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KEYWORD: Fair Value

Case Name:
IN RE ISN SOFTWARE CORP. APPRAISAL LITIGATION
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 8388-VCG (as appealed: Delaware Supreme Court, No. 43, 2017)
Keywords:
Appraisal Action, Fair Value
Industry:
Software-as-a-Service
Professionals:
David G. Clarke, ASA, Joseph W. Thompson, CFA, ASA, William P. McInerney, ASA

Privately-held ISN Software Corp. experienced substantial growth in the years prior to a 2013 cash-out merger initiated by its founder and controlling shareholder William Addy. Two minority shareholders, Ad-Venture Capital Partners and Polaris, objected to the transaction and filed a petition in the Delaware Court of Chancery seeking appraisal of their shares.

Mr. Addy established the squeeze-out merger consideration of $37,317 per share without assistance from a financial advisor or assurance from a fairness opinion. Instead, Mr. Addy determined the merger consideration by adjusting a third party’s 2011 valuation to reflect his expectations for ISN’s outlook in early 2013. Ultimately, not even Mr. Addy argued that the merger consideration, which implied a total equity value for the company of approximately $135 million, was a reliable indicator of fair value.

The valuation expert retained by Mr. Addy on behalf of respondent ISN argued at trial that the company’s fair value was $106 million — lower, in fact, than the equity value implied by the unreliable merger consideration. In arriving at this value, the respondent’s expert relied in part upon indications of value derived from two transactions of company stock that occurred prior to the merger.

The Griffing Group was retained by counsel for petitioner Ad-Venture Capital Partners. David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted opening and rebuttal reports and testified at deposition and at trial in February 2016, opining that the company’s fair value was $645 million. The expert for the other petitioner, Polaris, concluded a value of $820 million. In addition to providing traditional valuation analyses such as a discounted cash flow analysis, Mr. Clarke offered a detailed rebuttal of the respondent’s expert’s claim that the two prior transactions of stock provided reliable indications of the company’s value.

In an August 2016 opinion, Vice Chancellor Glasscock rejected the prior transactions of stock (and the merger consideration) as unreliable and determined the company’s fair value by conducting a discounted cash flow analysis that reflected a combination of the inputs used by the experts. The Vice Chancellor ruled that ISN’s fair value was $98,783 per share, or approximately $357 million in total – nearly triple the $135 million value implied by the per-share merger consideration and more triple the $106 million value argued by the respondent’s expert.

The decision was appealed to the Delaware Supreme Court, which in October 2017 affirmed the Chancery Court’s ruling in a one-page order.

David G. Clarke, ASA was assisted by Joseph W. Thompson, CFA, ASA, David Neuzil, CFA, and William P. McInerney, ASA. Petitioner Ad-Venture Partners was represented by Jon E. Abramczyk, John P. DiTomo, and Matthew R. Clark of Morris, Nichols, Arsht & Tunnell LLP.

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Case Name:
JOHN DOUGLAS DUNMIRE, ET AL., V. FARMERS & MERCHANTS BANCORP OF WESTERN PENNSYLVANIA, INC.
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 10589-CB
Keywords:
Appraisal Action, Fair Value
Industry:
Commercial Banking
Professionals:
Daniel R. Van Vleet, ASA

In October 2014, Farmers & Merchants Bancorp of Western Pennsylvania, Inc. (“F&M”) merged with neighboring community bank NexTier, Inc. (“NexTier”), in a stock-for-stock transaction (the “merger”). The 2.17 stock exchange ratio valued NexTier at $180 per share and F&M at $83 per share. John D. Dunmire and other F&M stockholders (the petitioners) filed an appraisal action seeking the Court’s determination of the fair value of their shares, which they argued was more than the $83 per share value afforded to them in the transaction.

The petitioners’ expert claimed that the fair value of F&M’s common stock was $138 per share, 66% more than the merger consideration. F&M retained Daniel R. Van Vleet, ASA, a Managing Principal of The Griffing Group, who determined the company’s fair value to be $76 per share, about 8% less than the merger consideration. Mr. Van Vleet submitted opening and rebuttal expert reports, and testified at deposition and trial in support of his analysis.

