The appellants and respondents-below, Montgomery Cellular Holding Company ("MCHC"),
Because we find MCHC's claims of error to be without merit, we affirm the Court of Chancery's valuation of MCHC and its selection of a flat prejudgment interest rate. We conclude, however, that the Court of Chancery's denial of the minority shareholders' application for an award of attorneys' fees and expert fees constituted, in the circumstances of this case, an abuse of discretion. Accordingly, we reverse the Court of Chancery's denial of an award shifting those fees and for that limited purpose, remand this case for further proceedings.
MCHC, the corporation that is the subject of this appraisal, was part of a complex holding company structure. MCHC itself was a holding company that had no operating assets, MCHC's sole asset being 100% of the stock of Montgomery Cellular Telephone Co. ("Montgomery"). Montgomery
What follows is a capsule summary of the background facts, which are based upon the extensive findings made by the Court of Chancery in its well-written Opinion.
Palmer owned controlling interests in 16 cellular systems in Georgia, Florida, and Alabama, including a 94.6% interest in MCHC. Some of those systems were wholly owned and the rest were majority-owned. Eight of those cellular systems were Metropolitan Statistical Areas ("MSAs") and eight were Rural Service Areas ("RSAs"). The main difference between an MSA and an RSA is population density. An MSA has greater density, while an RSA is much more spread out. An MSA is generally more valuable, because an MSA usually has a higher penetration rate due to its demographics, such as residents with higher income and residents who are more conversant with wireless devices. Moreover, an MSA usually has a lower cost structure than an RSA because it does not need to build as many cell towers to serve the same number of users. Montgomery, which encompasses the area surrounding Alabama's state capital, was classified as an MSA.
As a group, Palmer's holdings formed a contiguous cluster of cellular systems in the southeastern United States. Montgomery, located on the western edge of Palmer's cluster, was at the center of the cellular systems in Alabama. That geographic location is important because the center of Alabama is a crucial area for any company that wants to provide substantial regional coverage, and Montgomery's system was located in Alabama's most populous area. The more populous areas commonly have both higher penetration rates and users that spend more per month for their cellular phone usage. For those reasons, Montgomery, and therefore MCHC, was one of Palmer's most valuable holdings.
In 1997, Price entered into discussions with various cellular telecommunications system operators about a possible sale of Palmer's cellular systems. Those discussions continued into 2000, at which time Price hired the investment bank, Donaldson, Lufkin & Jenrette ("DLJ"), to solicit interest in acquiring Palmer. DLJ's efforts resulted in three potential acquirers: Verizon and two other parties. Ultimately, Verizon was the potential acquirer with whom Palmer negotiated an acquisition.
After two months of due diligence, Verizon and Price negotiated a transaction agreement that was executed on November 14, 2000. In that transaction, Price agreed to sell Palmer to Verizon for $2.06 billion. The consummation of the transaction,
Because Palmer did not control 100% of the stock of certain of its subsidiaries, including MCHC, the Verizon agreement also obligated Price to use commercially reasonable efforts to acquire those minority shareholder interests. If Palmer failed to acquire the minority interest in MCHC, the agreement allowed Verizon to reduce the purchase price by a corresponding amount. The price reduction would be computed by multiplying the minority shareholders' pro rata share of FY 2000 EBITDA
The structure of the Verizon merger agreement gave Price a strong incentive to squeeze out all the minority shareholders of Palmer's subsidiaries at a price that was lower than Verizon's corresponding price reduction. Thus, any purchase of a minority position using an EBITDA multiple of less than 13.5 guaranteed more money for Price if the Verizon deal closed. Having no credible reason to expect the Verizon deal not to close, Price caused Palmer to go forward with the cash out mergers.
On June 30, 2001, Price caused Palmer, which owned more than 90% of the stock of MCHC, to eliminate the minority shareholder interest by a short form merger under 8 Del. C. § 253. In determining the price to be paid to MCHC's minority shareholders, Price made no effort to obtain an independent valuation, despite Verizon's repeated suggestions that it do so. When questioned about Price's reasons, Price's CFO testified that Price's CEO did not want to hire a financial advisor to perform a valuation because he viewed such valuations as "very costly." Instead, in fixing the MCHC merger price, Palmer purported to rely on Price's settlement of an appraisal action with the dissenting minority shareholders of a different Palmer subsidiary, Cellular Dynamics ("CD"). That "CD settlement" is next described.
