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KEYWORD: Entire Fairness

Case Name:
IN RE GOOGLE INC. CLASS C SHAREHOLDER LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 7469-CS
Keywords:
Economic Damages, Entire Fairness, Fiduciary Duties, Stock Split, Voting Power
Industry:
Internet Services
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William Jeffers, CFA, William P. McInerney, ASA

On April 12, 2012, Google Inc. announced its intention to issue a stock dividend whereby each of its current stockholders would receive one share of Class A voting stock and one share of nonvoting Class C stock for each previously held (voting) Class A share.

The Griffing Group was retained by counsel for plaintiffs, who sought to enjoin Google from completing the recapitalization on the grounds that it would benefit the company’s founders, Larry Page and Sergey Brin (by extending their voting control over Google), while harming minority stockholders (who would be left with a non-voting share that would trade at a discount to its voting counterpart). David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted opening and rebuttal reports and testified at deposition, opining that the economic evidence supported plaintiffs’ claims.

Just prior to the commencement of the injunction hearing before Chancellor Leo E. Strine, Jr., the parties entered into a settlement agreement pursuant to which the recapitalization would be allowed to proceed, but with certain key protections for minority stockholders. Under the terms of the settlement, if the non-voting shares trade at a discount (measured over one year), Google is obligated to pay holders of the non-voting shares a percentage of the overall trading differential, which could be as high as $7.5 billion. In addition, when the founders’ combined voting power falls below 15%, the non-voting Class C shares will convert to voting Class A shares – thereby regaining voting rights – unless the company’s Board of Directors at the time determines that it is in Google’s best interests to maintain the class of non-voting stock. Finally, the settlement agreement makes it more difficult for the founders to sell or swap their non-voting stock, further ensuring that their economic interests remain aligned with the interests of all Google stockholders. The settlement was approved by Chancellor Strine in October 2013.

David G. Clarke, ASA was assisted by Michael J. Mattson, William Jeffers, CFA, and William P. McInerney of The Griffing Group; and Professor Matthew D. Cain of the University of Notre Dame. The plaintiffs were represented by Jeffery C. Block and Whitney E. Street of Block & Leviton LLP; Laurence D. Paskowitz of The Paskowitz Law Firm P.C.; and Nicholas I. Porritt and Douglas E. Julie of Levi & Korsinsky LLP.

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Case Name:
IN RE EL PASO CORP. SHAREHOLDER LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 6949-CS
Keywords:
Economic Damages, Entire Fairness, Fiduciary Duties
Industry:
Natural Gas Pipelines
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William Jeffers, CFA, William P. McInerney, ASA

In October 2011, counsel for plaintiffs filed a class action complaint in the Delaware Court of Chancery on behalf of shareholders of natural gas pipeline company El Paso Corporation, challenging the proposed $38 billion sale of the company to competitor Kinder Morgan, Inc.

Among other things, the complaint alleged that El Paso’s Board of Directors breached their fiduciary duties in connection with the merger, and that the consideration to be paid to El Paso shareholders was inadequate. Goldman Sachs and Morgan Stanley served as financial advisors to El Paso’s Board of Directors.

David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted opening and rebuttal reports and testified at deposition, opining that (i) the financial analyses prepared by Goldman Sachs and Morgan Stanley contained significant errors that should have been recognized by El Paso’s Board of Directors, and (ii) if the errors had been recognized, it would have been clear to the board that the consideration to be paid to El Paso shareholders was inadequate.

In February 2012, Chancellor Leo E. Strine, Jr. denied the preliminary injunction motion, finding that while “plaintiffs [had] a reasonable likelihood of success in proving that the Merger was tainted by disloyalty,” the “balance of harms counsel[ed] against a preliminary injunction.” Plaintiffs proceeded with a damages case, and in September 2012, the parties entered into a settlement agreement under which the plaintiff class would receive $110 million in cash. In December 2012, Chancellor Strine granted final approval of the settlement.

