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In Appraisal Action, Court of Chancery Employs Discounted Cash Flow and Comparable Companies Methods To Value Shares Purchased by 98% Owner in Cash-Out Merger

Posted In Appraisal
Andaloro v. PFPC Worldwide, Inc., C.A. No. 20289, 2005 WL 2045640 (Del. Ch. Aug. 19, 2005). Andaloro v. PFPC Worldwide, Inc., C.A. No. 20336, 2005 WL 2045640 (Del. Ch. Aug. 19, 2005). This was a consolidated appraisal and equitable fiduciary duty action (the court did not address the fiduciary claim in this opinion). It arose out of a merger in which PFPC Worldwide, Inc. ("PFPC"), was acquired by its parent PFPC Holding Corp. ("Holding"), which held over 98% of PFPC's stock before the merger. (The merger was also approved by PFPC's ultimate parent and Holding's immediate parent, PNC Financial Services Group, Inc. ("PNC").) The merger resulted in the elimination of the minority shareholders' position in PFPC for $34.26 per share. Prior to the merger, PNC conceived a restructuring idea that would bring several of PNC's higher multiple businesses under one company, PFPC, which would eventually go public. To this end, PFPC purchased the businesses from PNC with money loaned to it by PNC. In addition, several key employees of PFPC (one of which was plaintiff Andaloro) were given the opportunity to buy into the new entity as minority shareholders, which many of them did by taking out loans to leverage their purchases--with the expectation that an IPO would take place within a few years. However, these plans were put off after PFPC purchased a large corporation and needed to integrate the two firms. This inability to go public gave rise to thoughts of other ways to give liquidity to the PFPC minority stockholders. PNC management settled on the idea of a cash-out merger, and thus, PFPC was purchased by Holding. The court concluded that the fair market value of PFPC on the merger date was $32.81 per share. The court reached that figure by giving two-thirds weight to its determination of PFPC's valuation under the discounted cash flow method of valuation, and one-third weight to its determination of PFPC's valuation under the comparable companies method of valuation. Authored by: R. Christian Walker 302-888-6974 rwalker@morrisjames.com