CD, like MCHC, was the operator of a non-wireline cellular company in the southeastern United States and, like MCHC, was majority-owned by Price. In 1999, Price eliminated the minority shareholders of CD by a short form merger. Litigation ensued. After a lengthy negotiation using POPs
Although Price had eliminated the minority shareholder interest in MCHC to
The Valuations Of The Trial Experts and The Decision Of The Court Of Chancery
During the three-day trial, the parties presented their respective positions through the testimony of their valuation experts.
Although both experts used similar methods to value MCHC, Sherman looked to third party experts to create his forecasts, whereas Gartrell did not consult outside appraisers or other sources of relevant information. Moreover, only Sherman performed a comparable transaction analysis. The experts' "significantly divergent" results, the Court of Chancery found, were attributable to those two differences in approach.
A. The Respondents' Expert Testimony
The respondents' expert, Gartrell, employed two valuation methodologies: a comparable company analysis and a discounted cash flow ("DCF") analysis. In his comparable company analysis, Gartrell focused on 14 rural and regional cellular companies. From that data set he derived revenue multiples of 3.5 for the rural companies and 3.3 for the regional companies, and he derived EBITDA multiples of 7.1 for the rural companies and 15.2 for the regional companies.
To eliminate the minority discount embedded in those multiples, Gartrell added a control premium of 35%, which was the mean of his range of control premia (30% to 40%). Applying that 35% premium, Gartrell increased the median revenue multiples from 3.5 to 4.0 for rural cellular carriers, and from 3.3 to 4.0 for regional carriers; and he increased the median EBITDA multiples from 7.1 to 8.4 for rural cellular companies and from 15.2 to 18.9 for regional companies.
Having generated revenue and EBITDA multiples, Gartrell proceeded to determine their "strategic weights," in order to "reflect the optimal mix of rural and regional business strategies" for MCHC. Gartrell arrived at strategic weights of 79% for rural values and 21% for regional values, which resulted in an initial valuation for MCHC of $122.7 million. Gartrell determined that valuation was too high, based on MCHC's "combinatorial deficiency," because (in Gartrell's view) cellular companies are "significantly more valuable in specific combinations" and Gartrell viewed
Gartrell used the C-Block auction as a model for valuing MCHC because (in his judgment) MCHC should be valued as an isolated, single license entity, like the start-up PCS bidders at that auction. Applying Gartrell's total 48% combinatorial discount resulted in a "stand-alone" value for MCHC of $63.3 million. To that amount Gartrell then added the outstanding inter-company receivable, arriving at a final valuation, based on his comparable company analysis, of $80.5 million.
Gartrell also performed a DCF valuation of MCHC. Based on MCHC's financial performance for FY 2000 and its year-to-date performance as of June 30, 2001, Gartrell created his own forecasts of MCHC's future financials for a five-year period. He then adjusted those forecasts to subtract the bad debt expense that resulted from MCHC's installation of a new billing system. For his growth rate, Gartrell used the long-term GNP rate, which was 3.3%. Gartrell reasoned that the long-term GNP was the correct growth rate because MCHC had already saturated its market and therefore could not grow faster than the overall economy. Using those growth rates for his DCF analysis, Gartrell valued MCHC at $59.1 million, to which he added the $17.2 million inter-company receivable, to reach a final DCF valuation of $76.3 million.
Thus, Gartrell's comparable company analysis and his DCF analysis resulted in a valuation of MCHC that ranged from $76.3 million to $80.5 million—values both lower than the unilaterally set price that had been paid to the minority shareholders in the MCHC merger. Having no reason to differentiate between those two values, Gartrell averaged them to arrive at his final valuation for MCHC of $7,840 per share.
The Court of Chancery found that Gartrell's valuation approach was legally and factually flawed, and must be disregarded in its entirety, for three reasons. First, the Vice Chancellor found that Gartrell's overall theoretical framework was invalid as a matter of law, because Gartrell's "stand alone" approach valued MCHC as if it were not a going concern that had contractual relationships with other cellular providers. In fact, the Court found, MCHC had contractual relationships with Palmer and Palmer's larger preexisting networks, and those relationships represented value to which MCHC's minority stockholders were entitled. By valuing MCHC on a counterfactual "stand alone basis," the Court concluded, Gartrell "intended to deprive the minority stockholders of existing value as of June 30, 2001."
