The Delaware Supreme Court heard argument on January 13th in the SourceHOV case, with interesting issues on the proper standard of review, the concept and application of operative reality, and expert credibility coming up. Some key questions asked and argued were:
- Of relevance to private company investors: what is the standard of review appropriate when there is no market evidence for an appraisal fight, and the Court is forced to decide between a ‘battle of the experts’? While questions of ‘standard of review’ may seem foreign to investors, the standard of review can heavily influence how likely a higher court is to leave the decision of the lower court in place. Here, where SourceHOV has so far refused to pay the investors despite the judgment, a sense of how likely the decision being overturned is would weigh into any calculation of resolution.
- Of relevance to all investors interested in appraisal rights: How must a court deal with the “operative reality” of the company? Operative reality speaks to what is ‘actually’ occurring at the time of the challenged corporate action. For example, in 2017 case SWS, changes to SWS’s capital structure as the result of cancelling debt in exchange for equity were part of the “operative reality” because the exercise of the warrants and debt cancellation was a known element of value as of the Merger Date and was not conditioned or contingent on the merger. Operative reality depends on the facts of each specific case.
- And of relevance to all: how much does expert credibility matter, and how is credibility overall determined by the trial court in an appraisal case? Of relevance here, in SourceHOV, the Company’s expert, and the Company, were considered less credible in part because of extremely low valuations, as well as alleged malfeasance regarding the backdating of a document. As one prior analysis observed, the Chancery Court, in a case where the parties agreed that market based evidence of value was lacking or irrelevant, went back to ‘traditional’ valuation methodologies, ultimately adopting the vast majority of the petitioner’s expert’s discounted cash flow analysis based on the credibility of that analysis.
We’ll continue to cover this case as the Delaware Supreme Court renders its decision.
You can view arguments of the Delaware Supreme Court here.
You can read Law360’s review of the argument here.
We previously covered the Chancery Court decision here.