We’ve already seen other states apply their own appraisal statutes; we’ve covered Nevada before, for example. We’re now also seeing other courts look to Delaware courts for the tools and methods behind valuation methods as well, not only in appraisal actions. Thus, for example, an Arizona appeals court has cited Delaware appraisal cases in adjudicating the complex fraud and breach of fiduciary claims before it.
In Kottayil v. Insys Therapeutics, Inc., 2017 WL 3712196 (Ariz. Ct. App. Aug. 29, 2017), Arizona’s Court of Appeals upheld the discounted cash flow analysis employed by the trial court to award a minority shareholder a higher valuation than the company had determined in resolving the shareholder’s breach of fiduciary duty claim.
A minority shareholder of Insys had challenged Insys’ reverse stock split and Insys’ prior debt-to-equity conversion as diluting his shares. After a bench trial to decide the shareholder’s breach of fiduciary duty claim, the trial court determined that the share price for the debt-to-equity conversion was fair but the reverse stock split was not. In determining the fair value of the reverse stock split, the trial court found that traditional valuation methods proved unreliable and that the best approach was to define a range of values instead. The trial court set the low end of the range at $53.2 million, based on discounted cash flow analyses performed by third parties between 2004 and 2009, and the high end of the range at $151.5 million, based on IPO valuations. The trial court ultimately awarded the minority stockholder damages based on a valuation of $151.5 million, the highest value in that range. The Court of Appeals upheld the trial court’s ruling, finding that the discounted cash flow analyses the trial court relied upon for both the debt-to-equity conversion and the reverse stock split used reasonable inputs and methodology.
In discussing the valuation analysis, the appellate court found that valuation is not purely a matter for experts and that valuations by the company could be relevant to the determination as well, citing the well-known Delaware Dole decision. The appellate court also cited Delaware appraisal law in rejecting certain discounts to fair-value analysis that the parties urged the court to consider.
Delaware appraisal continues to impact other courts’ determinations of valuation approaches throughout the country and outside the US as well.
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