Third, the Court of Chancery found that Gartrell's comparable company analysis was invalid because of his methodology and his data. To begin with, Gartrell switched between the mean and the median at critical points. To compute his EBITDA multiples, Gartrell used figures that were the median of their data set, but for every other computation he used the mean. Had Gartrell used the mean numbers consistently throughout, the value of MCHC based on EBITDA would be over $163 million which, when added to the non-operating assets, would be $183 million — a figure much closer to the value reached by the petitioners' expert.
Lastly, Gartrell chose inputs (based on the C-Block auction) that were not relevant to a valuation of MCHC, because the C-Block auction suffered from "obvious and glaring" flaws which included outdated data, different technology, an emerging market and inexperienced bidders. The result, the Court found, was that the C-Block data "[could] not be termed comparable in any reasonable sense of the word."
MCHC has not appealed the Court of Chancery's rejection, in its entirety, of the valuation of its expert, Gartrell.
B. The Petitioners' Expert Testimony
The petitioners' expert, Marc Sherman, performed three different financial analyses of MCHC: a comparable transactions analysis, a DCF analysis, and a comparable company analysis. In his comparable transactions analysis, Sherman split the selected comparable transactions into three categories: similar sized transactions, the initial Verizon transaction, and the CD settlement. For the similar sized transactions category, Sherman considered five transactions that occurred between May 2000 and January 2001, each involving a cellular company with approximately the same number of POPs. The remaining
Sherman then analyzed each category using his four cellular system metrics (POPs, subscribers, EBITDA, and revenue). For each metric, Sherman computed a value of MCHC based on the category of comparable transactions, and then weighted these values to derive his final overall valuation. Sherman did that as follows: he first weighted the metrics based on their importance in valuing cellular companies. He then weighted the category of comparable transactions within each metric. The result of that process is shown infra on the table, which breaks down Sherman's categories, metrics, valuations, and weightings as follows:
Metric Category Category Valuation Weighting Weighting POPs45% Verizon Transaction $199,278,316 20% CD Settlement $199,286,698 10% Similar Sized Transactions $136,352,297 15% Subscribers20% Verizon Transaction $226,758,135 15% CD Settlement $225,865,136 5% Operating Cash Flows25% Verizon Transaction $160,650,176 20% CD Settlement $226,738,142 5% Revenue10% Verizon Transaction $236,517,971 7% CD Settlement $224,240,681 3% Total100% 100%
Multiplying the valuations by their respective weightings, Sherman computed a value of $192 million based on comparable transactions. To that figure he added the $20 million value of the non-operating assets to arrive at a comparable transactions value for MCHC of $212 million.
Sherman also performed a DCF analysis. Because of the lack of management projections, Sherman created forecasts of MCHC's cash flows based on predictions by others for the cellular industry and the economy. In creating those forecasts, Sherman relied primarily on Paul Kagan, an outside industry expert.
The next step in Sherman's DCF analysis was to determine the discount rate using a weighted average cost of capital ("WACC") approach. Applying that approach to the inputs he determined for each component of the WACC formula, Sherman arrived at a discount rate of 13.25%.
From these inputs, Sherman arrived at a final enterprise (DCF) valuation of $150 million for Montgomery as a going concern, operating asset of MCHC. To that figure Sherman added the value of Montgomery's non-operating assets, which increased his valuation to $170 million. Finally, to that sum, Sherman applied a control premium of 31%, thereby increasing his DCF valuation to $216 million.
In his third (comparable company) analysis, Sherman found only two comparable companies, neither of which was similar in size to Montgomery. Sherman excluded companies that had international operations, multiple lines of business, or prepaid customers, as well as companies that used PCS technology. After selecting his comparable companies, Sherman applied the same metrics that he used in his comparable transactions analysis and gave them the same weight. That approach resulted in a valuation of $206 million. After adding in the value of the non-operating assets, Sherman's ultimate comparable company valuation of MCHC was $226 million.
