Summary
holding Delaware law “permit consideration of post-merger evidence that could have been discerned at the time of the merger, but [does] not [] permit consideration of post-merger evidence that was not capable of being known on the date of the merger”
Summary of this case from Andes Capital Fin. v. Crossed Keys LLCOpinion
C.A. No. 7129.
February 25, 1999.
Robert K. Payson, Arthur L. Dent, Potter, Anderson Corroon, LLP, Wilmington, DE.
Thomas J. Allingham, II, Leonard P. Stark, Skadden, Arps, Slate, Meagher Flom, Wilmington, DE.
John G. Day, Morris and Morris, Wilmington, DE.
Dear Counsel:
This is my decision on Cinerama's Motion for Reconsideration of my January 29, 1999 Memorandum Opinion appointing an appraisal expert to appraise Technicolor's stock. The press of other matters prevents me from providing you with a more expansive response to Cinerama's motion. Accordingly, I will briefly address Cinerama's motion point by point.
1. The Independent Expert Must Serve As A Witness, And Not As A Court Appointed Appraiser or Special Master
To borrow a phrase, Cinerama's assertion on this point is "demonstrably and objectively incorrect." The 1976 amendment to § 262(e) did not strip from the Court of Chancery all power to appoint special appraisal experts or masters in appraisal proceedings. The 1976 amendment removed the requirement of special masters in appraisal actions. In addition, 10 Del. C. § 372 provides that "[t]he Court of Chancery may, in any cause pending in the Court of Chancery of this State, appoint a Master in Chancery, pro hac vice in such particular cause." (emphasis added) To the same effect is Chancery Rule 135, which states that "[t]he Court shall have authority in any cause pending in the Court of Chancery . . . to appoint a Master in Chancery. . . ." (emphasis added)
No one can seriously argue that this Court is without power to appoint a special master, or an independent appraisal expert, to appraise stock value in an appraisal proceeding. The Court also has the inherent authority to define the nature and scope of the duties to be performed by the Court's appraisal expert or special Master. The duties of such an expert may change from case to case, depending on the unique circumstances of the particular action. If the expert or special Master is to assist the trial court, I would think that the trial judge should have authority to establish the parameters of the expert's duties. My January 29 Opinion tried to do just that. Cinerama and Technicolor will have full opportunity to present evidence and argument to the expert, and ultimately challenge the expert's findings and conclusions, in the manner contemplated by the Court's Rules. See Chancery Rules 135-144. Furthermore, the expert appointed by the Court shall be paid equally by the parties, although the Court may assess as costs all of the expert's fees to one party if the circumstances warrant.
I have appointed an independent expert who will function much like a special appraisal Master. This is the procedure I intend to follow in this case. I would think any reasonable person could understand how and why I have come to this conclusion. The record in this case is vast. The case was tried before Chancellor Allen, and thus I am forced to consider a voluminous record on remand. Moreover, as several passages from the Supreme Court's Remand Opinion quoted in my January 29 Opinion should illustrate to any impartial observer, it is not precisely clear which valuation determinations may have to be revised as a result of Chancellor Allen's improper majority acquiror principle. Finally, I am not an expert in corporate finance, and to bring myself up to the level of knowledge of the independent expert I have appointed would take years of study and practice in the field. For all of these reasons, I have concluded that a special appraisal expert should be appointed to assist the Court, and nothing in Cinerama's motion persuades me otherwise.
2. The Expert Should Receive Neutral Instructions Consistent With The Law Of The Case.
Despite Cinerama's disparaging comment on my level of familiarity with the parties' briefs and the record ("The Opinion . . . appears to be the product of a preliminary assessment of the parties' briefs without consideration being given to the record ( see Opinion at 29). . . ."). I have thought long and hard on the questions raised in the briefs and I have tried to assimilate as much of the record as is humanly possible given the rather full schedule of a trial judge. Consequently, I do not agree with Cinerama that my observations about certain questions, outlined in my January 29 Opinion, improperly biases the expert's responsibilities to appraise Technicolor's stock consistent with the Supreme Court's Remand Opinion. See January 29, 1999 Opinion at 25-30. My January 29 Opinion, moreover, plainly states that "the expert may reject all of my suggestions," so long as he explains "why the suggestions are not relevant or are incorrect." January 29, 1999 Opinion at 29. In addition, by alerting the parties in advance to my thinking on certain issues, I thought I was helping the parties by giving them an opportunity to convince the expert of my wisdom, or my error, as the case may be. Thus, I reject Cinerama's suggestion that I have unfairly tainted the expert's approach to the issues on remand. I also reject Cinerama's request that I instruct the expert to review only the evidence and the arguments that Cinerama contends should be considered in the course of appraising Technicolor's stock.
