Nathan Owen v. Lynn Cannon

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

NATHAN OWEN, )
)
Plaintiff, )
)
v. ) C.A. No. 8860-CB
)
LYNN CANNON, BRYN OWEN, ENERGY )
SERVICES GROUP, INC., a Delaware )
corporation, and ESG ACQUISITION CORP. )
(n/k/a Energy Services Group, Inc.), a Delaware )
corporation, )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: March 17, 2015
Date Decided: June 17, 2015

Kenneth J. Nachbar, D. McKinley Measley and Shannon E. German of MORRIS,
NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Attorneys for Plaintiff.

Edward M. McNally, P. Clarkson Collins, Jr., Lewis H. Lazarus, Jason C. Jowers and
Patricia A. Winston of MORRIS JAMES LLP, Wilmington, Delaware; Attorneys for
Defendants.

BOUCHARD, C.
I. INTRODUCTION

In this joint fiduciary duty and appraisal action, Nathan Owen (―Nate‖), formerly

the largest stockholder of Energy Services Group, Inc. (―ESG‖ or the ―Company‖),

challenges a conflicted merger (the ―Merger‖) in which he was cashed-out of ESG in

May 2013, for the right to receive $19.95 per share, or $26.334 million in total. The

Merger was orchestrated by the Company‘s two other largest stockholders: Lynn

Cannon, who replaced Nate as President in August 2009, and Bryn Owen (―Bryn‖),

Nate‘s brother. The Merger price was derived from a valuation that ESG‘s financial

advisor performed based on five-year projections (the ―2013 Projections‖) prepared under

Cannon‘s direction, which projections the Company submitted to a nationally reputable

lender in order to obtain a $25 million credit facility to buy out Nate.

Nate and his financial expert accept the 2013 Projections that formed the basis for

the Merger price, but they argue that the $19.95 per share price is unfair because ESG‘s

financial advisor applied certain incorrect assumptions in its valuation, the most

significant of which is the tax rate applicable to ESG as a Subchapter S corporation.

Applying what he submits are the correct assumptions to the 2013 Projections, Nate

contends that the fair value of his stock was $53.46 million.

Although defendants were content to use the 2013 Projections at the time of the

Merger, they now insist that those projections are not sufficiently reliable to value Nate‘s

stock. Instead, they rely on a valuation based on a set of ten-year projections their

financial expert created in the midst of this litigation. Based on their expert‘s valuation,

which applies a corporate tax rate for ESG that disregards its status as a Subchapter S
corporation at the time of the Merger, defendants contend that the fair value of Nate‘s

stock was no more than $21.502 million.

The two primary areas of disagreement between the parties concern which

projections to use for a discounted cash flow (DCF) analysis to value Nate‘s stock as of

the Merger, and whether to tax affect the earnings in that analysis to account for ESG‘s

status as a Subchapter S corporation. In this post-trial opinion, I conclude that it is

appropriate to use the 2013 Projections because they reflected management‘s best

estimate of what was known or knowable about ESG‘s future performance as of the

Merger. I also conclude, consistent with this Court‘s precedents, that it is appropriate to

tax affect the earnings in the DCF analysis given ESG‘s status as a Subchapter S

corporation. Based on these two conclusions, and certain other determinations discussed

below, I find that the fair value of Nate‘s shares was $42,165,920 as of the Merger.

II. BACKGROUND

These are the facts as I find them based on the documentary evidence and

testimony of record.1 I accord the evidence and testimony the weight and credibility that

I find it deserves.

1
The deposition testimony of witnesses is part of the trial record to the extent that
testimony was used at trial. In addition, the deposition of ESG‘s controller, Lisa Swift,
who did not testify at trial, is part of the record. Tr. of Oral Arg. 202-03. Objections to
any testimony or joint exhibits are overruled to the extent that testimony or exhibits are
used in this opinion.

2
 A. The Parties

Plaintiff and Petitioner Nathan Owen was the President of ESG until his removal

in August 2009, and a director of the Company until the Merger. Before the Merger,

Nate held 1,320,000 shares of ESG stock, which were cancelled in the Merger in

exchange for the right to receive $19.95 per share in cash, or $26.334 million in total.

Nate currently resides in Maine.

Defendant Lynn Cannon served as a director of the ESG and as President ―pro

tem‖ after Nate‘s removal as President.2 Before the Merger, Cannon held 1,218,750

shares of ESG stock. In connection with the Merger, Cannon became President of ESG.

Defendant Bryn Owen, Nate‘s brother, is a Vice President and director of ESG.

Before the Merger, Bryn held 1,098,750 shares of ESG stock.

Non-party Felimon Gurule is the Vice President of Information Technology at

ESG. Before the Merger, Gurule held 112,500 shares of ESG stock.

Respondent Energy Services Group, Inc., a Delaware corporation based in

Norwell, Massachusetts, provided services to the retail energy industry. At all relevant

times before the Merger, Nate, Cannon, and Bryn were the three members of the

Company‘s board of directors, and Nate, Cannon, Bryn, and Gurule were stockholders of

the Company. In connection with the Merger, Cannon, Bryn, and Gurule transferred

their ESG stock to Defendant ESG Acquisition Corp. (―Acquisition Corp.‖), a Delaware

corporation, in exchange for an equal amount of Acquisition Corp. stock. In the Merger,

2
Trial Tr. (―Tr.‖) 152 (Cannon).

3
ESG merged with and into Acquisition Corp., which is now known as Energy Services

Group, Inc.3 Unless noted otherwise, I refer to Energy Services Group, Inc. and

Acquisition Corp. interchangeably as ―ESG‖ or the ―Company,‖ and I refer to Cannon,

Bryn, and Acquisition Corp. as ―Defendants.‖

B. The Formation of ESG

In the mid-1990s, Nate started a website- and intranet-development company

called IC Solutions, which was the predecessor to ESG.4 Bryn joined IC Solutions and

reported to Nate.5 In the late 1990s, one of the country‘s first retail energy providers,

which are known as ―REPs,‖ engaged IC Solutions to create a software solution to

manage its electronic data interchange, or EDI, in order to participate in the retail

electricity market. Other REPs also approached IC Solutions for a similar service.6

EDI is the data interchange system that REPs use to schedule and deliver

electricity.7 REPs operate in states that have deregulated retail electricity that permit

competition with the incumbent utility. REPs arbitrage what they term ―headroom‖: the

difference in price between the electricity that they can buy at wholesale prices through

short-term contracts and the electricity bought by incumbent utilities through long-term

3
Pre-Trial Stip. and Order (―Pre-Trial Stip.‖) ¶ II.A.2.
4
Tr. 668-69 (Nate).
5
Id. 622, 625-26 (Bryn), 669 (Nate).
6
Id. 668-69 (Nate), 601 (Bryn).
7
JX 336 (Weigand Report) at 8-9.

4
contracts.8 Historically, the price of natural gas, a primary source to generate electricity,

has been highly volatile, which creates opportunities for headroom.9 For example, when

natural gas prices drop, REPs can buy electricity at lower wholesale prices than

incumbent utilities that are locked into long-term contracts and thereby sell electricity at

lower retail prices than incumbent utilities.10

Lynn Cannon was introduced to Nate through his wife, Leslie Cannon, who had

been doing marketing and business planning work for Nate to explore business

opportunities for IC Solutions.11 Nate and Lynn Cannon began discussing working

together to create EDI solutions for the then-nascent retail electricity industry.12

Nate, Cannon, and Bryn agreed to work together at what became ESG. Each

would receive stock in exchange for their contributions to the Company. In general

terms, Cannon would invest capital; Bryn would work in client services; and Nate would

lead the company.13 They also decided to hire Gurule, a software developer at IC

Solutions.14

8
Tr. 1035-39 (Weigand).
9
Id. 1082 (Weigand).
10
JX 332 (Jacobs Report) at ¶ 100.
11
Tr. 669 (Nate).
12
Id. 17-18 (Cannon), 601 (Bryn), 669 (Nate).
13
Id. 670 (Nate), 39, 132 (Cannon).
14
Id. 23 (Cannon), 325-26 (Gurule), 670-71 (Nate).

5
 On September 20, 2000, Nate, Cannon, Bryn, and Gurule entered into a

Stockholders‘ Agreement, which specified their stock ownership of ESG as follows:15

Stockholder Number of Shares Percentage Ownership
Nate 1,320,000 35.20%
Cannon 1,218,750 32.50%
Bryn 1,098,750 29.30%
Gurule 112,500 3%

As required by Section 9 of the Stockholders‘ Agreement, ESG made the appropriate

elections to be taxed as a Subchapter S corporation.16 Thus, ESG does not pay federal tax

on its income. Rather, the stockholders of ESG pay federal income tax on their

respective shares of the Company‘s profits.

C. ESG’s Lines of Business and Growth

Before the Merger, ESG offered three services: (i) Transaction Management

Services (TMS), which is an EDI solution; (ii) Prospect-to-Cash (P2C), which is largely a

billing management service; and (iii) Wholesale Energy Services (WES), which is a data

management and reporting service. TMS has accounted for the majority of the

Company‘s revenue, as demonstrated by ESG‘s revenues in 2012, the last full year before

the Merger: approximately $18.8 million from TMS, approximately $10.8 million from

P2C, and approximately $1.8 million from WES.17 Given its recurring revenue business

model, an average contract length of around three years, and high customer retention

15
JX 2 (Stockholders‘ Agreement) at NO00000291.
16
Id. at § 9.
17
JX 288 (Energy Services Group, Inc., Profit & Loss: January through December 2012).

6
rates,18 ESG‘s revenues have generally been ―predictable,‖ as Cannon acknowledged at

trial.19

Much of the Company‘s success can be traced to several apparent advantages it

holds over its competitors. As touted on the Company‘s website, ESG‘s three products

offer an ―end-to-end business process solution‖ for REPs,20 which can reduce their costs

and the risk of data translation errors.21 Cannon and ESG‘s senior management testified

uniformly that they believe ESG‘s products and services are higher quality than those of

its competitors.22

Consistent with its strong position in the market, the Company experienced

significant revenue and cash flow growth in the years leading up to the Merger despite

facing competition since its founding.23 In the five-year period before the Merger, ESG‘s

18
JX 225 (Energy Services Group, Inc., Sales and Marketing Overview, Jan. 2013) at
ESG00036442.
19
Tr. 159-60 (Cannon). Most TMS customers are billed monthly on a per-meter basis.
P2C customers are billed monthly on a per-account basis. WES customers are billed
monthly on a megawatt-hour or per-account basis. Pre-Trial Stip. ¶¶ II.C.9-11. ESG‘s
contracts generally have tiered pricing, meaning that larger customers are charged less on
a per-meter, per-account, or megawatt-hour basis. Tr. 1258 (Jacobs).
20
JX 330 (Technology, Energy Services Group, http://www.energyservicesgroup.net/
technology (last visited July 25, 2014)) at JACOBS0005434.
21
Tr. 571 (Fenton), 314-15 (Purdum).
22
Id. 136-38 (Cannon), 306, 314-15 (Purdum), 419-23 (Potter), 570-74 (Fenton).
23
Id. 678 (Nate).

7
revenues and earnings before interest and taxes (EBIT) demonstrated strong growth,

which ESG‘s financial expert, E. Allen Jacobs, calculated as follows (in millions):24

2008 2009 2010 2011 2012
Revenue $14.9 $15.2 $20.7 $27.4 $32.2
EBIT $5.6 $5.7 $9.7 $14.3 $17.3

According to Nate‘s expert, Yvette Austin Smith, over the seven years from 2005 to

2012, ESG‘s revenue grew at a compound annual rate of 23.4%.25

ESG made pro-rata distributions of a majority, but not all, of its income to its

stockholders. Historically, Nate, Bryn, Cannon, and Gurule received a combination of (i)

below-market salaries (i.e., $80,000 per year for Nate, Bryn and Cannon and more for

Gurule); (ii) monthly ―draws‖ that were in effect interest-free loans against their

distributions; and (iii) distributions, a portion of which covered the stockholders‘ tax

liabilities for their pro rata shares of the Company‘s profits.26 Because the amounts paid

to Nate, Bryn, Cannon, and Gurule as salary were below-market, the distributions they

received did not accurately reflect the return on their equity investments in the Company.

To accurately reflect their equity returns, the distributions must be ―normalized‖ to

account for the difference between market-rate salaries and the salary payments they

24
JX 332 (Jacobs Report) at ¶ 35; see also JX 331 (Austin-Smith Report) at ¶ 13
(reflecting similar calculations for ESG‘s historical revenues).
25
JX 331 (Austin Smith Report) at ¶ 13.
26
JX 332 (Jacobs Report) at ¶¶ 18-21.

8
actually received.27 Table 1 below reflects the normalized distributions from ESG to

Nate, Bryn, Cannon, and Gurule for the years 2009-2012 as calculated by Jacobs,

Defendants‘ expert.

Table 1
ESG Normalized Distributions28
Nate Bryn Cannon Gurule Total
2007 $1,148,389 $966,212 $1,115,315 $0 $3,229,916
2008 $1,864,181 $1,537,720 $1,794,635 $0 $5,196,535
2009 $1,937,022 $1,606,018 $1,799,602 $2,334 $5,344,976
2010 $1,740,546 $1,487,198 $1,596,909 $677 $4,825,330
2011 $3,385,556 $3,004,595 $3,503,761 $237,228 $10,131,140
2012 $4,226,053 $4,008,597 $4,437,621 $277,020 $12,949,291
Total $14,301,747 $12,610,340 $14,247,842 $517,259 $41,677,188

Using the normalized distributions in Table 1, Jacobs calculated the median

percentage of pre-tax income that ESG distributed for the years 2007-2012 as 76.7%.29

The Company retained most of its undistributed income as cash on its balance sheet. At

the time of the Merger, ESG had $17.4 million in cash and equivalents on its balance

sheet.30

27
As discussed below, a DCF analysis is the sole valuation method the parties advanced
here and that I use to value Nate‘s interest in ESG. To determine ESG‘s value through a
DCF, the distributions to be paid to the Company‘s stockholders in the future must be
estimated taking into account market-rate salaries for employees.
28
Id.
29
JX 339 (Jacobs Rebuttal Report) at ¶ 70.
30
Tr. 1330 (Jacobs); JX 332 (Jacobs Report) ¶ 195. As of trial in this action in
November 2014, ESG had approximately $19 million in cash and equivalents on its
balance sheet. Tr. 140 (Cannon).

9
 D. Nate’s Removal as President of ESG

During the late 2000s, a significant disagreement arose among Nate, Cannon, and

Bryn concerning what to do with the Company‘s growing pile of cash. Nate wanted to

reinvest in the business. Cannon and Bryn were more interested in ―being paid‖ through

profit distributions.31 There also was day-to-day friction in managing the Company. In

July 2009, for example, Cannon postponed a new WES project after repeated operational

delays.32 Nate responded by directing ESG‘s controller to not ―pay any bonuses without

my explicit approval.‖33 A colorful email exchange ensued, with Nate and Cannon each

stating that the other would have been fired if he was not a stockholder of ESG.34

Nate, Cannon, and Bryn sought to work out their differences. On August 11,

2009, they engaged in mediation conducted by Bryn‘s father-in-law.35 They left the one-

day mediation with ―assignments‖ to work on in anticipation of a second meeting.36

Rather than continue with the mediation, Cannon decided that it was time to end

Nate‘s employment relationship with ESG. On August 11, the same day of the

mediation, Cannon drafted a notice for a special meeting of the ESG board of directors to
31
Tr. 688 (Nate).
32
Id. 45-46 (Cannon); JX 42 (Email from Keith Ruhl to Bob Potter (July 10, 2009)) at
ESG00032962.
33
JX 42 (Email from Nate Owen to Lisa Swift (July 13, 2009)) at ESG00032961.
34
Id. (Email from Nate Owen to Lynn Cannon (July 13, 2009)) at ESG00032960; Id.
(Email from Lynn Cannon to Nate Owen (July 13, 2009)) at ESG00032960.
35
Tr. 150 (Cannon).
36
Id. 690-91 (Nate).

