Document: In re Appraisal of The Orchard Enterprises, Inc., C.A. No. 5713-CS (Del. Ch. July 18, 2012)
The Delaware Court of Chancery rejected respondent’s argument that the value of the liquidation preference of its preferred stockholders should be deducted from respondent’s enterprise value when determining the value of the corporation’s common stock in an appraisal proceeding because the merger at issue did not constitute a liquidation event under respondent’s certificate of incorporation.
In July 2010, The Orchard Enterprises, Inc. (“Orchard”) effected a going-private merger with its controlling stockholder, Dimensional Associates, LLC (“Dimensional”). Orchard’s common stockholders were cashed out at a price of $2.05 per share. The merger did not constitute a deemed liquidation entitling Orchard’s preferred stockholders to their liquidation preference under Orchard’s certificate of incorporation because it was a related party merger, and Orchard’s preferred stock remained outstanding at the effective time of the merger. In this statutory appraisal action brought by holders of Orchard common stock, Orchard argued that the value of the preferred stockholders’ liquidation preference should be deducted from the enterprise value of Orchard when calculating the value of its common stock. According to Orchard, Dimensional, as the holder of a majority of the outstanding preferred stock, could demand its liquidation preference as a precondition to any future merger with an unrelated party. The Court found Orchard’s arguments unpersuasive because: (1) the issue of whether the liquidation preference may be triggered in the future was a matter of speculation as of the going-private merger date, and (2) under settled law, the petitioners were entitled to receive their pro rata share of the value of Orchard as a going concern—not its liquidation value.