I cannot find anything on page 29 of my Opinion that might lead Cinerama to make such an accusation against me. Perhaps Cinerama misread footnote 25 as saying that I had not yet read the briefs; in fact, I said I would review the briefs before issuing a final opinion based on the special Master's work.
In fairness, perhaps Cinerama misread this part of the January 29 Opinion. The Court's comments directed to particular parts of the Torkelsen model results from the fact that Rappaport's model adopts the wrong legal theory ( i.e., the Kamerman plan). Thus, Torkelsen's report constitutes the starting point for the Court's (and the neutral expert's) inquiry. The Court cannot ignore, however, fundamental flaws in that report (unrelated to the plan it used) and needs to have the neutral expert consider the flaws that Chancellor Allen identified.
3. Evidentiary Issues Requiring Determination Before The Expert Begins Consideration Of The Evidence.
A. Resolution of Cinerama's Rule 63 Contention
Accusing me of "fundamental legal error," Cinerama demands a ruling on its Rule 63 contention before the neutral appraisal expert begins his assignment. On this point, Cinerama insists, for example, that it has an absolute due process right, pursuant to Chancery Rule 63, to recall certain witnesses, and that it has the absolute right to foreclose the neutral expert (and the Court) from considering certain inputs to the DCF model provided by Rappaport, Hamada, Kamerman and others.Again, however, the heat of Cinerama's attack on my January 29 Opinion effectively obscures the rationale for my ruling. Rule 63 provides that when a successor trial judge takes over from the original presiding trial judge, he or she shall, at a party's request, recall any witness "whose testimony is material and disputed and who is available to testify again without undue burden." Chancery Rule 63. How can one be confident, at this stage of the proceeding, that the testimony or evidence proffered by Cinerama (or by Technicolor, for that matter) is material to the appraisal calculation? The Court's neutral appraisal expert will be able to assess the materiality of Cinerama's witnesses and evidence and render a preliminary report, to which the parties will then respond. This process ultimately will assure Cinerama two bites at the apple — once before the neutral expert and, again, before me. How this procedure violates Cinerama's due process rights, I must confess, completely escapes me. Nothing in my January 29 Opinion has tainted the neutral expert because the expert has carte blanche to reject my every suggestion, ignore Chancellor Allen's tainted findings, and adopt persuasive legal and factual arguments contained in the parties' already submitted briefs.
B. Klopfenstein's Report And Testimony Under DRE 702
Cinerama argues that I must resolve its objection to certain testimony as "junk science" before the expert commences his assignment. But if Klopfenstein's forecasting methodology and his sales calculations are indeed based on unreliable data or flawed methodologies, then I would expect the Court's neutral appraisal expert to be able to understand Cinerama's arguments on this point just as well as I can understand them. After all, the Court's neutral expert is a well known authority in corporate finance experienced in assessing the integrity of financial data and financial forecasting models. The Court's expert will make the initial determination whether the Klopfenstein testimony and report is reliable and relevant.
4. Established Law Of The Case Principles Preclude The Court — Or Its Expert — From Reconsidering The Discount Rate Or Technicolor's Cost Of Debt
Cinerama contends that I have erred by suggesting that the neutral expert should also revisit the discount rate and Technicolor's cost of debt in light of the Supreme Court's finding that the Perelman Plan was in effect on the date of the merger. The discount rate and Technicolor's cost of debt may well be law of the case, and therefore the neutral expert must apply these determinations (15.28% discount rate; $19.9 million corporate debt). With due respect to the Supreme Court, however, it seems to be at least conceivable that these numbers might be affected if the expert is to value Technicolor under the Perelman Plan. Chancellor Allen found the discount rate and the level of corporate debt, but his findings were tainted by his erroneous legal theory. The Supreme Court stated it could not determine the extent to which Chancellor Allen's erroneous legal theory tainted the inputs to the financial model that he used to value Technicolor. To my mind, that comment at least theoretically admits of the possibility that the inputs to the cost of debt and discount rate calculations were also improperly tainted by the Chancellor's erroneous legal theory. Or maybe not. I invited the neutral expert to think about it, but I did not direct him to change the cost of debt and discount rate findings.
