DCF analysis in Delaware

2022The DCF Analyses Were Unhelpful Quintero and Fischel both performed DCF valuations.485 I recognize that, in certain situations, “[p]roperly conducted DCF analyses can be a useful valuation tool to ‘corroborate’ market prices and evidence.”486 Here, however, neither expert persuaded me that a DCF analysis is the proper method by which to value SolarCity given the facts of this case, and so I decline to rely on the DCFs when analyzing whether the Acquisition price was fair to Tesla’s stockholders.487 In any event, the 485 Highfields Cap., Ltd. v. AXA Fin., Inc., 939 A.2d 34, 53 (Del.

2022The DCF Analyses Were Unhelpful Quintero and Fischel both performed DCF valuations.485 I recognize that, in certain situations, “[p]roperly conducted DCF analyses can be a useful valuation tool to ‘corroborate’ market prices and evidence.”486 Here, however, neither expert persuaded me that a DCF analysis is the proper method by which to value SolarCity given the facts of this case, and so I decline to rely on the DCFs when analyzing whether the Acquisition price was fair to Tesla’s stockholders.487 In any event, the 485 Highfields Cap., Ltd. v. AXA Fin., Inc., 939 A.2d 34, 53 (Del.

2023Respondent relies 305 See Dkt. 199 (“Pet’rs’ Post-Trial Opening Br.”) at 69–70 (arguing that “[a] DCF is [n]ot [a]ppropriate”); Pet’rs’ Post-Trial Reply Br. at 45–56. 306 See, e.g., DFC, 172 A.3d at 388 ; Dell Appeal, at 21–22; Jarden, 236 A.3d at 324; AOL, 2018 WL 1037450 , at *1 (“[N]o presumption in favor of transaction price obtains.”); Panera, 2020 WL 506684 , at *18–19. 307 Regal, 2021 WL 1916364 , at *19 (quoting Jarden, 2019 WL 3244085 , at *2). 308 Regal, 2021 WL 1916364 , at *44. 309 Id. at *19 (quoting Panera, 2020 WL 506684 , at *40). 54 on the $8.30 figure in a limited way—as cont

2022May 3, 2004) (“This Court views the parties’ virtual non-treatment of the comparable company valuation as a tacit concession that that alternative valuation is a ‘throwaway’ of no material significance.”); compare DOB at 54 (“Even Plaintiffs’ expert Quintero, for his now-abandoned ex post DCF analysis, employed a cost of equity below the midpoint of this range.”), with PAB at 59 (“In his Opening Brief, Musk ignores Fischel’s abandoned DCF analysis . . . .”). 489 DFC Glob., 172 A.3d at 369–70; see also id. at 366 (“[S]econd-guessing the value arrived upon by the collective views of many sophist

2020DCF Is the Only Reliable Means By Which to Appraise SourceHOV In fulfilling the statutory mandate to account for “all relevant factors” bearing on “fair value,” Delaware courts consider a range of evidence that often includes (i) “market evidence,” such as a company’s unaffected trading price or the “deal price” following an appropriate “market check”239 and (ii) “traditional valuation techniques,” 240 such as a comparable company, comparable transaction or DCF analysis. 241 In this case, however, the parties and their experts agree that the 238 Id. at 526 (emphasis in original) (citing Cede I

2020(D.I. 109) at 30–37, 65–68. 239 Dell, Inc., 177 A.3d at 27–30. 240 Cede I, 542 A.2d at 1186–87 (noting that Weinberger directs that the trial court consider traditional valuation techniques if relevant to fair value); Highfields Capital, 939 A.2d at 37 (describing DCF as a “traditional valuation methodology”). 241 Cede II, 684 A.2d at 297 ; see, e.g., Merion Capital, 2016 WL 7324170 , at *14 (considering deal price); Dell, Inc., 177 A.3d at 5 (considering, among other factors, unaffected stock price and a DCF analysis); In re Appraisal of Dole Food Co., Inc., 114 A.3d 541 , 550 (Del.

