In Laidler v. Hesco Bastion Environmental, Inc., the petitioner, Patricia Laidler (a former employee of Hesco Bastion USA, Inc. (“Hesco”)) sought statutory appraisal pursuant to 8 Del. C. § 262 of her 10% interest in Hesco following a short-form merger of Hesco into Hesco Bastion Environmental, Inc., the holder of a 90% interest in Hesco (and respondent in this proceeding). Vice Chancellor Glasscock issued a memorandum opinion on May 12, 2014, determining the fair value per share of Hesco, the sole remedy for a freeze out merger, and explaining his methodology for the valuation.
Hesco and its affiliates design and manufacture large, mobile barrier units, designed to be filled with sand and rock and rapidly deployed for protection of land and assets in the event of a natural disaster or military emergency. Due to the variable demand for the units, Hesco’s sales and revenues varied. During November and December of 2011, shortly before the January 26, 2012 merger, third party valuations of Hesco stock were prepared in connection with the death of a stockholder who retained a controlling interest in the Hesco affiliated entities, and in connection with the put right provided to Ms. Laidler in accordance with a shareholder agreement to compel Hesco to repurchase her shares in connection with the termination of her employment. Ms Laidler was offered $180 per share by Hesco for her stock and she chose not to exercise her put at that time. Two other minority stockholders (each holding a 10% interest in Hesco) tendered their shares to respondent for $207.50 per share. Ms. Laidler was similarly offered $207.50 per share in connection with the short-form merger. Ms. Laidler declined the consideration offered and filed a petition for appraisal. In connection with seeking an appraisal Petitioner obtained an expert valuation, which valued the shares as of December 31, 2011 at $515 per share.
Vice Chancellor Glasscock determined the fair value per share of Hesco based on a direct capitalization of cash flow (DCCF) analysis. While the court noted that other valuation metrics, such as the merger consideration paid to other stockholders or a market analysis of similarly situated companies, might be appropriate in other circumstances, he declined to apply them in this case. Because the merger consideration had been unilaterally determined and approved by Hesco’s single 90% stockholder, it was not an arm’s length transaction and as a result could not be an independent basis for determining the fair market value of Ms. Laidler’s minority stake. And, due to the specialized nature of Hesco’s business, comparable companies and transactions could not be reliably analyzed as a benchmark for the value of the Hesco stock.
The Vice Chancellor’s decision rested on the finding that the Hesco stock should be valued on a going-concern basis, and that its future cash flows were best predicted by past cash flows. The court rejected the respondent’s argument that cash flows from extraordinary or “non-recurring” sales should be excluded from the calculation, because while no particular emergency event could be specifically predicted, Hesco’s business was founded on the premise that extraordinary events would occur with some regularity and lead to sales of its products. The court went on to weight equally the past cash flows of Hesco for a three year period and to consider other factors such as applicable tax rate, depreciation, and capital expenditures, equity and size premium, and industry risk. The court found the fair value of one share of Hesco was $364.24 in favor of petitioner.