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The 3rd U.S. Circuit Court of Appeals recently served up an “mmm mmm good!” result to Campbell Soup in a fraudulent transfer case that turned on the valuation of the assets received in exchange for the transfer. The case is VFB LLC v. Campbell Soup Co. In 1998, Campbell Soup Co. was the owner of Vlasic and other companies collectively known as the Specialty Foods Division. Because those companies were underperforming, Campbell decided to spin them off in a leveraged transaction. Campbell formed a new subsidiary, Vlasic Foods International, which borrowed $500 million to purchase the division from Campbell. The Vlasic stock was then distributed to Campbell’s shareholders as an in-kind dividend. Vlasic did not thrive after the spin. As its earnings declined, it sold the division piecemeal for less than it paid Campbell to acquire it. Vlasic ultimately filed for bankruptcy. As a result of the bankruptcy, Vlasic’s claims against Campbell were assigned to its impaired creditors, who then filed suit against Campbell in the federal district court in Delaware, contending that the leveraged spin was a constructively fraudulent transfer under New Jersey’s enactment of the Uniform Fraudulent Transfer Act. The UFTA authorizes the avoidance of a transfer made by a debtor without receiving a reasonably equivalent value in exchange for the transfer, provided the debtor was insolvent, undercapitalized or intended to incur debts beyond its ability to pay. Neither the UFTA nor New Jersey law provides a clear definition of “reasonably equivalent value” beyond the general principle that a debtor must get “roughly the value it gave.” The key issue at trial was the value of the Specialty Foods Division at the time of the spin, specifically whether it was worth the $500 million Campbell received for it. Two different kinds of valuation evidence were presented at trial: the price of Vlasic’s publicly traded stock and bonds after the spin; and expert testimony that relied on discounted cash flow (DFC) analyses and compared Vlasic’s DCF to that of other comparable companies to arrive at a valuation figure. The equity market capitalization approach yielded a value of $1.1 billion for the division, while the expert opinions ranged from a low of $377 million to a high of $1.8 billion. Judge Kent A. Jordan, conducting a bench trial, considered the expert valuations to be a sideshow to what he regarded as the best evidence of value – the market capitalization in “one of the most efficient capital markets in the world.” Based on the stock price of Vlasic after the spin, the district court concluded that the value of the division was well in excess of the $500 million that Vlasic paid Campbell. Therefore, Vlasic received “reasonably equivalent value” and there was no fraudulent transfer. On appeal, the creditors argued that market capitalization is not a reliable measure of value because the market price of a company’s stock is based on projections of future income that may prove to be inaccurate. The 3rd Circuit rejected this contention as clearly wrong. The market capitalization approach may depend on future earnings projections, but it is anchored in the company’s actual performance, because its stock price reflects all the information that is publicly available at that time. A company’s actual subsequent earnings might be relevant to the reasonableness of a market-based valuation, but the court held that such a hindsight approach should not be the benchmark for valuation. The creditors also argued on appeal that market capitalization was not a valid measure in this case because Campbell manipulated the division’s sales and earnings prior to the spin and thereby inflated Vlasic’s stock price. The district court, however, explicitly chose not to rely on the market price immediately post-spin – when the prices might have been artificially inflated – but rather on the price nine months after the spin, when the truth about Vlasic’s performance had become clear. The 3rd Circuit held that the district court’s approach was correct unless the creditors could prove that Vlasic’s market price was still affected by the pre-spin manipulations nine months later. They failed to do so. The decision of the appeals court revealed a clear preference for valuations based on market capitalization over expert valuations based on discount cash flow analyses, which the court described as “inapt tools.” It concluded that the stock price of a public company is a more reliable measure of its value than any of the subjective estimates of valuation experts. In a separate claim for relief, Vlasic’s creditors also alleged that its directors breached a fiduciary duty to creditors when they approved the spin and that Campbell was liable for aiding and abetting that breach. This claim was doomed, however, when the court upheld the finding that the division was worth well over $500 million. Because Vlasic’s assets exceeded its liabilities, it was solvent, and directors of solvent companies owe no fiduciary duty to creditors. Accordingly, Campbell could not have aided and abetted any breach of such duty. The VFB decision may short-circuit fraudulent conveyance litigation involving leveraged transactions of public companies. Absent evidence that pre-spin manipulations occurred and that such manipulations impacted the stock price post sale, the analysis could quickly end if it can be shown that the market capitalization of the company exceeded the amount paid for the assets. That calculation shouldn’t be hard to make. FRANCIS J. LAWALL , a partner in the Philadelphia office of Pepper Hamilton, concentrates his practice in national bankruptcy and reorganization matters. He routinely lectures to various creditor groups concerning general bankruptcy issues, including preferences, reclamation, the role of creditors’ committees and related issues. BONNIE MACDOUGAL KISTLER is of counsel in the firm’s bankruptcy and business reorganization practice. Kistler is resident in the Philadelphia office and focuses her practice on the energy industry. She represents clients in bankruptcy and other court proceedings throughout the United States, including the Enron case, and advises them on contract formation, credit risk avoidance, debt restructuring, acquisitions anddivestitures, and creditors’ rights issues.

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