Opinion
No. 232, 1998.
January 5, 1999.
Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 8474
AFFIRMED IN PART; REVERSED IN PART; REMANDED.
Unpublished Opinion is below.
LAUREL GONSALVES, Petitioner Below, Appellant/Cross-Appellee, v. STRAIGHT ARROW PUBLISHERS, INC., a Delaware corporation, Respondent Below, Appellee/Cross Appellant. No. 232, 1998. In the Supreme Court of the State of Delaware. Submitted: December 8, 1998. Decided: January 5, 1999.
Court Below: Court of Chancery of the State of Delaware in and for New Castle County, C.A. No. 8474
Before WALSH, HOLLAND, and BERGER, Justices.
ORDER
This 5th day of January, 1999, upon consideration of the briefs of the parties and oral argument it appears as follows:
(1) This appraisal action is once again before this Court following a remand to the Court of Chancery. The extensive background of the dispute is set forth in a previous decision of this Court. Gonsalves v. Straight Arrow Publishers, Inc., Del. Supr., 701 A.2d 357 (1997) ( Gonsalves I). We refer only to such facts as may be necessary to an understanding of the matter in its present posture.
(2) Briefly stated, the appraisal action resulted from the January 8, 1986 merger of Straight Arrow Publisher's Holding Co., minority owner of 2,000 shares, was cashed out in the merger but rejected the $100 per share merger price. The matter eventually proceeded to trial in the Court of Chancery before former Chancellor Allen who fixed the value of Gonsalves' interest as of the merger date at $131.60 per share and awarded simple interest at the legal rate. Gonsalves v. Straight Arrow Publishers, Inc., Del. Ch., C.A. No. 8474, 1996 WL 696936 (Nov. 27, 1996). Gonsalves appealed from the valuation decision and SAP cross-appealed the interest award.
(3) In Gonsalves I, this Court ruled that Chancellor Allen's valuation approach was "fatally flawed" because he had announced an intention in advance of trial to implement an either-or valuation approach by adopting the methodology and resulting price of one of the competing valuation experts. 701 A.2d at 362. We viewed such a pre-announced choice between absolutes as "at variance with the Court of Chancery's statutory obligation to engage in an independent valuation exercise." Id. Accordingly, we reversed the appraisal award and remanded the matter to the Court of Chancery for further consideration. Notwithstanding our reversal and remand, we did affirm a discrete ruling of the Chancellor that disallowed the capitalized value of an alternative cost which may occur post-merger. With respect to SAP's cross-appeal on the award of interest, we noted the absence of reasons supporting the award of interest and assumed that the Court of Chancery "[would] supply reasons for any award of interest if that issue continue[d] to be a matter of dispute." Id. at 363.
(4) Upon return of the case to the Court of Chancery, responsibility for its disposition was assumed by Chancellor Allen's successor, Chancellor Chandler. Apparently, the parties rejected the Chancellor's suggestion for the use of a court-appointed neutral expert witness on valuation (an alternative recommended by this Court in Gonsalves I) but agreed that the court should decide the matter based on the record compiled before Chancellor Allen, with additional briefing. In a decision dated March 26, 1998 ( Gonsalves v. Straight Arrow Publishers, Inc., Del. Ch., C.A. No. 8474, 1998 WL 155556 (Mar. 26, 1998)) (the "Remand Opinion") the Chancellor did not fix a specific per share award but made certain findings adopting valuation "guidelines" which when applied by the parties resulted in a value of $173.82 per share. The court also awarded pre-judgment interest from the date of the merger, compounded monthly.
(5) Gonsalves has appealed from the Remand Opinion contending that it: (1) accords "law of the case" deference to the earlier decision of the Court of Chancery reversed by this Court; and (2) improperly discounts SAP's success to be anticipated from the business plan in effect as of the date of the merger. SAP has cross-appealed from the award of interest on the ground that the form of interest was contrary to the law of the case and constituted an abuse of discretion by applying a "recently formulated rule" of awarding compound interest in appraisal actions, and by placing SAP in a worse position after having
(6) The parties are in essential agreement that the Chancellor, in his Remand Opinion, felt obliged to follow the law of the case, i.e., the law formulated by this Court in Gonsalves I. They diverge sharply over what areas he could properly revisit under that principle. The Chancellor viewed himself as constrained from reconsidering his predecessor's findings only to the extent they were "expressly or impliedly overturned" by this Court. He thus determined to give reconsideration in two areas only: (i) where Chancellor Allen's decision did not "expressly provide justification for both the rejection of one expert's conclusion and the acceptance of the other expert's conclusion" and (ii) issues "fully supported initially," but requiring revisiting to "reflect the availability of new information not previously available. All other issues constitute law of the case." 1998 WL 155556 at *4.
