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Blueblade Capital Opportunities LLC v. Norcraft Companies, Inc.

Court of Chancery of Delaware

July 27, 2018

BLUEBLADE CAPITAL OPPORTUNITIES LLC, a Delaware limited liability company, and BLUEBLADE CAPITAL OPPORTUNITIES CI LLC, a Delaware limited liability company, Petitioners,
v.
NORCRAFT COMPANIES, INC., a Delaware corporation, Respondent. Net Sales ($ Millions) YoY % change Adjusted EBITDA ($ Millions) YoY % change Base Case Projections (FY2014-2019) Upside Case Projections (FY2014-2019) FY2015-E (Stub) FY2016-E FY2017-E FY2018-E FY2019-E FY2015-E (Stub) FY2016-E FY2017-E FY2018-E FY2019-E Guideline Public Company Levered Beta Unlevered Beta

          Submitted: April 25, 2018

          David A. Jenkins, Esquire and Robert K. Beste, Esquire of Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware and Michael E. Davidian, Esquire of Blueblade Capital Opportunities LLC and Blueblade Capital Opportunities CI LLC, New York, New York, Attorneys for Petitioners Blueblade Capital Opportunities LLC and Blueblade Capital Opportunities CI LLC.

          Raymond J. DiCamillo, Esquire and Kevin M. Gallagher, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware, Attorneys for Respondent Norcraft Companies, Inc.

          MEMORANDUM OPINION

          SLIGHTS, Vice Chancellor.

         This statutory appraisal action arises out of a May 12, 2015, merger whereby Fortune Brands Home & Security, Inc. ("Fortune") acquired Norcraft Companies, Inc. ("Norcraft" or the "Company") (the "Merger") for $25.50 cash per share (the "Merger Price"). Petitioners, Blueblade Capital Opportunities LLC and Blueblade Capital Opportunities CI LLC (together, "Blueblade"), were Norcraft stockholders on the Merger's effective date and seek a judicial determination of the fair value of their Norcraft shares as of that date.

         In an appraisal action under the Delaware General Corporation Law, the trial court's "fair value" determination must "take into account all relevant factors."[1] The relevance (or not) of certain factors "can vary from case to case depending on the nature of the [acquired] company," the nature of the process leading to the company's sale and, perhaps most importantly, the evidence adduced by the parties at trial in support of their respective valuation positions.[2] "In some cases, it may be that a single valuation metric is the most reliable evidence of fair value and that giving weight to another factor will do nothing but distort that best estimate. In other cases, "it may be necessary to consider two or more factors."[3] In all cases, however, the trial court's determination respecting the "relevant factors" must be grounded in the evidentiary record and "accepted financial principles."[4]

         I am cognizant of the Delaware Supreme Court's embrace of "deal price" as a strong indicator of fair value in Dell and DFC. Those decisions teach that deal price often will be a relevant factor in the trial court's fair value calculus- particularly where the respondent company was publicly traded and sold following a meaningful market check.[5] In both cases, however, despite having been urged to do so, the Supreme Court declined to adopt a rule that the deal price is presumptively reflective of fair value.[6] Mindful of DFC and Dell, I have considered carefully whether the Merger Price (less synergies) reflects the fair value of Norcraft as of the Merger date. For the reasons explained below, I am satisfied it does not.

         In this case, the evidence reveals significant flaws in the process leading to the Merger that undermine the reliability of the Merger Price as an indicator of Norcraft's fair value. There was no pre-signing market check; Norcraft and its advisors fixated on Fortune and never broadened their view to other potential merger partners. As the parties worked to negotiate the Merger agreement, Norcraft's lead negotiator was at least as focused on securing benefits for himself as he was on securing the best price available for Norcraft. And, while the Merger agreement provided for a thirty-five-day post-signing go-shop, that process was rendered ineffective as a price discovery tool by a clutch of deal-protection measures.

         Dell reminded us that Delaware courts have "long endorsed" the "efficient market hypothesis" and emphasized "that the price produced by an efficient market is generally a more reliable assessment of fair value than the view of a single analyst, especially an expert witness who caters her valuation to the litigation imperatives of a well-heeled client."[7] I have heeded that guidance as well. Unfortunately, this case was tried before the Supreme Court decided Dell, and the record evidence regarding the efficiency of the market for Norcraft stock prior to the Merger is, in a word, thin. With that said, the evidence that can be drawn from the record reveals that, at the time of the Merger, Norcraft was fresh off an initial public offering of its stock, was relatively thinly traded given the niche market in which it operated and was also thinly covered by analysts. Under these circumstances, I can discern no evidence-based rationale that would justify looking to the unaffected trading price of Norcraft's stock either as a standalone indicator of fair value or as a data point underwriting the use of a deal-price-less-synergies metric.

         Having concluded that flaws in the sales process leading to the Merger undermine the reliability of the Merger Price as an indicator of fair value, and that the evidence sub judice does not allow for principled reliance upon the efficient capital markets hypothesis, I have turned to a "traditional valuation methodology," a discounted cash flow ("DCF") analysis, to calculate the fair value of Norcraft as of the Merger date.[8] In my view, given the evidence in this record, a DCF-based valuation provides the most reliable means by which to discharge the Court's statutorily mandated function to appraise Norcraft.

         Not surprisingly, both parties proffered expert testimony regarding Norcraft's fair value on a DCF basis. And, as we have come to expect in appraisal litigation, the experts' DCF analyses yielded valuations that are miles apart. Neither expert walked the high road from start to finish during their respective DCF journeys. That is to say, both experts, at times, made choices in their analyses that were not supported by the evidence or not supported by "accepted financial principles" in order to support a desired outcome. I have, therefore, borrowed the most credible components of each expert's analysis to conduct my own DCF valuation, in my best effort to obey our appraisal statute's "command that the Court of Chancery undertake an 'independent' assessment of fair value" when performing its mandated appraisal function.[9] As explained below, my DCF analysis reveals a valuation of $26.16 per share.

         Insofar as Dell and DFC require that the trial court carefully consider deal price before disregarding it altogether, I have returned to the Merger Price as a "reality check" before locking in my DCF valuation as the last word on fair value. Having done so, I am satisfied that the $0.66 per share delta between the Merger Price and my DCF valuation of Norcraft is a product of the identified flaws in Norcraft's deal process. Accordingly, I conclude that the fair value of Norcraft as of the Merger date was $26.16 per share.

         I. FACTUAL BACKGROUND

         I recite the facts as I find them based on the evidence presented during a four-day trial. That evidence comprises testimony from thirteen fact witnesses (some presented live and some by deposition) and three live expert witnesses, along with over 500 exhibits. I accord the evidence the weight and credibility I find it deserves. As noted, both parties carried a burden to prove their respective valuation positions by a preponderance of the evidence. Thus, Petitioners were obliged to prove that their proffered valuation of Norcraft, a DCF-based valuation of $34.78 per share, represented Norcraft's fair value as of the Merger; Respondent's burden was to prove that its proffered valuation of $21.90 per share, the Merger Price less synergies, was Norcraft's fair value as of the Merger. With these competing burdens in mind, I find that the following facts were proven by a preponderance of the evidence.

         A. Parties and Relevant Non-Parties

         Respondent, Norcraft, is a Delaware corporation in the cabinetry manufacturing business.[10] Prior to the Merger, Norcraft's stock traded on the New York Stock Exchange.[11] On May 12, 2015, Fortune acquired Norcraft for $25.50 cash per share in the Merger.[12] In connection with that transaction, Norcraft merged with an indirect, wholly-owned subsidiary of Fortune, Tahiti Acquisition Corp. ("Tahiti"), with Norcraft surviving as a wholly-owned Fortune subsidiary.[13]

         Petitioners were Norcraft stockholders as of the Merger date and collectively held 557, 631 shares of Norcraft common stock.[14] It is undisputed that they properly perfected their statutory appraisal right.

