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Chancery Appraisal Decision Illustrates the Importance of Reliable Expert Testimony and Witness Credibility to Fair Value Determinations

Posted In Appraisal, Chancery

Manichaean Capital, LLC v. SourceHOV Holdings, Inc., C.A. No. 2017-0673-JRS (Del. Ch. Jan. 30, 2020).

Even when its role is to determine the fair value of shares in an appraisal proceeding, credibility matters to the Court of Chancery. Following a three-party business combination, Petitioners (former minority stockholders) exercised appraisal rights under 8 Del. C. § 262. Petitioners and Respondent agreed to use a discounted cash flow analysis to determine the fair value because there was insufficient market-based evidence of fair market value. But the parties’ experts disagreed on the input values and results of the DCF analysis, leaving the Court to “grappl[e] with expert-generated valuation conclusions that [were] solar systems apart.” Mem. Op. 2.

After a lengthy comparison of the competing DCF analyses, the Court concluded that Petitioners’ calculation (with minor adjustments) represented fair value. By contrast, Respondent’s position suffered from significant credibility issues. One of the executives involved in the business combination transactions requested a backdated valuation, misrepresented the date of the valuation in discovery responses, and continued with its misrepresentation until the eve of trial. The Court also found Respondent’s expert was not credible because elements of his valuation approach were bespoke, were not used in the industry, and relied heavily on the ipse dixit of the expert. Complicating things further, Respondent disagreed with its own expert’s calculations and conclusions. These factors, combined with the superior DCF analysis by Petitioner’s expert, led the Court to accept Petitioner’s fair value calculation with only minor adjustments.