In S. Muoio & Co. LLC v. Hallmark Entm’t Invs. Co., et al., C. A. No. 4729-CC (Sept. 16, 2010), read letter ruling here, the Court of Chancery addressed cross-motions in limine by the plaintiff and the Special Committee defendants to exclude certain experts’ rebuttal reports and expert testimony. After reviewing the parties’ submissions as well as the expert reports in question, the Court denied all of the motions and stated that it will allow the experts’ reports and testimony to be admitted in the trial scheduled to start tomorrow, September 21, 2010, subject to the Court’s discretion to limit testimony as cumulative or repetitive.
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP
This case involves a recapitalization proposal that Crown Media received from its controlling stockholders, the Hallmark entities. The proposal resulted in the formation of a Special Committee to review and make a recommendation regarding the proposal. The Special Committee retained Morgan Stanley for financial advice and a recommendation, and Houlihan Lokey to provide a fairness opinion that the recapitalization was fair to Crown from a financial point of view.
Plaintiff filed their expert report and the Hallmark defendants submitted their expert report. The Special Committee defendants did not submit an expert report. However, when rebuttal reports were due, on the same day that the plaintiff submitted its rebuttal report, the Special Committee defendants submitted three reports to rebut the report of the plaintiff’s expert. Two of the Special Committee defendants’ expert reports were from financial experts hired by the Special Committee either to perform a financial evaluation of the proposal or to render a fairness opinion.
Defendants’ Fact and Expert Witness
Plaintiff challenged the Special Committee’s rebuttal reports on the grounds that the expert reports and testimony should be excluded under Rule 403 of the Delaware Rules of Evidence because: (i) the witnesses were both fact and expert witness and their expert testimony would be cumulative of their fact testimony; and (ii) they were biased. Special Committee defendants responded that there was nothing improper about a witness testifying in both fact and expert capacities. The Court agreed with the Special Committee defendants, noting that both witnesses can testify to the work they performed as part of the transaction as well as provide expert testimony on the valuation methodology that was used. The Court stated that because they are both fact and expert witnesses affects the weight their testimony is given as opposed to the admissibility.
The Special Committee defendants also challenged the rebuttal report of the plaintiff’s expert, Prof. Hamada, on the grounds that it did not actually rebut a position taken in the expert report submitted by the Hallmark defendants, Prof. Hausman. As support for their position, the Special Committee defendants cited the stipulated scheduling order for this matter, wherein the Court instructed the parties to limit their rebuttal expert reports to “rebutting positions taken in an opposing party’s Opening Expert Report,” and warned that “no party may submit a Rebuttal Expert Report on a topic not addressed by another party in its Opening Expert Report.”
The Court made the following observations:
(i) Prof. Hausman relied in part on Morgan Stanley’s valuation in his expert analysis;
(ii) very little of Prof. Hausman’s report discusses or even refers to Morgan Stanley’s financial analysis;
(iii) Prof. Hamada’s rebuttal report is largely a report identifying flaws in Morgan Stanley’s DCF analysis; and
(iv) Prof. Hamada does nothing to rebut Prof. Hausman’s opinions or findings, other than to suggest that because there are flaws in Morgan Stanley’s analysis.
While the Court agreed with the defendants that Prof. Hamada’s rebuttal report “probably could have been submitted as an Opening Expert Report analyzing the Morgan Stanley valuation,” the Court declined to exclude the report or Prof. Hamada’s testimony but noted that the Court would “give it whatever weight it deserves.”