         Non-party, Fortune, is a home and security products company with four business segments: cabinets, plumbing, doors and security.[15] Fortune sells its products through several sales channels, "including kitchen and bath dealers, wholesalers oriented to builders or professional remodelers, industrial and locksmith distributors [and] 'do-it-yourself remodeling-oriented home centers .... "[16]

         Non-parties, Mark Buller, Christopher Reilly, Michael Maselli, Harvey Wagner, Ira Zecher and Edward Kennedy served on Norcraft's board of directors (the "Board") at all relevant times.[17] Buller also served as the Chief Executive Officer of Norcraft (and its predecessors) from 2003 to the Merger's consummation in May 2015.[18] Non-party, Leigh Ginter, was the Chief Financial Officer of Norcraft (and its predecessors) from 2003 through the Merger's consummation.[19] And nonparty, Eric Tanquist, was Norcraft's Vice President of Finance Administration from approximately 2007 through the Merger's consummation.[20]

         Non-party, Christopher Klein, is Fortune's CEO and served in that capacity at all times relevant to this action.[21] Non-party, Robert Biggart, is Fortune's general counsel and served in that capacity at all relevant times.[22] And non-party, Jason Baab, served as Fortune's Vice President of Corporate Development and M&A at the time of the Merger.[23]

         B. Pre-Merger Norcraft

         As of the Merger date, "Norcraft was a leading manufacturer of kitchen and bathroom cabinetry in the United States and Canada."[24] The Company sold its products primarily to kitchen and bathroom cabinet dealers in the home repair, remodeling and new home construction markets through four business divisions: Mid Continent Cabinetry, StarMark Cabinetry, UltraCraft Cabinetry and Urban Effects (a.k.a. Norcraft Canada).[25] Prior to the Merger, Norcraft regarded Fortune, American Woodmark Corporation ("American Woodmark") and Masco as its principal competitors.[26] It also faced competition from "a large number of smaller manufacturers. "[27]

         1. Duller and Two Private Equity Firms Acquire Norcraft's Operating Subsidiary in 2003

         In October 2003, Buller, certain Buller family members and funds affiliated with the private equity firms Saunders, Karp & Megrue ("SKM") and Trimaran Capital Partners ("Trimaran") acquired Norcraft Companies, L.L.C. for approximately $315 million (the "2003 Acquisition").[28] At the same time, Norcraft Companies, L.L.C. converted to a Delaware limited partnership, Norcraft Companies, L.P. ("Norcraft LP"), and Buller became the CEO of that entity.[29] For the next ten years, Norcraft LP operated as a privately-held company.

         2. Norcraft and the Cyclical Cabinetry Industry

         The undisputed evidence reveals that Norcraft operated in a cyclical industry.[30] As one naturally might expect, the cabinetry industry is directly affected by the home improvement industry, which, in turn, is affected by macro-economic conditions, including employment levels, demographic trends, availability of financing, interest rates and consumer confidence.[31] The cabinetry industry is also directly affected by housing starts, as a significant percentage of sales are connected to new home construction.[32] When housing starts decrease, as they often do for various reasons, [33] cabinet sales decrease as well.[34]

         Norcraft was no exception to this cyclicality. Norcraft LP enjoyed steady growth of its earnings before interest, taxes, depreciation and amortization ("EBITDA") from 2003 through 2006-$47 million (2003) to $80 million (2006).[35]This growth was fueled, in large part, by a significant acquisition in March 2002 and a boom in the United States housing market.[36] Growth stalled, however, beginning in 2007, when Norcraft LP experienced the first of three consecutive years of declining sales and adjusted EBITDA.[37] As is typical in classically cyclical businesses, Norcraft LP saw improved sales beginning in 2010, although its adjusted EBITDA continued to decline until 2012 (with 2010 being the only exception). The attached chart illustrates the trends[38]:

Net Sales ($ Millions)
YoY % change
Adjusted EBITDA ($ Millions)
YoY % change

[1]

2003

256

47

[2]

2004

330

29%

58

23%

[3]

2005

405

23%

70

21%

[4]

2006

441

9%

80

14%

[5]

2007

394

-11%

72

-10%

[6]

2008

332

-16%

51

-29%

[7]

2009

247

-26%

36

-29%

[8J

2010

263

6%

39

8%

[9]

2011

269

2%

37

-5%

[10]

2012

289

7%

34

-8%

[11]

2013

340

18%

43

26%

[12]

2014

376

11%

52

21%

         As reflected in the chart, Norcraft LP's adjusted EBITDA trended up in 2013, suggesting that its six-year period of decline had come to an end, at least for the time being.[39]

         3. Norcraft's IPO and Reorganization

         On November 13, 2013, Norcraft completed an initial public offering ("IPO")[40] whereby the Norcraft enterprise was reorganized into the following holding company structure[41]:

         (Image Omitted)

         The newly-formed parent company, Norcraft-a publicly-traded company-was a holding company; Norcraft Companies LLC ("Norcraft LLC")[42] and its subsidiaries were the operating entities.[43] Following the reorganization, Norcraft was Norcraft LLC's sole managing member and owned (directly and indirectly) approximately 87.7% of Norcraft LLC, with Buller, his family members and certain members of Norcraft management holding the remainder.[44]

         As part of the IPO, Norcraft sold 7, 356, 634 shares of Norcraft common stock, or 39.1% of Norcraft's equity, to the public at $16.00 per share.[45] SKM and Trimaran together retained a 60.9% equity interest in Norcraft, while Buller, his family members and certain members of Norcraft management, through their convertible Norcraft LLC units, collectively held a prospective 12.3%) equity interest.[46]

         In conjunction with the IPO, Norcraft entered into Tax Receivable Agreements ("TRAs") with SKM, Trimaran and the Norcraft LLC unitholders (collectively, the "TRA Beneficiaries").[47] Under the TRAs, Norcraft was required to pay the TRA Beneficiaries 85% of the applicable annual tax savings, if any, that Norcraft realized as a result of certain tax benefits contributed to Norcraft by the TRA Beneficiaries, including net operating losses and asset basis step-ups.[48] The TRAs also provided that Norcraft's payment obligations to the TRA Beneficiaries would be accelerated in the event of a "Change of Control."[49] The TRAs later came to feature prominently in the Norcraft-Fortune negotiations leading up to the Merger.

         C. Fortune Approaches Norcraft

         On October 20, 2014, representatives of Fortune's financial advisor, RBC Capital Markets, LLC ("RBC"), contacted Buller to inform him of Fortune's interest in a potential acquisition of Norcraft.[50] Three days later, Buller met with Fortune's CEO, Christopher Klein, at Fortune's headquarters in Deerfield, Illinois to discuss a potential Norcraft-Fortune transaction.[51] During that meeting, Buller informed Klein that Norcraft was not for sale, but also indicated that he (Buller) would convey any acquisition proposal to Norcraft's Board.[52] Perhaps sensing that his Board might be inclined to pursue a deal with Fortune, Buller advised Klein that he would like to have a role in the post-Merger company in the event the parties reached an agreement.[53] Klein was noncommittal but, internally, Fortune was disinclined to bring Buller on board post-Merger.[54] At the meeting's close, Klein provided Buller with a written, non-binding proposal under which Fortune would (1) acquire "100% of [Norcraft's] equity ownership interests" for $22.00 cash per share via a tender offer (followed by a merger); and (2) satisfy Norcraft's obligations under the TRAs.[55]

         Buller promptly informed Norcraft's Board of Fortune's proposal, and the Board convened on November 4, 2014 to discuss it.[56] Following that meeting, Norcraft engaged legal and financial advisors to assist the Board in its consideration of Fortune's proposal.[57] The Company retained Ropes & Gray LLP ("Ropes & Gray") as its legal advisor and Citigroup Global Markets Inc. ("Citi") as its financial advisor.[58] The Board promptly tasked Citi with "review[ing] strategic alternatives of the [C]ompany, including a potential sale to Fortune."[59] Norcraft also engaged Pricewaterhouse Coopers ("PwC") to provide an assessment of the Company's contractual obligations under the TRAs.[60]

         D. Norcraft's Management Prepares Long-Term Projections

         Norcraft's Board met again on November 8, 2014.[61] During this meeting, "[t]he [B]oard . . . discussed next steps in formulating a potential response to [Fortune], and after discussion, agreed that [Buller, Ginter and Reilly] would map out a proposed strategy and response with Citi[] and report their recommendations back to the [B]oard."[62] The Board also instructed Buller and Ginter to prepare five-year financial projections to facilitate the Board's evaluation of strategic alternatives (including a potential Norcraft-Fortune transaction).[63]

