June 14, 2010

Use of Control Premium in Delaware Appraisal Action

From Kevin Miller of Alston & Bird: In a recent decision – Berger v. Pubco Corp. – Delaware Chancellor Chandler held that the application of a control premium in an appraisal action under Delaware law is not appropriate where the appraisers did not rely upon a comparable company valuation methodology. Here is a notable quote from the opinion:

“First, as to the control premium issue, I conclude that the addition of a control premium in this case is not appropriate. Both appraisers used the discounted cash flow and book value methodologies. Under Delaware law, it is appropriate to add a control premium when appraisers use a comparable public company methodology. This has been the teaching of cases following the Delaware Supreme Court’s decision in Rapid-American Corp. v. Harris.

Since the comparable public company methodology was not a methodology used by either appraiser in this case, I decline to extend the rule of Rapid-American in these circumstances. Even the Court in Rapid-American held that the inclusion of a control premium was required “under the unique facts” of that case, which was based on comparable values using the market price of similar shares of stock.

Cases decided in the Court of Chancery since Rapid-American have clearly held that the addition of a control premium to a discounted cash flow valuation, as here, is not appropriate.

Authoritative commentators have likewise observed that it is improper and illogical to add a control premium to a discounted cash flow valuation. Accordingly, the value of Pubco’s shares should not be increased by a control premium because no such premium was implicit in any valuation methodology used by the appraisers.”