In an appraisal proceeding under Section 262 of the Delaware General Corporation Law, the Delaware Court of Chancery determines the “fair value” of a company’s “shares exclusive of any element arising from the accomplishment or expectation of the merger.” In determining fair value of a company’s shares, the court values the company as a “going concern” based on the “operative reality” existing as of the date of the merger. The court has “significant discretion to use the valuation methods it deems appropriate, including the parties’ proposed valuation frameworks, or one of the court’s own making.” Both the petitioner and the respondent share the burden of proof in an appraisal proceeding to establish fair value of a company’s shares by a preponderance of the evidence.
In its recent appraisal decision, In re ISN Software Appraisal Litigation, C.A. No. 8388-VCG (Del. Ch. Aug. 11) (Glasscock, V.C.), the Court of Chancery held that the most reliable method to value a company, whose stock was not traded publicly, lacked historical sales of its stock that were reliable indicators of fair value, and for which no comparable company evaluations existed, was the discounted cash flow (DCF) method. Relying exclusively on the DCF method, and faced with widely divergent expert valuations, the court started its valuation analysis using the DCF framework of ISN Software Corp.’s expert because his valuation used the standard five-year cash flow projection period, which the court had found appropriate. After making adjustments for inputs where the parties diverged, the court subsequently concluded that $98,783 per share, which far exceeded the merger consideration of $38,317 per share, was the fair value of ISN Software as of the date of the merger.
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