Opinion ID: 2209471
Heading Depth: 1
Heading Rank: 8

Heading: The Ten-Day Trading Average by which Avaya Proposes to Compensate the Cashed-Out Stockholders Constitutes Fair Value under Section 155(2)

Text: As an alternative to selling the fractional interests on behalf of the stockholders, Avaya may opt to pay the stockholders cash in an amount based on the trading price of Avaya stock averaged over a ten-day period preceding the Proposed Transaction. To do so, Avaya relies on Section 155(2), which provides that a corporation may pay in cash the fair value of fractions of a share as of the time when those entitled to receive such fractions are determined. [27] The corporation owes its cashed-out stockholders payment representing the fair value of their fractional interests. The cashed-out stockholders will receive fair value if Avaya compensates them with payment based on the price of Avaya stock averaged over a ten-day period preceding the Proposed Transaction. While market price is not employed in all valuation contexts, [28] our jurisprudence recognizes that in many circumstances a property interest is best valued by the amount a buyer will pay for it. [29] The Vice Chancellor correctly concluded that a well-informed, liquid trading market will provide a measure of fair value superior to any estimate the court could impose. [30] Applebaum relies on two instances where the Court of Chancery intimated that a Section 155(2) valuation may be similar to a going concern valuation employed in an appraisal proceeding. In Chalfin v. Hart Holdings Co., [31] the Court of Chancery rejected a market price offered by a majority stockholder because the stock was not traded in an active market. In Metropolitan Life Ins. Co. v. Aramark Corp., [32] the Court of Chancery declined to apply a private company discount presented by a controlling stockholder seeking to squeeze out the minority stockholders. Neither case applies here. The court cannot defer to market price as a measure of fair value if the stock has not been traded actively in a liquid market. [33] In Chalfin, for example, the Court of Chancery held that the controlling stockholder could not offer as fair value in a reverse stock split the same amount alleged to be the past trading value because the stock had not been publicly traded for some time. [34] The market price offered by the controlling stockholder was based on stale information. [35] An active trading market did not exist to monitor the corporation's performance. Thus, a more thorough valuation would have been necessary. Avaya stock, by contrast, is actively traded on the NYSE. The concerns noted in Chalfin are not pertinent to the Proposed Transaction because the market continues to digest information currently known about the company. The value of Avaya's stock is tested daily through the purchase and sale of the stock on the open market. In a related argument, Applebaum contends that the trading price cannot represent fair value because the stock price is volatile, trading at a range of prices from $13.70 per share to $1.12 per share over the past year. [36] The volatility in trading does not necessarily mean that the market price is not an accurate indicator of fair value. Avaya stock is widely-held and actively traded in the market. The ten-day average has been recognized as a fair compromise that will hedge against the risk of fluctuation. Corporations often cash out fractional interests in an amount based on the average price over a given trading period. [37] Applebaum also misunderstands the appropriate context for which a going-concern valuation may be necessary under Section 155(2). In both Chalfin and Aramark, the Court of Chancery recognized that a transaction employing Section 155 may warrant a searching inquiry of fair value if a controlling stockholder initiates the transaction. [38] When a controlling stockholder presents a transaction that will free it from future dealings with the minority stockholders, opportunism becomes a concern. [39] Any shortfall imposed on the minority stockholders will result in a transfer of value to the controlling stockholder. The discount in value could be imposed deliberately [40] or could be the result of an information asymmetry where the controlling stockholder possesses material facts that are not known in the market. [41] Thus, a Section 155(2) inquiry may resemble a Section 262 valuation if the controlling stockholder will benefit from presenting a suspect measure of valuation, such as an out-dated trading price, [42] or a wrongfully imposed private company discount. [43] Although the Reverse/Forward Split will cash out smaller stockholders, the transaction will not allow the corporation to realize a gain at their expense. Unlike the more typical freeze-out context, the cashed-out Avaya stockholders may continue to share in the value of the enterprise. Avaya stockholders can avoid the effects of the proposed transaction either by purchasing a sufficient amount of stock to survive the initial Reverse Split or by simply using the payment provided under Section 155(2) to repurchase the same amount of Avaya stock that they held before the transaction. The Reverse/Forward Split merely forces the stockholders to choose affirmatively to remain in the corporation. Avaya will succeed in saving administrative costs only if the board has assumed correctly that the stockholders who received a small interest in the corporation through the Lucent spin off would prefer to receive payment, free of transaction costs, rather than continue with the corporation. The Transaction is not structured to prevent the cashed-out stockholders from maintaining their stakes in the company. A payment based on market price is appropriate because it will permit the stockholders to reinvest in Avaya, should they wish to do so.