This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is a scenario that plays out more often than it should. A closely held company has three holding entities stacked on top of one operating business, a legacy from a financing that closed fifteen years ago. Somebody finally decides to clean it up — collapse the structure, eliminate a layer, make it possible to grant options. It is housekeeping. No banker is hired. No fairness opinion is commissioned. The exchange ratio gets set off the most recent valuation sitting in a drawer, which was prepared for the auditors rather than for a deal. Both stockholder approvals go out by written consent on the same day. Total elapsed time: a few weeks.
Four years later, a court decides what that company was worth. On August 7, 2026, Vice Chancellor Paul A. Fioravanti, Jr. issued a post-trial appraisal opinion in Gladstone v. EBC Holdings, Inc., C.A. No. 2022-0867-PAF, awarding $11.08 per share where the petitioner had asked for $18.50 and the company had argued for $6.79. The award came to roughly $7.68 million on 693,165 shares, plus statutory interest running from the June 2022 merger date. The opinion is the most useful private-company valuation decision in years, and almost none of it is about the things founders worry about.
Why there was nothing to defer to
Start with what was missing. The Dell and DFC and Aruba apparatus that dominates public-company appraisal — deal price as evidence of fair value, unaffected market price, deference to a robust and conflict-free sale process — simply had no purchase. There was no auction, no market check, no trading price, no fairness opinion. The merger was an upstream reorganization collapsing a Delaware holding company into its New York parent, adopted for structural simplification and tax reasons. Management performed no merger-specific valuation because, as the CEO testified, the only result of the merger was simplification of the corporate structure.
That inverts the usual risk calculus. In a public deal, good process is a shield. In a private deal there is no shield, so exposure is whatever a trial judge computes years later — plus interest at five percent over the Federal Reserve discount rate, compounded quarterly, running the entire time. Any conversion of stock triggers appraisal under 8 Del. C. § 262, and private companies get no market-out exception. Nobody in that boardroom thought they were doing an appraisal-triggering transaction. They were.
No projections meant no discounted cash flow
The petitioner’s expert used a single-period capitalization of cash flow on the operating business, then valued non-operating assets separately. The company’s expert used a dividend discount model at the equity level, plus a guideline public company analysis on price-to-book and price-to-earnings.
The court took the capitalization structure. There were no reliable management projections, so no DCF was possible — the same problem the court confronted in Laidler v. Hesco Bastion Environmental. The dividend discount model failed because it requires a stable stream of distributable earnings, and this business operated in a highly concentrated and volatile corner of the capital markets. The guideline public company analysis got no independent weight either: three comparables was not enough, with the court noting treatises call for at least five or six, and the company’s own expert had retreated to describing it as a cross-check.
That is the first practical lesson, and it is entirely within an owner’s control. If you want a DCF — and if you want your projections to anchor it — you have to generate board-approved projections in the ordinary course, long before any transaction is contemplated. A company that has never produced a forecast cannot manufacture one credibly once litigation starts, and the court will fall back on capitalized historical earnings, normalized over a period the experts fight about. Here the parties agreed on a five-year normalization window that deliberately excluded an unsustainable boom period.
The excess cash fight is the whole ballgame on an asset-heavy balance sheet
The operating business was worth about $22.4 million on the court’s numbers. The company was holding roughly $83.6 million in cash and another $45 million in securities. So the valuation was not really about the business. It was about how much of that balance sheet belonged to the stockholders.
The petitioner said all of it beyond a minimal reserve was excess and should be added dollar-for-dollar. The company said the capital was embedded in the going concern and largely unavailable. The court refused both extremes and articulated a rule worth committing to memory: a valuation may not treat capital necessary to sustain the business as though it could be distributed without consequence while simultaneously capitalizing the earnings that capital generates — but if the balance sheet reflects value beyond what the business reasonably requires, that excess does not disappear merely because the company is regulated.
The court landed on a roughly $30 million operating reserve and treated the rest as excess. It rejected the company’s regulatory expert’s $44 million ceiling because the capital requirements were episodic rather than constant, and the actual regulatory minimum was under $1 million against more than $71 million of excess. It also rejected the company’s definition of excess cash — which was, conveniently, exactly the amount distributed as a dividend shortly after closing. A post-closing dividend, the court held, may reflect considerations unrelated to fair value as of the merger date.
The gap between the court’s $30 million and the company’s $44 million was worth roughly $1.32 per share. Nobody proved a number, so the court picked one. That is the entire lesson: build a contemporaneous, documented record of how much capital the business genuinely requires on an ongoing basis. Bonding and surety requirements, licensing net-worth minimums, insurance reserves, lender covenants, seasonal working capital swings, self-insured retentions. Board minutes, treasury policies, and regulator correspondence are the evidence. Companies that already think carefully about the cash-free, debt-free convention and what counts as operating cash in a negotiated sale are, without realizing it, building the same record an appraisal court will want.
