DealLawyers.com Blog

In Hyde Park v. FairXchange (July 30, 2024), the Chancery Court addressed an appraisal petition filed in connection with Coinbase’s acquisition of a start-up securities exchange. Despite a flawed sale process, Vice Chancellor Laster concluded that the deal price was the “least bad” option for valuing the target.  Here’s an excerpt from Fried Frank’s memo on the decision:

The court compared FairX to an ancient coin, rare baseball card, or piece of art—stating that such non-cash generating assets are worth whatever someone is willing pay for them. We would note that, for an early-stage company with a disruptive plan and no track record, the deal price reflects, almost entirely, not going concern value as a stand-alone enterprise, but the target’s option value—that is, what the buyer was willing to pay for the chance that a company with no cash generation and no track record may be worth billions in its near-term future. Moreover, in FairX, the deal price also was unreliable because the sale process was seriously flawed, with value clearly “left on the table.” The court viewed the deal price as the “least bad” methodology for determining fair value in this context, however.

Vice Chancellor Laster considered both a DCF analysis and a valuation based on the terms of previous rounds of the target’s financings.  However, he concluded that the projections used in the DCF analysis were too speculative, and that the dynamics of the negotiation process for private financings made the valuations implied by those transactions unreliable.  He also declined to use the results of a variety of other analytical approaches, including a comparable transactions analysis and internal valuations, due to concerns about their reliability.

– John Jenkins