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Contents
SC&H Business Valuation & Support Leaders 
Michael J. Young, 
Nathan E. DiNatale,
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Valuations Insights, July, 2010 Delaware Chancery Rules on Attempt to "Freeze Out" 15% Shareholder In re Sunbelt Beverage Corp., 2010 WL 92519 (Del. Ch.) (Unpub.) The Delaware Chancery Court found the majority owners of a large, privately owned alcohol distributor (Sunbelt) authorized a merger to "freeze out" a 15% minority shareholder by using a process that was "anything but fair." A fairness opinion, obtained a week prior to the merger, was an "afterthought…pure window-dressing" to justify the majority's objective. The majority tried to justify the buy-out price (approximately $46 per share) based on a stock repurchase agreement negotiated in 1994, the last transaction taking place in 1997—just weeks before the merger. But this overlooked the obvious: The formula pricing arrangement was more than three-years old by the time of the merger. The parties may have been sophisticated investors, but for reasons the court refused to speculate, they negotiated a price heavily dependent on book value, excluding goodwill and other intangibles. An expert for the minority shareholder also found the formula priced 12 comparable public companies at three times less than market value, the court emphasized. Thus it was no fair proxy for Sunbelt's value. Under a comparable transactions approach, the minority expert valued the company at over $104 per share, but the selected deals differed too much in size, pricing terms, and geographic location. They also took place in a private, "tightly controlled market," the court said, refusing to accept "personality-driven" transactions. To compensate for these admitted shortcomings, the minority expert applied the median multiples, but the court wouldn't accept this "Goldilocks" approach to market value. It also rejected an asset valuation by the majority's expert ($42 per share), because a large alcohol distributor derived far less of its value from its physical assets. Court confirms preference for Discount Cash Flow analysis. The majority's expert used a discounted cash flow (DCF) analysis to price the company at approximately $36 per share. Using essentially the same financial inputs, adjusted for alleged overstatements, the minority's expert calculated a $114 per-share value under a DCF. In particular, he applied a smaller size premium and declined to use any company-specific risk premium. After a lengthy discussion of the "circular logic" inherent in the determination of a size premium, the court adopted the minority expert's number, because he relied more on the strict selection criteria in the Ibbotson's data source. It also rejected a company-specific risk premium, because the majority expert failed to supply "rigorous, quantitative" support. Interestingly, in a rare agreement between experts, the minority expert adjusted his value to account for the company's conversion to an S Corp following the merger, but this violated a fundamental principle of Delaware appraisal law, the court found, which precludes an oppressed shareholder from claiming any expectations or accomplishment of the merger. The court ultimately adopted the minority's unadjusted DCF value of $114 per share. In so doing, it rejected the minority shareholder's alternative requested for rescission and compensatory damages, asking the court to carve out approximately 15% of Sunbelt's distribution portfolios at the time of the merger. But this would involve another problematic valuation exercise, fraught with uncertainty. "Simply put, Sunbelt and its business portfolio are too complex to unscramble," the court said, in finding its statutory appraisal had fully and fairly compensated the minority shareholder for her holdings.
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