Opinion ID: 1488138
Heading Depth: 1
Heading Rank: 6

Heading: MCHC's Challenges To The Court Of Chancery's Factual Findings

Text: MCHC's first three claims of error challenge the Court of Chancery's factual findings pertaining to the proper treatment of three inputs to its valuation analysis. This Court reviews the Court of Chancery's factual findings with a high level of deference. [26] So long as the Court of Chancery has committed no legal error, its factual findings will not be set aside on appeal unless they are clearly wrong and the doing of justice requires their overturn. [27] We conclude, for the reasons next discussed, that none of the challenged findings is clearly wrong, and indeed, all have firm support in the evidentiary record. 1. The Verizon Transaction MCHC's first claim of error is that the Court of Chancery improperly included the initial Verizon transaction price in its comparable transactions valuation of MCHC. The Verizon transaction resulted from an agreement that Price negotiated with Verizon in November 2000. In that agreement, Verizon contracted to acquire Palmer for $2.06 billion. The accomplishment of the initial Verizon transaction was conditioned on the completion of an initial public offering (IPO) of Verizon Wireless. [28] The Verizon-Palmer agreement also required Palmer to use commercially reasonable efforts to acquire all the minority shareholder interests in the 16 cellular markets that Palmer owned, including MCHC. [29] In conformity with that agreement, Palmer eliminated the minority shareholders' interest in MCHC and its other non-wholly-owned subsidiaries through short form mergers. On July 31, 2001, one month after the MCHC-Palmer merger was accomplished but before the Verizon-Palmer transaction was scheduled to close, Price and Verizon announced that the Verizon transaction would not go forward as planned, because Verizon would not be able to complete its IPO by the contractual September 30, 2001 deadline. Following that announcement, Price and Verizon negotiated a new agreement wherein the purchase price of Palmer was reduced from $2.06 billion to $1.7 billion. On August 15, 2002, Verizon purchased Palmer for that reduced price. The minority shareholders' expert, Marc Sherman, treated the initial $2.06 billion Verizon transaction as a comparable transaction. To determine what portion of that aggregate price should be attributed to MCHC, Sherman divided the total $2.06 billion purchase price by each of four financial metrics commonly used in valuing cellular systems, and then applied the resulting price per metric to MCHC's corresponding metrics to determine what portion of the purchase price for Palmer represented the value of MCHC. Although Sherman used other transactions besides the Verizon transaction to conduct his valuation analysis, he accorded the Verizon transaction the greatest weight (62%). In addition, Sherman gave his comparable transactions analysis the most weight (80%) of the three valuation methods he employed. As a consequence, the Verizon transaction price represented 50% of Sherman's ultimate valuation of MCHC. As earlier noted, the Court of Chancery adopted Sherman's methodology, but reduced the weight accorded to Sherman's comparable transactions value from 80% to 65%, thereby reducing the overall weight of the Verizon transaction to 40.3% of Sherman's ultimate fair value of MCHC. On appeal MCHC argues that the Vice Chancellor's inclusion of the Verizon transaction in its comparable transactions analysis was erroneous, because: (a) the Court failed to back out the synergistic elements of the Verizon transaction price, as Delaware law requires, and (b) the Verizon transaction did not reflect MCHC's going concern value, again as Delaware appraisal law requires. We conclude that the Court of Chancery did not err in either respect. (a) The Treatment Of The Synergies In The Verizon Transaction MCHC argues that the Court of Chancery erroneously included the Verizon transaction, because the transaction price contained synergistic elements of value whose inclusion is proscribed by 8 Del. C. § 262. That statute requires the Court of Chancery to appraise the subject shares by determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation. [30] In determining statutory fair value, the Court must value the appraisal company as a going concern. [31] In performing its valuation, the Court of Chancery is free to consider the price actually derived from the sale of the company being valued, but only after the synergistic elements of value are excluded from that price. [32] Those synergistic elements were not excluded here, MCHC claims, because the price Verizon agreed to pay for Palmer reflected the combinatorial value that Verizon expected to realize by acquiring 16 cellular markets (including MCHC) in a single transaction. MCHC argues that Palmer had unique strategic value to Verizon, because Verizon had a particular need to acquire cellular systems in the southeastern United States to fill the gaps in its national network. The cluster of systems that Verizon acquired, plus Palmer's unique strategic value to Verizon, were (MCHC urges) synergies that should have been excluded from the purchase price before the Verizon transaction could be considered in any valuation of MCHC. Because that was not done, the argument goes, the entire comparable transactions valuation was fatally flawed. The Court of Chancery acknowledged in its Opinion that the initial Verizon transaction price represented a value that implicitly incorporated whatever synergies [Verizon] expected to realize from creating a national network. [33] The Court found, however, that the only combinatorial value that was attributable to Palmer was deal-making value. That is, by offering a cluster of 16 cellular systems for sale at one time, Palmer would be reducing Verizon's transaction costs and eliminating a holdout problem. [34] But, the Court found, Palmer offered no business-related combinatorial value to MCHC, and MCHC was probably the most valuable company in Palmer's cluster. [35] Thus, the Vice Chancellor concluded, the only synergies included in the purchase price were deal-makingnot business-relatedsynergies. That conclusion is supported by the evidence. The Verizon merger with Palmer did not add any synergistic business value to MCHC (as the Court found) because Montgomery was a metropolitan statistical area (MSA), which is generally more valuable than a rural service area (RSA), and Montgomery had superior demographics relative to Palmer's other cellular holdings. [36] Therefore, the only synergies required to be eliminated from the Verizon transaction price were the Palmer-related deal making synergies. The question became how to determine the value of those synergies. The Court of Chancery was unable precisely to quantify those deal-making synergies, because MCHC did not present any reliable evidence at trial of what those synergies were worth. Having received no helpful evidence from MCHC, the Court of Chancery had toand didaccount for the synergies in a different way, namely, by reducing the total weight accorded to the comparable transactions component of the overall valuation, from 80% to 65%. [37] Although in a perfect world that may not have been the ideal solution, in this world it was the only one permitted by the record evidence, given MCHC's failure to obtain a pre-merger valuation and to present legally reliable expert valuation testimony during the trial. In a statutory appraisal proceeding, each side has the burden of proving its respective valuation positions by a preponderance of the evidence. [38] Even if one side fails to satisfy its burden, the Court is not free to accept the competing valuation by default, but must use its own independent judgment to determine fair value. [39] Having failed to present any reliable evidence to enable the Court of Chancery to carry out its statutory obligation to engage in an independent valuation exercise, [40] MCHC cannot now credibly argue that the Court erred by resorting to a valuation approach necessitated by MCHC's own failure. Given the paucity of synergy-related evidence for which MCHC was responsible, the Vice Chancellor coped admirably with the evidence that was presented, and reached a reasonable valuation using the analytical tools and evidence that were available to him. In our most recent decision in Cede & Co. v. Technicolor, Inc., [41] we reaffirmed that our deferential standard of review in corporate appraisal cases is based on a recognition `that the Court of Chancery, over time, has developed an expertise' in statutory appraisal proceedings. [42] Where, as here, a controlling stockholder has provided no reliable evidence, either pre-merger or during the trial, to enable the Court of Chancery to perform its mandated task, the Court may rely upon its expertise and upon whatever evidence is presented to determine fair value independently. In this case, the Court was free to use whatever methodology was supportable by the record to reach a valuation result that excluded, to the extent reasonably possible, the synergies implicit in the comparable transaction being considered. The Court's chosen method of eliminating the deal-making synergics from the Verizon transaction price represented a reasonable application of its expertise to the evidence available, and is entitled to deference from this Court. (b) Whether Including The Verizon Transaction Price Was Inconsistent With a Going Concern Valuation MCHC next contends that including the Verizon transaction in its comparable