Thus, Sherman's three analyses valued MCHC within a range of from $212 million to $226 million. Sherman derived his final fair value by combining the results of his three analyses into a weighted average, giving 80% weight to the comparable transactions value, 15% weight to the DCF value, and 5% weight to the comparable company value. Sherman's heavy weighting of the comparable transactions analysis reflected his judgment that the transaction data, particularly the initial Verizon transaction price, were the best indication of value for MCHC. In contrast, Sherman gave little weight to the DCF analysis because of his concerns about the reliability of MCHC's financial data and the lack of management projections. He gave even less weight to the comparable company valuation because of the scarcity of publicly traded companies to which MCHC could reliably be compared. Combining the results of the three analyses into a weighted average yielded a fair value for MCHC of $213,455,619, or $21,346 per share.
In making its independent determination of MCHC's fair value, the Court of Chancery adopted Sherman's overall valuation framework, and most — but not all — of Sherman's inputs. The Court made adjustments to some of the inputs that it did not adopt. The result was to reduce Sherman's valuation of $213,455,619 ($21,346 per share) to a final valuation of
Because the Vice Chancellor's valuation analysis is discussed more extensively elsewhere in this Opinion, at this point we summarize the Court's critical valuation rulings only briefly.
First, with respect to the comparable transaction analysis, the Vice Chancellor determined that the Verizon transaction price and the CD settlement price were valid inputs. But, the Court adjusted Sherman's CD settlement price by eliminating what Sherman perceived (incorrectly, the Court determined) to be a minority discount. The Court then independently increased the CD settlement figure ($470 per POP) by 15% to eliminate a so-called "settlement haircut," to arrive at a value of $540.50 per POP.
Second, the Court adjusted Sherman's DCF valuation by eliminating the 31% control premium that Sherman had added to his DCF value.
Third, and most significant, the Court adjusted the weights that Sherman had accorded to the values derived by his three valuation methods. Sherman had weighted the comparable transaction value at 80% of total fair value. Because the effect of that weighting was to give the Verizon transaction an overall weight of 50% — a weight the Court found to be "too significant" — the Vice Chancellor reduced the weight accorded to the comparable transactions valuation from 80 to 65%.
Finally, because Sherman had corrected the figures derived from MCHC's financial statements in a reasonable manner, and also had looked to third party authority for guidance on other inputs, the Court determined that the 15% weight Sherman had accorded to the DCF valuation should be increased to 30%.
MCHC's Claims Of Error On Appeal
On appeal, MCHC does not challenge the Court of Chancery's adoption of Sherman's overall valuation framework. Instead, MCHC limits its attack to selected inputs to the valuation model that Sherman used and that the Vice Chancellor adopted. MCHC also challenges the prejudgment interest rate adopted by the Court.
Specifically, MCHC contends that the Court of Chancery erred in four different respects, namely by: (1) including in its comparable transactions analysis the price that Verizon Wireless initially agreed to pay to acquire Palmer; (2) adding a 15% premium to the price that the minority shareholders of CD, a separate Palmer subsidiary, had agreed to accept to settle their appraisal action; (3) subtracting the management fees that Palmer charged to MCHC, as reported in MCHC's financial statements; and (4) adopting a flat prejudgment interest rate rather than a variable rate that would have reflected the periodic changes in the federal discount rate. Those claims are next addressed.
MCHC's Challenges To The Court Of Chancery's Factual Findings
MCHC's first three claims of error challenge the Court of Chancery's factual
1. The Verizon Transaction
MCHC's first claim of error is that the Court of Chancery improperly included the initial "Verizon transaction" price in its comparable transactions valuation of MCHC. The Verizon transaction resulted from an agreement that Price negotiated with Verizon in November 2000. In that agreement, Verizon contracted to acquire Palmer for $2.06 billion.
The accomplishment of the initial Verizon transaction was conditioned on the completion of an initial public offering ("IPO") of Verizon Wireless.
On July 31, 2001, one month after the MCHC-Palmer merger was accomplished but before the Verizon-Palmer transaction was scheduled to close, Price and Verizon announced that the Verizon transaction would not go forward as planned, because Verizon would not be able to complete its IPO by the contractual September 30, 2001 deadline. Following that announcement, Price and Verizon negotiated a new agreement wherein the purchase price of Palmer was reduced from $2.06 billion to $1.7 billion. On August 15, 2002, Verizon purchased Palmer for that reduced price.