David G. Clarke, ASA was assisted by Martin J. Ferguson, Michael J. Mattson, William Jeffers, CFA, and William P. McInerney. The plaintiffs were represented by Stuart M. Grant, Megan D. McIntyre, and Christine M. Mackintosh of Grant & Eisenhofer P.A.; Christine S. Azar, Ira Schochet, and Charles B. Vincent of Labaton Sucharow LLP; and Mark Lebovitch and Jeremy Friedman of Bernstein Litowitz Berger & Grossmann LLP.

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Case Name:
IN RE HANOVER DIRECT, INC. SHAREHOLDERS LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, Consol. C.A. No. 1969-CC
Keywords:
Appraisal Action, Entire Fairness, Fair Value, Fiduciary Duties, Preferred Stock
Industry:
Clothing; Home Goods
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William P. McInerney, ASA

Hanover Direct, Inc. sold clothing and home goods through a portfolio of catalogs and websites. The company was publicly traded, but by 2007 had become distressed and was struggling to remain solvent, as its debt commitments and mandatorily redeemable preferred stock exceeded the value of its assets.

In April 2007, the company was taken private by its controlling shareholder. Several minority shareholders sued, alleging that consideration of $0.25 per common share paid in the going-private transaction was unfair. The case, a hybrid entire fairness/appraisal action, was heard by Chancellor William B. Chandler, III.

The Griffing Group was retained by the respondent/defendant group. David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted opening and rebuttal reports and testified at deposition and trial, opining that the fair value of Hanover Direct’s common stock was zero. Mr. Clarke relied upon indications of value from three valuation methods: the discounted cash flow method, the guideline public company method, and the guideline transaction method. Each method indicated that the fair value of the company’s common stock was negative. Mr. Clarke also noted that the terms of a prior offer to acquire the company’s preferred and common stock implied that the common stock was worthless. The expert for the plaintiffs/petitioners opined that the fair value of the common stock was $4.75 per share, based solely upon the result of a guideline public company analysis.

Chancellor Chandler gave full weight to Mr. Clarke’s testimony and no weight to that of the opposing expert, noting: “From using a data set that raises no issues of reliability, to applying multiple valuation techniques that support one another’s conclusions, respondent’s expert witness [Mr. Clarke] has convinced me that his valuation of the company is accurate, reliable, and reflective of a per-share value of the company below $0.00.” Citing the “overwhelming persuasiveness of the respondent’s evidence and arguments relative to those of petitioners,” the Court concluded that the merger price of $0.25 was fair.

David G. Clarke, ASA was assisted by Martin J. Ferguson, Michael J. Mattson, and William P. McInerney. The defendants were represented by Bruce L. Silverstein, Elena C. Norman, Tammy L. Mercer, and James M. Yoch, Jr. of Young Conaway Stargatt & Taylor, LLP.

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Case Name:
IN RE LORAL SPACE AND COMMUNICATIONS INC. CONSOLIDATED LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 2808-VCS
Keywords:
Economic Damages, Entire Fairness, Fiduciary Duties, Preferred Stock
Industry:
Satellites; Telecommunications
Professionals:
David G. Clarke, ASA, Michael J. Mattson, Edward T. Schroeder, CPA/CFF, CVA, MAFF, William P. McInerney, ASA

In this case, the Court evaluated the fairness of a $300 million convertible preferred stock transaction entered into between Loral Space and Communications, Inc., a manufacturer of satellites and provider of related services, and its largest stockholder, MHR Fund Management LLC.

The case was brought as a derivative and class action by shareholders of Loral who alleged that the MHR financing was an unfair transaction approved through a flawed special committee process. With respect to fair price, the Court determined that the financial terms of the MHR financing were unfair to Loral. After concluding that the MHR financing failed the entire fairness standard, the Court determined that the most equitable remedy would be to convert the preferred stock that MHR received into non-voting stock. In setting the conversion price, the Court took into account MHR’s access to inside information, its insulation of itself from market pressure, as well as Loral’s actual stock trading price. The Court gave 50% weight to the mid-range of MHR’s internal valuation of Loral and 50% weight to Loral’s trading price.

