In a short letter decision in Berger v. Pubco Corp., et al., C. A. No. 3414-CC (May 10, 2010), read letter decision here, the Court of Chancery addressed two valuation issues in an appraisal case – whether a control premium was an appropriate factor to be considered here and whether an estimated amount for a capital gains tax liability should be factored into the valuation calculation. See four prior decisions in this case highlighted here.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
Control Premium Not Appropriate
In this case, appraisers for both parties used the discounted cash flow and book value methodologies; they did not use a comparable public company methodology. Chancellor Chandler found, however, that under Delaware law, it is only appropriate to add a control premium when appraisers use a comparable public company methodology. See Rapid-American Corp. v. Harris, 603 A.2d 796 (Del. 1992) (emphasis added). In that case, the Court stated that an appraisal evaluation must consider the unique nature of the enterprise and that the full value of the corporate assets to the corporation is not the same as the value of those assets to a common stockholder because of the factor of discount. Id. at 805. The Rapid-American case addressed the issue of whether to add a premium at the parent level (in this case the parent corporation owned 100% of the interest in its subsidiaries) and a valuation technique which involved comparable values using market price of similar shares (which presumptively traded at a price that discounted the control premium.) Id. at 805-806. Since neither appraiser of Pubco used a comparable public company methodology approach (which relies on the market value of the stock), the Court declined to add a control premium.
Expected Capital Gains Tax Liability Not Considered
With respect to the capital gains tax issue, Pubco owned a significant portfolio of securities on the merger date, some of which had market prices that exceeded their purchase prices. The appraisers reduced the valuation of Pubco’s shares by $ 4.00 per share to reflect the expected capital gains tax liabilities that would be due in the event those appreciated assets were sold to determine an “adjusted” value on the merger date. The Court rejected that approach and reiterated a basic principle of Delaware appraisal law — that the value of any securities or assets is determined on the date of the merger and in making the valuation determination, the Court will only factor into the equation, what is known and capable of being proved on the merger date. In this case, the Court noted that there was nothing in the record to indicate that any particular securities were earmarked for sale on a particular date, or that Pubco had a particular schedule regarding the disposition of any securities in its portfolio.
The Court followed the Delaware Supreme Court case of Paskill Corp. v. Alcoma Corp., 747 A.2d 549 (Del. 2000) (Court held that it was “improper to apply a deduction to an asset valuation based on speculative future tax liabilities attributable to sales that were not specifically contemplated at the merger date.”) The Court also stated that it was a “bedrock principle of Delaware appraisal law that entitles ‘[t]he dissenter in an appraisal action . . . to receive a proportionate share of fair value in the going concern on the date of the merger, rather than value that is determined on a liquidated basis.’” Here, the known value was the market value of the securities that defendants owned, and it is that value that had to be factored into a valuation under 8 Del. C. § 262. Accordingly, the Court removed the $4 per share that had been added to the $34 per share base valuation in order to adjust for the appraiser’s improper calculations regarding the capital gains tax issue.
In a footnote, the Court discussed an issue raised by defendants regarding Pubco’s net operating loss value (“NOL”). Apparently, the defendants had argued that it would be inconsistent to include in the valuation calculation Pubco’s NOL while at the same time excluding the estimated capital gains tax liability. While the Court was not asked by the parties to consider the NOL issue, the Court did note that as of the merger date, Pubco had a definite plan to apply the NOL’s value as soon as possible to income from its subsidiaries. Thus, the Court noted that the NOL’s value “appears to have been appropriately included as a component of Pubco’s going concern value.”