10
remove Nate as President. Cannon understood that he could not eliminate Nate‘s

ownership interest ―without going through some type of negotiated purchase,‖ but that,

with Bryn‘s cooperation, there would be sufficient votes on the three-person board to end

Nate‘s day-to-day relationship with the Company.37

On Thursday, August 13, 2009 at 1:49 p.m., Cannon and Bryn sent Nate a notice

of a special board meeting to occur on Friday, August 14 at 11:00 a.m., in Boston.38 This

was the first formal board meeting in the history of the Company.39 The notice identified

the purpose of the meeting as ―considering, and upon such a determination by the Board

of Directors, approving the immediate termination [of] the employment of Nate Owen as

President of the [Company], and the election of Lynn Cannon as President pro tem.‖

Further, the board would ―consider the employment of Nate Owen as Vice President,

Special Projects, pursuant to terms and conditions attached‖ to the notice. 40 Those terms

and conditions contemplated a six-month leave of absence and a demotion for Nate, who

would report to Cannon if he returned after six months.41 Cannon knew that Nate would

find this condition unacceptable.42

37
Id. 150, 155 (Cannon).
38
JX 53 (Email from Lynn Cannon to Nate Owen (Aug. 13, 2009)) at ESG00020434.
39
Tr. 153 (Cannon).
40
JX 53 (Notice of Special Meeting of the Board of Directors) at ESG00020436.
41
Id. at ESG00020435.
42
Tr. 153 (Cannon), 695-96, 700 (Nate).

11
 Nate, who was in Pennsylvania attending to a medical issue for his wife, was

―shocked‖ by the proposal and felt ―incredibly betrayed‖ by his brother.43 He called the

lawyer whose name appeared in the special meeting notice (Barry C. Klickstein, Esquire

at Duane Morris LLP)44 and asked for a delay of the meeting to make it easier for him to

travel to Boston and attend the meeting in person. Cannon and Bryn refused.45

After making arrangements for his family, Nate traveled overnight to attend the

meeting. Once there, he was not allowed to say anything. Cannon and Bryn promptly

voted, over Nate‘s objection, to remove him as President. After the meeting, Nate‘s

keycard access was deactivated, his email access was terminated, and all of his work and

personal emails were deleted from the system. That same day, $35,000 was removed

from his personal bank account, likely because Cannon and/or Bryn cancelled a recent

direct deposit from the Company.46

After the six-month leave of absence, Nate did not return to ESG, nor did he

contact Cannon or Bryn about returning to work.47 Under the terms imposed by Cannon,

Nate continued to receive a base salary and benefits as well as stockholder distributions.48

43
Id. 693-94 (Nate).
44
Cannon and Bryn retained Klickstein to represent ESG. Id. 53 (Cannon). Nate had
never heard of him before receiving the special meeting notice. Id. 694 (Nate).
45
Id. 151 (Cannon), 694-95 (Nate).
46
Id. 696-700 (Nate).
47
Id. 723-24 (Nate).
48
Id. 49-50, 154 (Cannon), 719-20 (Nate); JX 53 at ESG0020435.

12
 According to Nate, the Company became ―extremely obstinate‖ in providing Nate

access to information about ESG once he was terminated.49 In October 2009, Nate made

a formal demand under 8 Del. C. § 220 to obtain books and records from the Company.50

ESG thereafter provided certain financial information, including its 1999-2008 tax

returns, its 2007-2008 audited financial statements, and a copy of its QuickBooks files.51

E. Cannon Prepares Multi-Year Projections and Offers to Buy Out Nate

Before 2010, ESG had not prepared multi-year projections for the Company or its

individual lines of business.52 Instead, at the beginning of each calendar year, Cannon

would prepare an annual budget. ESG management participated in Cannon‘s budgeting

process ―in terms of providing the inputs for what [the Company] can expect for the

upcoming year.‖53 Bryn also typically reviewed the budget with Cannon.54

Cannon‘s understanding of ESG‘s future prospects stems in large part from

weekly, two-hour meetings held on Monday mornings, during which he and the

department heads discuss sale opportunities and operations.55 Drew Fenton, Vice

President of Business Development at ESG, described the two-hour meetings as

49
Tr. 701-03 (Nate).
50
JX 378 (Letter from Joseph Demeo to Barry Klickstein (Oct. 21, 2009)).
51
Pre-Trial Stip. ¶¶ II.D.15-16.
52
Tr. 300 (Purdum), 350 (Gurule), 405 (Potter).
53
Id. 34-35 (Cannon).
54
Id. 629-31 (Bryn).
55
Id. 33-34, 160-61 (Cannon).

13
―exhausting.‖56 Once a month, ESG management also compares realized revenue to the

annual budget.57 Based on these meetings with management, Cannon admitted that he

knows what the department heads know, meaning that he is ―very familiar‖ with the

Company‘s business and has a ―good handle‖ on specific customer relationships.58

In February 2010, Cannon extrapolated the Company‘s 2010 annual budget into a

set of multi-year projections for years 2010-2015 to see what ESG‘s future performance

might ―look like from a P&L perspective.‖59 I refer to these projections as the ―2010

Projections.‖60 To create the 2010 Projections, Cannon took the Company‘s 2010 annual

budget and then applied an assumed growth rate to each line of the budget for each year.

Some line items had higher growth rates in later years, and others had lower growth rates.

Cannon projected revenue growing from approximately $15.27 million in 2009 to $39.5

million in 2015.61

Cannon claims he created the 2010 Projections, and every future set of multi-year

projections for ESG, without seeking input from anyone else at the Company. Although

ESG‘s employees confirmed that Cannon did not seek their input into the preparation of

56
Id. 583 (Fenton).
57
Id. 305 (Purdum), 357 (Gurule).
58
Id. 179, 160-61 (Cannon).
59
Id. 56 (Cannon).
60
JX 89 (2010 Projections).
61
Id. at 1.

14
projections per se,62 the weight of the evidence reflects that, even if Cannon did not

explicitly ask for their input, he obtained functionally equivalent knowledge based on the

extensive discussions of ESG‘s future prospects he had with members of management on

a regular basis.63 Indeed, Cannon‘s familiarity with the Company‘s business prospects

grew over time after he had arranged to remove Nate from management and assumed

firm control over the day-to-day operations of ESG.

According to Nate, Cannon and Bryn (through ESG) offered to repurchase his

stock for $8 million in 2010. Nate rejected this offer, which Cannon denied making,64 as

―ridiculously low.‖65 Although no documentary evidence supports the existence of this

offer, I find Nate‘s testimony to be credible on this point.66 The making of such an offer

also is consistent with the fact that Cannon contemporaneously created a set of multi-year

projections for the first time in the Company‘s history in 2010; and that the parties had

retained, at ESG‘s expense, valuation experts during this period.67

62
Tr. 300-01 (Purdum), 350 (Gurule), 405 (Potter).
63
Id. 160-61 (Cannon), 305 (Purdum), 356-57 (Gurule), 583 (Fenton).
64
Id. 192 (Cannon).
65
Id. 704-05 (Nate).
66
See Cruz v. State, 12 A.3d 1132, 1136 (Del. 2011) (―The fact finder ‗is free to accept or
reject in whole or in part testimony offered before it, and to fix its verdict upon the
testimony it accepts.‘ ‖).
67
JX 91 (Email from Barry Klickstein to Chris Waterman (Feb. 3, 2010)) at
NO00000879-80.

15
 In 2011, Cannon engaged Duff & Phelps to provide a valuation of the Company

for the purpose of repurchasing Nate‘s shares.68 Duff & Phelps performed a discounted

cash flow analysis based on projections extrapolated from Cannon‘s 2011 annual budget,

as well as an analysis of five, comparable publicly traded companies.69 On May 12,

2011, Duff & Phelps provided a midpoint valuation of ESG (including cash and

equivalents) of approximately $64.8 million, or approximately $17 per share.70 At that

price, Nate‘s 1,320,000 shares would have been worth $22.44 million.71

According to Nate, ESG made a second offer to repurchase his shares in mid-

2011, this time for $12 million. He rejected the offer as ―entirely insufficient.‖72 No

documents in the record reflect such an offer and Cannon again disclaimed ever making

such an offer, but I find Nate‘s testimony more credible.73

68
Tr. 161-62 (Cannon).
69
JX 122 (Energy Services Group, Inc., Equity Valuation as of Apr. 30, 2011) at
D&P_ESG001110-13.
70
JX 122 (Email from Jeff Davis to Lynn Cannon (Mar. 12, 2011)) at D&P_ESG001088;
Duff & Phelps‘s valuation produced a range of $61.7 million to $67.9 million, with a
midpoint of $64.8 million. Id. (Energy Services Group, Inc., Equity Valuation as of Apr.
30, 2011) at D&P_ESG001097.
71
Pre-Trial Stip. ¶ II.D.19.
72
Tr. 706 (Nate).
73
Id. 192 (Cannon).

16
 In early 2012, Cannon prepared a revised version of the 2010 Projections, which I

refer to as the ―2012 Projections.‖74 The 2012 Projections use the same growth

assumptions as the 2010 Projections but project higher future revenues. This is because

the 2012 Projections were derived from the Company‘s actual results for 2010, which

were higher than the 2010 annual budget used to create the 2010 Projections.75 For

example, projected revenue of $39.5 million for the year 2015 in the 2010 Projections

increased to projected revenue of $44.34 million in the 2012 Projections.76

In an April 2012 planning conference, Cannon presented the 2012 Projections to

senior management as a ―bogie‖ for ESG‘s potential future performance.77 The

presentation described the projections for the years 2013-2015 as ―Revenue Targets.‖78

The same presentation noted that while falling natural gas prices were good for ESG

customers, there was a market expectation that natural gas prices would level off

eventually.79

74
JX 167 (2012 Projections); JX 149 (Email from Lynn Cannon to Mark Drew (Mar. 13,
2012)) at ESG00056706.
75
Tr. 73-74 (Cannon).
76
Compare JX 167 (2012 Projections), with JX 89 (2010 Projections).
77
Cannon Dep. 48-49; Tr. 173 (Cannon).
78
JX 157 (Executive Conference, Agenda and Presentation Materials (Apr. 26-27, 2012))
at ESG00059235.
79
Id. at ESG00059254.

17
 F. ESG Engages Grant Thornton to Perform a Series of Valuations

In June 2012, Cannon engaged Grant Thornton to assist ESG in obtaining

financing to buy back Nate‘s shares.80 Cannon directed the Company‘s controller, Lisa

Swift, to send the 2012 Projections to Grant Thornton.81 When ESG shared the 2012

Projections with Grant Thornton in June 2012, it had exceeded the monthly projections in

them.82

ESG‘s main contact at Grant Thornton was Len Batsevitsky, although a colleague,

Peter Resnick, would perform the indication of value of the Company in connection with

the Merger.83 In June 2012, Grant Thornton used the 2012 Projections to analyze a

proposed financing structure from Wells Fargo.84

In early July 2012, Cannon spoke with Batsevitsky about making certain

adjustments to the 2012 Projections, including decreasing revenue growth and increasing

operating costs.85 In an email, Cannon stated that these revisions were necessary due to

―future competitive forces in the market.‖ Batsevitsky responded that the revisions

80
Pre-Trial Stip. ¶ II.D.21; Tr. 173-74 (Cannon).
81
JX 166 (Email from Lisa Swift to Len Batsevitsky (June 20, 2012)).
82
Tr. 174 (Cannon).
83
Resnick was deposed as a Court of Chancery Rule 30(b)(6) witness of Grant Thornton,
but he was tendered at trial in his personal capacity. Tr. 501. Batsevitsky, who was no
longer with Grant Thornton at the time of trial, was not deposed and did not testify at
trial. Id. 112-13.
84
JX 167 (Email from Len Batsevitsky to Lisa Swift (June 27, 2012)) at ESG00093694.
85
Tr. 176-77 (Cannon).

18
would ―make the projections more conservative which may be better as Wells [Fargo]

will most[] likely use them to set covenant levels.‖86 All else being equal, the changes

Cannon proposed would make ESG less valuable.87

Cannon testified that, at this time, Batsevitsky ―had taken over custody of the

financial modeling,‖ implying that the assumptions in the revised projections were those

of Grant Thornton‘s creation.88 I do not accept Cannon‘s attempt to distance himself

from the revisions to the 2012 Projections. Based on the documentary evidence and the

testimony of Resnick, who was a credible third-party witness, I find that Cannon caused

Grant Thornton to revise the 2012 Projections into a new set of multi-year projections for

the years 2012-2017,89 which I refer to as the ―Revised 2012 Projections.‖90 The changes

Cannon requested with respect to the overlapping years in the 2012 Projections and the

Revised 2012 Projections were relatively modest. For example, projected revenue for

2015 decreased from $44.34 million to $43.93 million.91

The Revised 2012 Projections were created by taking the base year of 2012 (which

was a combination of actual results plus projected results drawn from the 2012 annual

86
JX 171 (Email from Len Batsevitsky to Lynn Cannon (July 17, 2012)).
87
Tr. 498-99 (Resnick).
88
Id. 91 (Cannon).
89
JX 171 (Email from Len Batsevitsky to Lynn Cannon (July 17, 2012)); Tr. 495-96
(Resnick).
90
JX 192 (Revised 2012 Projections).
91
Compare id., with JX 167 (2012 Projections).

19
budget) and then applying an assumed growth rate. The Revised 2012 Projections

include quarterly line item projections for the years 2012-2015 and annual bottom line

revenue growth assumptions for the years 2016-2017.92 Projected year-over-year

revenue growth was 20.2% in 2012; 11.9% in 2013; 10.0% in 2014; and 8.5% in 2015-

2017, with projected revenue for 2017 of $51.73 million. The projected EBIT margin

was 57.4% in 2012; 56.5% in 2013-2015; and 56.6% in 2016-2017, with projected EBIT

for 2017 of $29.28 million.93

In July 2012, at the same time Cannon was discussing these assumptions with

Grant Thornton, ESG employees were voicing their concerns with Cannon ―about

possible attrition‖ in their customer base, including the threat of losing customers to a key

competitor, EC Infosystems.94 Thus, the record shows that Cannon was well aware of

pricing pressures and ―future competitive forces in the market‖ when he was discussing

ESG‘s prospects with Batsevitsky.95

92
Typically, the assumed growth rates were constant for each year. For example, ESG‘s
largest income line item, Transaction Processing Fees, was assumed to grow 1.19% on a
quarterly basis (4.8% annually) during 2013-2015, and ESG‘s second largest income line
item, Billing Services, was assumed to grow 5.0% on a quarterly basis (20% annually)
during 2013, 3.75% on a quarterly basis (15% annually) in 2014, and 2.5% on a quarterly
basis (10% annually) in 2015. JX 192 (Revised 2012 Projections).
93
Id.
94
JX 170 (Email from Carol Purdum to Lynn Cannon (July 5, 2012)) at ESG00100820;
Id. (Email from Lynn Cannon to Carol Purdum (July 3, 2012)) at ESG00100823.
95
JX 171 (Email from Len Batsevitsky to Lynn Cannon (July 17, 2012)); Tr. 83
(Cannon).