         Buller and Ginter both had experience preparing long-term projections, having previously prepared five-year projections in connection with Norcraft's IPO and four debt financing transactions between 2003 and 2010.[64] Norcraft, however, did not prepare long-term projections in the ordinary course of its business; it only did so in connection with "extraordinary event[s]" such as financing transactions and ultimately the Merger.[65] Ordinarily, Norcraft management prepared an annual one-year budget, which forecasted Norcraft's quarterly (and monthly) performance for the upcoming year.[66] The Company's annual budgeting process began each fall and involved several steps[67]:

■ First, the corporate controller for each of Norcraft's four business divisions would prepare a detailed "bottoms-up" budget for his or her division.[68] As part of that process, the division controllers "would work with [their respective] division presidents to come up with what they expected for sales growth in the [upcoming] year and... would build that into the budget[, ] [along with] . . . other assumptions like labor efficiencies [and] material cost."[69] In this way, the division controllers "would get a picture of what [profit and loss] would look like for [their respective divisions for] the [upcoming] year."[70]
■ Next, each division controller would present his or her division-level budget to Buller and Ginter "for review and approval."[71]
■ Finally, "[a]fter several rounds of... back-and-forth," Ginter would compile the division-level budgets "into a consolidated format," which was then presented to the Board for review and approval in January of the budgeted year.[72] After review, the Board typically would approve the consolidated annual budget that same month.[73]

         Following the Board's November 8, 2014 meeting, Buller and Ginter created two sets of five-year projections: a base-case projection (the "Base Case") and an upside-case projection (the "Upside Case"), both of which are summarized below.[74]

Base Case Projections (FY2014-2019)75

($ in millions)

2014E

2015E

2016E

2017E

2018E

2019E

Net Sales

$371

$409

$448

$483

$523

$568

EBITDA

$51

$59

$70

$79

$89

$100

EBIT

$36

$42

$51

$58

$68

$81

CapEx

$10

$18

$12

$15

$16

$17

Upside Case Projections (FY2014-2019)76

($ in millions)

2014E

2015E

2016E

2017E

2018E

2019E

Net Sales

$373

$415

$460

$507

$558

$613

EBITDA

$51

$61

$75

$89

$105

$120

EBIT

$36

$45

$56

$67

$82

$100

CapEx

$10

$18

$12

$15

$17

$18

         In preparing the Base Case and Upside Case projections, Buller and Ginter took a "top-down" approach-independently projecting Norcraft's net sales, operating expenses and capital expenditures (for all business divisions) in the first instance, and then consulting with division-level management as and where needed-rather than the "bottoms-up" approach they used to prepare Norcraft's annual budgets.[77] They created the Upside Case first.[78] After preparing the Upside Case, Buller and Ginter presented it to Reilly for his review.[79] "Upon review, [Reilly opined] that the [Upside Case] . . . was too aggressive . . . and asked [Buller and Ginter] to go back and... do a more conservative model, which became known as the [B]ase [C]ase."[80] Buller and Ginter both believed that Norcraft could achieve the results forecasted in the Base Case and Upside Case projections, although "the [U]pside [C]ase was more of a stretch and everything would have had to go right."[81]

         Buller and Ginter presented the Base Case and Upside Case projections to Norcraft's Board at a meeting on November 25, 2014.[82] After discussion, the Board approved both sets of projections for use in connection with the Board's consideration of Fortune's proposal.[83]

         E. Norcraft Pushes Fortune to Increase its Offer

         Norcraft's Board next met on December 3, 2014.[84] During this meeting, Citi presented the Board with an analysis of Norcraft's standalone prospects and possible strategic alternatives.[85] Citi's presentation included an overview of preliminary valuation perspectives and selected strategic alternatives, [86] "including maintaining the status quo, a possible sale of the Company to [Fortune] or another buyer, as well as some other potential acquisition targets."[87] Following Citi's presentation, the Board determined that (1) "[Fortune's] proposed price of $22.00 per share was inadequate"; and (2) "[Fortune's] offer would need to be significantly and substantially higher in order for the Board to consider a potential sale of the Company at this time."[88] The Board, however, did not task Citi with pursuing alternative buyers or canvassing the market.

         Two days later, Buller called Klein and conveyed to him the Board's determination.[89] Buller also explained that "if [Fortune] were interested in significantly increasing [its proposed price] . . ., [Norcraft] would be prepared to share certain [non-public] information [with Fortune], under a confidentiality agreement with an appropriate standstill, in order to assist [Fortune] in understanding [Norcraft's] prospects, upside potential and intrinsic value."[90] Soon thereafter, on December 11, 2014, Norcraft and Fortune entered into a confidentiality agreement with a standstill.[91]

         On January 7, 2015, Buller, Ginter and Citi representatives met with Fortune's management at Buller's home in Winnipeg, Canada to discuss the proposed Norcraft-Fortune transaction.[92] The discussion focused on the structure and timing of the proposed transaction, Norcraft's business and financial projections and the integration of Norcraft into Fortune.[93] Norcraft provided Fortune with the Base Case and Upside Case projections as well as certain preliminary information regarding the TRAs.[94] During this meeting, Buller reiterated his interest in post-closing employment with Fortune and discussed the possibility with Klein.[95] Again, Klein "ke[pt] the door open" but stopped short of making a commitment.[96]

         The following week, on January 14, Norcraft's tax advisor, PwC, presented its analysis regarding the TRAs to Fortune's management and RBC.[97] PwC explained that termination of the TRAs in connection with Fortune's acquisition of Norcraft would require significant payments to the TRA Beneficiaries (including Buller).[98] PwC also identified certain tax benefits that Fortune could realize from the acquisition, including a stepped-up basis in Norcraft's assets.[99] The next day, Klein advised Buller that Fortune's tax advisor was performing its own analysis of Norcraft's obligations under the TRAs following the proposed transaction.[100] Klein also noted that Fortune would require more information about the TRAs to calculate Fortune's full payment obligations to the TRA Beneficiaries.[101]

         On January 27, 2015, Klein delivered to Buller a revised written indication of interest with a proposed price of $25.00 per share.[102] Buller promptly informed Norcraft's Board of Fortune's revised proposal, and the Board met on February 2 to discuss it.[103] During this meeting, Citi provided the Board with its revised valuation analysis, which incorporated Norcraft's net sales and EBITDA results for Q4 FY2014 (both of which were higher than expected) and Fortune's latest proposal of $25.00 per share.[104] Reilly then reviewed with the Board the tax benefits that Fortune would realize in connection with its proposed acquisition of Norcraft, including a stepped-up basis in Norcraft's assets.[105] After receiving Reilly's report, "the Board concluded that [Fortune] would benefit from th[at] step-up in basis going forward and should therefore value th[at] benefit in its offer price."[106]

         With Citi's and Reilly's input in hand, the Board determined that Fortune's proposed purchase price of $25.00 per share was inadequate, in part because it did not value the tax benefits that Fortune would realize in connection with the proposed transaction.[107] The Board also believed, however, "that a transaction with [Fortune] could potentially create more value for [Norcraft] stockholders if at an appropriate valuation than if [Norcraft] continued independently to execute on its strategic plan. Accordingly, the Board authorized [Buller and Reilly] to continue to engage in discussions with [Fortune] to confirm if [Fortune] was willing to further increase its propos[ed] [price]."[108] Even at this stage, however, the Board did not reach out to other potentially interested parties in hopes of securing a better offer or, at least, a source of leverage in its discussions with Fortune.

