DealLawyers.com Blog

Last week, in Gladstone v. EBC Holdings, Inc. (Del. Ch.; 8/26), Vice Chancellor Fioravanti addressed a statutory appraisal action arising from a 2022 stock-for-stock reorganization that collapsed a dual holding-company structure that held a boutique broker-dealer specializing in underwriting SPACs. The parties supported “starkly” different valuations at trial. Petitioner’s expert used a capitalized cash flow analysis and added cash and securities as assets that were valued separately, resulting in $18.50 per share. Respondents’ expert used an equity-level dividend discount model and a guideline public company analysis with resulting values of $6.79 to $7.29 per share.

Complicating the analysis were the company’s regulatory capital requirements – specifically, whether those requirements should limit the amount of cash and investments treated as separately valued – as well as challenges in valuing the securities portfolio, given the timing of closing and further deterioration of the SPAC market thereafter and the SEC’s proposed (at the time) SPAC rules that would increase underwriting costs. VC Fioravanti ultimately applied a capitalization-of-earnings approach and then adjusted for cash reasonably required to support operations and the value of the securities portfolio.

As far as the complicating factors, he:

– Determined that the company needed $30 million of regulatory capital to support its underwriting business, which he excluded from any separate addition of liquid, allowable assets;

– Declined to adopt post-closing securities valuations reflecting the decline in the value of the nonmarketable SPAC securities portfolio (due to the reduced possibility that SPACs would complete de-SPAC transactions) as operative measures of value because, while post-merger evidence can help validate what was knowable at the merger date, this post-merger analysis should be treated as “informative but not dispositive;” and

– Declined to accept respondents’ expert’s adjustment for potential increases in underwriting expenses resulting from the SEC’s SPAC rule proposal since he found that it was too speculative, though he acknowledged that the proposal introduced “meaningful regulatory uncertainty.”

His analysis resulted in a valuation of $11.08 per share.

– Meredith Ervine