The Delaware Supreme Court recently upheld the Chancery Court’s decision in Huff Fund Investment Partnership v. CKx, Inc. with respect to assessing the merger price in an acquisition. On February 12, 2015, in a short, two-page order, the Court affirmed the holding of the Chancery Court in its determination of the “fair value” of CKx for the reasons set forth by the Court of Chancery in its prior opinions.
The Chancery Court had addressed the issue of appraisal for stockholders of CKx who had exercised their appraisal rights in lieu of accepting the cash-out price which otherwise would have been received in the sale of CKx to the acquiror. The Chancery Court noted that the sales process “has been challenged, reviewed, and found free of fiduciary and process irregularities” and that CKx was sold “after a full market canvas and auction”. It also acknowledged that the Court is not permitted to “rely presumptively on the price achieved by exposing the company to the market” and, pursuant to the Delaware appraisal statute, must “evaluate ‘all relevant factors’”, without taking into account any potential change in the value that could occur as a result of or in anticipation of the merger transaction itself.
The Chancery Court reviewed two different valuation methodologies presented by the parties to the lawsuit. First, it considered and rejected the proposed valuation based upon a comparable company analysis because the guideline companies were not truly comparable to CKx – the companies were not of a similar size, none of the companies owned assets similar to CKx’s assets and none of the companies competed with CKx. Second, the Court considered and rejected the discounted cash flow analysis approach because the Court found that the five-year cash flow projections were unreliable; “without reliable five-year projections, any values generated by a [discounted cash flow] analysis are meaningless.” Additional future revenue remained uncertain and the unreliability of these estimates created significant difficulty in preparing an appropriate discounted cash flow analysis. Without reliable cash flow projections, the Court was unable to determine fair value using a discounted cash flow analysis method.
In analyzing whether it should ignore the merger price in determining the fair value of CKx, the Chancery Court stated that it has “an obligation to consider all relevant factors, and that no per se rule should presumptively or conclusively exclude any of those factors from consideration.” In this situation, given that the Court could not look to any appropriate comparable companies, comparable transactions or reliable cash flow projection models, the consideration given in the transaction was the best indicator of the actual value of CKx. CKx’s transaction process was “thorough, effective, and free from any spectre of self-interest and disloyalty,” with several potential buyers presenting offers and CKx engaging a financial advisor to assist with the transaction to negotiate the best possible price for CKx’s stockholders. The Chancery Court therefore concluded that the merger price was the “most relevant exemplar of valuation available.”
The Delaware Supreme Court’s affirmation of the lower court’s decision in this case is an important reminder for stockholders contemplating exercising appraisal rights that the merger price may very well be used during an appraisal proceeding as an appropriate method to determine the fair value of a company.
Any questions regarding this topic, please feel free to contact Mary Beth Kerrigan directly.