David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at deposition and trial, opining that the fairness opinion relied upon by the Special Committee of Loral’s Board of Directors was flawed, and that Loral’s trading price did not reflect its fair value (and thus should not be used as a basis for setting the conversion price). Vice Chancellor Leo E. Strine, Jr. recognized Mr. Clarke as one of the “credible experts” (for the plaintiffs) who had “done a good job of pointing out flaws in the work of the Special Committee’s advisor, North Point, that leave me unable to draw any confidence from North Point’s work.”

David G. Clarke, ASA was assisted by Martin J. Ferguson, Michael J. Mattson, Edward T. Schroeder, CPA/CFF, CVA, MAFF, and William P. McInerney. The Blackrock plaintiffs were represented by Lawrence C. Ashby, Philip Trainer, Jr., and Richard L. Renck of Ashby & Geddes; and Lewis R. Clayton, Roberto Finzi, David Friar, Anthony P. Ellis, and Joseph D. Borrero of Paul, Weiss, Rifkind, Wharton & Garrison LLP.

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Case Name:
IN RE PNB HOLDING CO. SHAREHOLDERS LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, Consolidated C.A. No. 28-N
Keywords:
Appraisal Action, Entire Fairness, Equitable Relief, Fair Value, Fiduciary Duties
Industry:
Commercial Banking
Professionals:
David G. Clarke, ASA, Michael J. Mattson

PNB Holding Company (PNB) was a bank holding company that owned central Illinois-based Pontiac National Bank. In February 2003, the Board of Directors of PNB approved a proposal to convert the company to a Subchapter-S corporation for federal income tax reporting.

The key benefit of converting was a reduction in income taxes, but in order to qualify for the Subchapter-S designation, the company had to reduce the number of its shareholders from 360 to no more than 75. In order to achieve this reduction in the number of shareholders, the conversion proposal stipulated that those who did not own at least 2,000 of the approximately 629,000 shares outstanding, and were not one of the largest 68 stockholders, would be cashed out of their shares.

Relying on a $40.74 per share valuation/fairness opinion prepared by its financial advisor, PNB’s Board of Directors set the cash-out price at $41.00 per share. While the conversion was approved by a majority of PNB’s shareholders in April 2003, other shareholders dissented and petitioned the Delaware Court of Chancery to determine the fair value of their shares through an appraisal action. In addition, certain of those who were cashed out in the merger sought equitable relief (i.e., a payment equal to the difference between the merger price and the fair value of PNB). During the trial, opposing experts provided testimony regarding the fair value of PNB’s common shares.

The valuation expert for the respondent/defendants estimated the fair value of PNB to be $40 per share, based on a discounted cash flow (DCF) analysis, a comparable public company analysis, and a comparable transactions analysis. On behalf of the plaintiffs/petitioners, David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at deposition and trial, opining that the fair value of PNB was $61 per share. Mr. Clarke also relied on the DCF, comparable public company, and comparable transactions analyses.

Vice Chancellor Leo E. Strine, Jr. relied on the DCF analysis to determine PNB’s fair value, which method both experts agreed was the best given the facts and circumstances of the case. The Court rejected the methodology employed by the expert for the respondent/defendants, which valued the company on the basis of the dividends a minority shareholder could expect to receive; in essence, a minority interest-level valuation that was impermissible under Delaware law. Instead, the Court adopted the DCF framework used by Mr. Clarke (calling him the “more reliable expert”) that measured the dividend-paying capacity of the company; that is, measuring all of the company’s free cash flows on controlling basis. The Court ruled that the appropriate discount rate to use in determining the present value of the company’s free cash flows was 12%, closer to the 11.5% calculated by Mr. Clarke than the 14% proffered by the opposing expert. The Court concluded that the fair value of PNB was $52.34 per share, significantly higher than the transaction price of $41 per share and the $40 per share concluded by the expert for the respondent/defendants.

David G. Clarke, ASA was assisted by Michael J. Mattson. The plaintiffs were represented by Ronald A. Brown, Jr. and Bruce E. Jameson of Prickett, Jones & Elliott, P.A.; and Arthur T. Susman, John R. Wylie, Matthew T. Heffner, and Matthew Hurst of Susman, Watkins & Wylie, LLP.

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