20
 Cannon authorized Grant Thornton to provide the Revised 2012 Projections to

several financing sources for a prospective buyout of Nate‘s interest in the Company,

including Citizens Bank, UBS, and Wells Fargo.96 Cannon admitted he would not have

authorized Grant Thornton to share the Revised 2012 Projections with these potential

lenders if he thought they were unrealistic.97

In September 2012, ESG‘s counsel proposed to Nate‘s counsel that the parties

engage in mediation to facilitate a purchase of Nate‘s shares in the Company.98 On

September 12, 2012, ESG‘s counsel formally engaged Grant Thornton to perform a

valuation of the Company.99 Given the sequencing of events, I find that Cannon and

Bryn sought an updated valuation of the Company based on the Revised 2012 Projections

for purposes of the mediation.100

In October 2012, Grant Thornton performed a discounted cash flow analysis of

ESG based on the Revised 2012 Projections. Assuming a discount rate of 15.1%, a tax

rate of 40%, and a perpetuity growth rate of 2.5%, and excluding the cash on the

Company‘s balance sheet, Grant Thornton came to an enterprise value for ESG of

approximately $118.5 million. Further assuming that Nate owned 33.3% of ESG on a

96
Tr. 172 (Cannon); JX 187 (Email from Lynn Cannon to Francois Karl-Henry (Sept. 28,
2012)).
97
Tr. 189 (Cannon).
98
Pre-Trial Stip. ¶ II.D.24; Tr. 707 (Nate).
99
JX 180 (Engagement Letter from Grant Thornton to Barry Klickstein (Sept. 12, 2012)).
100
Tr. 190 (Cannon).

21
fully diluted basis, Grant Thornton indicated that the enterprise value of Nate‘s interest

was approximately $39.5 million on a going-concern basis, excluding his pro rata share

of any cash on hand.101

Before the mediation, Nate sought and obtained certain information from the

Company. In October 2012, Nate received ESG‘s 2011 audited financial statements.102

In November 2012, Nate‘s financial advisor, Floyd Advisory, obtained access to the

financial information contained in the Company‘s QuickBooks file.103 Nate also received

certain personal tax information from Cannon and Bryn, and representatives of Floyd

Advisory met with Cannon and ESG senior management.104

In November 2012, the parties engaged in mediation. It was unsuccessful.

Cannon and Bryn offered to buy out Nate for $18 million.105 This offer was based on the

―May 2011 valuation report prepared by Duff & Phelps.‖106 In other words, the offer was

not based on the more recent Grant Thornton discounted cash flow analysis of the
101
JX 192 (Revised 2012 Projections); Tr. 519-21 (Resnick). Grant Thornton further
assumed a 20% discount for lack of marketability and a 20% discount for a non-
controlling interest, which reduced the enterprise value of Nate‘s interest to
approximately $25.3 million, excluding his pro rata share of the Company‘s cash. JX
192 (Revised 2012 Projections).
102
JX 191 (Email from Barry Klickstein to Wayne Dennison (Oct. 3, 2012)) at
NO00000165.
103
JX 199 (Email from Michael Abasciano to Len Batsevitsky (Nov. 7, 2012)).
104
Tr. 96-98 (Cannon).
105
Id. 190 (Cannon).
106
JX 226 (Letter from Wayne Dennison to Barry Klickstein (Jan. 16, 2013)) at
ESG00101316.

22
Revised 2012 Projections. Nate rejected the $18 million offer as too low. He thought

that ESG was ―exploding in growth.‖107 On January 16, 2013, Nate countered with a

proposal that did not involve selling his shares but would have led to his resigning from

the board of ESG.108 Cannon and Bryn rejected this proposal, which ESG‘s lawyer,

Klickstein, characterized as ―absurd.‖109

G. ESG’s Business Shortly before the Merger

By December 2012, ESG learned that Viridian, the Company‘s largest customer,

expected to end its relationship with ESG in early 2013.110 Viridian accounted for

approximately $2.5 million, or 7.9%, of ESG‘s 2012 revenue.111 Bob Potter, ESG‘s Vice

President of Sales and Marketing, tried to retain Viridian by offering lower prices and

emphasizing ESG‘s greater functionality and value, but he was unsuccessful.112

By April 2013, Viridian had left ESG to become a customer of EC Infosystems,

one of ESG‘s main competitors.113 EC Infosystems had been a consistent competitor of

107
Tr. 708 (Nate).
108
JX 226 (Letter from Wayne Dennison to Barry Klickstein (Jan. 16, 2013)) at
ESG00101318.
109
Tr. 100-01 (Cannon); JX 230 (Letter from Barry Klickstein to Wayne Dennison (Jan.
31, 2013)) at ESG00089398.
110
JX 215 (Email from Florie Ritchie to Bob Potter (Dec. 28, 2012)) at ESG00041703.
111
Tr. 110 (Cannon); JX 332 (Jacobs Report) at ¶ 68.
112
JX 209 (Email form Bob Potter to Michael Fallquist (Dec. 5, 2012)) at ESG00071791-
93; Tr. 383-85 (Potter).
113
Tr. 258-59 (Purdum), 383-85 (Potter).

23
ESG‘s, likely for over a decade.114 Potter testified that the Company‘s competitors were

―commoditizing‖ its products.115 In a July 2012 email chain and at other times, ESG

employees were complaining to Cannon that EC Infosystems was stealing their business

by offering lower prices, even though they believed that ESG offered ―superior client

support.‖116 Into early 2013, ESG employees were still ―worried about the bleeding‖ of

losing their customers.117

In addition to facing competition from other service providers, ESG‘s business

faced the risk of losing customers that might choose to in-source some or all of the

services ESG provided. As competition in the retail energy market matures and

consolidates, REPs can be forced to cut costs, particularly for the type of back-office

functions that ESG offers.118 For example, in mid-2012, ESG lost two of its top five P2C

customers, NAPG and AEP, to in-sourcing.119 AEP in-sourced the TMS services it

received from ESG as well.120 ESG also lost several WES customers that year for a

114
Id. 566 (Fenton).
115
Id. 378-79 (Potter).
116
JX 170 (Email from Carol Purdum to Lynn Cannon (July 5, 2012)) at ESG00100820.
117
See, e.g., JX 236 (Email from Carol Purdum to Bob Potter (Feb. 26, 2013)) at
ESG00085988.
118
Tr. 1040-41 (Weigand).
119
JX 170 (Email from Carol Purdum to Lynn Cannon (July 5, 2012)) at ESG00100820-
21.
120
Tr. 267 (Purdum).

24
similar reason,121 although the WES losses represented only a fraction of ESG‘s

revenue.122 These and related competitive threats often forced ESG to renegotiate

expiring contracts with customers at lower prices. In 2012 and 2013, ESG renegotiated

certain contracts for prices that would yield 30% or lower revenue.123

ESG employees were disappointed by the loss of Viridian, but Cannon viewed this

as a ―one-time event‖ and not as a ―defect in the business model.‖124 Consistent with this

testimony, in a January 2013 sales and marketing overview presentation, ESG touted a

―[v]ery full sales pipeline‖ and an expectation that the Company ―[w]ill close 6 to 10

deals in 2013.‖125

121
Id. 334-35 (Gurule).
122
For example, in their brief, Defendants cite the loss of TruPro as a WES customer.
Defs.‘ Ans. Br. 18. But TruPro generated no revenue in 2011 and only $12,285 in
revenue in 2012, which was less than 0.0005% of the Company‘s revenue that year. JX
319 (Excel File – ESG Monthly Sales by Client – Fiscal Years 2000-2014).
123
JX 354 (Excel File – Reduced Fee Impact Summary). On the other side of the
equation, there is the possibility of new retail energy markets for REPs. A news report
published shortly after the Merger discussed recent developments in Michigan and
Indiana to consider expanding consumer utility choice. JX 315 (Bill Malcolm, Michigan,
Indiana Warm to the Idea of Expanding Consumer Utility Choice, Midwest Energy News
(May 14, 2013), http://www.midwestenergynews.com/2013/05/14/michigan-indiana-
warm-to-the-idea-of-expanding-consumer-utility-choice/).
124
Tr. 211 (Cannon).
125
JX 225 (Energy Services Group, Inc., Sales and Marketing Overview, Jan. 2013) at
ESG00036453.

25
 H. Cannon Decides to Cash Out Nate

In January 2013, Cannon decided that it was time to eliminate Nate‘s ownership

interest in the Company.126 According to Cannon, ―the relationship had to come to a

head‖ after the latest failed mediation, and he and Bryn ―chose to do a cash-out merger

because it was clear that [he, Bryn, and Nate] couldn‘t come to a resolution any other

way.‖127

In March 2013, Cannon updated the Company‘s valuation materials. He revised

his 2013 annual budget to reflect the loss of Viridian, and made line-by-line changes to

accurately reflect the developments he saw in the Company‘s business.128 Although

Cannon testified that, in revising the 2013 annual budget, he did not undertake a ―deep

dive‖ of the Company‘s or the industry‘s future prospects beyond 2013,129 the record

shows that he was well versed in the Company‘s future prospects from, among other

things, the comprehensive weekly and other meetings he held with members of the

Company‘s senior management.

On March 13, 2013, Cannon sought to schedule a meeting the following day with

Grant Thornton‘s Batsevitsky to review the Company‘s projections. Cannon explained to

Batsevitsky, who Cannon knew was on ―personal time‖ that day, that ―[t]iming has

126
Tr. 101, 193 (Cannon).
127
Id. 206-07 (Cannon).
128
Id. 193-94 (Cannon).
129
Id. 116-17, 213, 230 (Cannon).

26
become a significant issue.‖130 When I asked Cannon at trial to explain why he thought it

was necessary to buy out Nate in the March-April 2013 time frame, he was unable to

offer any credible business explanation for why timing had become such an ―issue.‖131 I

credit Cannon‘s deposition testimony and find that he and Bryn wanted to effectuate a

cash-out transaction quickly in order ―to stop the hemorrhage‖ of paying profit

distributions to Nate.132 As noted in Table 1 above, Nate had received over $14 million

in distributions during 2007-2012, with the majority of those distributions being made

after Nate was removed as President in August 2009.

In March 2013, Cannon directed ESG‘s controller to provide the Company‘s 2013

annual budget to Grant Thornton.133 As occurred in 2012 with respect to the Revised

2012 Projections, Grant Thornton and Cannon discussed the appropriate growth rate

assumptions to apply with respect to the 2013 annual budget.134 At Cannon‘s direction,

Grant Thornton applied the assumptions they discussed to the 2013 annual budget to

produce a set of projections for the years 2013-2017, dated as of March 15, 2013.135

130
JX 242 (Email from Lynn Cannon to Len Batsevitsky (Mar. 13, 2013)).
131
Tr. 232-33 (Cannon).
132
Id. 208-09 (Cannon); Cannon Dep. 190.
133
JX 249 (Email from Lynn Cannon to Len Batsevitsky (Mar. 15, 2013)).
134
Tr. 194 (Cannon).
135
JX 250 (Email from Len Batsevitsky to Lynn Cannon (Mar. 15, 2013)); Tr. 229
(Cannon).

27
Resnick testified that these projections came from ESG management,136 and internal

Grant Thornton documents characterized them as ―management‘s financial forecast.‖137

Grant Thornton did not come up with any of its own financial forecast

assumptions.138 Rather, as Resnick testified, which I find to be a credible account, ESG

provided the underlying assumptions, and Grant Thornton tested the reasonableness of

those assumptions in the March 15 projections through conversations with Cannon,

including discussions about the Company‘s position in the industry, pricing pressure from

competitors, and industry trends.139 To note one example, I find that it is more likely

than not that Cannon told Batsevitsky to decrease the 8.5% revenue growth assumption

for years 2016-2017 in the Revised 2012 Projections to the 6.0% revenue growth

assumptions for years 2016-2017 in the March 15 projections.140

In delivering the March 15 projections, Batsevitsky noted that he and Cannon

should discuss further the 6.0% revenue growth assumptions for the years 2016-2017.141

Cannon testified that he thought those assumptions were ―overly optimistic given the
136
Tr. 513 (Resnick).
137
JX 255 (Email from Len Batsevitsky to Oksana Westerbeke (Mar. 19, 2013)) at
GT017922.
138
Tr. 493 (Resnick).
139
Id. 484, 486-87, 490-91 (Resnick). Although Resnick did not have personal
knowledge of some of these events, he was Grant Thornton‘s partner on the ESG account
and his explanation of events was logical and consistent with the documentary record.
140
Id. 508-10 (Resnick), 116 (Cannon).
141
JX 250 (Email from Len Batsevitsky to Lynn Cannon (Mar. 15, 2013)) at
ESG00095769.

28
headwinds that [the Company was] seeing.‖142 Although Cannon did not specifically

solicit input from ESG management for this purpose, he likely discussed the growth

assumptions at some point in time with Bryn, who also testified that he thought the

assumptions ―were quite optimistic.‖143

Based on Batsevitsky‘s conversations with Cannon, and, to a lesser extent, with

ESG‘s controller,144 Grant Thornton produced another set of projections for the years

2013-2017 dated March 28, 2013, which I refer to as the ―2013 Projections.‖145 There

are certain differences between the March 15 projections and the 2013 Projections. For

example, projected revenue growth of 7.4% for 2014 and 6.1% for 2015 in the March 15

projections were revised to 7.5% for 2014 and 5.8% for 2015 in the 2013 Projections.

However, the 6.0% projected revenue growth for 2016-2017—what Cannon claimed at

trial was ―overly optimistic‖—went unchanged.146 According to Resnick, there was no

disagreement between Grant Thornton and ESG on any of the forecast assumptions.147

The 2013 Projections include quarterly line item projections for the years 2013-

2015 and annual bottom line revenue growth assumptions for the years 2016-2017.

Overall, the most significant changes in the 2013 Projections from the Revised 2012

142
Tr. 111-12 (Cannon).
143
Id. 608 (Bryn), 113 (Cannon), 301 (Purdum), 405 (Potter).
144
Id. 485, 535, 538 (Resnick).
145
JX 264 (2013 Projections) at NO00000046-50.
146
Compare JX 255 at GT017931, with JX 264 (2013 Projections) at NO00000052.
147
Tr. 493, 510 (Resnick).

29
Projections were reducing revenue forecasts to reflect the loss of Viridian as a customer

and reducing ESG‘s operating margin to reflect increased competition, which resulted in

lower projected EBIT for 2013 and, in turn, lower projected EBIT for 2014-2017.148

Cannon testified that he ―[a]bsolutely‖ used the best information he had available in

creating the 2013 Projections.149 Resnick understood the 2013 Projections to reflect ESG

management‘s best estimates of the Company‘s expected future performance.150 I credit

this testimony.151

Although the record is not entirely clear on this point, my understanding is that the

parties do not dispute that the 2013 Projections reflect ―normalized‖ salary expenses for

Cannon, Bryn, and Gurule similar to those built into the model that Defendant‘s expert,

Jacobs, created for his discounted cash flow analysis.152 As explained above,

normalization of the salary expenses for these employees is necessary to perform a

discounted cash flow analysis of ESG because they historically had been compensated

148
Id. 194-98 (Cannon), 502, 506 (Resnick). Around the same time, Cannon was in the
process of negotiating a new commercial lease that would increase ESG‘s space from
16,000 to 26,000 square feet and would permit future growth. Id. 214 (Cannon), 303
(Purdum). Cannon and other ESG employees testified that their then-current facilities
were ―inadequate.‖ Id. 215 (Cannon), 295-96 (Purdum), 346-48 (Gurule).
149
Id. 186 (Cannon).
150
Id. 492 (Resnick).
151
ESG‘s performance for the rest of 2013 generally tracked the 2013 Projections. Id.
221-22 (Cannon).
152
Pl.‘s Op. Br. 23 (citing JX 264 (2013 Projections) at NO00000052)); Tr. of Oral Arg.
116-17.

30
with below-market salaries. The following tables compare certain key metrics across the

2012 Projections, the Revised 2012 Projections, and the 2013 Projections.

Table 2 below reflects ESG‘s projected revenue growth for the years 2012-2017.