         The next day, Buller called Klein to convey Norcraft's position regarding Fortune's revised proposal.[109] During that call, Buller advised Klein that Fortune's proposed price remained inadequate and encouraged Fortune to increase its bid.[110]Unable to invoke the threat of an alternative transaction, Buller highlighted Norcraft's better than expected preliminary FY2014 results and FY2015 outlook as support for his pitch that Fortune pay a higher price.[111] Apparently not feeling the heat, Klein advised Buller that Fortune would consider increasing its bid but that it was unlikely that Fortune's proposed price would move significantly higher than $25.00 per share.[112]

         Following Buller and Klein's February 3 call, Fortune increased its offer to $25.50 per share, indicating that this was its "best and final offer."[113] The Norcraft team was less than thrilled with Fortune's $25.50 per share proposal; indeed, Reilly and Ginter both believed that Fortune's proposal significantly undervalued Norcraft.[114] Nevertheless, the Board remained focused exclusively on Fortune. In a last- ditch effort to get Fortune to increase its "best and final offer," the Board responded with a counterproposal of $27.50 per share.[115] When Fortune rejected that counterproposal, the Board bid against itself with a second counterproposal of $26.25 per share.[116] Once again, Fortune held firm and reiterated that $25.50 per share was its best and final offer[117]-well aware that it was getting the Company for a "good price."[118] With no alternative transaction on the horizon, Norcraft's Board capitulated on February 21 at $25.50 per share, hoping to extract further value during a post-sign go-shop.[119]

         F. The Parties Negotiate the Merger Agreement

         In late February 2015, Citi informed Fortune that Norcraft was prepared to move forward with Fortune's $25.50 per share proposal, subject to the negotiation of a merger agreement that included a forty-five-day post-signing go-shop right for Norcraft.[120] Fortune responded with a counterproposal that provided for a twenty-five-day post-signing go-shop "that would be limited to certain identified potential purchasers."[121] The counterproposal also called for a $15 million termination fee if Norcraft accepted a superior proposal received during the go-shop period and a $25 million termination fee otherwise.[122] By proposing this structure, Fortune sought to give Norcraft's Board "the minimum amount [of time it] needed to satisfy [its] fiduciary responsibility... and no more, "[123] while also "discourag[ing] potential bidders."[124]

         On February 27, following negotiations, the parties eventually settled on a thirty-five day post-signing go-shop period (the "Go-Shop Period") with no restrictions on the parties Norcraft or its advisors could contact, a $10 million termination fee if Norcraft accepted a superior proposal during the Go-Shop Period and a $20 million termination fee otherwise.[125] Importantly, however, Fortune also secured information rights with respect to competing proposals and unlimited matching rights with respect to superior proposals.[126] In a final stroke of masterful bargaining, Fortune also secured the right to launch Tahiti's tender offer for all of Norcraft's outstanding common stock (at $25.50 per share) fifteen days after the start of the Go-Shop Period.[127]

         In early March 2015, Fortune was given access to Norcraft's electronic data room, and on March 4, Fortune and Norcraft entered into a thirty-day exclusivity agreement.[128] Thereafter, on March 13, Buller, Ginter and Tanquist met with Fortune management to provide additional non-public information about Norcraft, and, on March 18, Fortune met with the senior management of each Norcraft business division.[129]

         With the Merger Price set, and negotiations between Norcraft and Fortune proceeding apace, Buller again approached Klein about post-Merger employment with Fortune. At a Fortune-initiated meeting with Norcraft management on March 6, Buller advised Klein that he wanted to head Norcraft and Fortune's combined cabinetry business post-acquisition.[130] With the price locked in, and the inevitably uncomfortable confrontation now unavoidable, Klein finally informed Buller that Fortune would have no place for him after the Merger.[131] This came as a shock to Buller, who thereafter became increasingly "disruptive."[132]

         Unable to abandon the enterprise completely, Buller soon returned to Fortune with a new proposal: if he would not be a part of the combined company, then, upon Fortune's acquisition of Norcraft, Buller would acquire Urban Effects (Norcraft Canada) from Fortune.[133] After Buller announced his interest in acquiring Norcraft Canada, the Board determined, for the first time, that Buller was conflicted and, therefore, should be excluded from Board deliberations regarding the potential Norcraft-Fortune transaction.[134]

         Buller, for his part, was determined to acquire Urban Effects and continued to press Fortune for a commitment to sell him the business, while also continuing to lead Norcraft's negotiations with Fortune.[135] Fortune, however, was unwilling to give such a commitment while negotiations with Norcraft were ongoing-much to Buller's frustration.[136] Yet it soon became clear to Fortune that Buller's ire now risked derailing the deal.[137] To keep the peace, on March 25, Reilly emailed Buller to advise him that "[Klein] is going to offer to provide you some meaningful comfort on [C]anada. . . ."[138] Klein's overture to Buller accomplished its intended purpose; Buller felt he had "[g]ot[ten] good comfort on UE."[139] This "comfort" included:

■ Fortune's waiver of a two-year, Canada-specific non-compete covenant otherwise applicable to Buller[140]; and
■ Fortune's agreement to modify Buller's employment agreement with Norcraft's operating subsidiary to provide that Buller would receive a severance payment if his employment was terminated without cause (including by Buller himself) within twelve months of Fortune's acquisition of Norcraft.[141]

         Thereafter, it appears that Buller was content to "live with a trust me I will sell Canada to you" status quo, and ostensibly was willing to support the Norcraft- Fortune transaction again-to Fortune's great relief.[142]

         With the Norcraft Canada fire contained, Fortune was soon on to the next Buller-related fire. In late March 2015, having finalized most of the merger agreement's material terms, Norcraft and Fortune found themselves unable to reach agreement on the termination payments that would be due to the TRA Beneficiaries holding Norcraft LLC units (including Buller and his family members).[143] Norcraft's and Fortune's tax advisors disagreed as to the value of certain tax attributes associated with the Norcraft LLC units, resulting in a $3 million difference in their respective calculations of the termination payments.[144]

         On March 26, Fortune tried to "cut a deal with Buller" on the TRA termination payments by offering to pay $2 million of the $3 million difference.[145] Buller insisted, however, that Fortune pay the entire $3 million, much to Fortune's exasperation.[146] At this point, Fortune seemingly had reached its limit with Buller and advised Citi that "if there [was] no signed [merger] agreement by [the morning of March 30, Fortune was] done."[147] Negotiations followed. Ultimately, to appease Buller and keep the deal on track, SKM and Trimaran offered to transfer $1 million of the TRA termination payments they stood to receive to the Norcraft LLC unitholders, such that the unitholders would receive the full $3 million demanded by Buller.[148] With that, the TRA fire was extinguished and Fortune had no more Buller- related fires to fight.

         G. Norcraft's Board Approves the Merger and Norcraft Executes the Merger Agreement

         On March 29, 2015, Norcraft's Board received Citi's fairness opinion and approved the Merger Agreement.[149] The following day, Norcraft and Fortune executed the Merger Agreement and issued a press release announcing the Merger.[150] Immediately following the execution of the Merger Agreement, Norcraft entered into TRA termination agreements with the TRA Beneficiaries-SKM, Trimaran and the Norcraft LLC unitholders-providing that the TRAs would be terminated (if the Merger was consummated) in exchange for $43.5 million in total payments to the TRA Beneficiaries.[151]

         SKM, Trimaran and the Norcraft LLC unitholders also entered into Tender and Support Agreements ("TSAs") with Fortune and Tahiti, [152] whereby SKM, Trimaran and the Norcraft LLC unitholders agreed that:

■ they would "promptly" tender their Norcraft shares into Tahiti's tender offer and, in any event, would do so at least two days before the offer's initial expiration date[153]; and
■ the shares so tendered could not be withdrawn unless and until the tender offer expired or was "terminated in accordance with the terms of Merger Agreement."[154]

         H. The Go-Shop

         The Go-Shop Period commenced with the Merger's announcement on March 30, 2015.[155] Given that Norcraft and Citi had focused exclusively on Fortune during the pre-sign "process," it was especially important that the Company run an effective go-shop to provide a meaningful market check. Yet Citi's lead banker, Eldridge, had never run a sell-side go-shop.[156] Because Norcraft's Board was unsure of the go-shop's core components, it relied completely on Citi to oversee the process.[157] Fortune, on the other hand, knew full well what was at stake. Its Vice President of M&A, Robert Baab, pushed hard for an unlimited match right and for Fortune's right to launch Tahiti's tender offer during the Go-Shop Period, understanding that both measures would make it less likely that a topping bidder would emerge.[158]

         During the Go-Shop Period, Citi contacted fifty-four potential bidders: twelve potential "strategic" bidders and forty-two private equity firms.[159] Of the fifty-four parties contacted, seven entered into nondisclosure agreements-six private equity firms and American Woodmark, one of Norcraft's industry peers.[160] Only one of those seven parties, Carlyle, went on to meet with Norcraft management.[161] Carlyle ultimately did not submit a bid.[162]

