Hyde Park Venture Partners Fund III, L.P. v. FairXchange, LLC, C.A. No. 2022-0344-JTL (Del. Ch. July 30, 2024)
In this post-trial appraisal decision, the Court of Chancery determined the fair value of a privately-held startup corporation, and ultimately defaulted to the deal price as the “least bad” method.
The Court first noted that determining the fair value of the company was challenging because it was privately held, and no trading price was available to assess fair value. Moreover, the company was early in its development stage, and it lacked any track record to support a credible stream of revenue. Additionally, the company was pursuing a disruptive business model that would likely generate binary results: either extreme success, or total failure. Accordingly, the Court found that there was no perfect methodology for determining fair value based on the facts presented.
The Court then turned to the parties’ proposed valuation methodologies. The selling stockholders largely relied on their expert opinions, internal valuations, and investors’ reactions to the merger, none of which the Court found persuasive to determine fair value. The petitioners relied on a DCF analysis, which the Court did not find reliable based on the facts presented. The selling stockholders nevertheless argued that, even if the Court rejected the parties’ methodologies, the Court was not permitted to make its own independent valuation determination. The Court explained, however, that even if none of the parties’ proposed methods were convincing, it was nevertheless required to determine fair value. Accordingly, the Court relied on its own valuation method and held that the deal price was the most reliable fair value indicator in this case, despite a flawed sale process.
