Golden Telecom, Inc. v. Global GT LP, No. 392, 2010, C.A. No. 3698 (Del. Dec. 29, 2010) (Steele, C.J.)
In this panel opinion, the Delaware Supreme Court affirmed the Court of Chancery’s appraisal valuation. In so doing, the Court refused to adopt a standard under Section 262(h) of the Delaware General Corporation Law that would require the Court of Chancery to defer conclusively or presumptively to the merger price in determining fair value, even if the transactional process involved were “pristine” and “unchallenged.” The Court also refused to adopt a bright-line standard requiring a corporation in an appraisal proceeding to abide by corporation-specific data that it previously transmitted to its shareholders in conjunction with the transaction. Finally, the Court held that the Court of Chancery’s valuation was not an abuse of discretion.
This action arose out of the February 2008 merger of Golden Telecom, Inc. (“Golden”) into Lillian Acquisition, Inc., a wholly owned subsidiary of open joint stock company Vimpel-Communications. The merger was accomplished through a tender offer of $105 in cash per share of Golden. There was no open market check. Golden’s special committee never solicited other buyers nor conducted an auction. Further, Golden’s special committee was informed that one of its largest stockholders, Altimo Holdings and Investments Limited, would not agree to a transaction with any other bidder. Golden shareholders Global GT LP and Global FT Ltd. (collectively, “Global”) elected not to accept the merger price in favor of a statutory appraisal proceeding under Section 262(h).
The Court of Chancery determined the fair value of Golden as a going concern was $125.49 per share. In arriving at its valuation, the Court of Chancery rejected the merger price as conclusive or presumptive of fair value, reasoning the merger price was not market-tested. The Court of Chancery instead relied upon a blended beta, Global’s expert’s equity risk premium, and Global’s expert’s long-term growth rate in making its discounted cash flow calculation.
Golden appealed on two grounds. First, Golden contended that the merger price of $105 equaled fair value under Section 262(h). Golden requested the Delaware Supreme Court to adopt a standard requiring the Court of Chancery to defer conclusively or presumptively to the merger price in determining fair value because the merger was conducted at arm’s length and because the special committee was able to determine a fair price through its advisors. Second, Golden contended the Court of Chancery erred as a matter of law and abused its discretion by not considering the merger price and by considering the blended beta and Global’s expert’s Equity Risk Premium and long-term growth rate in its discounted cash flow calculation.
Global cross-appealed, contending the Court of Chancery erred as a matter of law by using a blended beta (instead of its proffered beta) and by using an incorrect tax rate in the discounted cash flow calculation. Regarding the tax rate, Global argued that Golden was bound by the tax rate used in its fairness opinion and could not use another in the appraisal proceeding because Golden had disclosed that tax rate to its shareholders who relied on that rate as true in determining whether to tender their shares.
The Delaware Supreme Court affirmed the Court of Chancery’s decision. First, the Court rejected Golden’s contention that the Court of Chancery should defer conclusively or presumptively to the merger price in determining fair value under Section 262(h), “even in the face of a pristine, unchallenged transactional process.” The Court reasoned that Section 262(h) unambiguously requires the Court of Chancery to conduct an independent evaluation of the target corporation’s fair value as a going concern (not as an acquisition) by accounting for “all relevant factors.” The Court explained that to adopt such a standard would contravene the plain language of the statute, the flexible process the statute envisions, and reasoned precedent.
Second, the Court refused to adopt Global’s requested bright-line standard that a corporation in an appraisal proceeding is bound by the corporation-specific data it previously sent to its stockholders in recommending the transaction. The Court reasoned such a standard (a) would limit the flexibility of the appraisal proceeding contemplated in the statute; (b) is not called for by the plain language of the statute; and (c) would “pay short shrift” to the difference between valuation in the transactional context and valuation as a going concern. Further, the Court dismissed Global’s concern that allowing a corporation to deviate from the disclosures made to the stockholders in considering the transaction would necessarily allow directors to “abuse the system” because the shareholders would remain protected by their right to complain and recover for any fiduciary breaches that may explain such deviations.
Finally, the Court held that the Court of Chancery did not abuse its discretion by considering a blended beta and giving weight to Global’s expert’s testimony. The Court explained that the standard of review for abuse of discretion in an appraisal proceeding is “formidable” and the Court of Chancery’s valuation will not be overturned unless devoid of factual support or “clearly wrong.” The Court reasoned that the Court of Chancery did not abuse its discretion because it discussed its findings of fact and valuation methods using an “orderly and logical deductive process.”