Table 2
ESG’s Projected Revenue Growth
2012 2013 2014 2015 2016 2017
2012 Projections 29.8% 15.2% 12.6% 10.4%
Revised 2012 Projections 20.2% 11.9% 10.0% 8.5% 8.5% 8.5%
2013 Projections -4.4% 7.5% 5.8% 6.0% 6.0%

Table 3 below reflects ESG‘s projected operating margin for the years 2012-2017.

Table 3
ESG’s Projected Operating Margin
2012 2013 2014 2015 2016 2017
2012 Projections 62.27% 63.6% 62.4% 60.6%
Revised 2012 Projections 57.4% 56.5% 56.5% 56.5% 56.6% 56.6%
2013 Projections 47.9% 45.0% 43.7% 43.8% 43.9%

Table 4 below reflects ESG‘s projected EBIT for the years 2013-2017.

Table 4
ESG’s Projected EBIT (in thousands)
2013 2014 2015 2016 2017
Revised 2012 Projections 20,797 22,876 24,822 26,971 23,284
2013 Projections 14,702 14,838 15,248 16,196 17,195
Difference -29.3% -35.1% -38.6% -40.0% -41.3%

Grant Thornton performed a discounted cash flow valuation of ESG based on the

2013 Projections (the ―Grant Thornton Valuation‖).153 Assuming a discount rate of

16.0%, a tax rate of 40%, and a perpetuity growth rate of 2.5%, and excluding the $13.6

million in cash on ESG‘s balance sheet, the Grant Thornton Valuation reflected an

153
JX 264 (Grant Thornton Valuation) at NO00000052-58.

31
enterprise value for ESG of approximately $67 million. Assuming that Nate owned

33.3% of ESG on a fully diluted basis, Grant Thornton indicated that the enterprise value

of Nate‘s interest (excluding cash) was approximately $22.331 million.154

On March 28, 2013, ESG provided the 2013 Projections and the Grant Thornton

Valuation to Nate.155 In the disclaimer to its valuation materials, Grant Thornton stated

that the included information ―does not constitute an independent valuation or fairness

opinion‖ and that the information ―includes certain statements, estimates and projections

provided by the Company with respect to its anticipated future performance.‖156 Also in

March 2013, ESG provided its then-current financial statements and QuickBooks file to

Nate‘s counsel.157

In a cover letter, ESG‘s counsel proposed that the Company repurchase Nate‘s

interest in ESG for $26.331 million, which is the sum of $22.331 million (based on the

Grant Thornton Valuation) plus $4 million as a proportionate distribution of ESG‘s cash

on hand. The offer was to expire on April 5, 2013.158 Nate did not respond to the

154
Id. at NO00000052-53.
155
JX 264 (Letter from Barry Klickstein to Wayne Dennison (Mar. 28, 2013)) at
NO000000042.
156
JX 264 (Grant Thornton Valuation) at NO00000045.
157
JX 349 (Stipulation (Oct. 2, 2014)) at ¶ 14.
158
JX 264 (Letter from Barry Klickstein to Wayne Dennison (Mar. 28, 2013)) at
NO00000042; Tr. 709 (Nate).

32
offer.159 He ―didn‘t think that anything would be gained from having the discussion‖

with Cannon and Bryn.160

On April 4, 2013, with Cannon‘s authorization, Batsevitsky sent the 2013

Projections to Citizens Bank for the purpose of obtaining financing to buy out Nate.161

According to Resnick, Grant Thornton would not have sent the 2013 Projections to

Citizens Bank without ESG‘s consent.162 ESG thereafter obtained a $25 million credit

facility from Citizens Bank to cash out Nate‘s interest pending resolution of this action.163

I. The Merger

On Friday, May 3, 2013, a county sheriff served Nate at his Maine residence

(when Nate was out of town) with a notice of a special meeting of the ESG board to be

held on at 8:30 a.m. on Monday, May 6, 2013, to consider and vote upon a proposed

merger between ESG and Acquisition Corp.164 This was only the second formal board

159
JX 270 (Email from Barry Klickstein to Wayne Dennison (May 3, 2013)) at
NO00000018.
160
Tr. 710 (Nate).
161
JX 265 (Email from Len Batsevitsky to Denise McGeough (Apr. 4, 2013)).
162
Tr. 512 (Resnick).
163
Id. 130-31 (Cannon), 651 (Bryn); Cannon Dep. 241-42.
164
JX 269 (Letter from Barry Klickstein to Megan Kelley (May 3, 2013)) at
ESG00089409; Pre-Trial Stip. ¶ II.D.27. Depositions were scheduled to begin the
following week in a lawsuit Nate had filed in Massachusetts Superior Court against
Cannon, Bryn, and Gurule related to his removal as President of ESG. Id. ¶ II.D.20; Tr.
711 (Nate). Cannon testified that the timing of the Merger had nothing to do with the
scheduled depositions. Id. 206 (Cannon). On September 11, 2013, the parties to the
Massachusetts litigation filed a joint motion to stay the proceedings in that lawsuit

33
meeting in the Company‘s history.165 The Merger Agreement, attached to the notice,

contemplated that Nate would be cashed out of ESG at $19.95 per share, 166 or $26.334

million in total—$3,000 more than the Cannon and Bryn‘s March 2013 offer.

Also attached to the notice was the Grant Thornton Valuation based on the 2013

Projections that had been provided to Nate previously.167 Earlier on May 3, 2013,

Batsevitsky had informed ESG‘s counsel that Grant Thornton had ―spoke[n] with ESG‘s

Management and confirmed that as of today‘s date there have been no material changes

to the business operations or forecast assumptions since completion of the analysis back

in March.‖168 In other words, when given one last chance to propose further revisions to

the 2013 Projections before the Merger, Cannon reaffirmed the accuracy of the 2013

Projections. ESG also told Grant Thornton on May 3, that ―the actual financial

performance of the Company (from January 1, 2013 through April 30, 2013) is tracking

in a manner that is materially in-line with the Company‘s forecast used in the

analysis.‖169 At trial, Cannon confirmed that both of these statements were accurate.170

pending the outcome of this action. JX 286 (Joint Mot. for Stay and to Continue Prelim.
Inj. (Sept. 11, 2013)).
165
Tr. 153 (Cannon).
166
JX 269 (Merger Agreement) at § 7(b).
167
JX 269 (Email from Len Batsevitsky to Barry Klickstein (May 3, 2013)) at
ESG00089429; Pre-Trial Stip. ¶ II.D.28.
168
JX 272 (Email from Len Batsevitsky to Barry Klickstein (May 3, 2013)).
169
Id.
170
Tr. 122 (Cannon).

34
Pressed on the subject at trial, Cannon further admitted that he stands by the 2013

Projections, testifying, ―I – I signed off on the Grant Thornton projections [i.e., the 2013

Projections], and I‘ll – I‘ll live with them.‖171

Nate learned about the special board meeting scheduled for May 6 when he was in

New York. He immediately asked for a one-day delay so that he could travel back to

Maine and study the documents served at his residence. Cannon and Bryn refused.172

Tellingly, Cannon testified he ―wasn‘t interested in extending [the board meeting] any

further‖ because he believed that Nate only wanted a delay ―to get to the Court to try and

get an injunction.‖173 In Cannon‘s mind, Nate, who had received the 2013 Projections

back in March, ―absolutely‖ had enough time to review the Merger materials.174

On May 6, 2013, the board of ESG, consisting of Nate, Bryn, and Cannon, held a

special meeting to vote on the Merger. Nate recalled that this meeting was ―extremely

tense,‖ in part because ESG ―had hired an armed guard‖ who stood ―at the door with a

171
Id. 213, 172 (Cannon).
172
Id. 711-12 (Nate).
173
Id. 121 (Cannon). When Nate later sought injunctive relief in a Massachusetts state
court, the court denied his request because the Merger already had closed. Id. 712 (Nate).
174
Id. 121 (Cannon).

35
gun at his hip.‖175 At the meeting, Cannon and Bryn voted in favor of the Merger; Nate

voted against it.176

In connection with the Merger, Cannon, Bryn, and Gurule transferred their ESG

stock to Acquisition Corp. in exchange for Acquisition Corp. stock. After this transfer,

Nate owned 1,320,000 shares, or 35.2%, of the outstanding shares of ESG and ESG

Acquisition Corp. owned 2,430,000 of the outstanding shares, or 64.8%.177 The Merger

Agreement contemplated that ESG would merge with and into Acquisition Corp., with (i)

Nate receiving $19.95 per share in cash for his ESG stock; (ii) the ESG stock held by

Acquisition Corp. being cancelled for no consideration; and (iii) the stock of Acquisition

Corp. remaining outstanding. On May 6, 2013, Cannon executed a stockholder written

consent as President of Acquisition Corp. in favor of the Merger.

At 9:07 a.m. on May 6, 2013, a Certificate of Merger was filed with the Delaware

Secretary of State.178 Nate described the Merger as ―boom, done, Blitzkrieg style.‖179

175
Id. 713 (Nate).
176
JX 278 (Resolutions of the Board of Directors of Energy Services Group, Inc. (May 6,
2013)) at NO00000250, 252; Tr. 713-14 (Nate).
177
Pre-Trial Stip. ¶ II.D.29. The ownership of ESG Acquisition Corp. on an undiluted
basis was as follows: Cannons owned 1,218,750 shares (approximately 50.2%); Bryn
owned 1,098,750 shares (approximately 45.2%); and Gurule owned 112,500 shares
(approximately 4.6%).
178
JX 280 (Certificate of Merger (May 6, 2013)).
179
Tr. 712 (Nate).

36
 On May 13, 2013, a notice of the Merger was sent to Nate.180 On May 21, 2013,

Nate delivered a written demand to ESG for appraisal of his shares pursuant to 8 Del. C.

§ 262.181

J. Procedural History

On September 3, 2013, Nate initiated this action. On October 9, 2013, Nate filed

the Verified Amended Complaint asserting four claims: breach of fiduciary duty against

Cannon and Bryn as directors of ESG (Count I); breach of fiduciary duty against Cannon,

Bryn, and Acquisition Corp. as controlling stockholders of ESG (Count II); aiding and

abetting against Acquisition Corp. (Count III); and appraisal under 8 Del. C. § 262

against ESG (Count IV). In his prayer for relief, Nate sought, among other relief,

rescissory damages.182 On November 20, 2013, Defendants filed an Answer to the

Amended Complaint. Discovery ensued. On September 29, 2014, Nate withdrew his

request for rescissory damages. In November 2014, a four-and-a-half day trial was held.

On March 17, 2015, I heard post-trial oral argument.

III. LEGAL ANALYSIS

Because this combined appraisal and fiduciary duty action ultimately turns on the

fair value of Nate‘s shares in ESG as of the Merger, I analyze Nate‘s statutory appraisal

180
JX 280 (Letter from Energy Services Group, Inc. to Stockholders of Energy Services
Group, Inc. (May 13, 2013)).
181
JX 289 (Am. Compl.) at Ex. D. (Letter from Wayne Dennison to Energy Services
Group, Inc. (May 21, 2013)); Pre-Trial Stip. ¶ II.D.36.
182
JX 289 (Am. Compl.) at Prayer for Relief ¶ B.

37
claim first before addressing his fiduciary duty claims. For the reasons explained below,

I conclude based on a discounted cash flow analysis that the fair value of Nate‘s stock as

of the Merger was $42,165,920. It follows that the Merger was not entirely fair,

primarily because it was not effectuated at a fair price. I further find that damages for

Nate‘s breach of fiduciary duty claims are equivalent to the appraised value of his stock.

A. Count IV: Appraisal

In Count IV of the Amended Complaint, Nate petitions the Court under 8 Del. C.

§ 262 to determine the fair value of his stock as of the Merger. Nate demanded the

appraisal of his shares on May 21, 2013, and filed a claim for appraisal in this Court on

September 3, 2013, both of which occurred within the time periods required under the

statute.183

―An action seeking appraisal is intended to provide shareholders who dissent from

a merger, on the basis of the inadequacy of the offering price, with a judicial

determination of the fair value of their shares.‖184 Under 8 Del. C. § 262(h), I must

―determine the fair value of the shares‖ by ―tak[ing] into account all relevant factors.‖

Both the petitioner seeking appraisal and the surviving corporation bear the burden of

proof, and I am obligated to use my independent judgment to determine fair value,185

183
See 8 Del. C. § 262(d)(2) (requiring, where a merger is approved by stockholder
written consent, a stockholder to demand appraisal within twenty days of the date of
mailing of notice); 8 Del. C. § 262(e) (requiring a stockholder to commence an appraisal
proceeding within 120 days after the effective date of a merger).
184
Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1142 (Del. 1989).
185
See Montgomery Cellular Hldg. Co., Inc. v. Dobler, 880 A.2d 206, 221 (Del. 2005).

38
meaning ―the value to a stockholder of the firm as a going concern.‖186 As the Delaware

Supreme Court explained over sixty years ago in Tri-Continental Corp. v. Battye,187 the

concept of ―fair value‖ includes ―market value, asset value, dividends, earning prospects,

the nature of the enterprise and any other facts which were known or which could be

ascertained as of the date of merger and which throw any light on future prospects of the

merged corporation.‖188 More recent decisions reiterate that ―elements of future value,

including the nature of the enterprise, which are known or susceptible of proof as of the

date of the merger and not the product of speculation, may be considered.‖189

―[I]t is within the Court of Chancery‘s discretion to select one of the parties‘

valuation models as its general framework, or fashion its own, to determine fair value in

the appraisal proceeding.‖190 In doing so, I may consider any valuation methodology that

is ―generally considered acceptable in the financial community and otherwise admissible

in court.‖191 The parties‘ post-trial briefing focused exclusively on the use of a

discounted cash flow (DCF) analysis. Thus, this is methodology I use to determine fair

value in this case.

186
Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 217 (Del. 2010).
187
74 A.2d 71 (Del. 1950).
188
Id. at 72.
189
Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983).
190
Cede & Co. v. Technicolor, Inc., 684 A.2d 289, 299 (Del. 1996).
191
Weinberger, 457 A.2d at 713.

39
 ―[T]he DCF valuation methodology has featured prominently in this Court

because it ‗is the approach that merits the greatest confidence‘ within the financial

community.‖192

Put in very simple terms, the basic DCF method involves several
discrete steps. First, one estimates the values of future cash flows for a
discrete period . . . . Then, 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.
Finally, the value of the cash flows for the discrete period and the terminal
value must be discounted back[.]193

The fact that ESG had no outstanding debt as of the Merger simplifies my analysis

because ESG‘s enterprise value is equal to its equity value. Although the parties agree on

the DCF methodology, they disagree on certain key inputs to the DCF model. I

summarize below the experts‘ competing valuations and then analyze the five areas of

disagreement between the parties.

