## Facts

- The Orchard Enterprises, Inc. was a NASDAQ-listed digital music distribution company.
- Dimensional Associates, LLC was Orchard’s controlling stockholder, holding about 40% of common stock and nearly all preferred stock, with roughly 53% voting power on an as-converted basis.
- In July 2010, Orchard completed a controller-led going-private merger that cashed out public common stockholders at $2.05 per share.
- Former common stockholders sought appraisal under 8 Del. C. § 262, asserting fair value of $5.42 per share based on a discounted cash flow (DCF) analysis.
- Orchard contended the merger price was generous and proposed fair value of $1.53 per share.
- A central dispute concerned Dimensional’s preferred stock, which carried a $25 million liquidation preference payable only upon: (1) dissolution, (2) a sale of substantially all assets leading to liquidation, or (3) a sale of control to an unrelated third party.
- The merger did not trigger any contractual event that required payment of the liquidation preference, but Orchard argued the preference should still be treated as a dollar-for-dollar reduction when valuing the common.
- At trial, both sides presented DCF-based expert valuations disputing key inputs, including discount rate methodology (CAPM versus build-up models), risk adjustments, and whether to reflect the liquidation preference in valuing the common.

## Issues

1. How should “fair value” of common stock be determined in a § 262 appraisal arising from a controller-led going-private merger?
2. Must an untriggered $25 million preferred stock liquidation preference be subtracted from enterprise value as a reduction to the appraised value of the common?
3. How should the court assess competing DCF inputs, including discount rate construction and risk adjustments?

## Decision

- The Court of Chancery determined the fair value of Orchard’s common stock as of the merger date was $4.67 per share.
- The court declined to treat the untriggered $25 million preferred liquidation preference as an immediate reduction to enterprise value for purposes of valuing the common.
- The court applied a going-concern valuation framework and used a DCF methodology with discount-rate inputs grounded in mainstream financial theory, including CAPM and an appropriate size premium.
- The court awarded statutory interest on the appraisal amount from the effective date of the merger.

## Legal Principles

- Appraisal under 8 Del. C. § 262 requires valuation of the corporation as a going concern as of the merger date, excluding speculative post-merger outcomes.
- Preferred stock rights are enforced according to their contractual terms; preferences payable only upon specified triggers are not treated as current liabilities when the merger does not activate those triggers.
- When allocating value between preferred and common in appraisal, the court should value the enterprise as a going concern and then allocate value consistent with the operative terms of the capital structure at the valuation date, rather than importing a hypothetical liquidation waterfall.
- DCF remains an accepted appraisal tool, but discount-rate construction should reflect accepted finance methods; risk adjustments should avoid double counting risks already captured in projections or other pricing components.

## Conclusion

The Court of Chancery appraised Orchard’s common shares at $4.67 per share, holding that an untriggered preferred liquidation preference could not be netted dollar-for-dollar against going-concern value in a § 262 appraisal and that value should be determined through a DCF-based going-concern analysis with contract-faithful allocation between preferred and common.


In re Appraisal of Orchard Enters., Inc., No. 5713-CS, 2012 WL 2923305 (Del. Ch. July 18, 2012)