Opinion ID: 1536001
Heading Depth: 1
Heading Rank: 12

Heading: holding company valuation control premium for subsidiary proper

Text: The comparative acquisition approach used by Clark included the value of MGB's controlling interest in its two subsidiaries. In conducting his comparative acquisition analysis, Clarke identified three specific transactions involving community banks in the same geographical area as MGB's subsidiaries, and which had occurred within a year of the merger. Clarke also considered data published by The Chicago Corporation in its September 1993 issue of Midwest Bank & Thrift Survey, which reflected an analysis of 137 bank acquisitions announced from January 1, 1989 and June 1, 1993. The Respondents contend that Clarke's comparative acquisitions approach was erroneously relied upon by the Court of Chancery because that valuation analysis is proscribed by the statutory directives in Section 262, as construed by this Court. The interpretation and application of the mandates in Section 262 to this appraisal proceeding presents a question of law. Therefore, the Court of Chancery's construction of Section 262 must be reviewed de novo on appeal. [35] This Court has held that in valuing a holding company in a statutory appraisal proceeding, pursuant to Section 262, it is appropriate to include a control premium for majority ownership of a subsidiary as an element of the holding company's fair value of the majority-owned subsidiaries. [36] In Rapid-American, this Court stated: Rapid was a parent company with a 100% ownership interest in three valuable subsidiaries. The trial court's decision to exclude the control premium at the corporate level practically discounted Rapid's entire inherent value. The exclusion of a control premium artificially and unrealistically treated Rapid as a minority shareholder. Contrary to Rapid's argument, Delaware law compels the inclusion of a control premium under the unique facts of this case. Rapid's 100% ownership interest in its subsidiaries was clearly a relevant valuation factor and the trial court's rejection of the control premium implicitly placed a disproportionate emphasis on pure market value. [37] Based upon the foregoing statements from Rapid-American, the Court of Chancery concluded that Clarke's comparative acquisition approach, which includes a control premium for a majority interest in a subsidiary, was a relevant and reliable methodology to use in a Section 262 statutory appraisal proceeding to determine the fair market value of shares in a holding company. The Respondents argue that this Court's holding in Rapid-American turned on the unique fact that its subsidiaries were involved in three different industries. The Court of Chancery rejected the Respondents' construction of Rapid-American as too narrow. We agree. The fact that the holding company being valued in Rapid-American owned subsidiaries engaged in different businesses was not the dispositive basis for our holding. The underlying assumption in an appraisal valuation is that the dissenting shareholders would be willing to maintain their investment position had the merger not occurred. [38] Accordingly, the corporation must be valued as a going concern based upon the operative reality of the company as of the time of the merger. [39] Therefore, any holding company's ownership of a controlling interest in a subsidiary at the time of the merger is an operative reality and an independent element of value that must be taken into account in determining a fair value for the parent company's stock. [40] The Court of Chancery properly concluded that the rationale of this Court's holding in Rapid-American applied to the MGB appraisal proceeding. Because MGB held a controlling interest in its two subsidiaries, it was necessary to determine the value of those controlling interests in order to ascertain the value of MGB, as a whole, as a going concern on the Merger date. [41] We hold that the Court of Chancery acted in accordance with the statutory parameters of Section 262 by making a per share fair value determination of MGB on the basis of the comparative acquisitions approach applied by Clarke, using the premia that he attributed to MGB's controlling interests in Greenwood and WBC.