transaction analysis led the Court of Chancery to commit reversible error by not valuing MCHC as a going concern. Delaware law requires that in an appraisal action, a corporation must be valued as a going concern based on the `operative reality' of the company as of the time of the merger. [43] In determining a corporation's operative reality, the use of speculative elements of future value arising from the expectation or accomplishment of a merger is proscribed, but elements of future value that are known or susceptible of proof as of the date of the merger may be considered. [44] As we have held, any ... facts which were known or which could be ascertained as of the date of the merger and which throw any light on future prospects of the merged corporation are not only pertinent to an inquiry as to the value of the dissenting stockholder's interest, but must be considered by the agency fixing the value. [45] MCHC argues that the Verizon transaction was not part of MCHC's operative reality for two reasons. First, the transaction was conditioned on the successful completion of Verizon's IPO. Second, at the time of the MCHC-Palmer merger, the transaction was not expected to close. MCHC characterizes the Verizon transaction as a mere option whose exercise was entirely within Verizon's control and which neither Price nor Verizon realistically expected to close at the time the MCHC-Palmer merger occurred. The Court of Chancery found otherwise, however, and the record supports its finding. The Vice Chancellor rejected MCHC's argument that because the Verizon-Price agreement was conditional, it was impermissibly speculative and did not reflect MCHC's going concern value. The Court of Chancery found that the Verizon transaction was more than an offer (or an option as MCHC argues). Rather, it was a validly executed enforceable transaction agreement which bound Verizon to the implied covenant of good faith and fair dealing that inheres in every contract. [46] Moreover, Section 9.07 of the Verizon-Price agreement required Verizon to use reasonable efforts to consummate the IPO, and excused Verizon from a failure to do so only if market or other identified factors precluded the offering or the necessary restructuring. [47] Rejecting MCHC's contrary argument, the Vice Chancellor also found as fact that at the time of the Palmer-MCHC merger the Verizon transaction was expected to close. As the Court pointed out, there were no contemporaneous press releases or other communications to the market that Price or Verizon did not expect the deal to go through. And, at that time the securities industry continued to report that the deal was going forward as planned. Not until July 31, 2001 (one month after the Palmer-MCHC merger took place) did the parties publicly announce that the sale of Palmer to Verizon would not close. The Court characterized as self-serving the testimony of Price's CFO, and of its counsel, that at the time of the MCHC merger, Palmer and Price did not think Verizon would successfully complete the IPO. To the contrary (as the Court pointed out), the fact that Price caused Palmer to initiate a cash-out merger with MCHC was clear proof that Price did expect the Verizon deal to close. Given that record and those findings, the Court of Chancery correctly held that the Verizon transaction was a known element of future value that was susceptible of proof at the time of the merger. [48] 2. Adjustment Of The CD Settlement Price To Eliminate The Settlement Discount MCHC's second claim of error is that the Court of Chancery improperly adjusted the CD settlement price to eliminate what the Court regarded as a settlement haircut. MCHC argues that the record does not support that adjustment. MCHC is incorrect. The CD settlement was a settlement of litigation that arose out of Price's elimination, in a short form merger, of the minority shareholders of Cellular Dynamics (CD), a cellular company located in the southeastern United States. The minority shareholders of CD sued, and after protracted negotiations the parties agreed to a settlement price of $470 per POP. For purposes of valuing MCHC, both parties agreed that the CD settlement was a comparable transaction. Accordingly, Sherman utilized the $470 per POP metric in performing his comparable transactions analysis. The Vice Chancellor upheld Sherman's use of the CD settlement price, but adjusted that price to reflect what the Court described as a settlement haircut; [49] that is, a discount that reflected factors unrelated to CD's fair value, such as the costs of litigation and the uncertainty of the appraisal action's outcome. To eliminate that settlement discount, the Court of Chancery increased the CD settlement price by 15%, thereby reaching a value of $540.50 per POP as more fairly reflective