The minority shareholders' expert, Marc Sherman, treated the initial $2.06 billion Verizon transaction as a comparable transaction. To determine what portion of that aggregate price should be attributed to MCHC, Sherman divided the total $2.06 billion purchase price by each of four financial metrics commonly used in valuing cellular systems, and then applied the resulting price per metric to MCHC's corresponding metrics to determine what
On appeal MCHC argues that the Vice Chancellor's inclusion of the Verizon transaction in its comparable transactions analysis was erroneous, because: (a) the Court failed to "back out" the synergistic elements of the Verizon transaction price, as Delaware law requires, and (b) the Verizon transaction did not reflect MCHC's going concern value, again as Delaware appraisal law requires. We conclude that the Court of Chancery did not err in either respect.
(a) The Treatment Of The Synergies In The Verizon Transaction
MCHC argues that the Court of Chancery erroneously included the Verizon transaction, because the transaction price contained synergistic elements of value whose inclusion is proscribed by 8 Del. C. § 262. That statute requires the Court of Chancery to appraise the subject shares by "determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation."
Those synergistic elements were not excluded here, MCHC claims, because the price Verizon agreed to pay for Palmer reflected the "combinatorial value" that Verizon expected to realize by acquiring 16 cellular markets (including MCHC) in a single transaction. MCHC argues that Palmer had unique strategic value to Verizon, because Verizon had a particular need to acquire cellular systems in the southeastern United States to fill the gaps in its national network. The cluster of systems that Verizon acquired, plus Palmer's unique strategic value to Verizon, were (MCHC urges) synergies that should have been excluded from the purchase price before the Verizon transaction could be considered in any valuation of MCHC. Because that was not done, the argument goes, the entire comparable transactions valuation was fatally flawed.
The Court of Chancery acknowledged in its Opinion that the initial Verizon transaction price represented a value "that implicitly incorporated whatever synergies [Verizon]
That conclusion is supported by the evidence. The Verizon merger with Palmer did not add any synergistic business value to MCHC (as the Court found) because Montgomery was a metropolitan statistical area (MSA), which is generally more valuable than a rural service area (RSA), and Montgomery had superior demographics relative to Palmer's other cellular holdings.
The Court of Chancery was unable precisely to quantify those "deal-making" synergies, because MCHC did not present any reliable evidence at trial of what those synergies were worth. Having received no helpful evidence from MCHC, the Court of Chancery had to—and did—account for the synergies in a different way, namely, by reducing the total weight accorded to the comparable transactions component of the overall valuation, from 80% to 65%.
In a statutory appraisal proceeding, each side has the burden of proving its respective valuation positions by a preponderance of the evidence.
In our most recent decision in Cede & Co. v. Technicolor, Inc.,
(b) Whether Including The Verizon Transaction Price Was Inconsistent With a Going Concern Valuation
MCHC next contends that including the Verizon transaction in its comparable transaction analysis led the Court of Chancery to commit reversible error by not valuing MCHC as a going concern. Delaware law requires that in an appraisal action, a corporation "must be valued as a going concern based on the `operative reality' of the company as of the time of the merger."
MCHC argues that the Verizon transaction was not part of MCHC's "operative reality" for two reasons. First, the transaction was conditioned on the successful completion of Verizon's IPO. Second, at the time of the MCHC-Palmer merger, the transaction was not expected to close. MCHC characterizes the Verizon transaction as a mere "option" whose exercise was entirely within Verizon's control and which neither Price nor Verizon realistically expected to close at the time the MCHC-Palmer merger occurred. The Court of Chancery found otherwise, however, and the record supports its finding.
Rejecting MCHC's contrary argument, the Vice Chancellor also found as fact that at the time of the Palmer-MCHC merger the Verizon transaction was expected to close. As the Court pointed out, there were no contemporaneous press releases or other communications to the market that Price or Verizon did not expect the deal to go through. And, at that time the securities industry continued to report that the deal was going forward as planned. Not until July 31, 2001 (one month after the Palmer-MCHC merger took place) did the parties publicly announce that the sale of Palmer to Verizon would not close. The Court characterized as "self-serving" the testimony of Price's CFO, and of its counsel, that at the time of the MCHC merger, Palmer and Price did not think Verizon would successfully complete the IPO. To the contrary (as the Court pointed out), the fact that Price caused Palmer to initiate a cash-out merger with MCHC was clear proof that Price did expect the Verizon deal to close.
