• Berger v. Pubco Corp.: Use of Control Premium in Delaware Appraisal Action
  • June 3, 2010 | Author: Kevin Miller
  • Law Firm: Alston & Bird LLP - New York Office
  • In a recent letter opinion, Berger v. Pubco Corp., 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.

    "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. [603 A.2d 796 (Del. 1992)] 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. [Id. at 806.] 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. [See Montgomery Cellular Holding Co. v. Dobler, 880 A.2d 206 (Del. 2005); In re Toys “R” Us, Inc. S’holder Litig, 877 A.2d 975 (Del. Ch. 2005)] Authoritative commentators have likewise observed that it is improper and illogical to add a control premium to a discounted cash flow valuation. [See SHANNON PRATT, THE LAWYER’S BUSINESS VALUATION HANDBOOK 359 (2000)] 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."

    Chancellor Chandler distinguished Berger from the facts underlying the Delaware Supreme Court's 1992 decision in Rapid-American Corp. v. Harris. In Rapid-American, the valuation methodology underlying the challenged valuation was a "sum of the parts" valuation of a parent holding company based on a comparable company analysis with respect to each of the parent holding company's three main operating subsidiaries. In Rapid-American, the court wrote:

    "Harris urged the trial court to add a premium at the parent level to compensate all of Rapid's shareholders for its 100% ownership position in the three subsidiaries.  WMA's valuation technique arrived at comparable values using the market price of similar shares. These shares presumptively traded at a price that discounted the "control premium. . . . Rapid, as a parent company owning a 100% interest in three valuable subsidiaries, was entitled to an adjustment of its inherent value as a going concern to reflect the economic reality of its structure at the corporate level. The valuation technique the trial court applied artificially discounted Rapid's ownership interest in its subsidiaries and deprived all of Rapid's shareholders of fair value."  603 A.2d 796, 806 (Del. 1992).