The Court concluded that the fair value of F&M was $92 per share, much nearer to the $76 value concluded by Mr. Van Vleet (and the $83 merger consideration) than the $138 value proffered by the petitioners’ expert. The Court arrived at this fair value by conducting a capitalized net income analysis of F&M. In performing its analysis, the Court determined beta differently than either expert, but otherwise relied entirely on Mr. Van Vleet’s inputs and assumptions, including those for future net income, the risk-free rate, the equity risk premium, the size premium, the perpetuity growth rate, and the company’s excess capital and amortization tax benefits.

The respondent was represented by Kenneth J. Nachbar, Ryan D. Stottmann, and Glenn R. McGillivray of Morris, Nichols, Arsht & Tunnell LLP.

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Case Name:
FRANK G. PILKIEWICZ, PH. D., ET AL. V. TRANSAVE, LLC
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 6319-CS
Keywords:
Appraisal Action, Fair Value, Preferred Stock
Industry:
Pharmaceuticals, Biotechnology
Professionals:
David G. Clarke, ASA, Michael J. Mattson, William Jeffers, CFA, Joseph W. Thompson, CFA, ASA, William P. McInerney, ASA

Transave, Inc. was a privately-held biopharmaceutical company focused on developing drugs for the treatment of lung infections. In December 2010, Transave merged with Insmed, Inc., a publicly traded shell company.

Under the terms of the merger agreement, Insmed acquired all of the outstanding capital stock of Transave and paid off Transave’s debt of $7.8 million. Transave preferred and common stockholders received, in the aggregate, (i) approximately 25.9 million shares of Insmed common stock, (ii) approximately 91.7 million shares of Insmed Series B Conditional Convertible Preferred Stock with a stated value of $0.7114 per share, and (iii) cash consideration of $561,280. After giving effect to the merger, former Transave stockholders held a 46.7% equity interest in the combined company (on an as-converted, fully diluted basis), and Insmed shareholders held the remaining 53.3%.

At the time of the merger, Transave did not have any drugs on the market but was far along in the process of developing an anti-infective, inhaled drug compound with strong commercial prospects. The drug had the potential to become a leading treatment for at least three types of infection, for which few or no competing treatments existed. In order to finish clinical trials and bring the drug to market, however, Transave needed funding. Insmed was a pharmaceutical development company that had sold its technology portfolio and was looking for an opportunity to deploy its cash.

A group of former Transave stockholders brought an appraisal action, seeking the fair value of their common shares. David G. Clarke, ASA, a Managing Principal at The Griffing Group, submitted opening and rebuttal reports and testified at deposition on behalf of the petitioners. The matter settled shortly before trial.

David G. Clarke, ASA was assisted by Michael J. Mattson, William Jeffers, CFA, Joseph W. Thompson, CFA, ASA and William P. McInerney. The petitioners were represented by Paul A. Fioravanti, Jr., Marcus E. Montejo, and Laina M. Herbert of Prickett, Jones and Elliott, P.A. and Richard Feldman and Stephen M. Rosenberg of Rosenberg Feldman Smith, 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 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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Case Name:
THE UNION ILLINOIS 1995 INVESTMENT LIMITED PARTNERSHIP, ET AL. V. UNION FINANCIAL GROUP, LTD.
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 19586-VCS
Keywords:
Appraisal Action, Fair Value, Sale Process, Synergies
Industry:
Commercial Banking
Professionals:
David G. Clarke, ASA

Following the 2001 merger of Union Financial Group, Ltd. (UFG) and a subsidiary of First Banks, Inc., certain UFG shareholders filed an appraisal action asking the Delaware Court of Chancery to determine the fair value of their shares as of the merger date.

UFG was a bank holding company that owned two small community banks in southern Illinois. In 2000, the subsidiary banks were struggling. Following an examination, the Federal Reserve labeled UFG a “troubled financial institution” due to its low profitability, inadequate capital, and high leverage. UFG and the Federal Reserve entered into a formal memorandum of understanding (MOU) that required UFG to raise its capital levels and reduce its debt (which the company was defaulting upon at the time). The MOU also prevented UFG from declaring dividends or increasing its debt to pursue growth opportunities.

