Opinion ID: 1536001
Heading Depth: 1
Heading Rank: 10

Heading: Reilly's Capital Market Approach

Text: The qualifications of the Respondents' expert witness, Reilly, were undisputed at trial. The parties were in sharp disagreement, however, about whether Reilly's capital market approach was generally accepted within the financial community for valuing banks and bank holding companies. Reilly's capital market analysis used a number of pricing multiples related to the market value of invested capital (MVIC). Reilly computed the ratios of MVIC to: earnings before interest and taxes (EBIT); earnings before interest, depreciation and taxes (EBIDT); debt free net income (DFNI); debt free cash flow (DFCF); interest incomes; and total book value of invested capital (TBVIC). The Petitioners' expert, Clarke, testified that Reilly's capital market approach was not generally accepted in the financial community for valuing banks and bank holding companies. According to Clarke, the financial community focuses upon the ratio of price to book value and price to earnings for purposes of valuing banks and bank holding companies. The Court of Chancery concluded that the Respondents had failed to establish that Reilly's capital market methodology is generally accepted by the financial community for purposes of valuing bank holding companies, as distinguished from other types of enterprises. [25] The Court of Chancery also determined that Reilly's capital market valuation approach included a built-in minority discount. The Court of Chancery noted that the valuation literature, including a treatise co-authored by Reilly himself, supported that conclusion. [26] The Court of Chancery concluded that because Reilly's capital market method resulted in a minority valuation, even if it had concluded that Reilly's capital market approach was an otherwise acceptable method of valuing a bank holding company, the use of Reilly's capital market approach is improper in a statutory appraisal proceeding. Delaware Rule of Evidence 702, like its federal counterpart, establishes a standard of evidentiary reliability. [27] Delaware Rule of Evidence 702 requires a valid ... connection to the pertinent inquiry as a precondition to admissibility. [28] When the factual basis, data, principles, methods, or their application in an expert's opinion are challenged, the trial judge must decide if the expert's testimony has a reliable basis in the knowledge and experience of [the relevant] discipline. [29] The record reflects that the Court of Chancery rejected Reilly's capital market approach for two independent and alternative reasons. First, it concluded that the Respondents had failed to establish that Reilly's capital market approach is generally accepted in the financial community for valuing banks and/or bank holding companies. Second, it concluded that Reilly's capital market approach contained an inherent minority discount that made its use legally impermissible in a statutory appraisal proceeding. Both of those conclusions are fully supported by the record evidence that was before the Court of Chancery and the prior holdings of this Court construing Section 262. [30]