On September 24, 2010, the Court of Chancery issued in the Court’s words “an atypically short” (seven pages) post-trial letter decision regarding the combined entire fairness and statutory appraisal action arising out of a going-private merger. See, In re Hanover Direct, Inc. S’holders Litig. Consol. C.A. No. 1969-CC; Fackelmayer, et al. & Cede & Co. v. Hanover Direct, Inc., Civil Action No. 3047-CC; and Fackelmayer, et al. v. Feldman, et al., C. A. No. 3291-CC, (Del. Ch., Sept. 24, 2010), read opinion here. In the end, the Court agreed that the merger consideration of $0.25 per share was “fair value.”
This summary was prepared by Kevin F. Brady of Connolly Bove Lodge & Hutz LLP.
Company “Under Water” at Time of Going-Private Merger
The going-private merger, which was consummated on April 12, 2007, involved the public stockholders of Hanover Direct, Inc. being cashed out for $0.25 per share. Hanover was “underwater” at the time of the merger (and apparently for many years before the merger) “its debt commitments combined with its contractual obligations to its preferred stockholders together exceeded the value of its common stock.” After failed reorganization and recapitalization attempts, Hanover’s board hired an independent financial advisor to value the company and approved a merger proposal to pay the public stockholders $0.25 per share for their shares of common stock. The $0.25 per share valuation amount exceeded the amount which the board determined was actually the fair value of the company’s common stock. Several stockholders filed suit claiming that the $0.25 per share was unfair.
Appraisal Actions – Battle of the Experts
While this was a hybrid action involving fair value and fair price, the trial focused on only one issue — whether the merger price was entirely fair because “the issue of fair process is secondary to the ultimate import of fair price; and fair value under a statutory appraisal is tantamount to fair price in an entire-fairness action.”
Both sides presented valuation experts in an effort to persuade the Court that the price of $0.25 per share was either entirely fair, or grossly unfair. The defendants’ expert used three different approaches in the valuation analysis: (1) a DCF analysis; (2) a comparable companies analysis; and (3) a comparable transactions analysis. Petitioners’ expert, on the other hand, based her valuation on a single methodology: a comparable public companies analysis. While Petitioners’ expert had performed a DCF analysis and a comparable transactions analysis, she subsequently rejected that analysis having determined that neither of those approaches generated reliable indicators of value and that management’s “projections were unreliable.”