Hi everyone,
Hope all is well considering the global economy’s downturn as a result of the Coronavirus. Yet, business activity goes on along with many court cases. Here is a case worth briefly talking about. In the case of Manichean Capital, LLC v. SourceHOV Holdings, Inc., 2020 Del. Ch. LEXIS 38, the Delaware Court of Chancery recently agreed with the parties’ experts that a discounted cash flow analysis was the only way to determine fair value while rejecting, unequivocally, the company expert’s novel approach to calculating beta. Here is the kicker, the court stated that the expert’s willingness “to go out on a limb to support a forensic valuation opinion” raised serious questions about his entire testimony. While notwithstanding recent case law from the Delaware Supreme Court that embraced the use of market indicators to determine fair value, the court and the parties agreed that here there was no reliable market evidence because the company’s stock was not publicly traded and company managers made no effort to undertake a proper sales process. As a result, the court approved of the DCF approach. The court noted the “most consequential point of disagreement” was over how to calculate the company’s equity beta. The petitioners’ expert, using a generally accepted method, calculated beta indirectly, based on 19 publicly traded comparable companies, the court emphasized. In contrast the company’s expert said there were no comparable companies and that he could not use “indirect or regression-based betas.” Therefore, he calculated beta “directly by looking to market evidence” of the company’s debt. The court observed the debt was not publicly traded; these were private loans that traded only by appointment. The expert admitted he came up with this approach for this case. He had not used this method before, nor had he seen this method used before, but hoped it would “catch on” in the future. The court, said the company’s expert was “using the courtroom as an incubator for his untested beta calculation experiment.” Bottom line- if you want to test a new method, either: a) first have it published in referred journals, b) discuss it during conferences, and/ or c) gain support from valuation heavyweights. Do not use the courts as incubators!! Until next time……..
