According to a recent Delaware Division of Corporations Annual Report, more than 66% of the Fortune 500 companies are registered in the State of Delaware. That being said, it is not surprising that the Delaware Chancery Court is widely recognized as one of the nation’s leading courts in settling shareholder appraisal disputes.
Delaware affords protection to shareholders by granting appraisal rights within Delaware §262 where fair value is defined §262(h):
After the Court determines the stockholders entitled to an appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceeding the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors.
This definition can cause an appraiser to consider alternative methodologies and/or apply discounts and premiums differently than for different jurisdictions or for tax valuations.
As you may be aware, Fair market value as defined by Revenue ruling 59-60 is:
“the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
The use of relevant “factors” or “facts” and data that is “known or knowable” is common to both definitions, but there are some notable differences, as listed below.
| Issue | Delaware (Fair Value) | Revenue 59-60 (Fair Market Value) |
| Parties attitude towards transaction |
Seller is unwilling |
Both Parties are Willing |
| Outlook for merger or other |
Potentially Disregarded |
Included |
| Buyer’s Expectation on Synergies |
Excluded |
Included if interest is controlling |
| Timing and Costs to Transact (Application of Discounts) |
Excluded |
Included |
Given the differences, appraisals for Delaware cases often have computational considerations not always applicable in other circumstances. Some of these items are as follows:
- The Discounted Cash Flow (DCF) method is commonly applied.
- The M&A method is given less preference.
- Deal Value may be adjusted for expected synergies.
- Premiums for control may be considered but must exclude amounts for synergies.
- The market price and volume of the traded shares, if any.
- Deal Value may be ignored where the sales is restricted or limited by the buyer.
Cases heard by the Delaware Court of Chancery that require business valuation or financial damage calculations generally fall within two categories; Fiduciary Duty or Appraisal (Valuation). The appraisal cases arise when shareholders exercise appraisal rights in connection with a corporate action, such as a merger or acquisition.
Our firm is uniquely qualified to assist you and your clients in these circumstances. Please feel free to contact us if you have any matters requiring appraisal or valuation issues. In the interim, look at for Part 2 of 3 of this blog series.