Ordinary-course records beat litigation-driven revaluations
The company held a large portfolio of illiquid, deal-contingent securities. The court started from the contemporaneous regulatory filing and internal schedule as of the merger date, reasoning that those values were assessed in the ordinary course of business for regulatory reporting purposes, not for litigation, and therefore provided the most reliable starting point.
What it would not credit was the revaluation. Months after closing, the company’s valuation adviser cut the portfolio from roughly $36.9 million to $29.6 million and then, six days later, to about $5.6 million, using substantially reduced probabilities. The court treated that as hindsight and noted the company began questioning its methodology only after the market deteriorated further and litigation risk had materialized. The wide variation among the revised estimates, the court added, underscored their sensitivity to subjective assumptions.
Restating your numbers downward after an appraisal demand is worse than useless. It is affirmative evidence that the contemporaneous numbers were the honest ones. The same instinct that drives a seller to scrub the numbers before a quality of earnings review works against them here, because in appraisal the ordinary-course record is the exhibit.
The discount that survives, and the one that does not
This is the subtlest and most valuable distinction in the opinion. Cavalier Oil Corp. v. Harnett forbids discounting a petitioner’s stake for illiquidity or minority status — no marketability discount, no minority discount, at the shareholder level. The court applied none.
But it applied a 30 percent downward adjustment to the illiquid securities held inside the company, reasoning that a hypothetical buyer as of the merger date would have discounted those positions for illiquidity, uncertainty of completion, and the absence of reliable market pricing. It applied no adjustment to the marketable tranche. The court was candid that no record figure mechanically established 30 percent and that it selected the percentage as a valuation judgment based on conditions known or knowable at the merger date.
For any closely held company holding restricted stock, earnout receivables, carried interests, contingent consideration, or partnership interests, that is where the illiquidity argument actually belongs — as an asset-level haircut inside the enterprise, not as a discount against the dissenter’s shares. Owners frequently confuse the two and lose the argument by making it in the wrong place. Readers weighing whether to assert appraisal in a Florida deal should note that Florida’s own appraisal statute operates on a similar fair-value premise, so the framing question is the same even outside Delaware.
Smaller rulings that will decide somebody’s case
On taxes, the court used the company’s actual effective rate of 32.9 percent rather than the petitioner’s 22.41 percent industry-standard figure that omitted local tax, citing Dell‘s preference for rates consistent with the operative reality of the company. For multi-state closely held businesses this is often worth more than the discount rate fight.
On cost of capital, the court accepted the petitioner’s 1.35 beta over the company’s 1.00, on a consistency rationale worth internalizing: because cash and securities were pulled out of the capitalized operating stream and valued separately, a lower beta would import into the discount rate a risk measure tempered by assets already treated as outside that stream. The same logic drove the growth rate — 3 percent perpetual growth was rejected as unsupported because it paired higher growth with no meaningful reinvestment assumption. Strip assets out, and the discount rate must rise accordingly.
Two smaller rulings carry outsized practical weight. Related-party subordinated debt was not recharacterized as equity — nothing in the record supported doing so, and it was deducted once; if family or sponsor money is meant to be equity, paper it as equity. And a proposed forward-looking regulatory expense was refused as unproven and too speculative, though the court still captured that risk qualitatively through the growth rate and the securities haircut. Generalized testimony without budgets does not move a number.
And on the cap table, the court confronted a circular ownership structure in which the subsidiary held shares of its parent. Eight years of audited financials, tax returns, franchise tax reports, and even an estate-planning valuation had all called those shares treasury stock. It did not control. Nor did the merger agreement’s own definitions, which the court held could not dictate the appraisal answer. The decisive point, in the court’s words, was economic rather than semantic — allocating on the treasury theory would have handed the parent’s outside holders a transaction-specific benefit that did not match pre-merger economics. Clean up cross-ownership and cancel parent shares held by subsidiaries long before any conversion event.
The two cheapest defensive moves
First, prepay under § 262(h). The company here made two prepayments totaling about $5.75 million, and they were credited and stopped interest on that portion. Against a four-year case at five percent over the discount rate compounded quarterly, that is the single most cost-effective step available to a respondent, and it does not concede the valuation.
Second, get a transaction-specific valuation before you set the price. The original sin was using a securities valuation prepared for financial reporting to set an exchange ratio. If there is a minority — any minority — a housekeeping reorganization is not housekeeping. It is a priced transaction with a statutory remedy attached.
Fee shifting, for what it is worth, was denied; the court found no bad faith and distinguished Montgomery Cellular Holding Co. v. Dobler, which involved perjury and document destruction. Costs were awarded to the petitioner under § 262(j) because he beat the company’s litigation position. That asymmetry is worth understanding before deciding where to anchor.
The full opinion is available from the Delaware Court of Chancery.
If you are planning an internal reorganization, a squeeze-out, or any transaction that converts stock in a closely held company, feel free to reach out to our firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
