C.A No. 3351-CC (Del. Ch. Apr. 16, 2009)
In this post-trial statutory appraisal decision, Chancellor Chandler has added an opinion to the slim body of case law addressing the valuation of preferred stock. Charged with determining the “fair value” of the 7.25% Cumulative Convertible Preferred Stock of Metromedia International Group, Inc. (“MIG”) as of the date MIG became a whollyowned subsidiary of CaucusCom Ventures, L.P. through a cash-out merger, the Chancellor held that the certificate of designation governing the preferred stock (the “COD”) “clearly and unambiguously” set the value to which preferred stockholders were entitled in the event of a merger. As the Court had previously declared in In re Appraisal of Ford Holdings, Inc. Preferred Stock, 698 A.2d 973, 977 (Del. Ch. 1997), “a clear contractual provision in a certificate of designation that establishes the value of preferred stock in the event of a cash-out merger is not inconsistent with the language or the policy” of the Delaware appraisal statute, Section 262 of the Delaware General Corporate Law, and will be enforced. (Mem. Op. at 10-11.) The Chancellor thus rejected the petitioners’ assertions that potential elements of value and valuation methods, including those traditionally relied upon in Delaware appraisal proceedings, should apply.
CaucusCom Ventures, L.P., a company owned by two private investment firms, Salford Capital Partners, Inc. and Sun Capital Partners, Ltd. (all three collectively referred to as “CaucusCom”), acquired MIG through a series of transactions: first, a tender offer through which it obtained 78% of MIG’s outstanding common stock at $1.80 per share; second, the exercise of a top-up option enabling it to obtain the additional shares necessary to raise its ownership stake in MIG to 90% and thus transact a short-form merger under Section 253 of the General Corporation Law; and, third, the short-form merger effectuated immediately following the close of the tender offer and exercise of the top-up option, in which remaining, outstanding shares of MIG common stock were cashed out at the price set in the tender offer.
The Court acknowledged that it generally has broad discretion in an appraisal proceeding to consider all relevant factors involving the value of a company, and to consider proof of value by any methods generally acceptable to the financial community and otherwise admissible in court. The Court made clear, however, that, when valuing preferred stock, it will first determine whether the COD contractually establishes the method for valuation in the event of a merger. In this instance, the Court concluded, it did, thus “render[ing] irrelevant many of the underlying disputes among the [parties’] testifying experts over ... competing valuation models,” disputes typically at the core of litigation in an appraisal action. (Mem. Op. at 11.)
The Court found two provisions in MIG’s COD to be dispositive. The first provided that, in the event of the company’s merger with or into another entity, each share of preferred stock would, “without the consent of any holder” of that stock, be treated as though it had been converted into the number of shares of common stock it could have been converted into immediately prior to the merger, and thus receive consideration on an as-converted basis. Pursuant to the conversion rate set in the COD, each share of MIG preferred stock would have converted into 5.29 shares of common stock immediately prior to the merger.
The second critical provision in the COD mandated that, upon such conversion, all accumulated and accrued dividends, whether or not declared, “shall be immediately due and payable” in cash, stock, or a combination thereof, at MIG’s discretion. (Id. at 16.) At the time of the merger, MIG’s principal asset was its indirect majority ownership of Magticom, the leading mobile telephone company in the Republic of Georgia. Although MIG had carried no outstanding debt since September 2005 and Magticom had been generating positive free cash flow, MIG had not resumed paying quarterly dividends to preferred holders since it ceased doing so in March 2001. At the time of the merger, accrued and unpaid dividends totaled $29.40 per preferred share. Mandating that because the proceeding was an appraisal proceeding the dividends be paid in cash, despite the discretion afforded MIG under the COD, the Court held that the “fair value” of each share of preferred stock amounted to $9.52 of merger consideration (5.29 multiplied by $1.80) plus the unpaid dividends of $29.40, resulting in a final value of $38.92 per share.
In accordance with the appraisal statute, the Court awarded interest at the statutory rate of 5.0% over the Federal Reserve discount rate from the date of the merger through the date of payment, compounded quarterly.
The full opinion is available here.