M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, January 22, 2010

Sunbelt Appraisal Lessons

Chancellor Chandler recently handed down an interesting appraisal case that's worth taking a quick look at - In re Sunbelt Shareholders Litigation.  The case is interesting for a variety of reasons.  In the first instance, the plaintiffs made two claims in the alternative:  1) the plaintiffs made a variety of fiduciary duty claims that the directors cashed them out at an unfair price and the plaintiffs sought partial rescission (in the form of a distribution of some of Sunbelt's assets);  2) if the fiduciary duty claim failed, they sought an appraisal for fair value.

On its face, it seems that the only real question at issue is the price.  If price is the only complaint, then appraisal is the appropriate remedy (Singer v Magnavox, etc.) and not rescission of the transaction.  As you'd expect, Chancellor Chandler appropriately dealt with the alternative claims by simply treating this as an appraisal action and not awarding rescissory damages.  

As an appraisal action there are a number of useful lessons from Sunbelt.  First, the court will give some evidentiary weight to previous appraisals of the same stock.  Chandler said: "the fact that major shareholders … who had the greatest insight into the value of the company, sold their stock … at the same price paid to the remaining shareholders … powerfully implies that the price received was fair.  Additionally, even when provided with the results of expert valuations, a court may find arm’s-length negotiations to be the most persuasive evidence of fair value." 

In the case of Sunbelt, however, the previous stock evaluation was not given weight because the terms of that stock valuation were were controlled by an agreement negotiated and signed
three years prior to the merger.  Only stock valuations that result from negotiations occurring immediately before (or contemporaneously with) the Merger are going to be persuasive evidence of fair value.

Second, when the court uses language like "Penny prepared th[e] [valuation] opinion in one week’s time while simultaneously working on and traveling for another project"  you have to know that the court isn't going to look with favor on the substance of the valuation opinion.  

Third, Delaware courts will accept the use of "comparable transactions analysis" by corporate appraisers to determine fair value.  However, mindful of the effect that careful selection of comparables can have on the outcomes of an analysis, Delaware courts will look closely at which comparables are being used and place the burden of proof on the question whether the comparables are truly comparable lies with the party making that assertion.  In Sunbelt, Chandler ultimately gave no weight to the comparable transactions analysis submitted by the company's expert as the company was unable to overcome the burden of proof that its purported comparables were, in fact, comparable.   Rather, the court relied on the discounted cash flow analysis proposed by the plaintiff.  (HT: AF)




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