Cede v. Technicolor
Cede & Co. v. Technicolor
• Where is the value coming from in this
transaction?
• How much?
• Who should get it?
• Do minority shareholders need protection?
Technicolor deal
• The target Technicolor was a 20th century American icon.
• Unfortunately, T chose to invest in a series of One Hour
Photo stores
– proved disastrous and the company’s stock fell from $22 to
around $8.
• At this point, Ronald Perelman, of Revlon fame, offered to
acquire the company for $20, a handsome premium.
• Perelman plan
– sale of several businesses and the closing of One Hour Photo
– contrast to the Kamerman plan then being followed.
Technicolor deal 2
• Kamerman, existing CEO, negotiated with Perelman (an arm’s
length negotiation)
• agreed on a price of $23 ; Technicolor board agreed.
• The deal was announced as a two step meager with the same
consideration in both steps.
• More than 83% of the shareholders received cash for shares in TO.
• Those who did not tender knew that a cash‐out merger was coming
and that they would receive the same price.
• The new controlling shareholders, upon gaining control of the
board, set a date for follow‐on cash out merger.
Technicolor plaintiffs
• holders of about 4% of the Technicolor shares
– had been purchased in June when the stock was selling for about $10
– most of the way down from its high of $22 to its low of $8.37 in September
prior to the Perelman offer.
• now being offered $23 by a bidder who intended to change how
Technicolor does business
• Their response is not to sell at $23 and to file for appraisal for fair value
they say is more than $23.
– (BOD in an arm’s length negotiations agreed to this price (2.5 times the
prior market price) and the great majority of shareholders have concurred
by tendering.)
• plaintiffs believe they have a claim to a greater share of the gains being
created by this change in control
Technicolor: Long Litigation History
•
January 1983: Merger & Lawsuit
•
1988 S Ct.: Ch. Ct should not have required election of remedies before trial
•
1990 Ch. Ct trial (47 days) of both claims; battle of experts ($13.14 vs. $62.75)=$21.60
•
1991 Ch Ct on FD: no harm no foul
•
1993 S. Ct remand: appraisal should not have been first; entire fairness as standard
•
Ch. Ct (1994) on FD-entire fairness met
•
1995 S. Ct. affirms (contrast to Weinberger)
•
Ch. Ct (1995) on appraisal
•
–
$21.60 again
–
compound interest @ 10.32% pre-judgment; simple interest @10.5% post-judgment
–
Excluding what?
1996 S. Ct. now reverses appraisal
Technicolor holding
• Under the merger statute plaintiffs are entitled to
the fair value as of the day of the merger. What
date is that?
• turns out to be a day in late January, 1983, about
six weeks after the closing of the tender offer
– presumably the soonest a shareholder’s meeting
could be held under notice provisions provided by
state law and disclosure required by federal securities
law.
• What had happened in those six weeks?
Technicolor holding 2
• As trial court noted, Perelman began to dismember a “badly
conceived mélange of businesses”
– one division retained
– One Hour Photo and other under-performing divisions sold.
• Are shareholders are entitled to any gains arising from the
replacement of the Kamerman plan by the Perelman plan?
• The court below took economic approach looking at future value
that would not exist but for the takeover.
• But the Supreme Court took a more literal view
– Accorded plaintiff the full proportionate value of its shares as of late
January so that “value added to the going concern by the “majority
acquirer,” during the transient period of a two step merger, accrues to
the benefit of all shareholders.” (Casebook at 325).
Appraisal
• So . . . Merger date is after control change and
asset restructuring is already underway
• What does the court’s opinion do in terms of
allocating the gains from the transaction?
• As a shareholder, what incentive does it give
you to change your behavior?
• As a bidder, what incentive does it give to
change your behavior?
Technicolor appraisal timeline
Smart
Perleman
plan
Target
value
merger
Cash flows
anticipated
Tender
offer
time
Dumb
Kamerman
plan
Merger
date/appraissal
date
Protracted litigation history
• more than 20 years in length
• Illustrates interaction of the statutory appraisal remedy and the common
law fiduciary duty claim after Weinberger.
• Not a particularly positive commentary on DE
• two lengthy trials conducted by two different chancellors of Delaware.
• The valuation determined in each ($21.60 and $21.96) were each below
the value offered by MAF
• Note: Delaware’s appraisal statute puts the risk of a valuation that is lower
than the transaction value on the plaintiff
• Cf. Model Business Corporation Act which requires the corporation to
provide an estimate of fair value, which is paid prior to litigation and
cannot be recaptured.
Ultimate outcome for Plaintiff
• after almost a quarter of a century the plaintiffs finally
achieved a value higher than what they have been offered in
1982.
• Even better for them (and more of a windfall), the Supreme
Court also continued forward the prejudgment interest rate
from the 1990 determination so that it also covered the
second half of the litigation period as well (even though
inflation, for example, was not the same).