         Most of the parties Citi contacted indicated either that they were "not interested in competing with Fortune"[163] or that "[t]he price [was] too high."[164]At least two non-bidding parties, however, advised Citi that they could not "move fast enough [to submit a bid] in 35 days."[165]

         In an effort to ensure that Fortune would reap the benefits of its hard-fought bargain, RBC and Klein devised a strategy to dissuade potentially interested parties from engaging with Norcraft. In that connection, early in the go-shop process, RBC emailed Klein advising that RBC had "a call scheduled for [April 9, 2015] with Masco"-one of the go-shop participants-"to discuss the [Merger]."[166] In this email, RBC explained that it would "emphasize [to Masco] that [Norcraft] is an asset that [Fortune has] been monitoring/targeting for a long time . . . and [that Fortune] view[ed] the [Merger] as highly strategic."[167] RBC also indicated that it hoped to "get some sense from Masco as to whether or not [Masco was] likely to engage [withNorcraft]."[168] Eager to close the deal, Klein advised RBC that "[t]he trick [with Masco] ... is not to make Norcraft sound very interesting for them."[169] Klein also emphasized that he was "more interested in [RBC] shutting the door on [Masco] and [its] willingness to look at [acquiring Norcraft], versus learning a lot from [Masco].... "[170]

         When Fortune's general counsel, Biggart, learned of this correspondence, he nearly had "a heart attack in [his] office."[171] He immediately "went over to see [Klein]"-before RBC's call with Masco-and "explained to him that [Fortune and its deal team] can't be doing this."[172] Biggart then warned RBC that Klein's proposed approach was "the wrong way to deal with a go-shop" and that "[RBC] can't be interfering like this."[173] Klein apparently heeded Biggart's admonition, as did RBC.[174]

         As permitted by the Merger Agreement, Fortune launched Tahiti's tender offer for Norcraft's stock fifteen days into the Go-Shop Period, on April 14, 2015, securing the support of a majority of Norcraft's outstanding common stock (per the TSAs).[175] The Go-Shop Period expired as scheduled on May 4, with Norcraft having received no competing acquisition proposals.[176] Tahiti successfully completed its tender offer on May 11, and the Merger closed the following day.[177]

         I. The Parties' Experts

         Both parties presented valuation experts at trial to opine on Norcraft's fair value as of the Merger date.[178] Petitioners' valuation expert was David A. Clarke; Respondent presented Yvette R. Austin Smith.[179] Petitioners also presented a deal process expert, Guhan Subramanian ("Subramanian"), to opine on the soundness (or not) of Norcraft's deal process.[180] I summarize each expert's opinion below.

         1. Clarke's Opinion Regarding Norcraft's Fair Value

         Clarke opined that the Merger Price of $25.50 per share "does not reflect Norcraft's fair value [as of the Merger date] . . . [b]ecause there was no competitive process to acquire Norcraft prior to the signing of the Merger Agreement and the post-signing go-shop process was not an effective tool for price discovery . . . . "[181]According to Clarke, a DCF analysis premised on the Base Case projections provides the most reliable evidence of Norcraft's fair value as of the Merger date.[182]Based on his DCF analysis, Clarke concluded that Norcraft's fair value as of the Merger was $34.78 per share.[183]

         For his DCF analysis, Clarke chose to extend the Base Case projections for an additional five years (through 2024), before applying a perpetuity growth rate ("PGR") of 3.5% at the end of the projection period.[184] He also adjusted the Base Case projections to deduct for income tax expense in each projected year, which the Base Case projections presented in Norcraft's Schedule 14D-9 failed to do.[185]

         After determining Norcraft's projected unlevered free cash flows through Norcraft's FY2O24, Clarke then discounted each year's projected free cash flow amount to present value using a 9.6% discount rate based on an estimate of Norcraft's weighted average cost of capital ("WACC").[186] With these inputs, Clarke concluded that the present value of Norcraft's projected unlevered free cash flows through FY2O24 was $297.3 million.[187]

         Clarke then calculated Norcraft's terminal value by (1) dividing Norcraft's terminal year unlevered free cash flow by a capitalization rate of 6.1% and (2) discounting the quotient of that calculation to present value using Norcraft's estimated 9.6% WACC.[188] This yielded a terminal value of $509.5 million.[189]Clarke then added Norcraft's terminal value to the present value of Norcraft's projected unlevered free cash flows through FY2024 to obtain an $806.8 million operating value.[190]

         Clarke next made the following adjustments to Norcraft's operating value to derive Norcraft's total equity value: (1) adding Norcraft's excess cash, estimated at $44.3 million; (2) adding the value (to Norcraft) of TRA-related tax benefits, estimated at $4.4 million; (3) adding cash received by Norcraft from the (presumed) exercise of all outstanding options on Norcraft stock, estimated at $18.3 million; and (4) deducting the book value of Norcraft's long-term debt-$147.5 million, per Norcraft's Form 10-Q for Q1 FY2015.[191] After making these adjustments, Clarke concluded that Norcraft's total equity value was $726.3 million.[192] Finally, Clarke divided this aggregate value by Norcraft's "fully diluted" shares outstanding (20, 880, 123) to obtain an aliquot value of $34.78 per share.[193]

         Clarke also performed a comparable company analysis to confirm the results of his DCF analysis.[194] For this analysis, he selected four companies for his peer group: (1) American Woodmark, (2) Masonite International Corp. ("Masonite"), (3) PGT Innovations, Inc. ("PGT") and (4) Ply Gem Holdings, Inc. ("Ply Gem").[195]The analysis yielded a $33.92 per share valuation.[196] Clarke "determined not to weight this analysis in determining a specific per share value [for Norcraft], however, due to the difficulties in finding any companies that were fully comparable to Norcraft."[197]

         2. Austin Smith's Opinion Regarding Norcraft's Fair Value

         Austin Smith determined that the most reliable indicator of Norcraft's fair value as of the Merger date was the Merger Price, "less . . . contemporaneously estimated synergies [of $3.60 per share]"[198]-a metric that yields a valuation of $21.60 per share. Austin Smith also conducted an independent valuation using three different valuation methodologies: DCF, comparable company and precedent transaction analyses.[199] Based on those approaches, Austin Smith determined that Norcraft's fair value as of the Merger date "ranged from $17.48 to no more than $23.74."[200]

         Austin Smith's primary DCF analysis, like Clarke's, relied on the Base Case projections (adjusted to deduct for income tax expense in each of the projected years) and applied a 3.5% PGR at the end of the projection period.[201] Unlike Clarke, however, Austin Smith did not extend the Base Case projections.[202]

         After determining Norcraft's projected unlevered free cash flows through Norcraft's FY2019, Austin Smith discounted each year's projected free cash flow amount to present value using a 11.2% discount rate based on her estimate of Norcraft's WACC.[203] From this, Austin Smith concluded that the present value of Norcraft's projected unlevered free cash flows through FY2019 was $151 million.[204]

         Austin Smith then calculated Norcraft's terminal value by (1) dividing Norcraft's terminal year unlevered free cash flow by a capitalization rate of 7.69% and (2) discounting the quotient of that calculation to present value using Norcraft's estimated 11.2% WACC.[205] Austin Smith concluded that Norcraft's terminal value was $435 million.[206] She then added Norcraft's terminal value to the present value of Norcraft's projected unlevered free cash flows through FY2019 to obtain a $586 million operating value.[207]

         Austin Smith made two adjustments to Norcraft's operating value to determine Norcraft's total equity value: (1) adding Norcraft's excess cash, estimated at $52.7 million[208]; and (2) deducting the book value of Norcraft's long-term debt- $147.5 million, per Norcraft's Form 10-Q for Q1 FY2015.[209] Having made these adjustments, Austin Smith concluded that Norcraft's total equity value was $491 million.[210] She then divided this total equity value by Norcraft's "fully diluted" shares outstanding (20, 880, 123) to obtain an aliquot value of $23.54 per share.[211] Finally, upon "summing th[is]... component[] of [Norcraft's] value" with the value of the TRA-related tax benefits that Norcraft would realize in each projected year (estimated at $0.20 per share), Austin Smith determined that "the per share value of Norcraft was $23.74" as of the Merger date.[212]

