CHANCERY COURT USES FAMA-FRENCH MODEL TO VALUE BANK

State-of-the-art Finance
In a case called In Re PNB Holding Co. Shareholders Litigation, C.A. No. 28-N (Delaware Chan. August 18, 2006), the Delaware Chancery Court showed itself receptive to the use of state-of-the-art financial methodology to value the stock of PNB Holding Company, an Illinois bank holding company.

Unhappy Shareholders
The shareholders were in court because they were unhappy with the price they had received in a reorganization of PNB. The Bank wished to convert itself to a subchapter S corporation. In order to do so it needed to reduce the number of its shareholders. It did this by carrying out a reorganization under which all shareholders holding fewer than 2,000 shares were required to exchange their shares for $41 in cash per share.

A number of the shareholders felt that this price was too low, and the matter ended up as a combined appraisal/equitable action in Delaware Chancery Court.

Experts Disagree
The valuation experts for both sides used the same three methods to value the PNB stock; 1) the comparable publicly-traded company approach, 2) the comparable acquisition method, and 3) a discounted cash flow analysis. Although the methods used by both appraisers were the same, the results of their labors produced what the Court described as “the depressingly familiar parentheses,” $61 per share for the plaintiffs’ expert and $40 for the defendants’ expert. [Read More]