Nate‘s expert, Yvette R. Austin Smith of The Brattle Group, performed a DCF

analysis based on the 2013 Projections, which projected EBITDA and the other inputs

necessary to calculate the Company‘s free cash flows for the years 2013-2017.194 She

192
Cede & Co. v. JRC Acq. Corp., 2004 WL 286963, at *2 (Del. Ch. Feb. 10, 2004)
(quoting Ryan v. Tad’s Enters., Inc., 709 A.2d 682, 702 (Del. Ch. 1996), aff’d, 693 A.2d
1082 (Del. 1997) (TABLE)).
193
Andaloro v. PFPC Worldwide, Inc., 2005 WL 2045640, at *9 (Del. Ch. Aug. 19,
2005).
194
Austin Smith also performed a comparable companies analysis in her report. JX 331
(Austin Smith Report) at ¶¶ 55-63, Ex. 6. She gave 25% weight to her comparable
companies valuation ($45.6 million) and 75% weight to her DCF valuation ($53.7
million). Id. at ¶ 64. Because Nate did not discuss the comparable companies analysis in

40
concluded that it was appropriate to tax affect ESG‘s tax rate in her DCF model to reflect

the Company‘s Subchapter S status, and she used a tax rate of 21.5%. 195 Although

Austin Smith derived a weighted average cost of capital (WACC) of 13.28%, Nate has

since accepted the 14.13% discount rate proposed by ESG‘s expert.196 Austin Smith

assumed a terminal growth rate of 5.0%.197 Austin Smith also calculated Nate‘s

ownership percentage of ESG as 33.3%, but she acknowledged that Nate‘s share of

ESG‘s $17.4 million cash on hand at the Merger may need to be adjusted to reflect

discrete tax liabilities.198 Based on the foregoing assumptions, Austin Smith concluded in

her report that Nate‘s stock in ESG was worth $51.7 million total, or $39.15 per share 199

Based on a revised post-trial calculation of his percentage ownership and adjustments to

the Company‘s cash on hand, Nate submits that the fair value of his stock was $52.65

million, or $39.89 per share.200

his post-trial briefing, I treat that valuation as waived. See Emerald P’rs v. Berlin, 726
A.2d 1215, 1224 (Del. 1999).
195
JX 331 (Austin Smith Report) at ¶¶ 45-46.
196
Pl.‘s Op. Br. 29 n. 10.
197
JX 331 (Austin Smith Report) at ¶¶ 52-53, 65.
198
JX 340 (Austin Smith Rebuttal Report) at ¶ 5.
199
JX 331 (Austin Smith Report) at ¶¶ 64-65.
200
Tr. of Oral Arg. 80-81.

41
 ESG‘s expert, E. Allen Jacobs of Berkeley Research Group, LLC, also performed

a DCF analysis of ESG.201 Jacobs did not base his DCF analysis on the 2013 Projections.

Instead, Jacobs created his own set of ten-year projections for the years 2013-2023 based

on per-unit calculations of revenues and costs.202 His projections for the years 2013-2017

are considerably lower than those in the 2013 Projections. Jacobs asserted that it was not

appropriate to tax affect ESG‘s earnings and calculated the appropriate tax rate to be

44.8%. Alternatively, he proposed a 34.1% tax rate if ESG‘s earnings are tax affected.203

Jacobs computed a WACC of 14.13%, which Nate has accepted, and he calculated a

terminal growth rate of 3.0%.204 Based on these assumptions, Jacobs concluded that the

DCF value of the Company‘s future cash flows was $53.1 million and that its net cash on

hand was $11.9 million such that ESG was worth $65.0 million at the Merger.205 Based

on its post-trial calculation of Nate‘s ownership percentage as 33.08%, ESG contends that

the fair value of Nate‘s stock in ESG was worth $21.502 million.

The parties disagree in five respects over the proper inputs for a DCF valuation of

ESG: (i) the source of the projections of the Company‘s future performance; (ii) whether

201
Jacobs concluded that any comparable companies or comparable transaction analysis
was not informative of ESG‘s value due to insufficient data on comparables companies
and transactions. JX 332 (Jacobs Report) at ¶¶ 129-36.
202
Id. at ¶¶ 138-54.
203
JX 339 (Jacobs Rebuttal Report) at ¶¶ 63-78.
204
JX 332 (Jacobs Report) at ¶¶ 166-81.
205
Id. at ¶ 201.

42
ESG‘s earnings should be tax affected due to its status as a Subchapter S corporation; (iii)

the terminal growth rate; (iv) the proper treatment of the cash on ESG‘s balance sheet as

of the Merger; and (v) Nate‘s ownership percentage of the Company. Most of the delta

between the parties‘ competing valuations ($52.65 million versus $21.502 million) relates

to the first two issues. I address each in turn.

1. The 2013 Projections

Nate contends that the 2013 Projections ―were prepared by ESG management as

part of a careful and deliberate process and reflected management‘s best estimate at the

time of the Merger of the Company‘s expected performance.‖206 For support, he cites to

contemporaneous documents in the record reflecting how Cannon prepared and revised

the assumptions in the 2013 Projections in anticipation of cashing Nate out of ESG, as

well as testimony from Grant Thornton‘s Resnick about the creation and evolution of the

2013 Projections.

ESG argues that the 2013 Projections ―lack appropriate indicia of reliability for [a]

DCF valuation‖ because they ―were not the product of a robust process that included a

broad management team, were not developed within ESG‘s ordinary course of business,

did not involve a thorough review of ESG‘s or industry drivers, and were accepted by

Defendants in the hope that a high merger price would avoid litigation.‖207 ESG asserts

206
Pl.‘s Reply Br. 30.
207
Defs.‘ Ans. Br. 63.

43
that I should appraise the fair value of Nate‘s stock as of the Merger by performing a

DCF valuation using Jacobs‘s cash flow projections.

For the reasons explained below, based on the trial record, I agree with Nate that

the 2013 Projections reflected management‘s best estimates of what was known or

knowable about ESG‘s future performance as of the Merger.

―[M]ethods of valuation, including a discounted cash flow analysis, are only as

good as the inputs to the model.‖208 When performing a DCF analysis to determine the

fair value of stock, Delaware courts tend to place great weight on contemporaneous

management projections because ―management ordinarily has the best first-hand

knowledge of a company‘s operations.‖209 Management also typically ―has the strongest

incentives to predict the company‘s financial future accurately and reliably.‖210 That

said, it may be appropriate to reject a DCF analysis based on management-created

projections ―where the company‘s use of such projections was unprecedented, where the

projections were created in anticipation of litigation, or where the projections were

208
Neal v. Ala. By-Products Corp., 1990 WL 109243, at *9 (Del. Ch. Aug. 1, 1990),
aff’d, 588 A.2d 255 (Del. 1991).
209
Doft & Co. v. Travelocity.com Inc., 2004 WL 1152338, at *5 (Del. Ch. May 20, 2004,
revised May 21, 2004); see also In re Emerging Commc’ns, Inc. S’holders Litig., 2004
WL 1305745, at *14 (Del. Ch. May 3, 2004, revised June 4, 2004) (―This Court has
consistently expressed a preference for the most recently prepared management
projections available as of the merger date.‖).
210
In re Nine Sys. Corp. S’holders Litig., 2014 WL 4383127, at *40 (Del. Ch. Sept. 4,
2014).

44
created for the purpose of obtaining benefits outside the company‘s ordinary course of

business.‖211

Here, the record reflects that Cannon, ESG‘s top executive since Nate‘s removal in

August 2009, engaged in a deliberate, iterative process over a period of three years to

create, update and revise multi-year projections for the Company. This process began

with the 2010 Projections Cannon created in February 2010, continued with the 2012

Projections he created in early 2012, which were revised in mid-2012, and culminated

with the 2013 Projections that Grant Thornton prepared at Cannon‘s direction and with

his input.212 Resnick‘s unbiased testimony and Grant Thornton‘s internal documents both

confirm that ESG (not Grant Thornton) supplied the growth assumptions in the 2013

Projections, as revised from the Revised 2012 Projections.213

Although Cannon was likely the only ESG employee who had a direct role in the

creation of the 2013 Projections, which were derived from his 2013 annual budget, that

does not undermine the reliability of the 2013 Projections in my view because Cannon

regularly met with ESG‘s management to review the Company‘s sales and operations,

including through exhaustive two-hour meetings that were held weekly.214 ESG

211
Huff Fund Inv. P’rship v. CKx, Inc., 2013 WL 5878807, at *9 (Del. Ch. Nov. 1, 2013),
aff’d, -- A.3d --, 2015 WL 631586 (Del. Feb. 12, 2015) (TABLE).
212
Tr. 484, 486-87, 490-91, 508-10 (Resnick).
213
Id. 493, 513 (Resnick); JX 255 (Email from Len Batsevitsky to Oksana Westerbeke
(Mar. 19, 2013)).
214
Tr. 33-34, 160-61 (Cannon), 305 (Purdum), 357 (Gurule), 583 (Fenton).

45
employees also routinely updated Cannon about customer-specific challenges and

opportunities they observed.215 It is thus no surprise Cannon admitted that he is ―very

familiar‖ with the Company‘s lines of business and specific customers and agreed that

―ESG‘s revenues have generally been predictable.‖216 Given the regular feedback

Cannon received from other members of management, the relatively small size of the

Company ($32.2 million in revenue in 2012) and its limited operations (three closely

related lines of business), I find that Cannon was extremely well informed about the

Company‘s prospective growth and that he brought this knowledge to bear on the 2013

Projections.

This is not a case, as in In re John Q. Hammons Hotels Inc. Shareholder

Litigation,217 where projections prepared by management failed to account for

contemporaneous or anticipated business developments.218 Rather, as Cannon testified,

he updated the 2013 Projections to reflect the Company‘s growth prospects as of the

Merger. In particular, in March 2013, Cannon carefully revised his 2013 annual budget,

the base year for the 2013 Projections, on a line-by-line basis to reflect the recent loss of

215
See, e.g., JX 170 (Email from Carol Purdum to Lynn Cannon (July 5, 2012)) at
ESG00100820; JX 236 (Email from Carol Purdum to Bob Potter (Feb. 26, 2013)) at
ESG00085988.
216
Tr. 159-60, 178-79 (Cannon).
217
2011 WL 227634 (Del. Ch. Jan. 14, 2011).
218
See id. at *4-6 (rejecting an expert‘s reliance on management projections based on
―overly optimistic assumptions‖ in part because they ―failed to account for the sale of
three properties . . . after the projections were prepared‖).

46
Viridian as a customer and competitive changes in the market.219 Cannon also directed

Grant Thornton to make certain changes to the 2013 Projections to reflect increased costs

from the time of the Revised 2012 Projections.220 Those changes were significant. They

resulted in decreasing ESG‘s projected EBIT between 29.3% and 41.3% for each of the

years from 2013 to 2017, and in reducing ESG‘s operating margin in 2017 (the final year

of the discrete period) from 56.6% to 43.9%.221 The reasonableness of the 2013

Projections was tested, albeit perhaps not as robustly as one might see in a third-party

transaction, through discussions with Grant Thornton.222 And ESG management

confirmed the 2013 Projections to be accurate just days before the Merger.223

I also find that Cannon worked with Grant Thornton to revise the 2013 Projections

downward significantly at a time when he knew he would force Nate out of the

Company, if necessary, based on a valuation derived from those projections. Cannon

testified that he decided to cash out Nate in January 2013.224 After making up his mind to

do so, Cannon undertook to adjust the assumptions underlying the 2013 Projections,

resulting in material decreases to the Company‘s projected future performance justified

by the loss of Viridian and other perceived competitive pressures. Then, when Nate did

219
Tr. 193 (Cannon).
220
Id. 111-12, 116, 193-94 (Cannon), 508-10 (Resnick).
221
See supra Tables 3-4.
222
Tr. 484, 486-87 (Resnick).
223
JX 272 (Email from Len Batsevitsky to Barry Klickstein (May 3, 2013)).
224
Tr. 101, 193 (Cannon).

47
not respond to ESG‘s March 2013 buyout proposal, which was based on the Grant

Thornton Valuation using the 2013 Projections, the Merger followed as a matter of

course a few weeks later at essentially the same price.

Cannon‘s motive for deciding to force Nate out of the Company at this point was

obvious and admitted: he and Bryn wanted ―to stop the hemorrhage‖225 of paying

millions of dollars in equity distributions to Nate who had not worked at the Company

since August 2009. I reject as an after-the-fact rationalization ESG‘s assertion that I

should find the 2013 Projections to be overly optimistic because they supposedly offered

Nate a ―premium‖ to ―avoid continued litigation.‖226 To the contrary, Cannon was

motivated in my view to make the assumptions in the 2013 Projections as conservative

(i.e., reliable) as possible because he knew full well when they were created that they

could set the price to force Nate out of the Company involuntarily, which was an

invitation to litigation.

Notably, Cannon authorized Grant Thornton to submit the 2013 Projections to

Citizens Bank in connection with obtaining a $25 million credit facility to finance the

purchase of Nate‘s shares.227 As then-Vice Chancellor Strine observed in Delaware

Open MRI Radiology Associates, P.A. v. Kessler,228 because it is a federal felony ―to

225
Id. 208-09 (Cannon).
226
Defs.‘ Ans. Br. 72.
227
Tr. 512 (Resnick); JX 265 (Email from Len Batsevitsky to Denise McGeough (Apr. 4,
2013)).
228
898 A.2d 290 (Del. Ch. 2006).

48
knowingly obtain any funds from a financial institution by false or fraudulent pretenses

or representations,‖ projections that are provided to a financing source are typically given

―great weight‖ by this Court.229 The undisputed fact that Grant Thornton submitted the

2013 Projections to a financial institution at Cannon‘s direction further supports my

conclusion that the 2013 Projections reflected management‘s best estimate of ESG‘s

future performance. If the 2013 Projections were a reliable basis to obtain debt financing,

then there is no reason to conclude that they were an unreliable basis to value the

Company.230

In support of its position that the 2013 Projections are not reliable, ESG draws

heavily on principles discussed in Huff Fund Investment Partnership v. CKx, Inc.,231

Gearreald v. Just Care, Inc.,232 and In re Nine Systems Corp. Shareholders Litigation.233

Each of those cases is distinguishable from the record here.

229
See id. at 332, 332 n.109 (citing 18 U.S.C. § 1344 (2006)).
230
See Emerging Commc’n, 2004 WL 1305745, at *13 (―If contemporaneous reliance
upon the June projections by [the corporation‘s controlling stockholder], his lender and
his financial and legal advisors was appropriate, then logic and common sense dictate that
reliance on those same projections by [the plaintiff‘s expert] in performing his valuation
was no less appropriate.‖).
231
2013 WL 5878807 (Del. Ch. Nov. 1, 2013), aff’d, -- A.3d --, 2015 WL 631586 (Del.
Feb. 12, 2015) (TABLE).
232
2012 WL 1569818 (Del. Ch. Apr. 30, 2012).
233
2014 WL 4383127 (Del. Ch. Sept. 4, 2014), appeal docketed No. 281,2015 (Del. June
5, 2015).

49
 In CKx, after reviewing how management created the company‘s projections, the

Court concluded that the basis for a projected increase in licensing fees under a material,

to-be-negotiated contract was speculative because ―[i]nitial estimates of those revenues

were markedly lower than projections provided to potential buyers and lenders,‖ which

rendered the entirety of the company‘s revenue projections inherently unreliable.234

Unlike in CKx, ESG has not identified any particular line item or line of business in the

2013 Projections that is so uncertain as to undermine the integrity of the overall

projections.

In Just Care, the Court declined to defer to management‘s projections, which were

the first set of multi-year projections the company had ever prepared and thus were

―made outside of the ordinary course of business.‖235 Unlike in Just Care, the 2013

Projections were not Cannon‘s first crack at creating and/or revising multi-year

projections. Cannon had done so three times before: the 2010 Projections, the 2012

Projections, and the Revised 2012 Projections. He also had felt confident enough in his

earlier work product to share the 2012 Projections with ESG management at a planning

conference to set revenue targets, and to submit the Revised 2012 Projections to several

banks to finance a potential buyout of Nate and to one bank (Wells Fargo) to conduct a

234
See CKx, 2013 WL 5878807, at *9, *11 (―Because I have little confidence in the
reliability of using or excluding the estimated $20 million increase in revenues under the
to-be-negotiated American Idol contract, I conclude that a DCF analysis is not the
appropriate method of valuation in this case.‖).
235
Just Care, 2012 WL 1569818, at *4 (Del. Ch. Apr. 30, 2012).