• The result was an interest payment that much exceeded the
fair value.
Valuation techniques
In re Emerging Communications, Inc.
Shareholders Litigation
Emerging Tech deal
• Somewhat complicated
• ATN owned Virgin Island wired telecom
service – valuable
• Because of BOD deadlock, Prosser & Prior
decided to split ATN into ECM (52% owned by
Prosser; rest publically held)
• And other NewCo
ECM deal
Innovative Com
Corp (LLC)
(owns 52% ECM)
Merge into
sub
ECM
Type of going public deal
Innovative Com
Corp (LLC)
(owns 52% ECM)
Changed
into
Public ECM
s/h
ECM
ECM goes private deal
Deal issues
• With change of structure, the investment bank and the law firm that had
been hired to represent Emerging in buying now shifted to represent the
majority shareholder entity on the other side of the transaction.
• Who was looking out for the minority shareholders?
– A special committee of directors, a newly hired law firm, and a new
investment banking firm.
• The three member special committee of directors was headed by Richard
Goodwin, former close adviser to President Kennedy, and two others
directors, one living in Indonesia and the other in England.
• Time zones alone meant it was difficult for all members of the committee
to confer even by phone
– even the faxes that Goodwin sent to the other members were transmitted by
Prosser’s secretary that the Court found “was to give Prosser access to the
Committee’s confidential deliberations and strategy.” (Casebook at 349)
Valuation
• Section III of the court’s opinion contains both
“Fair Price” and “Fair Value”
• First is from an entire fairness analysis under
common law claims based on fiduciary duty
• Second is the statutory term that the court is
required to determine in an appraisal setting.
• The court has told us that in this case they are
one and the same.
Valuation (cont.)
• focus is on DCF
– (comparable company analysis being subordinated because of the lack
of comparable companies).
• The same three key inputs that were the focus on chapter 9:
– (a) cash flow for a specified period;
– (b) cash flow for the terminal period; and
– (c) the discount rate.
• work through the “value drivers” that the court sees as shaping the
valuation opinions of the expert on either side—
• see how the valuation process is developed by each of the experts
to support his valuation conclusions.
Valuation – DCF projections
• Which set of projections should be the basis for DCF?
• There had been a set of projections in March and another in June
– One for ECM-Innov. Merger, another for going private transaction
• Court notes (page 338) that the defendant had modified the June
projections;
• Effect was “to depress the cash flows that management had
contemporaneously prepared.”
• defendant’s expert seemingly arbitrarily increased forecasted the
CapEx (Capital Expenditures).
• What effect on the cash flow and the valuation?
• The court points out very directly‐ “a negative growth in cash flow
and “a consequential decrease in [the expert’s] overall valuation.”
DCF:
Value Drivers in Determining the Discount Rate
• experts on the two sides had a difference in discount rate of three
percentage points
– Which side wants what? How does WACC come in?
• remember—the higher the discount rate, the lower the valuation of
the company. (339)
• (three examples show how experts can be expected to differ and
how lawyers have to be prepared to argue the finance as well as the
law. )
• court notes that wrt/ cost of equity,
– a small stock premium, a super‐small stock premium and a hurricane
premium account for most of the difference between the two experts
on this part of the valuation.
Court on fair value
• Having analyzed the valuation opinions, the court
opines the fair value is $38.05 as opposed to the
$10.25 offered in the cash‐out
– testimony to large differences that sometimes show up in
conflicted interest cases.
• As to the impact of market price, ($7/share), the court
disposes of the testimony of noted economist (author
of A Random Walk Down Wall Street) and a leading
proponent of the efficient market theory and valuation
• court finds the stock market price merits little or no
weight and DE law supports him.
Fair dealing?
• Not so much
• Recall -- entire fairness review under fiduciary duty looks at fair
dealing as well as fair price.
• Here timing, initiation, and structure all work against the
defendants.
• Prosser flipped the deal – seems worrisome.
• he diverted the knowledgeable investment banker and law firm
from the company to himself – judge didn’t like that.
• Goodwin was faxing his own committee members through the
secretary of the person with whom he was supposed to be
negotiating – pretty lame
Remedy
• what we have here is a deal that clearly fails both the statutory fair
value standard and the common law fiduciary duty standard
• In this case, appraisal action and the fiduciary duty claim provide
equivalent financial returns
• a fiduciary duty claim can be be different than appraisal however.
– For example, appraisal must be filed only against the company while
the defendants in a fiduciary duty action are usually the directors
(with the result that insurance may be involved differently).
– Appraisal has been interpreted only to involve a legal issue of
valuation and courts have sometimes had difficulty with reduction in
value caused by director action (but see how the court deals with this
in the short form mergers . . . ).