We’ve written before about how appraisal-style valuation methodology–with direct reference to Delaware appraisal cases–is sometimes used in non-appraisal cases. In December 2017, Vice Chancellor Glasscock, of the Delaware Chancery court, handed down Wright v. Phillips, No. CV 11536-VCG, 2017 WL 6539383, at *1 (Del. Ch. Dec. 21, 2017), a case involving the valuation of business entities not in an appraisal context but rather as the result of a business (and marital) divorce.
Wright concerned a recycling and shredding business composed of three business entities originally 50 percent owned by each of a husband and wife duo. With the parties divorcing in 2013, the business continued until 2015, when the parties reached an impasse and a corporate deadlock ensued. After some litigation, the parties agreed that one would buy out the other; but perhaps unable or unwilling to trust each other’s valuations, the chancery was required to set the value.
Vice Chancellor Glasscock first observed that the business was a going concern, and thus a fair value analysis–the kind invoked by Section 262 of Delaware’s appraisal law–was required. The experts in the case used an “income approach analysis,” which the court accepted and discussed. The Vice Chancellor relied on one of the expert reports as an initial number, and then applied (1) an addition for the tax value of one of the entities tax status as an S corporation rather than as a C corporation; (2) applied a 10 percent marketability discount; and (3) required removal from the valuation any calculation of additional income attributable to discharging the non-continuing partner (what the court referred to as “synergies”).
Tax implications, discounts for lack of marketability, and valuations not including synergies are all issues found in appraisal; little wonder then that the Vice Chancellor cited an appraisal case, SWS, as part of his analysis in this non-appraisal matter. The corpus of appraisal law is likely to continue to provide guidance to Delaware courts–and non-Delaware courts–on valuation issues.
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