An interesting question has surfaced lately: how does publicly traded stock get valued when held by an M&A target that is itself the subject of an appraisal action? Not a ton of guidance on this question, but we did locate a turn-of-the-century case worth dusting off: in Paskill Corp. v. Alcoma Corp., Delaware’s Supreme Court weighed in on this question.
Paskill involved determining the fair value of Okeechobee, Inc., a closed-end investment company acquired by its majority owner, Alcoma. In setting its purchase price, Alcoma applied a net asset value (“NAV”) approach; for Okeechobee’s marketable stocks and bonds, those assets would be valued by using their trading values on the New York Stock Exchange or other public listing just prior to the effective date of the merger.
In reviewing the valuation analysis, the Supreme Court held that it would not be appropriate to reduce the value of those assets by deducting future tax liabilities or speculative expenses relating to potential future sales that were not contemplated by Okeechobee on the date of the merger. Since the appraised company’s “operative reality” did not envision selling those assets, the appraisal exercise should value those assets as they were, on the assumption that they would continue to be retained by the company; any deductions for expenses associated with a make-believe sale, or tax lability resulting from such a hypothetical sale, were speculative and therefore inappropriate to subtract from the valuation analysis.
The Supreme Court further held that a NAV should not have been relied upon as the only criterion for measuring Okeechobee’s value, since NAV reflects a liquidating value and thus cant be the sole measure of an appraised stock, as Delaware appraisal requires a going-concern valuation. In sending the case back down for further proceedings, the Supreme Court invited the Chancery Court to use any admissible valuation technique based on reliable and relevant record evidence. By thus avoiding exclusive reliance on a NAV and being nimble enough to utilize the most appropriate valuation metric(s), the lower court would then be in the best position to determine the appraisal target’s “fair value” as a going concern on the date of the merger closing, consistent with the statutory mandate for appraisal.
*RKS thanks Summer Law Clerk Sean Ji, currently attending Columbia Law School, for his assistance with this post.