Opinion ID: 1933235
Heading Depth: 1
Heading Rank: 2

Heading: Court of Chancery

Text: The Court of Chancery appraised Okeechobee exclusively on the basis of its net asset value. At the time of its merger with Alcoma, Okeechobee's investment assets were not for sale. Under those circumstances, the Court of Chancery determined that Alcoma's deduction of the estimated expenses that Alcoma attributed to those uncontemplated sales of appreciated investment assets was improper. Nevertheless, the Court of Chancery held that it was appropriate to compute Okeechobee's net asset value by deducting the estimated future tax liabilities attributed to those uncontemplated asset sales on the basis of the investment assets' appreciated value. The Court of Chancery distinguished its allowance of deductions for possible future tax liabilities from its disallowance of deductions for possible future sales expenses as follows: First, sales expenses occur only when and if sale of an asset occurs. They are not an accrued, deferred liability such as capital gains tax. Sales expenses represent transaction costs associated with one possible use of an investment. It is a cost difficult to quantify because the seller may be able to reduce or eliminate the expenses. Okeechobee's investments were not sold, but retained by its acquirer at the time of the merger; therefore, sales expenses had not been incurred and the minority shareholders should not front a portion of a cost that might (or might not) be incurred down the road. Instead, the minority are entitled to shareholders' pro rata share of the assets' value as a held investment. The record reflects that a sale of its appreciated investment assets was not part of Okeechobee's operative reality on the date of the merger. [2] Therefore, the Court of Chancery should have excluded any deduction for the speculative future tax liabilities that were attributed by Alcoma to those uncontemplated sales. Conversely, the Court of Chancery properly denied any deduction from Okeechobee's net asset value for speculative expenses relating to future sales that were not contemplated on the date of the merger. The Court of Chancery erred by attempting to appraise Okeechobee exclusively on the basis of its net asset value, however, even if Okeechobee's net asset value had been calculated correctly. Our reasoning is set forth in the balance of this opinion.