Given that record and those findings, the Court of Chancery correctly held that the Verizon transaction was a known element of future value that was susceptible of proof at the time of the merger.
2. Adjustment Of The CD Settlement Price To Eliminate The Settlement Discount
MCHC's second claim of error is that the Court of Chancery improperly adjusted the "CD settlement" price to eliminate what the Court regarded as a "settlement haircut." MCHC argues that the record does not support that adjustment. MCHC is incorrect.
The CD settlement was a settlement of litigation that arose out of Price's elimination, in a short form merger, of the minority shareholders of Cellular Dynamics ("CD"), a cellular company located in the southeastern United States. The minority shareholders of CD sued, and after protracted negotiations the parties agreed to a settlement price of $470 per POP. For purposes of valuing MCHC, both parties agreed that the CD settlement was a comparable transaction. Accordingly, Sherman utilized the $470 per POP metric in performing his comparable transactions analysis.
The Vice Chancellor upheld Sherman's use of the CD settlement price, but adjusted that price to reflect what the Court described as a "settlement haircut;"
On appeal, MCHC contends that there was no evidence of record that the CD settlement reflected a "settlement haircut," or that the selection of a 15% adjustment was appropriate. We disagree. There was ample evidence to support the Court of Chancery's finding that the CD settlement reflected a discount from CD's fair value. The record included an exchange of several letters between Price and CD during settlement negotiations. Those letters included an offer by CD, on December 19, 2000, to settle the litigation for $500 per POP. In that December 19 letter, the CD minority shareholders specifically stated that the $500 per POP offer was less than CD's fair value, but was being made in an effort to resolve the matter quickly. That letter evidences that CD's minority shareholders were willing to settle for an amount below fair value to avoid the costs and delays of litigation. Sherman's testimony also supports that conclusion. Sherman testified that CD's minority shareholders would be expected to take less for their shares of stock than the corporation's going concern value, to avoid "the continuing expense and risk of litigation." The December 19 letter, together with Sherman's testimony, provided sufficient support for the Court's finding that $470 per POP represented a settlement for less than CD's going concern value.
Although there was no evidence of the precise magnitude of the actual CD settlement discount, the Court of Chancery did not err by selecting 15% as a reasonable measure. That percentage was based on evidence that the CD minority shareholders had accepted a price lower than CD's fair value, as well as the Court of Chancery's extensive expertise in the appraisal of corporate enterprises—an expertise that this Court has recognized on several occasions.
3. Eliminating The Management Fees Paid by MCHC To Palmer As An Input To The DCF Valuation
MCHC's third claim of error challenges the Court of Chancery's adjustment of MCHC's financial statements to eliminate from the DCF valuation the management fees Palmer had charged MCHC.
Because there were no management projections upon which Sherman could rely to project MCHC's future cash flows, Sherman had to create his own forecasts. To do that he relied upon various sources, including MCHC's financial statements.
The Court of Chancery found that Sherman's subtraction of the management fees was appropriate, and the record amply supports that finding. None of Price's officers who testified were able to explain what management services Palmer had provided to MCHC, or how those management fees were calculated. Indeed, Price's CEO characterized the fees (under oath) as "accounting bullshit." The Court was also troubled by the fact that Palmer charged management fees only to its subsidiaries that had minority shareholders, but not to those subsidiaries that Palmer wholly owned. Tellingly, after Palmer eliminated MCHC's minority shareholders in the merger, Palmer stopped charging management fees to MCHC.
That evidence strongly supports the elimination of the management fees as an expense. Accordingly, we uphold the Court's determination that Sherman properly eliminated those management fees in conducting his DCF valuation analysis.
The Adoption Of a Flat Prejudgment Interest Rate
Finally, MCHC claims that the Court of Chancery erred by setting the prejudgment interest rate at a flat 8.25%. That rate represented the legal rate of interest, which is defined by 6 Del. C. § 2301(a) as the federal discount rate plus 5%. MCHC does not dispute the Court's adoption of the legal rate of interest. What MCHC contends is that the Court was required to adjust that rate to reflect the periodic changes to the federal discount rate.