         As noted, Austin Smith also undertook to value Norcraft using two "market-based" valuation methodologies. Her comparable company analysis yielded a valuation of $23.46 per share and her precedent transaction analysis yielded a valuation of $17.48 per share.[213]

         According to Austin Smith, "[t]he high level of consistency between [her] three separately determined estimates of fair value and the [Merger Price] (less synergies) provides strong analytical support that $21.90 accurately represents the per share fair value of Norcraft."[214] In addition, Austin Smith submits, "the fact that the [Merger Price] derived from a robust deal process" lends "additional support" to her fair value determination.[215]

         3. Subramanian's Opinion Regarding Norcraft's Deal Process

         Professor Subramanian served as Petitioner's deal process expert.[216]According to Subramanian, Norcraft's deal process was flawed in several respects that rendered the process "unlikely to have yielded fair value for the Norcraft shareholders."[217] The principal flaws Subramanian identifies are (1) the lack of any "competitive process to acquire Norcraft prior to the signing of the Merger Agreement"[218]; (2) information asymmetries between Fortune and potential third-party bidders[219]; and (3) the presence of certain deal protection mechanisms that curbed the efficacy of the go-shop and effectively truncated the Go-Shop Period by at least five days.[220]

         a. Absence of Pre-Signing Competition

         Subramanian posits that Norcraft's "decision to negotiate exclusively with Fortune" prior to signing the Merger Agreement "eliminated a standard source of bargaining leverage for Norcraft"-namely, "invok[ing] the threat of an alternative deal" to extract a higher price.[221] Consequently, Norcraft was unable to move Fortune above its proposed purchase price of $25.50.[222] Moreover, Subramanian submits, it does not appear "that Norcraft extracted something else [from Fortune] in exchange for exclusivity."[223]

         As a practical matter, the absence of pre-signing competition "meant that the Norcraft Board was relying on [the] go-shop process to ensure that Norcraft shareholders received fair value."[224] According to Subramanian, this reliance was misplaced because Norcraft's go-shop process was so poorly structured that it was rendered entirely ineffective as a price discovery tool.[225]

         b. Information Asymmetries

         Subramanian next posits that certain information asymmetries between Fortune and prospective acquirors vitiated the effectiveness of Norcraft's go-shop process.[226] As noted, Fortune first approached Norcraft regarding a potential acquisition on October 20, 2014, and the parties signed a confidentiality agreement on December 11, 2014.[227] Exclusivity soon followed.[228] This dynamic gave Fortune a substantial head start relative to other potential suitors in evaluating the benefits and challenges of a Norcraft transaction, including the complex issues relating to the TRAs.[229] And, per Subramanian, "[t]his discrepancy . . . created a severe information asymmetry problem, because it would be virtually impossible for prospective third-party bidders to [learn] as much about Norcraft as Fortune [already knew]" in the thirty-five days allotted for Norcraft's go-shop process.[230]

         Moreover, Subramanian submits, regardless of whether Fortune's "first mover" status provided it with an actual benefit, potential competing bidders would have perceived Fortune to enjoy an informational advantage.[231] That perceived advantage, in turn, discouraged others from bidding for Norcraft to avoid the "winner's curse"-a phenomenon that occurs in common value auction settings where the winning bidder has "buyer's remorse" because it has overpaid for the asset in question.[232] That remorse is a product, in part, of the winner's perception that it lacked an adequate understanding of the asset before it made its bid.[233] Here, Subramanian submits, because potential competing bidders for Norcraft perceived that Fortune knew more about the Company than they could hope to learn in thirty-five days, they may well have feared that they would end up overpaying to acquire Norcraft if they outbid Fortune.[234]

         c. Deal Structure Minimizes Efficacy of the Go-Shop

         According to Subramanian, the interaction between certain deal protection provisions in the Merger Agreement and the TSAs effectively truncated the Go-Shop Period "from 35 days to 30 days or even shorter."[235] As noted, the Merger Agreement entitled Fortune to launch Tahiti's tender offer for Norcraft's stock fifteen days into the Go-Shop Period.[236] In addition, under the TSAs, Buller, SKM and Trimaran were obligated to tender 53.6% of Norcraft's outstanding voting stock into Tahiti's tender offer "promptly following" the initiation of the offer and, in any event, no later than two days before the offer's initial expiration date.[237] And that tender could not be rescinded absent a "full-blown superior proposal."[238]

         Thus, if Fortune launched Tahiti's tender offer halfway through Norcraft's go-shop process (as it did), [239] 53.6% of Norcraft's voting shares would "promptly" be tendered to Tahiti-and that tender would be irrevocable absent a superior proposal. Moreover, even if Norcraft received a superior proposal during the Go-Shop Period, Fortune would still have at least four days to match that proposal.[240]

         According to Subramanian, the confluence of the deal protections, the limited duration of the Go-Shop Period, Fortune's unlimited match right, the definition of "superior proposal" and Fortune's ability to launch Tahiti's tender offer during the go-shop, resulted in a systematic "tightening and shortening" of the go-shop process. The "tightening" occurred because "a third party would have to make a full-blown superior proposal, not just get to excluded party status, by the end of the 35 days."[241]The full-blown superior proposal was required for Norcraft to terminate the Merger Agreement and prevent Tahiti from accepting the shares tendered pursuant to the TSAs (a majority of the shares outstanding). Subramanian explained:

Ordinarily, if this was a normal go-shop, you'd have excluded party status by the end of the go-shop period. But. . . [here] you've got to get to a superior proposal. Got to get the whole shebang done, as Chancellor Strine said it in Lear, by the end of the go-shop period. And in my observation and in my experience looking at these go-shops, that is a big deal. Having to get to an entire superior proposal by the end of the go-shop period is a very different task than getting to simply excluded party status.[242]

         The "shortening" occurred because any potential bidder contemplating whether to participate in the go-shop could wait no longer than April 30-what Subramanian terms the "last clear chance" date-to make its superior proposal if it wanted to ensure that (i) the Norcraft Board had the two business days it was allowed under the Merger Agreement to assess the proposal and declare it superior; (ii) Fortune's four-business-day period to match expired; and (iii) Norcraft terminated the Merger Agreement before Fortune (via Tahiti) could close on the tendered Covered Shares. The following graphic from Subramanian's report illustrates the "tightening and shortening" phenomenon:

         (Image Omitted)

         Subramanian also observes that, even without the "tightening and shortening" of the go-shop, Fortune's unlimited match right stands alone as a disabling feature of this go-shop.[243] According to Subramanian, from the perspective of a potential bidder, unlimited match rights are typically perceived as limiting any "pathway to success."[244] Indeed, Subramanian submits, "[e]verybody agrees that match rights deter bids. It [is] not even a debated question."[245]

         Here again, Fortune was acutely aware of the advantage it secured, while Norcraft's Board apparently did not understand what an unlimited match right was much less how that deal protection might work to hinder the go-shop.[246] In describing the disparity in the sophistication of the two parties negotiating this Merger, Subramanian observed: "it seems like... the Fortune side was playing chess and the Norcraft side was playing checkers."[247]

         J. Procedural Posture

         Petitioners filed a petition with this Court on June 22, 2015, seeking appraisal of their 557, 631 shares of Norcraft common stock.[248] The Court held a four-day trial in June 2017, and the parties thereafter submitted post-trial briefing. On December 20, 2017, the Court requested supplemental submissions from the parties to address certain questions following the Delaware Supreme Court's December 14, 2017, decision in Dell.[249] The Court heard post-trial argument on April 25, 2018.

