856.795.6026
  807 Haddon Avenue,
Haddonfield, NJ 08033
Phone: 856-795-6026
Fax: 856.795.4911

 

Search Our Site:


From Our Newsletters:

Judge Stands By His Deal Price Valuation

June 2014 | Issue 74 Introduction In a recent Delaware dissenting shareholder case, Vice Chancellor Glasscock was called upon to perform an appraisal in order to determine the fair value of the stock of a company involved in a merger.  Instead of using the methods normally employed to perform such an appraisal, such as an [...] More...

Preferred Shareholders Prevail in Trados Transaction

April 2014 | Issue 73 Trados, Inc. was sold to another company for $60 million in July of 2005.  The sale proceeds were distributed as follows; Trados management received $7.8 million, preferred shareholders received $52.2 million and common stockholders received nothing. Certain common stockholders sued.  The story is told in a Delaware Chancery matter called [...] More...

Tax Court Takes a New Valuation Line on Built-in Capital Gains

March 2014 | Issue 72 U.S Tax Court Judge David Gustafson was faced with the task of determining the fair market value of an interest in an investment company named Pearson Holding Co. (“PHC”).  The case is Estate of Richmond v. Commissioner T.C. Memo 2014-26 (February 11, 2014). At the time of her death, December [...] More...

Join Our Mailing List...

View our Library...

 

 
 

Chancery Court Clears Up Two Valuation Issues

June 2010 | Issue 46

Introduction

The Delaware Court of Chancery focused on two frequently-encountered valuation issues in a recent appraisal action opinion, Berger v. Pubco Corp., et al. (C. A. No. 3414-CC; May 10, 2010).  The parties to this case had agreed by stipulation to submit two valuation issues to the Court: the control premium issue and the capital gains tax issue.

Control Premium Issue

A control premium in a business valuation is an adjustment designed to incorporate into the valuation the increment of value attributable to a party’s holding a controlling interest in a company rather than a minority interest.  Since the control premium represents the difference between the value of a minority interest and the value of a controlling interest, it is normally applied “on top of” a minority interest value.

In this case, the appraisers had utilized the discounted cash flow method and the book value method of valuation to value Pubco  They had not used the comparable public company method. “Under Delaware law,” the Court said, “it is appropriate to add a control premium when appraisers use a comparable public company methodology.”  Since the comparable public company method was not used by either appraiser in this case, the Court concluded that it was not appropriate to apply a control premium in this case.  The Court went on to say that “cases decided in the Court of Chancery since Rapid-American 603 A.2d 796 (Del. 1992) have clearly held that the addition of a control premium to a discounted cash flow valuation, as here, is not appropriate.”

Capital Gains Tax Issue

The capital gains tax that was at issue in this case was imbedded in a portfolio of securities held by Pubco. The company owned a significant portfolio of securities, some of which had market prices on the valuation date that exceeded their purchase prices.  It was the capital gains tax liability that might be incurred if these securities were sold and the effect that such tax should have on the valuation that was at issue between the parties.

The Court concluded that the value should not be adjusted downward to account for this latent tax liability.  It came to this conclusion because Pubco had no particular schedule regarding the disposition of any securities in its portfolio.  The Court cited Paskill Corp v. Alcoma Corp. 747 A.2d 549 (Del. 2000), a Delaware Supreme Court case, which held that it was improper to apply a deduction to an asset valuation based on speculative tax liabilities attributed to sales that were not specifically contemplated at the merger date.  The Pascal holding was based on the principle of Delaware appraisal law that entitles the dissenter in an appraisal action to receive a proportionate share of the fair value in the going concern on the date of the merger, rather than the value that is determined on a liquidated basis.  Since there was no evidence that any particular Pubco asset would be sold at any particular date, the Court declined to make an adjustment for the potential tax liability.