On August 30, 2020, the California State Legislature passed a new and unprecedented bill intended to promote greater diversity in corporate boardrooms. If signed into law by the governor, California’s Assembly Bill (AB) 979 would require each publicly held corporation whose principal executive offices are located in California to have a minimum number of directors from an “underrepresented community” on its board of directors.
In fulfilling the statutory mandate to account for “all relevant factors” bearing on “fair value,” Delaware courts consider a range of evidence that often includes (i) “market evidence,” such as a company’s unaffected trading price or the “deal price” following an appropriate “market check” and (ii) “traditional valuation techniques,” such as a comparable company, comparable transaction or DCF analysis. In this case, however, the parties and their experts agree that the circumstances surrounding the Business Combination disqualify market evidence as reliable inputs for a fair value analysis. Accordingly, the valuation presentation from both sides focused on DCF. In my view, that focus was well placed.
SourceHOV’s deal process (or lack thereof) undermines any reliance on deal price as an indicator of fair value. Moreover, as a private company, SourceHOV’s equity was not traded in an efficient market, so its unaffected market price is also an unreliable indicator of fair value. Without reliable market evidence of fair value, the parties were left to focus on “traditional valuation methods” to appraise SourceHOV. This, of course, places the spotlight squarely on their competing valuation experts. In other words, as I see it, this case has played out as the quintessential “battle of the experts.”
Both experts agree there are no sufficiently comparable companies or transactions with which to perform either a trading multiples or a transaction multiples analysis. Given that other valuation techniques do not fit here, both experts also agree that a DCF analysis is the only reliable method to calculate SourceHOV’s fair value. In light of the experts’ agreement, and seeing no reason to disagree, I am satisfied that a DCF analysis is the only reliable indicator of SourceHOV’s fair value. (footnotes omitted)
In this appraisal action, I must determine the fair value of each share of the subject company on the closing date of its acquisition. I find that the process by which the company was sold bore several objective indicia of reliability, which were not undermined by flaws in that process. I therefore find that the deal price is persuasive evidence of fair value, and give no weight to other valuation metrics. I deduct some synergies, but find others were not adequately proven. I undergo that synergies analysis solely to fulfill my statutory mandate, rather than to effectuate any transfer of funds between the parties, because the company prepaid the entire deal price and has no recourse for a refund under the appraisal statute.