50
debt covenant analysis.236 The concerns in Just Care about projections being created by

novices are further assuaged here because the 2013 Projections were created with the

assistance of a financial advisor, Grant Thornton, with whom Cannon reviewed the

revenue growth assumptions.237

Finally, in Nine Systems, the Court rejected as unreliable a set of one-year

financial projections management had prepared and presented to the board because the

projections were ―inconsistent with the corporation‘s recent performance.‖238

Specifically, the projections were found unreliable because management had

―overestimated the [c]ompany‘s revenues even two to three months away . . . by more

than a factor of three.‖239 Here, by contrast, ESG‘s performance in March and April

2013, shortly before the Merger, was in line with the 2013 Projections.240

Separately, I find that the ten-year projections Jacobs prepared in connection with

this litigation are not reflective of management‘s best estimate of future performance as

of the Merger. In valuing the Company, Jacobs analyzed the ―fundamentals‖ of ESG: its

lines of business, its sales opportunities, its sales won and lost, its individual customers,

its market, its competition, and its growth. His process involved discussions with ESG

236
Tr. 172, 189 (Cannon); JX 187 (Email from Lynn Cannon to Francois Karl-Henry
(Sept. 28, 2012)).
237
Tr. 484, 486-87, 490-91, 493, 510 (Resnick).
238
Nine Sys., 2014 WL 4383127, at *41.
239
Id. at *42.
240
Tr. 221-22 (Cannon).

51
management in 2014 and input from ESG‘s industry expert, Peter Weigand.241 Based on

his analysis, Jacobs projected, on a per unit basis, the Company‘s future revenue for the

years 2013-2023.242

Compared to the 2013 Projections, Jacobs‘s projections are pessimistic, i.e., they

project lower revenue, primarily in the Company‘s TMS line of business. Over the

period from 2009 to 2012, TMS revenue had grown from $12.34 million to $18.76

million. In the 2013 Projections, Cannon projected consistent growth for the years 2013-

2017, albeit at a slower pace than in the years 2009-2012.243 In sharp contrast, Jacobs

projected that, going forward, TMS revenue would decline to $12.74 million in 2020 and

then slowly increase to $13.67 million in 2023.244

Delaware courts are generally skeptical of projections created by an expert during

litigation. ―Expert valuations that disregard contemporaneous management projections

are sometimes completely discounted.‖245 In Taylor v. American Specialty Retailing

Group, Inc.,246 for example, an expert hired by the company (Dunham) ―ignored a

contemporaneous set of projections prepared by Dunham‘s management,‖ and instead

performed a DCF analysis in that appraisal proceeding based ―on far more pessimistic

241
See, e.g., JX 332 (Jacobs Report) at ¶ 108; Tr. 1231-32 (Jacobs).
242
JX 332 (Jacobs Report) at Ex. C1.
243
JX 264 (2013 Projections) at NO00000046, 52.
244
JX 332 (Jacobs Report) at ¶ 145, Ex. C1.
245
JCR Acq. Corp., 2004 WL 286963, at *2.
246
2003 WL 21753752 (Del. Ch. July 25, 2003).

52
assumptions of Dunham‘s future prospects that he prepared on his own.‖ The

Company‘s Chief Financial Officer also refused to endorse the expert‘s valuation. For

these reasons, the Court concluded that the expert‘s calculation ―lacks credibility.‖ 247

Then-Vice Chancellor Strine reached a similar conclusion in Agranoff v. Miller.248

There, the company‘s expert concluded that management‘s projections were an unreliable

basis for a DCF analysis, but the expert nonetheless performed a DCF calculation based

on ―a substantial negative revision to those projections that he came up with after

discussions with . . . managers after the valuation date.‖249 In rejecting the expert‘s

analysis, then-Vice Chancellor Strine concluded that ―[t]he possibility of hindsight bias

and other cognitive distortions seems untenably high,‖ particularly since the expert had

consulted with an individual interested in the outcome of the case about the negative

revisions.250

In my opinion, consistent with Taylor and Agranoff, the after-the fact projections

Jacobs created for purposes of this litigation are tainted by hindsight bias251 and are not a

reliable source to determine the fair value of Nate‘s shares as of the Merger. Jacobs first

247
Id. at *2, *2 n.7.
248
791 A.2d 880 (Del. Ch. 2001).
249
Id. at 891.
250
See id. at 892, 892 n.25.
251
See In re Citigroup Inc. S’holder Deriv. Litig., 964 A.2d 106, 124 n.50 (Del. Ch.
2009) (defining ―hindsight bias‖ as ―the tendency for people with knowledge of an
outcome to exaggerate the extent to which they believe that outcome could have been
predicted.‖ (citation omitted)).

53
spoke with ESG management about valuation issues in the spring of 2014, approximately

one year after the Merger,252 when this litigation was well underway. The key individual

with whom Jacobs discussed the Company‘s future prospects—Cannon253—had a strong

financial interest for Jacobs to believe that management did not think that the 2013

Projections were reliable. As Cannon acknowledged at trial, every dollar paid to Nate in

the Merger is approximately $0.50 out of his own pocket.254 The rest of the payment

would come out of the pockets of only a few other senior managers: Bryn, Gurule and

Fenton. The financial incentive for them to steer Jacobs toward a lower valuation of the

Company, even if only subconsciously, is just too great to overcome in this case.

Indeed, Jacobs testified that, based on conversations he had with ESG

management in 2014, he understood the 2013 Projections to be inconsistent with the

contemporaneous beliefs of management.255 But this understanding is belied by the trial

record in my view, which demonstrates that the 2013 Projections were reflective of

management‘s best estimate of the Company‘s future performance as of the Merger.

Jacobs‘s projections also assume that the Merger occurred at the ―very peak‖ of ESG‘s

252
Tr. 1237 (Jacobs).
253
JX 339 (Jacobs Rebuttal Report) at ¶ 84.
254
Tr. 204-05 (Cannon).
255
Id. 1237-38 (Jacobs); see also JX 339 (Jacobs Rebuttal Report) at ¶¶ 84-85.

54
performance, at an ―inflection point‖ when ESG went from a growing company to a

declining company, which Cannon conceded would have been ―pretty stupid‖ to do.256

In sum, I see no basis to depart from the reasoned principle recited in Taylor,

Agranoff, and elsewhere to be chary of relying on an expert‘s post hoc, litigation-driven

forecasts where, as here, contemporaneous, reliable projections prepared by management

are available.257 I am persuaded that the 2013 Projections were ESG management‘s best

estimates of the Company‘s future performance as of the Merger, and provide a reliable

basis for performing a DCF valuation. Thus, I use the 2013 Projections in my DCF

analysis and give no weight to Jacobs‘s projections.

2. The Tax Rate

The DCF model requires a corporate-level tax rate to calculate the Company‘s

projected free cash flows.258 But, as a Subchapter S corporation, ESG does not pay any

corporate-level income taxes. Instead, ESG‘s income is taxed only once at the investor

level at the stockholder‘s ordinary income rate (rather than at the lower dividend rate). 259

This different tax treatment means that stockholders in a Subchapter S corporation such

256
Tr. 212-13 (Cannon).
257
See Gray v. Cytokine Pharmascienes, Inc., 2002 WL 853549, at *8 (Del. Ch. Apr. 25,
2002) (rejecting an expert‘s calculation that disregarded management‘s revenue
projections and that adjusted other projections where there were no ―valid reasons to
warrant all of the[] adjustments‖); see also Merion Capital, L.P. v. 3M Cogent, Inc., 2013
WL 3793896, at *11-12 (Del. Ch. July 8, 2013) (accepting management‘s projections,
not the expert-created projections, ―as a reliable starting point for the DCF analysis‖).
258
JX 331 (Austin Smith Report) at ¶ 45.
259
Tr. 1298 (Jacobs).

55
as ESG are able to receive distributions on a tax-advantaged basis when compared to

stockholders in a Subchapter C corporation, where income is taxed twice: once at the

corporate level, and again at the investor level (at the lower dividend rate).

As the Supreme Court stated in Tri-Continental Corp., Nate is ―entitled to be paid

for that which has been taken from him.‖260 A critical component of what was ―taken‖

from Nate in the Merger was the tax advantage of being a stockholder in a Subchapter S

corporation. As then-Vice Chancellor Strine reasoned in Kessler, ―[a]n S corporation

structure can produce a material increase in economic value for a stockholder and should

be given weight in a proper valuation of the stockholder‘s interest.‖261 The Court thus

concluded that ―when minority stockholders have been forcibly denied the future benefits

of S corporation status, they should receive compensation for those expected benefits and

not an artificially discounted value that disregards the favorable tax treatment available to

them.‖262

Based on the testimony of Austin Smith, who I found more persuasive on this

issue than Jacobs, I conclude that the Company‘s earnings should be tax affected in order

to perform a DCF valuation that adequately compensates Nate for being deprived of his

Subchapter S stockholder status.263 This conclusion follows Kessler, in which then-Vice

260
Tri-Cont’l Corp., 74 A.2d at 72.
261
Kessler, 898 A.2d at 327.
262
Id. at 328.
263
See id. at 330 (calculating a hypothetical S corporation tax rate of 29.4% by assuming
a 15% dividend tax rate and a 40% personal income tax rate).

56
Chancellor Strine thoughtfully surveyed the case law and literature on this subject,264 and

is consistent with another recent decision of this Court that also followed Kessler.265

Before explaining my calculations, I address ESG‘s contention that any Kessler-

based valuation must take into account the Company‘s policy with respect to distributed

earnings, which Jacobs calculated to be 76.7%--the median of ESG‘s distributions for the

years 2007-2012.266 According to ESG, Nate should not receive any special Subchapter

S value for earnings that are retained and reinvested in the Company. Thus, ESG

proposes a tax rate in a Kessler-based valuation that would permit Nate to receive value

from being a Subchapter S corporation stockholder for some of ESG‘s earnings (the

76.7% calculated by Jacobs) but not from any retained earnings (the 23.3% remainder).267

264
See id. at 326 (―This dispute raises an interesting question of valuation, which has
elicited a fair amount of attention from judges, appraisers, and academics.‖).
265
See Zutrau v. Jansing, 2014 WL 3772859, at *36 (Del. Ch. July 31, 2014) (accepting a
financial advisor‘s DCF calculation of a Subchapter S corporation that was based on an
estimated ―hypothetical ‗pre-dividend S corporation tax rate‘ ‖ of 28.8% (quoting
Kessler, 898 A.2d at 330)).

Other jurisdictions also have cited Kessler with approval. See Bernier v. Bernier, 873
N.E.2d 216, 221 (Mass. 2007) (―Our review of the scant case law and the pertinent
literature on the issues leads us to adopt generally the metric employed by the Kessler
court[.]‖); see also Hamelink v. Hamelink, 2013 WL 6839700, at *5 (Minn. Ct. App. Dec.
30, 2013) (―In light of Kessler and Bernier, we agree with husband that there is support
for [his expert‘s] decision to tax affect.‖).
266
JX 339 (Jacobs Rebuttal Report) at ¶ 70. Kessler itself acknowledges that ―[t]he
relative value of an S corporation, vis-à-vis a C corporation, to its shareholders is
dependent upon the level of distributions paid.‖ Kessler, 898 A.2d at 329.
267
Tr. 1301-05 (Jacobs).

57
Jacobs calculated this rate to be 34.1%.268 In my opinion, the Company‘s position is

based on a false premise.

ESG did not reinvest any appreciable amount of its undistributed earnings in its

business but instead kept those earnings as cash on its balance sheet. This is the reason

the amount of cash and cash equivalents on ESG‘s balance sheet increased from $3.2

million in 2009 to $17.4 million in May 2013.269 The record also does not contain any

evidence suggesting that, as of the Merger, Cannon or anyone else at ESG intended to

reinvest the cash it had accumulated in the business.270 Nor was it necessary for ESG to

reinvest earnings to grow. Both Austin Smith and Jacobs testified that the 2013

Projections included all of the capital expenditures necessary for ESG to generate the

projected future cash flows.271

In my opinion, the operative metric under the Kessler-based valuation method is

not the actual distributions made by a Subchapter S corporation, but the amount of funds

that are available for distribution to stockholders. To conclude otherwise would run afoul

of the rationale of Tri-Continental Corp. because Nate would be deprived of ―his

268
JX 339 (Jacobs Rebuttal Report) at ¶¶ 70-71.
269
Tr. 1306-08 (Jacobs).
270
It would inappropriate to consider post-Merger changes to the Company‘s
reinvestment practices. See, e.g., Gonsalves v. Straight Arrow Publishers, Inc., 701 A.2d
357, 363 (Del. 1997) (concluding in an appraisal proceeding that a petitioner was not
entitled to the pro rata value of ―possible changes which may be made by new
management‖ after the effective date of the transaction).
271
Tr. 888 (Austin Smith), 1309 (Jacobs).

58
proportionate interest‖ in ESG as a ―going concern,‖272 which includes the Subchapter S

corporation benefits that inure to earnings that are distributed and retained.

Table 5 below reflects my calculation, under Kessler, of the hypothetical corporate

tax rate for ESG that ―treat[s] the S corporation shareholder [i.e., Nate] as receiving the

full benefit of untaxed dividends, by equating [his] after-tax return to the after-dividend

return to a C corporation shareholder.‖273 For this purpose, I use Jacobs‘s calculation of

ESG‘s effective state and federal tax rate to be 43%, which Nate has accepted.274

Because Nate was the only stockholder cashed out in the Merger, I also accept Austin

Smith‘s calculation of Nate‘s actual tax rates as a Maine resident rather than Jacobs‘s

calculation of ―hypothetical‖ tax rates for a Massachusetts stockholder. Thus, I calculate

the tax rate Nate would pay on distributions from a Subchapter C corporation to be

31.75%, which is the sum of the 20% federal tax on dividends, the 3.8% Net Income

Investment Tax (NIIT) imposed by the Affordable Care Act,275 and the 7.95% Maine

state tax on dividends.276 I also calculate the tax rate that Nate would pay on distributions

from a Subchapter S corporation to be 47.25%, which is the sum of Nate‘s actual 35.5%

272
Tri-Cont’l Corp., 74 A.2d at 72.
273
Kessler, 898 A.2d at 330.
274
JX 339 (Jacobs Rebuttal Report) at ¶¶ 69-71; Pl.‘s Op. Br. 61.
275
See 26 U.S.C. § 1411.
276
I also accept Austin Smith‘s assumption that Nate‘s state taxes are effectively not
deductible for federal tax purposes. JX 331 (Austin Smith Report) at ¶ 46.

59
federal income tax rate (based on his 2012 tax returns),277 the 3.8% NIIT, and the 7.95%

Maine state tax.

Table 5
Hypothetical Corporate Tax for ESG under Kessler
C Corp S Corp S Corp Valuation
Income Before Tax $100 $100 $100
Entity-Level Tax 43% 0% 22.71%
Entity Net Earnings $57 $100 $77.29
Dividend/Personal Tax 31.75% 47.25% 31.75%
Net to Investor $38.90 $52.75 $52.75

Thus, I conclude that the appropriate tax rate to apply in my DCF valuation of Nate‘s

interest in ESG at the time of the Merger is 22.71%.

3. The Terminal Growth Rate

In a typical DCF valuation, the terminal growth rate ―attempt[s] to capture the

future growth prospects of the firm while recognizing that over time firms cannot

continue to grow at a rate that is materially in excess of the real growth of the

economy.‖278 Austin Smith offered a 5% terminal growth rate, calculated as a modest

premium (0.5%) to the midpoint of three estimates of nominal U.S. GDP growth prepared

in March 2013 for 2017 and onward (4.5%).279 Jacobs proposed a terminal growth rate of

277
Tr. 873-74, 883-84 (Austin Smith). I credit Austin Smith‘s testimony that it is
appropriate to apply Nate‘s most recent, actual tax rate because there is no evidence in
the record suggesting a different tax rate during the discrete discount period. Id. 885
(Austin Smith).
278
Andaloro, 2005 WL 2045640, at *12.
279
JX 331 (Austin Smith Report) at ¶¶ 52-53.

