M.G. Bancorporation v. Le Beau

Southwest Bancorp, Inc. (Southwest) (defendant) owned over 91 percent of the outstanding common stock of M. G. Bancorporation, Inc. (MGB) (defendant), a corporation with a controlling interest in two subsidiaries. MGB merged into Southwest through a short-form merger, which did not require shareholder approval. MGB’s minority shareholders were offered $41 per share as merger consideration. Southwest’s appraiser made the $41 per share valuation by applying a minority discount to the shares. A group of minority shareholders (the plaintiff shareholders) (plaintiffs) rejected the offer and sought to exercise their appraisal rights under 8 Delaware Code § 262. In a separate lawsuit, the Delaware Chancery Court found that Southwest’s appraiser had breached his fiduciary duty to the minority shareholders by improperly applying a minority discount to their shares. In the appraisal proceeding, the plaintiff shareholders presented evidence that their shares were worth $85 per share. The plaintiff shareholders used a combination of the comparative publicly traded approach, the discounted-cash-flow method, and the comparative-acquisitions approach. MGB and Southwest presented evidence that the shares were worth approximately $42 per share using a combination of the discounted-cash-flow method and a capital-markets analysis. In their discounted-cash-flow methods, the plaintiff shareholders applied a control premium to account for the controlling interest that MGB had in its two subsidiaries, and MGB and Southwest did not. The plaintiff shareholders argued that MGB and Southwest’s capital-markets analysis was not generally accepted in the financial industry. The Delaware Chancery Court ordered MGB and Southwest to explain how their new appraisal methods resulted in a price that was extremely similar to their earlier improper method. After hearing testimony, the court concluded that the capital-markets analysis contained an improper minority discount. The court found that the shares were worth $85 each and ordered MGB and Southwest to pay for the shares with 8 percent interest compounded monthly. MGB and Southwest appealed.