In going private merger rulings, DE Chancery and Supreme Court consider valuation vital

In a dissenting shareholder case, the plaintiffs made a great tactical error. Because their case ostensibly focused on a novel legal issue and not on valuation per se, they did not bother to offer expert valuation testimony. The case involved Ronald O. Perelman and his company, the owners of a 43.4% interest in the target company. Their proposal for a going private merger included two stockholder-protective procedures that they claimed ensured the same level of protection for the interests of minority owners as an arm's-length transaction. One safeguard involved setting up a special committee consisting of independent directors who would assess the merits of the proposal. Among other things, the special committee hired a financial advisor, Evercore Partners, to perform a series of valuation analyses, using a variety of methods, which established a range of values into which the proposed price fell. Ultimately, Evercore also issued a fairness opinion declaring the merger was fair based on generally accepted valuation methodologies, including the discounted cash flow method and comparable companies analyses.

 

In their post-merger suit, the plaintiffs claimed that, under the entire fairness standard, the highest standard of review in corporate law, the defendants breached their fiduciary duty. The defendants claimed that, given the dual protections for minority shareholders, the Chancery should review the transaction under the lower business judgment rule and find there was no genuine issue that the merger was fair. The Chancery agreed with the defendants. The plaintiffs did not offer a valuation from an expert that declared the merger price was unfair, said the Chancery. Even though the issue in front of the court was a legal issue, the plaintiffs should have known that they would have to show the merger imposed terms that a rational fiduciary could not accept in good faith. Without a counter expert opinion, they “have not come close to meeting that burden.” On appeal, the Delaware Supreme Court affirmed the Chancery's decision.