Example
Tad's Enterprises ran 6 steakhouses
in the NY area. It also owned an algae production
and marketing company, as well as a geothermal
power production company. In short, the company's
managers had no idea what they wanted to be.
In 1987 Tad's sold its steakhouses
for $9.75 million and then took the remaining
businesses private -- that is, it cashed out
the company's public shareholders and the majority
insiders retained a controlling interest of
the reduced company. In the transaction, public
shareholders received $13.25 per share.
The Ryan brothers, owners of 5.5%
of Tad's shares, dissented from the transaction
and sought an appraisal of their shares. They
later amended their complaint to add claims
that the Tad board breached its fiduciary duties
in approving the two-step transaction.
The court agreed: the majority
shareholders breached their duties in selling
the 6 steakhouses and taking the other assets
private. The court decided:
Ultimately, the court rejected the palintiff's
argument to rescind the transaction as a fiduciary
breach since the plaintiffs' had sat on their
claim. Instead, the question became one of fair
value in the appraisal -- what would the plaintiffs
have received if the transactions had been consummated
at a fair price? Review Ryan
v. Tad's Enterprises, Inc [full version] (Ch.
Del. 1996).
In particular, consider how the court determined
the value of Tad's algae marketing business (Cell
Tech), see Cell
Tech valuation (excerpts from opinion) --
| Issue |
Questions |
| Valuation methods |
- How did Tad's board set cash-out price
(historical investment costs in Cell Tech)
?
- How did plaintiff argue the court should
look at subsequent transactions (the offer
for Cell Tech four months after the cash-out
and then its sale two years later) ?
- What valuation method did court choose
for Cell Tech? Why not rescissory damages?
|
| DCF
method |
- how did the court determine the expected
returns?
- whose return / net cash flow figures
did the court accept?
- what did the plaintiff assume in
its computation of terminal value?
- why did the court accept the defendant's
discount rate?
- what was this rate based on?
- how did the defendant use the CAPM?
- how did the court's DCF methodology
contradict itself?
|
| Alternative computations |
- What would be the result if the court
had accepted (1) the plaintiff's expected
returns and the defendant's discount rate?
(2) the defendant's expected returns and
the plaintiff's discount rate?
- Why did the court mix and match --the
plaintiff's expected returns with the
defendant's discount rate? Is this approach
inherently contradictory?
- How much would the valuation have been
if the court had been consistent in using
plaintiff's returns and defendant's discount
rate? Why didn't the parties call the
court on its discrepancy?
|
| Prejudgment interest |
- What were the parties' arguments
- How did the Court handle this?
|
The plaintiffs would have received $418,700
in the merger. They received $753,976 (plus prejudgment
interest) in their court challenge. Did they win?
|
2.5.1 CAPM Basics