         II. ANALYSIS

         Our appraisal statute, 8 Del. C. § 262, provides, "[t]hrough [the appraisal] proceeding, the Court shall determine the fair value of the shares exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors."[250] "Easy enough," one might say on a first read, but the judicial appraisal process, through the years, has proven to be anything but "easy."[251]

         "Section 262(h) unambiguously calls upon the Court of Chancery to perform an independent evaluation of 'fair value' at the time of a transaction . . . [and] vests the Chancellor and Vice Chancellors with significant discretion to consider 'all relevant factors' and determine the going concern value of the underlying company."[252] "By instructing the court to 'take into account all relevant factors' in determining fair value, the statute requires the Court of Chancery to give fair consideration to 'proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court.' Given that '[e]very company is different; [and] every merger is different,' the appraisal endeavor is 'by design, a flexible process.'"[253]

         Taking to heart the mandate of Section 262(h), as reiterated by our Supreme Court, I have carefully considered all relevant factors. And I have assigned those factors the weight (or not) I determined they deserve based on my evaluation of the credible evidence, and my application of "accepted financial principles" as derived from that evidence.[254]

         A. The Merger Price is Not a Reliable Indicator of Norcraft's Fair Value

         As our Supreme Court has recognized, "corporate finance theory reflects a belief that if an asset-such as the value of a company as reflected in the trading value of its stock-can be subject to close examination and bidding by many humans with an incentive to estimate its future cash flows['] value, the resulting collective judgment as to value is likely to be highly informative[.]"[255] So long as "all estimators hav[e] equal access to information, the likelihood of outguessing the market over time and building a portfolio of stocks beating it is slight."[256] Thus, the Supreme Court has emphasized that our courts must appreciate "the economic reality that the sale value resulting from a robust market check will often be the most reliable evidence of fair value, and that second-guessing the value arrived upon by the collective views of many sophisticated parties with a real stake in the matter is hazardous."[257]

         Nevertheless, our Supreme Court has declined on several occasions to pronounce a presumption in favor of deal price in determining fair value.[258] Instead, it has reiterated the "flexible" nature of the trial court's fair value calculus, while also noting its lack of "confidence in [its] ability to craft, on a general basis, the precise pre-conditions that would be necessary to invoke a presumption" in favor of the deal price.[259]

         Here, Norcraft's deal process did not include a meaningful market check and, consequently, the Merger Price was not "arrived upon by the collective views of many sophisticated parties with a real stake in the matter."[260] Prior to the execution of the Merger Agreement, the Company chose to negotiate with Fortune and Fortune alone.[261] That decision, if made as a strategic choice, does not alone render Norcraft's deal process unsound.[262] Nor does it preclude a finding that Norcraft's deal process resulted in a reliable indication of fair value (reflected by the Merger Price). Indeed, even Petitioners' expert has acknowledged that negotiating with a single potential buyer pre-signing can, in certain instances, lead to significant value.[263]

         But the single bidder focus here, while perhaps not amounting to a breach of fiduciary duty, [264] did not provide a meaningful market check as would yield a reliable indication of fair value. First, there is no evidence that the Board or Citi employed a single bidder approach for the sake of achieving a strategic advantage or maximizing value. Second, and more troubling, the Board's focus on only one bidder was tainted by the fact that Buller (who was conflicted) served as Norcraft's lead negotiator from start to finish.

         The shambolic pre-signing process left Norcraft's post-signing go-shop as the only meaningful opportunity to check the market.[265] Unfortunately, Fortune extracted concessions from Norcraft that rendered the go-shop process equally ineffective as a price discovery tool.

         1. The Board's Singular Focus on Fortune, Failure to Manage Buller's Conflicts and Misplaced Reliance on the Go-Shop

         There is no dispute that neither Norcraft nor Citi contacted other bidders before Norcraft signed the Merger Agreement. This resulted in lost opportunities. Not only did Norcraft miss the opportunity to test the market before committing to Fortune, it also missed the opportunity to leverage the interest of another suitor to extract a higher price from Fortune. Given these missed opportunities, it is not surprising that, by the time the parties settled on the Merger Price, Norcraft's management still believed that the merger consideration was too low.[266] The plan, therefore, was to put all eggs in the go-shop basket as a means to achieve fair value for Norcraft stockholders.[267]

         Of course, on the other side of the table, Fortune perceived the Merger Price as very favorable (to Fortune).[268] It was protective of that price and sought to avoid or limit the go-shop to preclude a topping bid.[269] And that is precisely what it did.

         Norcraft's Board left the negotiations principally to Buller. Yet Buller was just as (if not more) fixated on extracting commitments from Fortune regarding the TRAs and his future role with the combined company as he was on securing the best price possible for Norcraft. Fortune, for its part, was "stringing Buller along" as it negotiated with him over the Merger Price, leading him to believe he might continue his employment with Fortune post-close.[270] When Fortune finally informed Buller (after settling on the Merger Price) that he would have no place at Fortune post-close, Fortune secured Buller's continued commitment to the Merger by stringing him along again, this time by dangling the possibility that Fortune would be willing to sell Norcraft Canada to Buller after the closing.[271]

         The Board either did not appreciate Buller's conflict, or chose not to manage it, until Buller announced that he would pursue the acquisition of Norcraft Canada after closing.[272] By then, Buller had been spurring with Fortune in an attempt to extract every dollar he demanded for the TRAs (diverting consideration from the stockholders) and had pushed hard for post-closing employment with Fortune. Yet all along, the Board did nothing to manage the conflict-it did not form a special committee of its members to negotiate with Fortune or take any other steps to neutralize Buller's influence. Even its half-hearted effort to recuse Buller from further Board deliberations regarding the Merger following his demonstrated interest in Norcraft Canada proved ineffective.[273]

         Given that the single-bidder pre-signing process led by a conflicted negotiator yielded what at least some within Norcraft deemed unsatisfactory consideration, it was imperative that the Norcraft Board run an effective post-signing go-shop. It did not.

         2. The Post-Sign Go-Shop Provides No Basis to Rely on the Deal Price

         Although it is hardly clear that Norcraft's Board appreciated this fact, the ineffective pre-signing process should have made clear that the post-signing go-shop would offer the only real opportunity for a meaningful market check.[274] Unfortunately, that process fell far short on many levels, as the following evidence illustrates:

■ Prior to the Go-Shop Period, it was not widely known that Norcraft was "up for sale"[275]; thus, potentially interested parties did not know that Norcraft was "in play" before the Merger was announced, putting them several steps behind Fortune in pursuing an acquisition of Norcraft[276];
■ Norcraft's Board appeared to lack even a basic understanding of the terms and function of the go-shop[277];
■ Any potential bidder had to value the TRAs-and provide for the satisfaction of Norcraft's payment obligations thereunder-within the Go-Shop Period, a task that Fortune had several months to complete (and struggled to navigate successfully, even with the assistance of expert tax advisors)[278];
■ Fortune had an unlimited match right under the Merger Agreement, which gave Fortune four business days to match a superior proposal by a third-party bidder and two business days to match any subsequent proposal by the same bidder[279];
■ In order to proceed with an alternate transaction, Norcraft had to receive a "Superior Proposal" by the end of the Go-Shop Period, "essentially requir[ing] the bidder to get the whole shebang done within the [Go-Shop Period]."[280] This requirement was made more onerous by the TRAs' interaction with the Merger Agreement's go-shop provisions, allowing "Fortune [to] close its tender offer for the 54 percent [of Norcraft common stock] before Norcraft [could] terminate the merger agreement, because Norcraft [couldn't] terminate on the possibility of a superior proposal. [Rather, Norcraft could] only terminate after [it had] given Fortune four days to match. And the four days [could] go beyond the tender offer expiration."[281]
■ On April 14, 2015, about two weeks into the thirty-five-day Go-Shop Period, Fortune launched Tahiti's tender offer, [282] triggering the TSAs and causing 53.6% of Norcraft's outstanding shares to be committed to supporting the Norcraft-Fortune transaction absent a superior proposal[283]; and
■ In a fit of bad judgment, RBC attempted to contact and dissuade possible bidders from topping Fortune's bid during the go-shop.[284]

         Presented with this factual record, I am not persuaded that Norcraft's go-shop process provided a meaningful market check that resulted in a transaction price derived from the "collective views of many sophisticated parties with a real stake in the matter."[285] Accordingly, I do not accord any weight to the deal price in my fair value calculus.[286]

         3. Insufficient Evidence to Consider the Efficient Market Hypothesis

         Following our Supreme Court's renewed endorsement of the efficient capital market hypothesis in Dell, I requested that the parties submit supplemental post-trial briefing addressing whether Norcraft's unaffected trading price was probative of Norcraft's fair value on the Merger date.[287] Because this case was tried before the Supreme Court's decision in Dell, the parties presented limited evidence at trial respecting Norcraft's trading history and the market for its stock. Consequently, the parties had a rather limited record to draw upon when addressing this issue in their supplemental submissions.[288]

