2007 merger of CaucusCom Mergerco Corp. (“MergerSub”), a wholly-owned subsidiary of CaucusCom Ventures, L.P. (“CaucusCom”), into MIG.
The merger occurred after an August 21, 2007 tender offer in which MergerSub acquired approximately 77.6% of MIG’s outstanding common shares making CaucusCom, through MergerSub, the controlling shareholder of MIG. Pursuant to the terms of the merger agreement between MIG, CaucusCom, and MergerSub, MergerSub was granted an option (the “Top-Up Option”), to obtain additional shares of common stock from MIG in order to raise MergerSub’s ownership stake to 90%. MergerSub exercised the Top-Up Option which was followed by a short-form merger under 8 Del. C. § 253 in which the remaining common shares were cashed out.
Primacy of Contract as Measure of Preferred’s Value vs. Statutory Appraisal Rights
Chancellor Chandler noted initially that “[a] preferred shareholder’s rights are defined in either the corporation’s certificate of incorporation or in the certificate of designation, which acts as an amendment to a certificate of incorporation.” Thus, while the rights of preferred shareholders are contractual in nature, they are “interwoven with a stockholder’s statutory right of appraisal.” With respect to the contractual nature of preferred stock, “a clear contractual provision that establishes the value of preferred stock in the event of a cash-out merger is not inconsistent with the language or the policy of § 262.”
Citing the only reported post-Weinberger opinion involving an appraisal of preferred stock, In Re Appraisal of Ford Holdings, Inc. Preferred Stock (698 A.2d 973 (Del. Ch. 1997), Chancellor Chandler stated that the primary issue before him then was “whether the certificate of designation, which establishes the rights of MIG’s preferred shares, contractually establishe[d] the metric for valuing the preferred shares in the event of a merger.” If he found that it did, that would “render[] irrelevant many of the underlying disputes among the testifying experts over the competing valuation models.” If he found that it did not, then the Court would be faced with determining fair value through the standard “battle of the experts” with regard to the approved methods of valuation in Delaware -- discounted cash flow valuation methodology, the comparable transactions approach, and the comparable company analysis.
Chancellor Chandler found that the certificate of designation did in fact establish the rights of MIG’s preferred shares and in particular the value to which preferred stockholders were entitled in the event of a merger -- $38.92 per share of preferred stock. Chancellor Chandler went on to state that:
Preferred holders who acquired their stock in 1997 for $50 may be disappointed that ten years later their stock was worth only 78% of its original issuance price, just as common stockholders who paid $12 in 1997 are no doubt disappointed to realize only 15% of their purchase price, but these consequences flow from the certificate and the market, not from the vagaries of financial methodologies applied in appraisal proceedings. Where the rights of preferred shareholders in the event of a merger are clearly stated in the certificate of designation, those shareholders cannot come to this Court seeking additional consideration in the merger through the appraisal process.
Court Awards Statutory Interest Rate
With respect to the issue of interest, Chancellor Chandler noted that “a party shall be awarded interest from the date of the merger through the date of payment of the judgment compounded quarterly and accruing at 5.0% over the Federal Reserve Discount Rate as measured during that period of time. This is the prescriptive statutory interest rate, unless good cause is shown to depart from it.” Finding no basis to depart from standard practice, the Court awarded interest at the statutory interest rate.