2020DCF Is the Only Reliable Means By Which to Appraise SourceHOV In fulfilling the statutory mandate to account for “all relevant factors” bearing on “fair value,” Delaware courts consider a range of evidence that often includes (i) “market evidence,” such as a company’s unaffected trading price or the “deal price” following an appropriate “market check”239 and (ii) “traditional valuation techniques,” 240 such as a comparable company, comparable transaction or DCF analysis. 241 In this case, however, the parties and their experts agree that the 238 Id. at 526 (emphasis in original) (citing Cede I

2018Bancorporation, Inc., 737 A.2d at 525 . 121 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983) (quoting Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950)). 122 DFC Global Corp., 172 A.3d at 35 1. 123 8 Del.

2024The $303.75 63 Oracle, 867 A.2d at 934 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). 64 Id. 65 Id. 66 Id. 67 Id. ¶¶ 93–96. 22 valuation, DCF analysis, and underlying management projections concerning the value of Coinbase would have had actual significance to persons who purchased stock from Defendants in the Direct Listing in the $300s and $400s.68 Defendants argue that the Andersen Report should not be considered material for three reasons.

2024The $303.75 63 Oracle, 867 A.2d at 934 (quoting Rosenblatt v. Getty Oil Co., 493 A.2d 929, 944 (Del. 1985)). 64 Id. 65 Id. 66 Id. 67 Id. ¶¶ 93–96. 22 valuation, DCF analysis, and underlying management projections concerning the value of Coinbase would have had actual significance to persons who purchased stock from Defendants in the Direct Listing in the $300s and $400s.68 Defendants argue that the Andersen Report should not be considered material for three reasons.

2022May 30, 2017) (explaining that cash flow projections are “‘the most important input’ in performing a DCF” and, without reliable projections, ‘a DCF analysis is simply a guess’” (quoting Delaware Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 332 (Del.

2022May 30, 2017) (explaining that cash flow projections are “‘the most important input’ in performing a DCF” and, without reliable projections, ‘a DCF analysis is simply a guess’” (quoting Delaware Open MRI Radiology Assocs., P.A. v. Kessler, 898 A.2d 290, 332 (Del.

2018July 8, 2013) (“[O]ne can ‘smooth’ beta by adjusting historical beta by a market beta of 1, using a 1/3 weighting factor for the market and a 2/3 weighting for the subject company’s beta . . . .”); Golden Telecom Trial, 993 A.2d at 524 (“I find that a beta that gives 2/3 weight to the Bloomberg historic raw beta of 1.32 and 1/3 weight to the 1.24 industry beta is the best approach to this DCF analysis.”). 111 the valuation literature supports the selection of a two-year period for Aruba.436 He then added the fifth-decline size premium.437 These calculations resulted in a 10% WACC.438 To calcul

2018July 8, 2013) (“[O]ne can ‘smooth’ beta by adjusting historical beta by a market beta of 1, using a 1/3 weighting factor for the market and a 2/3 weighting for the subject company’s beta . . . .”); Golden Telecom Trial, 993 A.2d at 524 (“I find that a beta that gives 2/3 weight to the Bloomberg historic raw beta of 1.32 and 1/3 weight to the 1.24 industry beta is the best approach to this DCF analysis.”). 111 the valuation literature supports the selection of a two-year period for Aruba.436 He then added the fifth-decline size premium.437 These calculations resulted in a 10% WACC.438 To calcul

2020(D.I. 109) at 30–37, 65–68. 239 Dell, Inc., 177 A.3d at 27–30. 240 Cede I, 542 A.2d at 1186–87 (noting that Weinberger directs that the trial court consider traditional valuation techniques if relevant to fair value); Highfields Capital, 939 A.2d at 37 (describing DCF as a “traditional valuation methodology”). 241 Cede II, 684 A.2d at 297 ; see, e.g., Merion Capital, 2016 WL 7324170 , at *14 (considering deal price); Dell, Inc., 177 A.3d at 5 (considering, among other factors, unaffected stock price and a DCF analysis); In re Appraisal of Dole Food Co., Inc., 114 A.3d 541 , 550 (Del.