60
3%, calculated as a premium (1%) to the Federal Reserve‘s projection of inflation as of

the Merger (2%).280

Although calculating the appropriate terminal growth rate is one of several

challenging estimations for a law-trained judge tasked with determining a corporation‘s

fair value,281 two well-reasoned principles guide my analysis. In Merion Capital, L.P. v.

3M Cogent, Inc.,282 the Court observed that, in most cases, ―a terminal growth rate should

not be greater than the nominal growth rate for the United States economy, because ‗[i]f a

company is assumed to grow at a higher rate indefinitely, its cash flow would eventually

exceed America‘s [gross national product].‘ ‖283 Under the logic of 3M Cogent, I find

Austin Smith‘s 5% terminal growth rate too high for a company like ESG, which, as of

the Merger, had matured into a company that was facing increasing competitive pressures

and flatter growth after several years of relatively rapid growth in an environment of

declining natural gas prices.

280
JX 339 (Jacobs Rebuttal Report) at ¶¶ 102-08.
281
See, e.g., In re Appraisal of Orchard Enters., Inc., 2012 WL 2923305, at *18 (Del.
Ch. July 18, 2012) (―As a law-trained judge who has to come up with a valuation
deploying the learning of the field of corporate finance, I choose to deploy one accepted
method as well as I am able, given the record before me and my own abilities.‖), aff’d,
2013 WL 1282001 (Del. Mar. 28, 2013) (TABLE).
282
2013 WL 3793896 (Del. Ch. July 8, 2013).
283
Id. at *21 (quoting Bradford Cornell, Corporate Valuation: Tools for Effective
Appraisal and Decision Making 146-47 (1993)).

61
 Conversely, as the Court noted in Global GT LP v. Golden Telecom, Inc.,284 ―the

rate of inflation is the floor for a terminal value estimate for a solidly profitable company

that does not have an identifiable risk of insolvency.‖285 Because the 2013 Projections

contemplate that ESG would remain profitable even after taking into account increasing

competitive pressures as of the Merger, I find that it is appropriate under Golden Telecom

to calculate the terminal growth rate as a premium to inflation. In my judgment, Jacobs‘s

3% rate strikes the appropriate balance. Indeed, a 3% rate is very close to the 2.5% rate

utilized in the Grant Thornton Valuation contemporaneous with the Merger.286

Courts have acknowledged that a non-trivial spread in the growth rate for the

discrete forecast period and the terminal growth rate is common.287 Thus, the 3%

difference between the revenue growth rate in the final year of the 2013 Projections

(6.0% for 2017) and the terminal growth rate I adopt (3%) should not be controversial.

There also is considerable precedent in Delaware for adopting a terminal growth rate that

is a premium, such as 100 basis points, over inflation. 288 Additionally, the fact that

ESG‘s own expert proposed a 3% terminal growth rate in connection with his projections

284
993 A.2d 497 (Del. Ch. 2010), aff’d, 11 A.3d 214 (Del. 2010).
285
Id. at 511.
286
JX 264 (Grant Thornton Valuation) at NO00000052.
287
See, e.g., S. Muoio & Co. LLC v. Hallmark Entm’t Invs. Co., 2011 WL 863007, at *21
(Del. Ch. Mar. 9, 2011), aff’d, 35 A.3d 419 (Del. 2011) (TABLE).
288
See, e.g., Kessler, 898 A.2d at 334, 337 (adopting a 4% terminal growth rate where
inflation was estimated to be 3%); JRC Acq. Corp., 2004 WL 286963, at *6 (adopting a
3.5% terminal growth rate where inflation was estimated to be 2.5%).

62
for the Company, which were unduly pessimistic in comparison to the 2013 Projections,

compels the conclusion that the terminal growth rate must be at least 3%. I therefore

adopt a 3% terminal growth rate.

4. The Cash on ESG’s Balance Sheet

ESG had approximately $17.4 million in cash and cash equivalents on its balance

sheet as of the Merger.289 It is undisputed that Nate is entitled to receive a pro rata share

of the ―excess‖ cash that could have been distributed to stockholders at that time. At

post-trial argument, Nate conceded that $2.3 million should be deducted to reflect certain

income tax liabilities.290 ESG argues that it is necessary to further deduct (i) $916,000 as

working capital; and (ii) $2.3 million for a Texas sales and use tax liability.

a. Working Capital

Jacobs opined that $916,000 in cash, roughly 3% of ESG‘s 2012 revenue, should

be set aside as the Company‘s working capital. He considered this amount to be an

―extremely conservative estimate.‖291 Austin Smith assumed that ESG did not need a

working capital reserve because ESG generated millions of dollars in cash every

month.292 The trial record supports Jacobs‘s estimation. Cannon testified that Nate

agreed upon the Company‘s ―long-standing practice‖ to retain a percentage of earnings to

289
Tr. 1330 (Jacobs); JX 332 (Jacobs Report) at ¶¶ 195.
290
Tr. of Oral Arg. 61.
291
JX 332 (Jacobs Report) at ¶ 196.
292
JX 340 (Austin Smith Rebuttal Report) at 17.

63
use for ―[c]apital expenditures, as well as other corporate matters.‖ According to

Cannon, who described himself as ―a very conservative kind of guy,‖ having no cash on

hand would not be a ―prudent thing to do.‖ 293 In my opinion, although there is no direct

evidentiary support for a working capital reserve of 3% of revenue, I credit Cannon‘s

testimony on this point and thus accept Jacobs‘s estimate that ESG‘s cash on hand at the

Merger should be decreased by $916,000.

b. Texas Use and Sales Tax

In 2012, ESG discovered that it was subject to a use and sales tax imposed by

Texas on ―data processing services‖ in the state, which the Company had not paid for

over a decade.294 Assuming that none of the Company‘s customers paid this tax on their

own, ESG‘s controller, Swift, estimated in April 2012 that the Company‘s potential

liability was $2.6 million. In an updated analysis in July 2013, she estimated that the tax

could be as high as $3.136 million.295 In the third or fourth quarter of 2013, the Company

hired a tax consultant, who subsequently estimated that the tax liability was around $1.2

million.296 In March 2014, ESG eventually contacted its clients over the course of a

week, learned that several had been paying the tax, and determined that its liability for

293
Tr. 38-39 (Cannon).
294
Swift Dep. 135-36, 138.
295
Id. 139-40, 144, 146.
296
Id. 148.

64
the Texas sales and use tax was $448,389, with the amount attributable to the period

before the Merger being $373,168.297

Based on his conversations with ESG management, Jacobs calculated that a low

estimate of the Texas tax as of the Merger date was $1.6 million. Jacobs then determined

that the midpoint of Swift‘s $3.1 million calculation and his own $1.6 million estimate,

calculated as $2.3 million, was a reasonable expectation of ESG‘s obligation as of the

Merger.298 Nate disagrees. He argues that, under Tri-Continental Corp., Jacobs‘s

calculation does not accurately reflect what was ―knowable‖ about the Texas use tax

because determining the Company‘s tax liability was an ―empirical exercise‖ that ―could

easily have been conducted as of the date of the Merger.‖299 He submits that the correct

amount to deduct for the Texas tax liability was $375,000.

Because ESG‘s management did not know for over a decade about the Texas sales

and use tax, I do not accept Swift‘s $3.1 million estimation, or Jacobs‘s derivative

estimation, as fairly representative as what was ―knowable‖ about this liability at the

Merger. In my view, ESG‘s tax consultant‘s estimate of $1.2 million, despite being

calculated several months after the Merger, is the best available proxy for what was

knowable about this liability as of the Merger.

* * *

297
Id. 155-56, 164.
298
JX 332 (Jacobs Report) at ¶ 198.
299
Pl.‘s Op. Br. 68.

65
 With the foregoing deductions, I conclude that ESG‘s ―excess‖ cash on hand as of

the Merger totaled $12.984 million ($17.4 million minus $2.3 million, minus $916,000,

minus $1.2 million).

5. Nate’s Ownership Percentage

The final area of disagreement between the parties concerns Nate‘s ownership

percentage of the Company. The shareholdings of Nate (1,320,000 shares) and

Acquisition Corp. (2,430,000 shares) in ESG at the time of the Merger are not in dispute.

In percentage terms, Nate contends that he owned 35.2% of the Company, but ESG

contends that he owned only 33.08%. The dispute stems from whether 240,000

―performance units‖ granted to other ESG employees, which the board of ESG ratified

when approving the Merger,300 should be included in a fully diluted valuation of the

Company.

Drew Fenton has what amounts to a phantom stock agreement for 150,000 shares

of ESG. He regularly receives pro rata distributions for those phantom shares. 301 Bob

Potter has 50,000 vested stock options that, according to Cannon, are exercisable in the

event of a change of control, which does not include the Merger.302 Neither Nate nor

ESG presented any evidence probative of the terms of the other 40,000 performance units

300
JX 278 (Resolutions of the Board of Directors of Energy Services Group, Inc. (May 6,
2013)) at NO00000249-50.
301
Tr. 558-60 (Fenton); Cannon Dep. 18-19.
302
Cannon Dep. 16-17; Tr. 407-08 (Potter).

66
referenced in the board resolution approving the Merger, so I will not include those units

in my calculation of Nate‘s percentage interest.

When Jacobs performed a normalization of the compensation Cannon, Bryn, and

Gurule received as ESG stockholders in the manner discussed above, he did not change

Fenton‘s compensation because Fenton‘s ―total compensation approximat[ed] a market

salary.‖303 In other words, Jacobs determined that Fenton‘s salary and bonus as an ESG

employee and his distributions as the holder of 150,000 phantom shares historically

approximated a market-rate salary for someone in his position.

Nate contends that, because Fenton‘s compensation was not normalized, it would

be double-counting to also include Fenton‘s 150,000 phantom shares for purposes of

determining the fair value of Nate‘s interest on a fully diluted basis. I disagree. The fact

that Fenton‘s total compensation as an employee and as a holder of phantom shares

historically approximated market-rate compensation does not change the reality that, in

the future, Fenton would still be entitled to distributions for those 150,000 phantom

shares in the same manner that Cannon or Bryn are entitled to distributions. In other

words, from my perspective, Jacobs ―normalized‖ Fenton‘s compensation by not

changing it in his projections.304 Because the parties have assumed that Grant Thornton

303
JX 332 (Jacobs Report) at Ex. G.
304
Consider the following example. Assume ESG‘s historical financials reflect that
Cannon, Bryn and Fenton each received $5 in compensation per year but that their
market rates were $10 each. Further assume that Cannon, Bryn, and Fenton historically
received distributions of $100, $90 and $5, respectively. It would be logical to normalize
the compensation expense for each of them by reallocating $5 from their distributions to
compensation expense, which would mean that the amount of distributions attributable to

67
normalized the 2013 Projections for purposes of the Grant Thornton Valuation in a

manner equivalent to Jacobs‘s own normalization process,305 I find it is more likely than

not that Fenton‘s phantom stock rights were functionally normalized in the 2013

Projections. I am thus persuaded that I should include Fenton‘s 150,000 phantom stock

rights when calculating the number of outstanding shares of ESG as of the Merger.

As to Potter‘s 50,000 units, I exclude them from my calculation because they are

exercisable only in the event of a change of control. My conclusion follows from then-

Chancellor Strine‘s decision in In re Appraisal of Orchard Enterprises, Inc.306 ESG

argues that, under Orchard, I must value the Company on a fully diluted basis, i.e., by

including Potter‘s 50,000 units.307 In my view, ESG‘s reading of Orchard misses the

mark. Orchard was an appraisal action involving a company with a series of preferred

stock that was entitled to participate in any dividends declared on common stock on an

as-converted basis and that had a liquidation preference of $25 million, which was

triggered in certain situations. In his post-trial decision, then-Chancellor Strine

concluded that the possibility of an event triggering the liquidation preference was

their equity interests would be reduced to $95, $85 and $0, respectively. After
normalizing ESG‘s historical financials in this manner and projecting future cash flows
based on the same assumptions, which is what Jacobs did as I understand it, Cannon,
Bryn, and Fenton would be entitled to share in equity distributions in the future on a pro
rata basis.
305
See, e.g., Tr. 1226-27 (Jacobs).
306
2012 WL 2923305 (Del. Ch. July 18, 2012), aff’d, 2013 WL 1282001 (Del. Mar. 28,
2013 (TABLE).
307
Defs.‘ Reply Br. 39-40.

68
―entirely a matter of speculation.‖308 Thus, when he determined the company‘s going

concern value, he valued the preferred stock on an as-converted basis without deducting

the liquidation preference because, ―if [the company] remains a going concern, the

preferred stockholders‘ claim on the cash flows of the company (if paid out in the form of

dividends) is solely to receive dividends on an as-converted basis.‖309 Under the logic of

Orchard, Potter‘s 50,000 units, which are only exercisable in a change of control, should

not be included in valuing ESG because there is no evidence in the record suggesting that

a change of control as of the Merger was anything but entirely speculative, and valuing

ESG by reference to speculative events is inconsistent with Delaware appraisal law.310

* * *

Therefore, I find that Nate owned 1,320,000 of ESG‘s 3,900,000 outstanding

shares at the time of the Merger,311 which equates to 33.85% of the Company.

6. The Fair Value of Nate’s Interest in ESG

Appendix A reflects my DCF valuation of ESG as of the Merger based on the

relevant items in the 2013 Projections, i.e., the projections for EBITDA, depreciation and

amortization, capital expenditures, and additional working capital for the years 2013-

308
Orchard, 2012 WL 2923305, at *6.
309
Id. at *7.
310
See, e.g., Weinberger, 457 A.2d at 713; Orchard, 2012 WL 2923305, at *8 (―[T]he
duty of this court in an appraisal is . . . to make a determination of [the company‘s] value
as a going concern, without reference to . . . speculative events.‖).
311
This amount is the sum of Nate‘s shares (1,320,000) plus Acquisition Corp.‘s shares
(2,430,000) plus Fenton‘s phantom shares (150,000).

69
2017. For the terminal period, I calculated EBITDA based on a 3% growth rate, and I

adopt Austin Smith calculation‘s for the other items.312 I also apply a partial period

adjustment to the year 2013 to represent the distributable cash flows between the Merger

and the end of the year. Finally, I use the agreed-upon WACC of 14.13%, and I adopt

Austin Smith‘s use of the mid-year convention to calculate present value, ―which

assumes cash flows will be received evenly throughout the period rather than at the end

of the period.‖313 Based on the foregoing assumptions, I find that the fair value of Nate‘s

1,320,000 shares in ESG as of the Merger date was $42,165,920.

B. Counts I and II: Breach of Fiduciary Duty Against
Cannon, Bryn, and Acquisition Corp.

In Count I of the Amended Complaint, Nate contends that Cannon and Bryn

breached their fiduciary duties as directors of ESG by approving the Merger as a self-

interested and unfair transaction. In Count II of the Amended Complaint, Nate contends

that Cannon, Bryn, and ESG Acquisition Corp. breached their fiduciary duties as

controlling stockholders of ESG by approving the unfair Merger. Defendants conceded

in the Pre-Trial Stipulation that they carry the burden to prove the entire fairness of the

Merger under Counts I and II.314 That was a sensible concession. Cannon and Bryn, as

the ESG directors who voted in favor of the Merger, were conflicted in that they had a

material interest in paying Nate as little as possible by virtue of their substantial holdings

312
JX 331 (Austin Smith Report) at ¶ 47.
313
Id. at Ex. 3.
314
Pre-Trial Stip. ¶ VI.C.3.

70
in Acquisition Corp., the surviving corporation in the Merger.315 Acquisition Corp., as

ESG‘s majority stockholder, also stood on both sides of the Merger.316 Absent

procedural mechanisms not present here,317 Cannon and Bryn as conflicted directors

(under Count I) and Acquisition Corp. as a controlling stockholder (under Count II) bear

the burden to prove the entire fairness of the Merger by establishing ―to the court‘s

satisfaction that the transaction was the product of both fair dealing and fair price.‖318

Because Cannon, Bryn, and Acquisition Corp. presented a single defense of the Merger,

the following entire fairness analysis applies to both claims.