(7) The Court of Chancery accepted the agreement of the parties that the most appropriate methodology for valuing Gonsalves shares was the earnings capitalization formula, an approach that turns on two basic inputs — the measure of the company's earnings and a capitalization rate. The earnings measure would, in turn, be affected by three variables or factors: (i) earnings before interest and taxes (EBIT) or earnings before interest, taxes, depreciation and amortization (EBITDA); (ii) the selection of an appropriate time period over which to examine earnings; and (iii) adjustments to eliminate aberrational or non-recurring expenses. The Remand Opinion characterized these factors as "inseparably intertwined."
(8) After discussion, the court adopted an EBIT, a weighted five year earnings period (in contrast to Chancellor Allen's straight five year period) and rejected most of Gonsalves' proposed earnings adjustments, including at least one, deferred subscription revenue, because of the "law of the case." After declining to "re-open this matter on remand" and making additional "observations and conclusions," the court adopted the capitalization rate tendered by Whitman, SAP's expert.
(9) With respect to the award of interest, the Chancellor adopted the average of the legal rate of interest and a prudent investor rate proposed by Whitman because of dissatisfaction with both parties' cost of debt evidence. The court declined to adjust the award of interest for delay but did award monthly compounding.
(10) Gonsalves argues that the Remand Opinion is inconsistent with the scope of the remand ordered by this Court in Gonsalves I because it accords deference to Chancellor Allen's valuation process which this Court found "fatally flawed" by his predetermination to accept one expert's valuation "hook, line and sinker." SAP responds that the valuation guidelines set forth in the Remand Opinion are fully supported both by Chancellor Allen's thorough reasoning and the additional reasons supplied by his successor.
(11) This Court's reversal in Gonsalves I wa contemplated a new and independent evaluation of the evidence offered by both experts if the Court of Chancery were to discharge its statutory obligation. The Remand Opinion thoroughly examines all aspects of valuation and, in some respects, represents a fresh view of the evidence. Unfortunately, in certain areas its adoption of Chancellor Allen's findings creates ambiguity which appears to violate at least the spirit of the mandate. For example, with reference to an appropriate capitalization rate, a key component in SAP's valuation, the court "decline[d] to re-open" Chancellor Allen's determination because the earlier opinion provided "a full explanation." In a footnote, however, the court appears to offer "additional observations and conclusions" for accepting Whitman's capitalization rate. In a similar vein, the Remand Opinion's treatment of the excess cash issue seems to accept Chancellor Allen's previous determinations as a premise, with specific references, as impliedly "law of the case," and clearly does so with the deferred subscription revenue. In these areas, we cannot state with confidence that the spirit of our mandate has been observed.
(12) In one significant area, the earnings base, we are satisfied that the Remand Opinion offers a fresh evaluation of the evidence and, indeed, reflects a different result in the form of a five year weighted earnings base. We are also satisfied that the Remand Opinion's treatment of SAP's repositioning plan and discontinuation of unprofitable businesses was based on an independent effort to fix the value as of the date of the merger, as the statute requires.
(13) With respect to SAP's cross-appeal on the award of compound interest, we note that 8 Del. C. § 262(i) provides the Court of Chancery with the option to award either simple or compound interest. Such an award is reviewed by this Court for abuse of discretion. Rapid-American Corp. v. Harris, Del. Supr., 603 A.2d 796, 808 (1992). SAP contends that, in its previous appeal it had challenged only the rate of interest, not the form (simple) which had been fixed by Chancellor Allen. Since the form of interest was not contested in Gonsalves I, SAP argues that the decision to award simple interest represents the law of the case. In remanding the interest question in Gonsalves I, this Court remarked that "we assume that the Court of Chancery will supply reasons for any award of interest." 701 A.2d at 363.