2020(D.I. 109) at 30–37, 65–68. 239 Dell, Inc., 177 A.3d at 27–30. 240 Cede I, 542 A.2d at 1186–87 (noting that Weinberger directs that the trial court consider traditional valuation techniques if relevant to fair value); Highfields Capital, 939 A.2d at 37 (describing DCF as a “traditional valuation methodology”). 241 Cede II, 684 A.2d at 297 ; see, e.g., Merion Capital, 2016 WL 7324170 , at *14 (considering deal price); Dell, Inc., 177 A.3d at 5 (considering, among other factors, unaffected stock price and a DCF analysis); In re Appraisal of Dole Food Co., Inc., 114 A.3d 541 , 550 (Del.

2020DCF Is the Only Reliable Means By Which to Appraise SourceHOV In fulfilling the statutory mandate to account for “all relevant factors” bearing on “fair value,” Delaware courts consider a range of evidence that often includes (i) “market evidence,” such as a company’s unaffected trading price or the “deal price” following an appropriate “market check”239 and (ii) “traditional valuation techniques,” 240 such as a comparable company, comparable transaction or DCF analysis. 241 In this case, however, the parties and their experts agree that the 238 Id. at 526 (emphasis in original) (citing Cede I

2017Rev. 1021 , 1050 (2009) (discussing synergies financial buyers may have with target firms arising from other companies in their portfolio and reduced agency costs). 365 Gonsalves, 701 A.2d at 362 . 366 Pet’rs’ Post-Trial Br. at 14. 367 JX 1714 (Metrick Dep.) 245:17-19; Trial Tr. 1317:10–21 (Metrick); JX 63 at 14. 84 indicator of fair value.368 Even though I am confident that the deal price in this case is a reliable indicator of fair value, I have approached the DCF valuations performed by the parties’ experts with an open mind.369 A proper DCF analysis follows a well-defined sequence: First,

2015P’ship, 847 A.2d at 359 n.43 (citing to a highly- regarded corporate finance text for the proposition “that if the DCF analysis you perform of a stock does not match the market price, you have probably used poor forecasts”). 186 The Base Case Projections were provided to the Court in native format at JX 390.

2015P’ship, 847 A.2d at 359 n.43 (citing to a highly- regarded corporate finance text for the proposition “that if the DCF analysis you perform of a stock does not match the market price, you have probably used poor forecasts”). 186 The Base Case Projections were provided to the Court in native format at JX 390.

2020We also questioned inputs made by the court in its DCF analysis. 46 DFC, 172 A.3d at 363 . 47 Dell, 177 A.3d at 5–6 (quoting DFC, 172 A.3d at 348–49). 48 Opening Br. at 3 (“The trial court’s reliance on Jarden’s trading price on December 4, 2015, constitutes legal error because it ignores the long-recognized principle in Delaware law, reinforced in Aruba, that stock price does not equal fair value.”). 49 457 A.2d 701 (Del. 1983). 20 Although we refused to adopt a presumption in appraisal proceedings favoring deal price for fair value, we noted that “our refusal to craft a statutory presumption

2020We also questioned inputs made by the court in its DCF analysis. 46 DFC, 172 A.3d at 363 . 47 Dell, 177 A.3d at 5–6 (quoting DFC, 172 A.3d at 348–49). 48 Opening Br. at 3 (“The trial court’s reliance on Jarden’s trading price on December 4, 2015, constitutes legal error because it ignores the long-recognized principle in Delaware law, reinforced in Aruba, that stock price does not equal fair value.”). 49 457 A.2d 701 (Del. 1983). 20 Although we refused to adopt a presumption in appraisal proceedings favoring deal price for fair value, we noted that “our refusal to craft a statutory presumption

2024The court concludes that the financial projections are conservative, such that they are useful for a DCF only if the model adjusts 368 Stillwater, 2019 WL 3943851 , at *60. 369 In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 490 (Del.

2024The court concludes that the financial projections are conservative, such that they are useful for a DCF only if the model adjusts 368 Stillwater, 2019 WL 3943851 , at *60. 369 In re Radiology Assocs., Inc. Litig., 611 A.2d 485, 490 (Del.

