In re Appraisal of Orchard Enterprises, Inc.
Delaware Chancery Court
2012 WL 2923305 (2012)
Facts
The Orchard Enterprises, Inc. (Orchard) (defendant) merged with Dimensional Associates, LLC, which cashed out Orchard’s common stockholders (plaintiffs) at $2.05 per share. The stockholders brought an appraisal action, arguing that the value of the stock was $5.42 per share at the time of the merger. Orchard countered that the $2.05 price was a generous increase over the true price, $1.53. Both sides employed valuation experts, who arrived at different discount rates using both the capital asset pricing model (CAPM), which took market risk into account, and the build-up model, which factored in company-specific risk. CAPM had wider acceptance among academics and market players than the build-up model and its variants. However, due to Orchard’s relatively small size, the CAPM at issue was modified to include a size premium to account for the higher rate of return expected as compensation for the risk involved in the investment. The Delaware Chancery Court was thus tasked with determining the fair market value of the shares at the time of the merger.
Rule of Law
Issue
Holding and Reasoning (Strine, J.)
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