The price paid in the transaction was $9.40 per UFG share, with the possibility of two additional payments to UFG shareholders of $0.80 per share if the performance of UFG’s loan portfolio did not fall below certain thresholds. The petitioners’ valuation expert determined a fair value of over $16 per share, based on a DCF analysis that deviated from company management’s projections by significantly increasing UFG’s projected net interest margin and reducing its projected operating expenses. Vice Chancellor Leo E. Strine, Jr. was critical of these optimistic assumptions and ultimately rejected the analysis prepared by the petitioners’ expert.

On behalf of the respondent, David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at deposition and trial, opining that the merger price, less expected synergies, (i.e., $8.20 per share) was the best evidence of UFG’s fair value. Mr. Clarke concluded this in view of the facts that, at the time, the mergers and acquisitions market for banks (including distressed banks) was very active, and the price realized in the sale of the company was the result of a robust sale process. As Delaware law requires that synergistic value must be excluded in determining fair value, Mr. Clarke calculated and subtracted synergies from the sale price to determine UFG’s fair value.

While Mr. Clarke also derived value indications using a discounted cash flow analysis, guideline public company analysis, and guideline transactions analysis, he determined that in the subject case, the merger price (which was higher than any of the values indicated by the other analyses) was the best evidence of value. The Court agreed, finding that sale process represented a competitive and fair auction, and that the merger price, less synergies, was the best indication of the fair value of UFG’s common shares. The Court concluded that the fair value was $8.74 per share.

The respondent was represented by Lewis H. Lazarus, Michael A. Weidinger, and Thomas E. Hanson, Jr. of Morris, James, Hitchens & Williams LLP.

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Case Name:
RICHARD A. LEBEAU, ET AL. V. M.G. BANCORPORATION, ET AL.
Case Conclusion:
Caption:
Delaware Court of Chancery, C.A. No. 13414-VCJ
Keywords:
Appraisal Action, Fair Value
Industry:
Commercial Banking
Professionals:
David G. Clarke, ASA, Michael J. Mattson

Headquartered in Worth, Illinois, M.G. Bancorporation, Inc. (MGB) was a bank holding company that owned a 100% equity interest in Mount Greenwood Bank and a 75.5% equity interest in Worth Bancorp, Inc.

In November 1993, MGB was merged into its 92% shareholder, Southwest Bancorp, Inc. (Southwest), in a “short form” merger in which neither MGB’s Board of Directors nor its minority shareholders were legally required to, or did, vote on the transaction. Southwest retained an investment bank to determine the fair market value of MGB’s common shares as of June 30, 1993. The investment bank concluded a value of $41 per share, and Southwest set that value as the merger price. (In a separate breach of fiduciary duty class action, the Delaware Court of Chancery found that the investment bank’s appraisal was legally improper, as it had determined only the fair market value of MGB – a minority-level value – as opposed to valuing MGB in its entirety as a going concern and determining the fair value of the minority shares as a pro-rata percentage of that controlling-basis value.)

On behalf of the petitioners, David G. Clarke, ASA, a Managing Principal of The Griffing Group, submitted a report and testified at trial, opining that the fair value of MGB was $85 per share. The respondent’s expert witness concluded that the fair value of MGB was $41.90 per share, just $0.90 higher than the improperly determined minority-basis fair market value of $41.00 used as the merger price. The trial court rejected entirely the valuation analyses performed by the respondent’s expert, and ruled that the $85 per share value concluded by Mr. Clarke was the fair value of MGB.

In affirming the trial court’s decision, the Delaware Supreme Court made two valuable contributions to the development of the law pertaining to valuations in appraisal actions: (1) when a subject company in a statutory appraisal is a holding company, it is appropriate to value the company’s ownership interests in its subsidiaries using a comparative acquisition method; and (2) the comparative public company method, which was employed by the respondent’s expert witness, includes a “built-in minority discount” that renders its use inappropriate in a statutory appraisal proceeding, absent the inclusion of a premium to reverse the effect of the minority discount.

David G. Clarke, ASA was assisted by Michael J. Mattson. The petitioners were represented by Bruce L. Silverstein and Martin S. Lessner of Young, Conaway, Stargatt & Taylor LLP and Thomas E. Chomicz of Wilson & McIlvaine.

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