Summary
excluding buyers' expected cost savings from post-merger tax status conversion
Summary of this case from In re Appraisal of Regal Entm't Grp.Opinion
Civil Action No. 18462 NC.
Submitted: May 6, 2004.
Decided: May 20, 2004.
Steven L. Caponi, Esquire Blank Rome LLP, Wilmington, DE.
David J. Teklits, Esquire Morris, Nichols, Arsht Tunnell, Wilmington, DE.
Dear Counsel:
Pending are cross Motions for Clarification and Reargument on the issue of the appropriate tax rate in this corporate appraisal case. The facts, which are well known to the parties, are set forth in the Court's April 22, 2004 Memorandum Opinion and will not be repeated here.
See Ng v. Heng Sang Realty Corp., 2004 WL 885590 (Del.Ch. Apr. 22, 2004).
The plaintiff's motion seeks to clarify inadvertent errors in the April 22, 2004 Opinion where the Court referred, in various places, to tax rates based on Heng Sang's "gross revenue" when what the Court actually intended was to refer to "net operating income." To correct that error, a revised Opinion was issued on May 18, 2004. That revised Opinion clarifies the references and makes clear the rate base to which the Court intended to refer in discussing the tax rate assumption for purposes of a discounted cash flow (DCF) valuation of Heng Sang. Because the revised Opinion essentially grants the plaintiff's Motion, that Motion need not be further addressed.
The defendant has also moved for reargument. It advances two contentions. First, the defendant asks the Court to adjust the salary assumptions in the plaintiff's DCF analysis to be consistent with both an assumed tax rate of 11% of gross revenue and with 44.5% of net operating income. Second, the defendant asks the Court to change the plaintiff's adjusted net asset valuation by utilizing the corporate level expense assumptions that this Court determined were appropriate for the plaintiff's DCF analysis. Neither argument has merit.
A. The Salary Adjustment Argument
Contending that the tax rate adjudicated by the Court (11% of net operating income) is erroneous, the defendant first argues that the testimony of the plaintiff's expert, Mr. Penny, does not support the Court's subsidiary finding that historically, Heng Sang's directors' and officers' salaries were increased so as to minimize income taxes. Indeed, Defendant points out, at trial Mr. Penny conceded that if the company was unable to convert to a subchapter S corporation before the merger, then Heng Sang must be valued as a subchapter C corporation. That concession is dispositive, defendant urges, because this Court found that Heng Sang could not convert to subchapter S status without the merger having first occurred. Second, and alternatively, the defendant argues that to value the company based on a tax rate equivalent to 11% of gross revenues, "the salary line item in the projections [in the Landauer report] must be adjusted" to reflect that Heng Sang's officers would continue to increase salaries as a tax saving measure.
This expression was corrected to reflect 11% of net operating income in the Revised Opinion issued May 18, 2004.
In determining fair value, this Court is not required to give dispositive weight to the testimony of Mr. Penny or of any other expert. The Court is free to accept, reject, or give whatever weight to expert opinion testimony that it deems appropriate. It may disregard any part of an expert's testimony in favor of evidence it finds to be more credible. Mr. Penny testified that if Heng Sang could not be valued as a subchapter S corporation, then it must be valued as a subchapter C corporation. Despite that, the Court found, for reasons grounded upon independent credible evidence, that even though Heng Sang must be valued as a subchapter C corporation, a tax rate of 11% of net operating income was an appropriate assumption.
Longoria v. State, 168 A.2d 695, 704 (Del. 1961), quoting Dashiell v. State, 154 A.2d 688, 690 (Del. 1959).
Defendant's second argument is misconceived, because it presupposes that the adjudicated tax rate is 11% of "gross revenues." In fact, the adjudicated tax rate is 11% of "net operating income." B. The Net Asset Valuation
See note 3, supra.
The defendant next requests the Court to adjust plaintiff's adjusted net asset valuation based on the corporate level expenses that were determined to be appropriate for purposes of a DCF valuation. This argument is procedurally barred. To prevail on a motion for reargument, the moving party must demonstrate that the Court's opinion was based on a misapprehension of a material fact or a misapplication of the law. Parties may not use reargument as a vehicle to raise new issues that were not litigated at trial. At trial and in the post-trial briefing, the defendant's sole argument was that plaintiff's net asset valuation was proscribed by Paskill v. Alcoma. At no time did the company advance the alternative (and its current) argument that adjustments must be made to the plaintiff's net asset valuation, if the Court upheld certain corporate level expense inputs relevant to that valuation. Because this contention is raised for the first time on reargument, it will not be considered.
In re ML/EQ Real Estate Pshp. Litig., 2000 WL 364188 at *1 (Del.Ch. March 22, 2000).
Cole v. Kershaw, 2000 WL 1336724 at *3 (Del.Ch. Sept. 5, 2000).
747 A.2d 549 (Del. 2000).
For the foregoing reasons, (1) the plaintiff's Motion for Clarification is granted, and has been implemented in the Revised Opinion filed on May 18, 2004; and (2) the defendant's Motion for Reargument is denied.