2024Petitioners argue that the unaffected stock price is an unreliable metric because several factors undermine the efficiency of the market in which Pivotal stock traded. 334 Id. at 717 (emphasis added) (quoting In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 30 (Del.

2024Petitioners argue that the unaffected stock price is an unreliable metric because several factors undermine the efficiency of the market in which Pivotal stock traded. 334 Id. at 717 (emphasis added) (quoting In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 30 (Del.

2023See also Rosenblatt, 493 A.2d at 940 (observing “that the relative importance of the several tests of value depends upon the circumstances of each case.”) (citing Sterling v. Mayflower Hotel Corp., 93 A.2d 107 , 115–16 (Del. 1952) (reasoning that net asset value was of less importance than earning power, given the nature of the assets of the two companies)).

2018Bancorporation, Inc., 737 A.2d at 525 . 121 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983) (quoting Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950)). 122 DFC Global Corp., 172 A.3d at 35 1. 123 8 Del.

2018Bancorporation, Inc., 737 A.2d at 525 . 121 Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983) (quoting Tri-Continental Corp. v. Battye, 74 A.2d 71, 72 (Del. 1950)). 122 DFC Global Corp., 172 A.3d at 35 1. 123 8 Del.

2018As noted, references to the 6th LPA or the subsequent 7th LPA are to the “LPA.” 42 Brinckerhoff V, 159 A.3d at 249. 43 TAC ¶¶ 117–18. 11 fair value, EEP GP’s 2014 DCF analysis and the value of the Special Tax Allocation and Liquidation Preference to EEP GP.44 C.

2015If an analysis, relied upon to assess whether a sales price represents fair value, in turn uses that very sales price as a check on its own plausibility, and if it must be revised if it fails that check, then the process itself approaches tautology. 202 See Joseph v. Shell Oil Co., 482 A.2d 335, 341 (Del.

2015The plans to cut costs and buy farms to improve profits were part of Dole‘s ―operative reality‖ on the date of the Merger.28 28 See id.; accord Cede & Co. v. Technicolor, Inc., 758 A.2d 485, 499 (Del. 2000) (holding that post-closing evidence that validated a pre-merger forecast was admissible to show that ―plans in effect at the time of the merger have born fruition‖); Cede & Co. v. Technicolor, Inc., 684 A.2d 289 , 298‐99 (Del. 1996) (requiring that valuation include 79 The modified DCF analysis suggests that with the benefit of full information about Dole‘s value, including its plans for co

2014Ch. 2011); see also Loudon v. Archer–Daniels–Midland Co., 700 A.2d 135, 145 (Del. 1997) 31 how and why a financial advisor chooses certain discount rates or multiple ranges when conducting a DCF analysis goes well beyond the “fair summary” that is required under our law.

2014Ch. 2011); see also Loudon v. Archer–Daniels–Midland Co., 700 A.2d 135, 145 (Del. 1997) 31 how and why a financial advisor chooses certain discount rates or multiple ranges when conducting a DCF analysis goes well beyond the “fair summary” that is required under our law.

2011Open MRI, 898 A.2d at 321-24 (adjusting company's income to adjust for overpayment to controller for services, and incorporating that adjustment to DCF analysis); ONTI, Inc. v. Integra Bank, 751 A.2d 904, 917-18 (Del.Ch.1999) (determining fair value using DCF analysis after adjusting projections to increase fees paid to corporation by affiliate of controller from 20% to 40%); Francis I. duPont & Co., 312 A.2d at 351 (determining fair value after adjusting distribution fee paid to controller from 30% to 12.5% because controller failed to prove that the actual distribution fee *473 was fair); se

2011Open MRI, 898 A.2d at 321-24 (adjusting company's income to adjust for overpayment to controller for services, and incorporating that adjustment to DCF analysis); ONTI, Inc. v. Integra Bank, 751 A.2d 904, 917-18 (Del.Ch.1999) (determining fair value using DCF analysis after adjusting projections to increase fees paid to corporation by affiliate of controller from 20% to 40%); Francis I. duPont & Co., 312 A.2d at 351 (determining fair value after adjusting distribution fee paid to controller from 30% to 12.5% because controller failed to prove that the actual distribution fee *473 was fair); se