By: Scott Bleier
Originally published in the ABA’s Business Law Today.
In October, the Delaware Supreme Court heard oral arguments in an appeal from the Court of Chancery’s 2016 appraisal decision which awarded Polaris Venture Partners and Ad-Venture Capital Partners more than a 2.5x increase (plus interest) over the price per share paid to stockholders in connection with a 2013 cash-out merger of minority stockholders of ISN Software Corp. (ISN), a venture-backed company. Following the 2013 merger, both Polaris and Ad-Venture sought appraisal of their ISN shares pursuant to Section 262 of the Delaware General Corporation Law. At trial, Polaris Venture’s expert opined that the fair value of a share of ISN stock was greater than eight times that implied by the valuation provided by ISN’s expert, although all experts relied to some extent on the guideline public company analysis (valuing ISN based on trading multiples derived from publicly traded companies that were similar to ISN) in valuing ISN.
In its opinion, the Delaware Court of Chancery determined to rely exclusively on the discounted cash flow (DCF) method in appraising the statutory “fair value” of ISN shares at $98,783 per share, a 257% increase to the $38,317 per-share merger consideration, finding several other valuation methods to be unreliable given that ISN was privately held and had not reached a “steady state of growth.” The case illustrates the unpredictable nature of valuations of venture-backed companies and suggests that a DCF valuation may be the Delaware Court of Chancery’s preferred methodology in an appraisal of an early-stage growth company.
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