Our previous order of remand, implicitly at least, required a fresh determination of "any award" of interest. Since the spirit of our remand, as previously noted, called for an independent fixing of value, it necessarily follows that the interest factor, inextricably connected to the shareholder's statutory award, must be examined anew. We thus conclude that the Court of Chancery was free to fix both the rate and the form of interest incident to an independent valuation effort.
(14) Notwithstanding the discretion accorded the Court of Chancery in the fixing of interest, we do have a concern as to whether the compounding was based on the merits of this case or, as SAP argues, reflective of a standard or general rule adopted by the Court of Chancery in appraisal cases. As SAP correctly notes, the Court of Chancery gave no reasons for awarding Gonsalves compound interest and, while such an award is within its discretion, it is a departure from the "standard practice," at least through the mid-1990s, of awarding simple interest. See Rapid-American Corp., 603 A.2d at 807 (quoting the trial court as deciding "not to depart from this Court's standard practice of allowing only simple interest"); Cede Co. v. Technicolor, Inc., Del. Supr., 684 A.2d 289, 302 (1996) (ruling upon motion for limited reargument and stating "[a]n award of compound post-judgment interest is the exception rather than the rule"). SAP also points out what appears to be a developing standard practice, or at least a recent trend, in the opposite direction, i.e., the routine awarding of compound interest. See Grimes v. Vitalink Communication Corp., Del. Ch., C.A. No. 12334, 1997 WL 538676 (Aug. 26, 1997), aff'd., Del. Supr., No. 425, 1997, 1998 WL 171538 (Apr. 1, 1998) (ORDER), cert. denied, 119 S.Ct. 160 (1998); LeBeau v. M. G. Bancorporation, Inc., Del. Ch., C.A. No. 13414, 1998 WL 44993 (Jan. 29, 1998); Hintmann v. Fred Weber, Inc., Del. Ch., C.A. No. 12839, 1998 WL 83052 (Feb. 17, 1998); Gilbert v. M.P.M. Enterprises, Inc., Del. Ch., C.A. No. 14416 (May 22, 1998) (ORDER).
While we decide only the case before us, SAP's contention that a new pattern, one of awarding compound interest as a matter of course, influenced the Court of Chancery's decision in this case, is of concern. Since the Court of Chancery provided no explanation for its selection of compound interest in a case where a predecessor judge had awarded simple interest, we lack a sufficient record upon which to decide the merits of SAP's cross-appeal. Of equal concern is SAP's argument that it is being penalized for succeeding on its cross-appeal of Chancellor Allen's award of simple interest by now having to pay a significantly greater amount in the form of compound interest.
We emphasize again that the Court of Chancery has broad discretion under the appraisal statute to award either simple or compound interest. But the option provided by 8 Del. C. § 262(i) precludes, ipso facto, the routine application of a standard which may have no relation to the record evidence or the merits of the appraisal proceeding. In short, the statute provides discretion to choose on a case-by-case basis, but requires explanation for the choice. Accordingly, we must remand for an explanation by the court for its selection of compound interest.
(15) It is with reluctance that we conclude that it is necessary to once again remand this protracted litigation to the Court of Chancery. We recognize the unenviable role thrust upon a judge who must undertake the retrial of a case, particularly a factually intensive appraisal proceeding initially tried by another judge. Under the circumstances, however, and in view of the entitlement of the parties to the independent valuation determination mandated by Delaware appraisal law, we have no choice. In sum, we affirm the Court of Chancery's determination as to (i) the weighted five year earnings base; and (ii) the treatment of SAP's repositioning plan and discontinuation of unprofitable businesses as affecting the value of the enterprise on the date of the merger. These rulings are to be viewed as "law of the case" upon remand. All other valuation rulings are remanded for redetermination and findings independent of the findings invalidated in Gonsalves I. Again, we do not preclude the adoption of the same or similar findings provided they arise from a view of the evidence uninfluenced by the approach found fatally flawed in Gonsalves I. The award of compound interest is also remanded for an explanation of the basis for the award.
NOW, THEREFORE, IT IS ORDERED that the judgment of the Court of Chancery be, and the same hereby is, AFFIRMED IN PART and REVERSED IN PART, and the matter is REMANDED for further proceedings consistent with this decision.
BY THE COURT:
s/Joseph T. Walsh Justice