Part 10- Corporations, Chapter 44: Shareholders’ Rights and Liabilities, Doc 3

In Montgomery Cellular Holding Co., Inc. v. Dobler, the Delaware Supreme Court examined how to fairly determine the value of minority shares in a corporate buyout of Montgomery Cellular Holding Company (MCHC) following its acquisition by Verizon, where the acquiring corporation, Price, may have undervalued shares to benefit financially. Here’s a breakdown of the key points and the court’s findings: Background and Dispute   Corporate Structure: Price owned Palmer, which in turn owned MCHC, a holding company for a cellular network based in Montgomery, Alabama. Verizon agreed to purchase Palmer’s holdings, but required Price to buy out minority MCHC shareholders. Minority Share Buyout: Price did not seek an independent valuation and proposed a buyout price of $8,102.23 per share based on its prior buyout of a different subsidiary, Cellular Dynamics (CD), using an EBITDA multiplier. Minority shareholders contested this valuation, seeking a fairer price based on other valuation metrics. Valuation Methods  Experts' Methods: The minority shareholders’ expert, Sherman, valued MCHC at $21,346 per share using three valuation methods: comparable transactions, discounted cash flow (DCF), and comparable company analysis, whereas MCHC’s expert, Gartrell, valued it at $7,840 per share using only two methods (comparable company analysis and DCF) and was found by the court to have methodological flaws. Key Findings and Valuation Issues 1. Comparable Transactions and Verizon Deal: o Use of the Verizon Purchase Price: Sherman included the Verizon purchase price of Palmer as a comparable transaction, which MCHC contested, arguing it included speculative synergies not reflective of MCHC’s standalone value. o Court’s Ruling: The court upheld the inclusion of the Verizon deal but adjusted its weight to 65% (down from 80%), accounting for synergies unique to Palmer. 2. Adjustment for the CD Settlement Price: o Settlement “Haircut”: The court adjusted the CD settlement price from $470 per POP to $540.50 per POP, finding that the original settlement price included a discount to avoid litigation costs. This 15% adjustment was deemed reasonable based on CD's minority shareholders' statements during settlement negotiations. o Outcome: This increased MCHC’s valuation, reflecting a more accurate fair value of the shares without litigation-induced discounts. 3. Elimination of Management Fees in DCF Analysis: o Management Fees as a Pretext: MCHC’s financial records included fees paid to Palmer, which Sherman argued were unjustified and inflated to reduce MCHC's profitability artificially. o Court’s Decision: The court sided with Sherman, agreeing to eliminate these fees from MCHC’s cash flow projections to ensure a more accurate DCF analysis. Final Valuation and Court’s Decision The Delaware Supreme Court upheld the Court of Chancery’s decision, which adjusted Sherman’s calculations, arriving at a final share value of $19,621.74. This decision highlighted the court’s commitment to appraising shares at fair market value based on going concern principles and excluding merger-specific synergies unless they reflect the company's “operative reality.” The court supported the Chancery’s adjustments, finding that MCHC’s challenges lacked substantive evidence to prove a miscalculation. Implications This case reinforces the principle that fair valuation in minority shareholder buyouts should account for going concern value and exclude speculative synergies that don’t reflect standalone operations. Furthermore, the Delaware courts will uphold valuation adjustments if based on reasonable industry practices and substantiated expert testimony, especially when the opposing party fails to provide credible alternative evidence.