After concluding that neither party had presented a reasonable valuation alternative method, the Court of Chancery used the merger price to determine “fair value” in a recent statutory appraisal proceeding where the sales process leading up to the merger had been judicially challenged, reviewed and found to be free of fiduciary issues.  In Huff Fund Investment Partnership d/b/a Musashi II, LTD, v. CKx, Inc., C.A. No. 6844-VCG (Del. Ch. Nov. 1, 2013), petitioners sought to perfect their appraisal rights in connection with the acquisition of CKx, Inc. (“CKx”), a publicly traded entertainment company, by the private equity firm Apollo.  Prior to the 2011 acquisition, CKx’s primary assets consisted of: (1) 19 Entertainment, Inc., which owned the distribution rights to the hit reality competition, American Idol, (2) Elvis Presley Enterprises, Inc., which owned the name and image of Elvis Presley, and (3) Muhammad Ali Enterprises, Inc., which owned the name and image of the boxing champion, Muhammad Ali.  The nature of CKx’s assets proved to be a challenge to the Court’s determination of the “fair value” or going-concern value of CKx at the time of the merger.  CKx’s future revenue streams were uncertain because the popularity of American Idol had waned over the prior five years, and CKx’s contract with Fox for its redistribution was set to expire at the time of the merger. 

Petitioners’ expert witness used a variety of valuation methodologies to derive CKx’s going-concern value, including the discounted cash flow method, a “guideline” comparable company method and a “guideline” comparable transactions method.  However, the unpredictable nature of CKx’s historical cash flows and the complete lack of any truly comparable companies or transactions rendered the various methodologies unreliable in the Court’s view.  Management estimates of future revenues from the American Idol franchise supplied to petitioners’ valuation expert for his DCF analysis were markedly lower than projections supplied to potential buyers and lenders of CKx prior to the merger.  Given the lack of other reliable valuation methodologies, the Court noted that “an arms-length merger price resulting from an effective market check is entitled to great weight in an appraisal.”  The Court also noted that the Court of Chancery had previously placed 100% weight on the merger price in determining “fair value” in at least one prior appraisal action.  The Court also rejected petitioners’ argument that the Delaware Supreme Court’s decision in Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214 (Del. 2010), rendered the merger price irrelevant in an appraisal proceeding.  The Court read the proffered Delaware Supreme Court decision as merely declining to impose a presumption systematically favoring one of the relevant factors in conducting an appraisal proceeding—merger price—over other relevant factors.