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AM General Holdings LLC v. Renco Group, Inc.

Court of Chancery of Delaware

May 29, 2015

AM General Holdings LLC
The Renco Group, Inc. The Renco Group, Inc.
MacAndrews AMG Holdings LLC

Submitted: February 13, 2015

Thad J. Bracegirdle, Esquire.

Joel Friedlander, Esquire.

Dear Counsel:

The Renco Group, Inc. ("Renco") and MacAndrews AMG Holdings LLC ("MacAndrews AMG") ask the Court to intervene once more regarding selection of the Third Appraiser to value AM General Holdings LLC ("Holdco").[1] In November 2014, the Court selected Valuation Research Corporation ("Valuation Research") as the Third Appraiser, "subject to a conflicts check."[2] The Court reasoned that Valuation Research "appears to be the firm most closely meeting the standards agreed to by the parties."[3] For purposes of the conflicts check, the Court relied on a test that was elaborated in Renco's Renewed Application for Appointment of a Third Appraiser[4]:

A conflict shall exist and Valuation Research shall not proceed as Third Appraiser if, at any time within the last five years, Valuation Research has performed work for or otherwise been engaged in any capacity by Renco, MacAndrews AMG, or any of their affiliates listed for purpose of the conflict check.[5]

After Valuation Research disclosed that it has performed work for clients of Paul, Weiss, Rifkind, Wharton & Garrison LLP ("Paul, Weiss"), MacAndrews AMG's counsel, Renco "refuse[d] to go forward with Valuation Research."[6] MacAndrews AMG filed its motion to order compliance with the Court's November 2014 order on January 22, 2015. Renco filed its own motion in connection with its opposition to MacAndrews AMG's motion. Renco is concerned that Valuation Research has worked with Paul, Weiss for mutual clients numerous times over the past five years and has received approximately $3-$5 million from related engagements (over an undefined period), representing work "'orders of magnitude' greater than [Valuation Research's] work with any other law firm."[7] Some work for mutual clients is ongoing, and Valuation Research's president has received thousands of emails from Paul, Weiss.[8] Furthermore, Renco faults MacAndrews AMG (and related parties[9]) for not disclosing these ties earlier. There is no issue about engagement by the parties and their affiliates, as set forth in the November 2014 order, over the last five years.[10]

Renco argues that Valuation Research cannot serve as the Third Appraiser because of its relationship with Paul, Weiss and MacAndrews AMG's non-disclosure. Under the evident partiality standard, an arbitrator's failure "to disclose a substantial personal or financial relationship with a party, a party's agent, or a party's attorney that a reasonable person would conclude was powerfully suggestive of bias" is reason to invalidate an arbitrator's award.[11] It is the burden of the party seeking vacatur to establish that an undisclosed relationship "is so intimate-personally, socially, professionally or financially-as to cast serious doubt on [the arbitrator's] impartiality."[12] The fact of non-disclosure of such relationships is enough to require vacatur, protecting courts from engaging in inefficient and unfruitful analysis of actual bias.[13] This formulation of a standard is obviously framed for application after an award; here, Valuation Research has not formally commenced its valuation work. Yet, the nature of the relationship that makes serving as an arbitrator (or appraiser) inappropriate is well-described.

The current situation is distinguishable from those in the authority Renco cites, however, because the alleged conflict is not so serious as to be disqualifying, [14] and Valuation Research disclosed its relationship with clients of Paul, Weiss before it began its work.[15] Instead, the reasoning in Anadarko Petroleum Corp. v. Panhandle Eastern Corp.[16] (though addressing a dispute over a representative selected by one party to negotiate with the other party's representative) respecting the discretion of an arbitrator is more on point. In Anadarko, the Court explained that it should not, at the outset, interfere with an arbitrator's judgment of his ability to serve once he has disclosed possible conflicts.[17] All too aptly, the Court cautioned that "[a]ny other rule might spawn endless applications and indefinite delay."[18]

On the other hand, the Court does not intend to suggest that the independence of an appraiser can never be challenged or that the standard used in its November 2014 order is a definitive test for conflicts. There may be cases where ex ante disqualification is appropriate. For example, actual misconduct[19] or close relationships could clearly render the Third Appraiser conflicted although not technically captured by the order.[20] One could also argue that ordering the parties to continue with Valuation Research would deprive them of the opportunity to make their own informed choices, flouting a major policy goal of disclosure requirements.[21] The situation in front of the Court, though, is that the parties have been attempting to select an appraiser for roughly one year and have ruled out many otherwise qualified firms based on real or perceived conflicts. Renco alleges that Valuation Research cannot serve because MacAndrews AMG did not inform Renco of the significant work Valuation Research does for clients shared with Paul, Weiss. Nonetheless, Valuation Research has disclosed this information. Paul, Weiss has represented that it "did not select, hire, retain, or pay"[22] (or recommend[23]) Valuation Research to the clients[24] whose engagement of Paul, Weiss and Valuation Research is at issue.[25] Perhaps most importantly, the Court does not conclude that Valuation Research has failed to make material disclosures or engaged in any misconduct.[26]

Renco suggests that the Court should give the parties more time to select a Third Appraiser and, if that effort is unsuccessful, choose between one more firm proposed by each side. Unfortunately, this path is not promising: MacAndrews AMG takes issue with all of Renco's alternative appraisers, [27] and (even if alternative tests are not as limited as MacAndrews AMG suggests) there does not seem to be a principled way to resolve the deadlock.[28] Again, Paul, Weiss has represented that none of its attorneys working on the current matter has worked with Valuation Research[29] and that it has "no personal or financial relationship or arrangement" with Valuation Research.[30] It is hard to believe that major law firms and valuation firms, to whom clients turn for their broad experience and professionalism, would not have common clients.[31] The conflicts test that Renco offered and the Court found reasonable in November 2014 continues to operate reasonably, and there is the safeguard of judicial review ex post.[32] The Court, thus, will not interfere with Valuation Research's professional assessment about whether it can and should serve as the Third Appraiser.

For the reasons above, Renco's motion to designate another appraiser is denied and MacAndrews AMG's motion to confirm Valuation Research's designation is granted subject to Valuation Research's determination of its ability to serve as a neutral appraiser.[33]


Very truly yours,


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