of the value of CD. The Court then included that upwardly-adjusted CD settlement value in the comparable transactions analysis. On appeal, MCHC contends that there was no evidence of record that the CD settlement reflected a settlement haircut, or that the selection of a 15% adjustment was appropriate. We disagree. There was ample evidence to support the Court of Chancery's finding that the CD settlement reflected a discount from CD's fair value. The record included an exchange of several letters between Price and CD during settlement negotiations. Those letters included an offer by CD, on December 19, 2000, to settle the litigation for $500 per POP. In that December 19 letter, the CD minority shareholders specifically stated that the $500 per POP offer was less than CD's fair value, but was being made in an effort to resolve the matter quickly. That letter evidences that CD's minority shareholders were willing to settle for an amount below fair value to avoid the costs and delays of litigation. Sherman's testimony also supports that conclusion. Sherman testified that CD's minority shareholders would be expected to take less for their shares of stock than the corporation's going concern value, to avoid the continuing expense and risk of litigation. The December 19 letter, together with Sherman's testimony, provided sufficient support for the Court's finding that $470 per POP represented a settlement for less than CD's going concern value. Although there was no evidence of the precise magnitude of the actual CD settlement discount, the Court of Chancery did not err by selecting 15% as a reasonable measure. That percentage was based on evidence that the CD minority shareholders had accepted a price lower than CD's fair value, as well as the Court of Chancery's extensive expertise in the appraisal of corporate enterprisesan expertise that this Court has recognized on several occasions. [50] To reiterate, where, as here, one side of the litigation presents no competent evidence to aid the Court in discharging its duty to make an independent valuation, we will defer to the Vice Chancellor's valuation approach unless it is manifestly unreasonable, i.e., on its face is outside a range of reasonable values. [51] Here, the record supports the conclusion that the use of a 15% adjustment was reasonable and a judicious application of the Vice Chancellor's valuation expertise. 3. Eliminating The Management Fees Paid by MCHC To Palmer As An Input To The DCF Valuation MCHC's third claim of error challenges the Court of Chancery's adjustment of MCHC's financial statements to eliminate from the DCF valuation the management fees Palmer had charged MCHC. The Court found that those fees were essentially a pretext, unrelated to the actual furnishing of management services, that Price used to justify upstreaming money from MCHC to Palmer. The Vice Chancellor upheld Sherman's elimination of those fees from MCHC's financial statements for purposes of conducting his DCF valuation. On appeal, MCHC contends that the elimination of those fees was not supported by the evidence. The record, however, shows otherwise. Because there were no management projections upon which Sherman could rely to project MCHC's future cash flows, Sherman had to create his own forecasts. To do that he relied upon various sources, including MCHC's financial statements. [52] But Sherman did not accept MCHC's financial statements at face value. In his review of those statements, he identified several irregularities. [53] The management fees that Palmer charged to MCHC represented one of those irregularities. The evidence established that since 1998, Palmer had charged MCHC more than $3 million in management fees, and that in the first five months of 2001 alone, those fees totaled $603,000. To determine MCHC's future cash flows more accurately, Sherman eliminated those fees. The Court of Chancery found that Sherman's subtraction of the management fees was appropriate, and the record amply supports that finding. None of Price's officers who testified were able to explain what management services Palmer had provided to MCHC, or how those management fees were calculated. Indeed, Price's CEO characterized the fees (under oath) as accounting bullshit. The Court was also troubled by the fact that Palmer charged management fees only to its subsidiaries that had minority shareholders, but not to those subsidiaries that Palmer wholly owned. Tellingly, after Palmer eliminated MCHC's minority shareholders in the merger, Palmer stopped charging management fees to MCHC. That evidence strongly supports the elimination of the management fees as an expense. Accordingly, we uphold the Court's determination that Sherman properly eliminated those management fees in conducting his DCF valuation analysis.