Del. Court Defers to Appraiser's Valuation of PECO Units

By Michael Greene

Jan. 5 — Two PECO Logistics LLC investors that exercised their right to sell back preferred units to the company must accept a repurchase price determined by a valuation firm, the Delaware Chancery Court ruled Dec. 30.

In a memorandum opinion, Chancellor Andre G. Bouchard found that under the LLC agreement, the parties were bound by a valuation firm's determination of the fair market value of the units and the agreement didn't provide for judicial review of the valuation.

Accordingly, the court concluded that it should refrain from “second-guessing” the substance of appraiser Duff & Phelps Corp.'s valuation.

Limited Review

The dispute stemmed from Walnut Investment Partners LP and Walnut Private Equity Fund (“Walnut investors”) refusing to transfer back their preferred units after exercising put rights. As a result, PECO filed a lawsuit in the chancery court seeking a declaration that it had complied with the terms of the LLC agreement and that the Walnut investors were bound by Duff & Phelps's determination of the value of the put units.

Under the LLC agreement, once the investors had exercised their put rights, the company was required to retain a nationally recognized valuation firm to determine the fair market value of the units in accordance with a specified formula.

The investors took issue with several aspects of Duff & Phelps's valuation. They specifically claimed that whenever there was ambiguity in the LLC agreement regarding the application of the valuation methodology, the appraiser took an approach that benefited PECO at their expense.

Judgment Calls

However, the court found that it should defer to Duff & Phelps's reasonable judgment calls in applying the valuation formula because the parties unambiguously granted the firm sole authority to determine value.

“Had the LLC Agreement provided for judicial review of disputes over that determination, questions about the reasonableness of Duff & Phelps’ assumptions might be fair,” Bouchard said. He added that “the Court will not take mere allegations of ambiguity about the valuation methodology as an invitation to circumvent the structure of the deal to substitute its own judgment for that of the valuation firm.”

The court also found that the investors were not left without legal protection. It observed that it could still review whether the appraiser's determination was a product of good faith and independent judgment, which involved determining whether there was a breach of the implied covenant of good faith and fair dealing inherent in every contract.

However, the court found that the investors failed to plead facts that such a breach existed here.

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