         To the extent the trial evidence is informative at all on this issue, it does not support assigning any weight to Norcraft's unaffected trading price for purposes of determining Norcraft's fair value on the Merger date. Norcraft had a limited public trading history given that it had just completed an IPO eighteen months before the Merger.[289] What trading did occur following the IPO was relatively limited, an unsurprising phenomenon given the niche market in which Norcraft operated.[290]The analyst coverage of Norcraft's stock was relatively sparse.[291] Based on this record, I am unable to conclude that the market for Norcraft's common stock was efficient or semi-strong efficient.[292] Absent that finding, I do not assign any weight to Norcraft's unaffected trading price as an indicator of Norcraft's fair value on the Merger date.[293]

         B. Norcraft's Fair Value under "Traditional Methods" of Valuation

         Having determined that neither the Merger Price nor Norcraft's unaffected stock price provide a reliable indicator of the Company's fair value, I must now consider the remaining valuation analyses presented by the parties' experts. In this regard, our law is clear that:

In discharging its statutory mandate, the Court of Chancery has the discretion to select one of the parties' valuation models as its general framework or to fashion its own. The Court of Chancery's role as an independent appraiser does not necessitate a judicial determination that is completely separate and apart from the valuations performed by the parties' expert witnesses who testify at trial. It must, however, carefully consider whether the evidence supports the valuation conclusions advanced by the parties' respective experts.[294]

         I have followed this guidance as I have worked through the experts' competing analyses here.

         1. Comparable Companies and Precedent Transaction Analyses Are Not Reliable

         As previously mentioned, both experts performed a comparable company analysis. Austin Smith also performed a precedent transaction analysis. "The utility of a comparable company [or precedent transaction] approach is dependent on the similarity between the company the court is valuing and the companies [or precedent transactions] used for comparison."[295] When there are no sufficiently comparable companies or precedent transactions, such analyses are unavailing in the search for fair value.[296]

         After carefully reviewing the evidence, I see no factual basis to rely on a precedent transaction or comparable company analysis as an indicator of Norcraft's fair value as of the Merger date. The parties agree that there had not been an acquisition of any publicly-traded, "dealer channel" cabinet manufacturer-or a satisfactorily comparable business[297]-in any temporal proximity to the Merger.[298]Nor were the parties (or their experts) able to identify any truly comparable companies that could support a reliable comparable company analysis.[299] It is, therefore, unsurprising that neither expert relied on market-based approaches (comparable company or precedent transaction analyses) as the principal metric by which to value Norcraft.[300] Instead, they offered these valuations to corroborate the results they reached utilizing their preferred valuation methodologies.[301] Because I disagree that market-based valuation metrics provide any guidance here, 1 do not consider those metrics further.

         2. The DCF Analysis

         "[A] DCF analysis can provide the court with a helpful data point about the price a sale process would have produced had there been a robust sale process involving willing buyers with thorough information and the time to make a bid."[302]

The basic premise underlying the DCF methodology is that the value of a company is equal to the value of its projected future cash flows, discounted to the present value at the opportunity cost of capital. Calculating a DCF involves three steps: (1) one estimates the values of future cash flows for a discrete period, where possible, based on contemporaneous management projections; (2) the value of the entity attributable to cash flows expected after the end of the discrete period must be estimated to produce a so-called terminal value, preferably using a perpetual growth model; and (3) the value of the cash flows for the discrete period and the terminal value must be discounted back using the capital asset pricing model or "CAPM." In simpler terms, the DCF method involves three basic components: (1) cash flow projections; (2) a discount rate; and (3) a terminal value.[303]

         a. The Disputed Inputs

         As is typically the case, the substantial delta between the experts' DCF valuations can be traced to their disagreements regarding the DCF inputs. Their most significant disagreements are: (1) whether to extend the Base Case projections by an additional five years; and (2) how to calculate Norcraft's beta in connection with estimating Norcraft's WACC. On the latter point, the experts disagree regarding (i) the selection of appropriate guideline public companies ("GPCs") for a proxy beta calculation and whether net debt or gross debt should be used to unlever the GPC betas and relever the resulting proxy beta[304]; and (ii) whether Norcraft's observed capital structure or a target capital structure should be used to relever the concluded beta when calculating Norcraft's cost of equity.[305] The experts generally agree on the remaining DCF inputs.

         i. Management Projections

         "The most important input necessary for performing a proper DCF is a projection of the subject company's cash flows. Without a reliable estimate of cash flows, a DCF analysis is simply a guess."[306] While Norcraft's management (Buller and Ginter) prepared several sets of projections, the experts agree that the most reliable projections are the Base Case projections-and both experts relied on those projections in their primary DCF analyses.[307]

         The record reflects that Norcraft management did not prepare long-term projections in the ordinary course of Norcraft's business.[308] Nevertheless, Buller and Ginter knew how to prepare long-term projections and they approached the Base Case projections with a view to providing the Board with a reliable estimate of Norcraft's future financial performance.[309] When all was said and done, Buller and Ginter were confident they had prepared a set of realistic, reasonable projections upon which Citi and the Board could rely in assessing Norcraft's value during the course of negotiations.[310] While not perfect, I am satisfied that the Base Case projections provide a reliable foundation for a valid DCF.[311]

         The experts' dispute regarding the Base Case projections does not turn on their reliability (or lack thereof), but rather on whether the projections should be extended by an additional five years. Clarke opined that the extension was necessary, while Austin Smith opined that a PGR should be applied at the end of the five-year Base Case projection period.

         According to Clarke, extending the Base Case projections is necessary to capture Norcraft's future cash flows because "the Base Case [p]rojections had not reached [a] steady state at the end of the [five-year] projection period" and, therefore, "it would be inappropriate to apply a standard [PGR] at th[e] last year [of that period]."[312] To account for Norcraft's growth potential as of 2019, Clarke extended the Base Case projections by an additional five years-through 2024-"to gradually reduce growth rates over time until reaching [a 3.5%] PGR."[313]

         Austin Smith, on the other hand, maintains that extending the Base Case projections is inappropriate because doing so forecasts growth that Norcraft almost certainly could not achieve. In this regard, she points out that the cabinetry industry is cyclical, as demonstrated by trends in (1)the industry's historical performance (growth and decline); and (2) the historical growth (and decline) of the residential construction market.[314] Extending the Base Case projections by an additional five years implies a ten-year period of consistent growth following two years of already achieved growth. According to Austin Smith, projecting twelve years of steady growth for a business in the cabinetry industry is patently unreasonable.[315]

         On this point, I find Austin Smith most credible. The evidence adduced at trial supports her view that the cabinetry industry is cyclical and follows the cycle of the residential construction market.[316] The evidentiary record also reflects that the residential construction market is projected to reach a "steady state" at or slightly before the last year of the Base Case projection period (2019).[317] Moreover, insofar as Norcraft's own management was not inclined to project Norcraft's financial results beyond FY2019, 1 see no basis to do so post hoc for the sake of reaching a litigation result.

         ii. Norcraft's Estimated WACC

         The parties also dispute how to calculate the applicable discount rate based on Norcraft's estimated WACC. More specifically, they dispute how to calculate Norcraft's beta in connection with estimating Norcraft's cost of equity capital (a key component of WACC).

         The application of a discount rate to financial projections attempts to "convert the [subject company's] expected economic income stream to present value."[318] Where the discount rate is based on the subject company's WACC, the projected future cash flows and terminal value are discounted by the WACC to bring them back to present value.[319] A company's WACC represents the cost (to the company) of financing its business operations; it comprises the weighted average of the company's cost of debt and equity[320]:

WACC = (requity x E/V) (rdebt x D/V x (1-t))
where:
requity = cost of equity capital
E = market value of the company's equity
rdebt = cost of debt capital
D = value of the company's debt
V = E D = total value of the company's equity and debt
t = applicable tax rate

         Here, both experts calculated Norcraft's cost of equity capital pursuant to CAPM.[321]Following CAPM, a company's ...


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