MCHC argued before the Court of Chancery that the appropriate rate of interest was the legal rate. The Court accepted MCHC's argument. MCHC did not argue that the legal rate should track the historical variations in the federal reserve discount rate during the prejudgment interest period. Thus, the Court adopted a flat rate of 8.25%, based on the 3.25% federal discount rate on the merger date. Although the Court noted that it would be more accurate to adopt a varying rate that reflected changes to the federal discount rate over the course of the litigation, the Vice Chancellor adopted the flat rate in this case, because MCHC had presented no evidence of any changes in the federal discount rate.
Despite that, MCHC now argues that the Court of Chancery erred by not adjusting the 8.25% legal rate at "regular intervals" to reflect changes in the federal discount rate between the merger date and the date of final judgment. MCHC did not present that argument to the Court of Chancery during post-trial briefing, however, nor did it introduce evidence of any federal reserve discount rate other than 3.25%. In essence, MCHC contends that the Court of Chancery should have, sua sponte, taken judicial notice of the changes in that discount rate, because those rates are published and readily available in an online database.
This argument fails for two reasons. First, this Court will not entertain a claim or argument that was not fairly presented to the trial court.
The Minority Shareholders' Cross-Appeal
On their cross-appeal, the minority shareholder petitioners claim that the Court of Chancery erred by refusing to award their attorneys' fees and expert witness fees against MCHC. They contend that the Court of Chancery's own findings establish bad faith on the part of MCHC sufficiently egregious to justify fee-shifting, and that the Court of Chancery's denial of a fee-shifting award in this circumstances constituted an abuse of discretion.
The Court of Chancery rejected the minority shareholders' application for a fee-shifting award because, in the Court's view, MCHC's conduct was not sufficiently egregious to justify fee-shifting.
Delaware follows the "American Rule," whereby a prevailing party is generally expected to pay its own attorney's fees and costs.
In this case, the Court of Chancery's factual findings, all firmly supported by the record, compel the conclusion that MCHC's conduct during the cash-out merger and during the course of the appraisal proceeding rose to the level of bad faith that both this Court and the Court of Chancery have found justifies an award of attorneys' fees. In Johnston v. Arbitrium (Cayman Is.) Handels AG,
When juxtaposed against the conduct found to constitute bad faith under those precedents, MCHC's conduct must similarly be regarded as demonstrative of bad faith. The Court of Chancery found that Price's CEO, Robert Price, set the merger price unilaterally, after ignoring repeated suggestions from Verizon that he hire an independent financial advisor. The resulting unfairly low price, which was not based on any legitimate valuation of MCHC, forced the minority shareholders to initiate an appraisal action—their only remedy in a short form merger.
MCHC's conduct during the litigation also interfered with the Court's performance of its duty to determine the fair value of the company, and unnecessarily prolonged and increased the costs of the litigation. MCHC repeatedly refused to produce documents that had been requested in discovery. The most egregious instance involved the minority shareholders' request for the production of documents—including computers—relating to allocations and intercompany loans between the respondent entities. MCHC refused to produce those documents until the Court of Chancery ordered them to do so nine months after the initial document request. Even after that order was issued, MCHC could not produce most of the information requested because MCHC had destroyed
Additionally, the Court of Chancery found that Robert Price, the CEO of Price and MCHC, had lied under oath about the valuation method he had used to determine the merger price, claiming—in the face of overwhelming evidence to the contrary—that the merger price was based on the CD settlement's EBITDA multiplier.
Finally, MCHC introduced, and relied upon, expert valuation testimony that the Court found was "fatally flawed" in both its methodology and its data. The Court was forced to reject completely the valuation testimony of MCHC's expert, Gartrell, because the Vice Chancellor found that testimony was not credible and was designed "to deprive the minority shareholders of the existing value" in the company.
Given the overwhelming evidence that the respondents repeatedly acted in bad faith to obstruct if not prevent a fair valuation of MCHC, we are constrained to conclude that the Court of Chancery abused its discretion by declining to award attorneys' and expert witness fees in favor of the minority shareholders and against the respondents. We therefore reverse the Court's judgment in that limited respect, and remand this case for a determination of the minority shareholders' reasonable attorneys' fees and expert witness fees.
For the foregoing reasons, the judgment of the Court of Chancery is affirmed in part, reversed in part, and remanded for proceedings consistent with the rulings in this Opinion.