5. Technicolor Assets Targeted For Sale Must Be Valued On A Liquidation Basis.
I am afraid that two words in my January 29 Opinion may have caused Cinerama to think that I was directing the neutral expert to value certain Technicolor divisions as "going concerns." That was not my intention. They should be valued based on their liquidation value. My only question, however, is whether some thought should be given to how quickly these assets could be liquidated? Perelman slated certain assets for sale. To consummate his plan, Perelman needed to find a buyer. Therefore, in order to calculate those assets' liquidation value at the time of the Cash Out, before a buyer was found, it seems reasonable to factor in the risk that a buyer might not be found for each particular asset within a year or that a buyer who was found might not be willing to pay the asking price. My opinion merely directs the expert to consider those issues in calculating an asset's liquidation value. Although Cinerama appears to be alarmed over any suggestion of independent thinking by the Court or by its expert, I fail to see how it is necessarily prejudicial to Cinerama or inconsistent with the Supreme Court's Remand Opinion.
6. Neither This Court Nor The Independent Expert May Accord Deference To The Factual Findings Of Chancellor Allen's Revised Opinion
At about this point in Cinerama's motion, I begin to experience a sensation similar to whiplash. The fourth point of Cinerama's motion chastises me for not according enough deference to Chancellor Allen's factual findings, but the sixth point of Cinerama's motion takes me to task for suggesting that the expert might be able to rely on a few of the former Chancellor's findings. Trial judges are accustomed to such treatment, but we do not enjoy it.
Again, the neutral expert shall appraise Technicolor, using the Perelman Plan, and may rely upon those parts of Chancellor Allen's findings that the expert concludes were not tainted by his legal error and that the expert concludes may properly be used in calculating the value of Technicolor
7. May The Court And The Neutral Expert Consider Post-Merger Evidence?
Finally, I have considered Cinerama's argument regarding this Court's (and the expert's) right to consider post-merger evidence. This issue was not addressed in my January 29 Opinion. All I can say is that I understand Delaware law (judicial precedents, the appraisal statute, and the law of the case) to permit consideration of post-merger evidence that could have been discerned at the time of the merger, but not to permit consideration of post-merger evidence that was not capable of being known on the date of the merger. That has been standard appraisal jurisprudence at least for as long as I have been on this Court. If it has changed, I am not aware of it. Gonsalves v. Straight Arrow II, Del. Supr., No. 232, 1998, Walsh, J. (Jan. 5, 1998) (ORDER), does not, in my opinion, alter this fundamental principle of Delaware's appraisal law.
The motion for reconsideration and withdrawal of my January 29 Opinion is denied.
* * *
I have already advised counsel of the identity of my appraisal expert. Please advise me in writing within five days of this letter of how you intend to arrange creation of a fund for the expert's expenses.
One last comment. I too am concerned that things be done correctly without the possibility of another reversible error. That is one of the reasons for my decision to appoint a neutral appraiser with expertise in corporate finance. So, in that spirit, I invite Cinerama, and Technicolor, to apply for certification of an interlocutory appeal to the Supreme Court with regard to any ruling in this letter or in my January 29, 1999 Opinion. Although I believe that I have exercised my discretion consistent within the letter and the spirit of the Supreme Court's Remand Opinion, I at least am willing to admit that reasonable minds could reach different interpretations of the Remand Opinion. Accordingly, in the interest of time and effort, I will happily certify either of these two decisions to the Supreme Court. Additionally, I will join the parties in petitioning the Supreme Court to expedite the interlocutory appeal, in the interest of the fair and prompt administration of justice in this overlong and overlitigated appraisal proceeding. As Cinerama now advises me that "swiftness is no longer a goal" in these proceedings, a brief detour to the Supreme Court now, rather than later, seems eminently logical.
To the extent the parties are not inclined to seek interlocutory review of these rulings, however, I make one further representation. The Court's ultimate opinion after the neutral expert's final report will undertake to prevent any further remands. Specifically, the Court's ultimate opinion will adopt a fixed dollar figure as Technicolor's appraised value. Nevertheless, the opinion will be crafted in a manner that will enable the Supreme Court to select from competing alternative valuations as urged by the parties or by the neutral expert.
IT IS SO ORDERED.