1. The Merger Was Not the Product of Fair Dealing

Fair dealing ―embraces questions of when the transaction was timed, how it was

initiated, structured, negotiated, disclosed to the directors, and how the approvals of the

directors and the stockholders were obtained.‖319 Nate contends that Cannon and Bryn

timed the Merger strategically in two ways: first, to exploit the loss of Viridian as a

315
See In re Digex Inc. S’holders Litig., 789 A.2d 1176, 1207 (Del. Ch. 2000)
(concluding that a decision by four directors must be reviewed for entire fairness because
those directors ―possessed substantial direct, personal financial interests in the proposed
transaction‖).
316
See Kahn v. Lynch Commc’ns Sys., Inc., 638 A.2d 1110, 1115 (Del. 1994) (―A
controlling or dominating shareholder standing on both sides of a transaction, as in a
parent-subsidiary context, bears the burden of proving its entire fairness.‖).
317
See Kahn v. M & F Worldwide Corp., 88 A.3d 635, 645 (Del. 2014).
318
Cinerama, Inc. v. Technicolor, Inc., 663 A.2d 1156, 1163 (Del. 1995) (citation
omitted).
319
Weinberger, 457 A.2d at 711.

71
major customer of ESG and thereby cash him out at a low valuation; and second, to

deprive Nate of the opportunity to enjoin the transaction in court before it closed.320

Defendants counter that the timing of the Merger was dictated by Nate‘s refusal to

negotiate over a cash-out price, and that the one-day notice of the ESG board meeting to

approve the Merger, which was permitted under ESG‘s bylaws, was equitable under the

circumstances because Nate already had the 2013 Projections and the Grant Thornton

Valuation for over a month. Further, Cannon and Bryn submit that their reliance on a

financial expert, Grant Thornton, to determine the Merger price is evidence of fair

dealing under 8 Del. C. § 141(e).321

In my opinion, Defendants failed to demonstrate that the Merger was the product

of fair dealing. Instead, I find that Cannon timed the Merger to take advantage of the

downward revision from the Revised 2012 Projections to the 2013 Projections, which

320
Pl.‘s Op. Br. 25-27.

Nate also argues that the Merger violated the Stockholders‘ Agreement. Pl.‘s Op. Br.
28. Section 10 of the Stockholders‘ Agreement requires that Nate, Cannon and Bryn
unanimously approve any ―agreements or transactions valued in excess of Ten Thousand
Dollars ($10,000)‖ and any ―material changes in the business of the Company.‖ JX 2
(Stockholders‘ Agreement) at §§ 10(2)(3), 10(2)(6). Defendants deny that the
Stockholders‘ Agreement barred the Merger and argue, alternatively, that the contracting
parties waived those provisions of Section 10 by not enforcing them in the past. Defs.‘
Ans. Br. 79-82; Tr. 27 (Cannon), 652 (Bryn). Nate counters that the Stockholders‘
Agreement includes a no-waiver provision. See JX 2 (Stockholders‘ Agreement) at §
17(3). I decline to resolve these issues because the parties did not fully or fairly brief the
legal effect of Cannon and Bryn transferring their ESG stock to Acquisition Corp. on the
contractual rights and obligations under the Stockholders‘ Agreement. In any event, the
impact of the Stockholders‘ Agreement would have no practical effect on the outcome of
my fairness analysis given my conclusions above.
321
Defs.‘ Reply Br. 4-10; Defs.‘ Ans. Br. 75-79.

72
were primarily brought about by the loss of Viridian, to cash out Nate and thereby ―stop
322
the hemorrhage‖ of paying millions in profit distributions to Nate, who had not

worked at the Company since August 2009.323 I also find it was inequitable for Cannon

and Bryn to reject Nate‘s reasonable request for a one-day delay of the May 6, 2013, ESG

board meeting at which the Merger would be put to a vote.

Under Section 6-4(b) of the Company‘s bylaws, ESG‘s board had the authority to

convene a special meeting on one day‘s notice.324 But, ―inequitable action does not

become permissible simply because it is legally possible.‖325 Nate may have had the

2013 Projections in hand since the end of March 2013,326 but there is no evidence in the

record suggesting that Cannon or Bryn had informed Nate before May 3, 2013, that the

2013 Projections would be the basis for a cash-out transaction.327 In any event, Nate

322
Tr. 208-09 (Cannon); Cannon Dep. 190.
323
According to Defendants, the fact that Nate withdrew his claim for rescissory damages
before trial meant that Nate himself no longer thought that the Company was worth more
after the Merger than on May 6, 2013. Tr. of Oral Arg. 102-03. Defendants offered no
authority for taking an adverse inference from Nate‘s litigation strategy, and I decline to
do so here. As with the appraisal analysis, fairness logically should focus on what was
known and knowable to the parties at the time of the challenged transaction.
324
JX 3 (Bylaws of Energy Services Group, Inc.) at § 6.
325
Schnell v. Chris-Craft Indus., Inc., 285 A.2d 437, 439 (Del. 1971).
326
JX 264 (Letter from Barry Klickstein to Wayne Dennison (Mar. 28, 2013)) at
NO00000042.
327
See Pepsi-Cola Bottling Co. v. Woodlawn Canners, Inc., 1983 WL 18017, at *13 (Del.
Ch. Mar. 14, 1983) (concluding after trial that it was not inequitable for a director to call
an impromptu special board meeting where the matters discussed were likely ―potential

73
asked only for a one-day delay to travel (from New York to Maine) and to review the

deal documents before the board meeting in Boston. Tellingly, Cannon conceded that he

and Bryn refused this request because they wanted to prevent Nate from having the

opportunity to go to court to enjoin the transaction.328 Because the record does not reveal

a legitimate need for such acute timing pressure, Cannon and Bryn‘s refusal of Nate‘s

reasonable request was inequitable.329

In sum, under the totality of the circumstances, Defendants have not proven that

the Merger was the product of fair dealing.

2. The Merger Was Not at a Fair Price

Fair price ―relates to the economic and financial considerations of the proposed

merger, including all relevant factors: assets, market value, earnings, future prospects,

topics for discussion‖ at a noticed board meeting and the annual shareholders meeting
scheduled for the same day).
328
Tr. 121 (Cannon).
329
Cannon and Bryn‘s reliance on 8 Del. C. § 141(e) is misplaced in my view. A
director‘s reliance on qualified experts under 8 Del. C. § 141(e) is ―a pertinent factor in
evaluating whether corporate directors have met a standard of fairness in their dealings,‖
but this factor alone is not dispositive of fair dealing. See Cinerama. Inc. v. Technicolor,
Inc., 663 A.2d 1134, 1142 (Del. Ch. 1994), aff’d, 663 A.2d 1156 (Del. 1995). ―To hold
otherwise would replace this court‘s role in determining entire fairness . . . with that of
various experts hired to give advice to the directors in connection with the challenged
transaction[.]‖ Valeant Pharm. Int’l v. Jerney, 921 A.2d 732, 751 (Del. Ch. 2007).
Under the circumstances of this case, where Cannon and Bryn advance the Grant
Thornton Valuation based on the 2013 Projections as evidence of fair dealing but
simultaneously insist that the 2013 Projections were not reflective of the Company‘s fair
value, I find Cannon and Bryn‘s reliance on Grant Thornton‘s bottom line to be
unpersuasive.

74
and any other elements that affect the intrinsic or inherent value of a company‘s stock.‖330

―When conducting a fair price inquiry as part of the entire fairness standard of review, the

court asks whether the transaction was one ‗that a reasonable seller, under all of the

circumstances, would regard as within a range of fair value; one that such a seller could

reasonably accept.‘ ‖331 The fair price inquiry in a fiduciary duty claim is largely

equivalent to the fair value determination in an appraisal proceeding, although the

remedies may be different.332 Under the DCF valuation set forth above, where I

concluded that the fair value of Nate‘s interest in ESG was $42,165,920, I find that

Defendants have failed to show that the $19.95 per share consideration ($26.334 million

in total) offered to Nate in the Merger was within a range of fair value of ESG.333

3. The Merger was not Entirely Fair

Under the entire fairness standard, I must make a unitary conclusion as to whether

the Merger was entirely fair. ―[I]n a non-fraudulent transaction . . . price may be the

preponderant consideration outweighing other features of the merger.‖334 After weighing

330
Weinberger, 457 A.2d at 711.
331
See In re Orchard Enters., Inc. S’holder Litig., 88 A.3d 1, 30 (Del. Ch. 2014) (quoting
Cinerama, 663 A.2d at 1143).
332
Weinberger, 457 A.2d at 713-14 (determining fair price under the entire fairness
standard by reference to determining fair value in an appraisal proceeding).
333
See Emerging Commc’ns,, 2004 WL 1305745, at *24 (concluding that the merger
consideration of $10.25 per share was not a fair price under Weinberger where the
appraised fair value of the company was $38.05 per share).
334
Weinberger, 457 A.2d at 711.

75
the respective fair dealing and fair price inquiries, I conclude that the Merger was not

entirely fair. Cannon, Bryn, and Acquisition Corp. thus breached their fiduciary duties.

―[W]here a merger is found to have been effected at an unfairly low price, the

shareholders are normally entitled to out-of-pocket (i.e., compensatory) money damages

equal to the ‗fair‘ or ‗intrinsic‘ value of their stock at the time of the merger, less the

price per share that they actually received.‖335 This principle plainly applies here.

Defendants have not shown that Nate‘s damages are less than the fair value of his interest

in ESG, nor has Nate shown that his damages are greater than the fair value of his

interest.336 Thus, judgment will be entered in Nate‘s favor under Counts I and II, with

Cannon, Bryn, and Acquisition Corp. jointly and severally liable to Nate for damages in

the amount of $42,165,920, representing the fair value of Nate‘s shares.

C. Count III: Aiding and Abetting Against Acquisition Corp.

In Count III of the Amended Complaint, Nate asserts that Acquisition Corp. is

liable for aiding and abetting Cannon and Bryn‘s breaches of fiduciary duty. Nate

waived this claim because he offered no probative evidence at trial and presented no

argument in support of this claim in his post-trial briefing.337

335
Strassburger v. Earley, 752 A.2d 557, 579 (Del. Ch. 2000); see also Orchard Enters.,
88 A.3d at 48 (―[T]his court has conducted consolidated breach of fiduciary duty and
appraisal proceedings and awarded the same damages measure in both cases.‖).
336
See, e.g., ONTI, Inc. v. Integra Bank, 751 A.2d 904, 932 (Del. Ch. 1999) (―I find the
Counterclaim Defendants dealt unfairly with the Counterclaimants, and the amount of
damages equals the fair value I have determined above less the $6,040,000 offered.‖).
337
See In re El Paso Pipeline P’rs, L.P. Deriv. Litig., 2015 WL 1815846, at *14 (Del.
Ch. Apr. 20, 2015).

76
 D. Interest, Fees, and Costs

Under 8 Del. C. § 262(h), unless I determine otherwise for good cause shown,

Nate is entitled to interest at the statutory rate (the Federal Reserve discount rate plus 5%,

compounded quarterly) from the effective date of the Merger until the appraised value of

his stock is paid. Neither Nate nor ESG has offered any good cause to depart from the

statute here. Thus, I award Nate interest at the statutory rate on his appraisal claim,

compounded quarterly.

In his post-trial briefing, Nate seeks to recover his expert fees and attorneys‘ fees

incurred in this action, contending that Defendants litigated in bad faith. I disagree that

Defendants‘ conduct rose to the level of bad faith, and I reject this request.

Under the American Rule, litigants in this Court generally pay their own

attorneys‘ fees.338 ―The bad faith exception to the American Rule applies in cases where

the court finds litigation to have been brought in bad faith or finds that a party conducted

the litigation process itself in bad faith, thereby unjustifiably increasing the costs of

litigation.‖339 ―[T]o constitute bad faith, the [litigant‘s] action must rise to a high level of

egregiousness.‖340 The thrust of Nate‘s request is that the Merger price, unilaterally set

by Cannon and Bryn, was unfair on its face and not based on any legitimate valuation of

338
See Goodrich v. E.F. Hutton Gp., Inc., 681 A.2d 1039, 1044 (Del. 1996).
339
Beck v. Atl. Coast PLC, 868 A.2d 840, 850-51 (Del. Ch. 2005).
340
Judge v. City of Rehoboth Beach, 1994 WL 198700, at *2 (Del. Ch. Apr. 29, 1994).

77
the Company because Grant Thornton failed to tax affect its DCF analysis of the 2013

Projections for ESG as a Subchapter S corporation under Kessler.341

In my opinion, this conduct does not rise to the level of bad faith to warrant fee

shifting because the parties ―could and did reasonably differ on the legal import‖ of

several critical issues,342 such as whether it was appropriate to tax affect ESG‘s earnings

under Kessler. For example, the import and application Kessler is not free from

criticism,343 nor is it a binding decision of the Delaware Supreme Court. I also rejected

several aspects of Austin Smith‘s valuation, including her discount rate and terminal

growth rate, in favor of Jacobs‘s calculations. None of the authorities Nate has advanced

compels me to award expert fees or attorneys‘ fees. I thus deny Nate‘s request for fees.

Under 8 Del. C. § 262(j) and Court of Chancery Rule 54(d), I award Nate his costs.

341
Pl.‘s Op. Br. 73-74.
342
See In re Sunbelt Beverage Corp. S’holder Litig., 2010 WL 26539, at *15 (Del. Ch.
Jan. 5, 2010, revised Feb. 15, 2010) (declining to award attorneys‘ fees under the bad
faith exception because the defendants‘ litigation strategy ―was sufficiently reasoned to
preclude a finding that there was no legal issue in the case upon which reasonable parties
could differ‖).
343
See, e.g., Stephen D. McMorrow, Consider “Tax-Affecting” When Setting the Value of
an S Corporation, 10 Bus. Entities 36, 42-43 (Nov.-Dec. 2008) (―Vice Chancellor Strine
gave an admiring nod to research in this area by noting that useful models for valuing S
corporations were provided by Chris Treharne and others . . . as well as by Z. Christopher
Mercer . . . . The problem with the court‘s model is that it works only when the S
corporation is distributing 100% of earnings.‖); Bret A. Tack, At Last, a Valid Way to
Value S Corps, WealthManagement.com (Nov. 1, 2006), http://wealthmanagement.com/
valuation/last-valid-way-value-s-corps-0 (―The Delaware Chancery Court‘s method for
capturing the value of the S corp status using a presumed corporate tax rate does not
address how the value of the S corp benefits is reduced when earnings are retained in the
corporation and not distributed.‖).

78
IV. CONCLUSION

For the foregoing reasons, judgment will be entered in Nate‘s favor under Counts

I, II, and IV of the Amended Complaint. Nate is entitled to: (1) the fair value of his

1,320,000 shares of ESG as of the Merger on May 6, 2013, which I find to be

$42,165,920; (2) pre-judgment and post-judgment on this amount at the Delaware legal

rate, compounded quarterly; and (3) costs. Judgment will be entered in Acquisition

Corp.‘s favor under Count III.

Counsel shall confer and submit an implementing order of final judgment within

five business days, providing for the foregoing payments to be made within thirty

calendar days of entry of judgment.

79
 APPENDIX A
ESG Discounted Free Cash Flow Analysis
(in thousands)

Calendar Year Ending December 31
2013 (A+P) 2014P 2015P 2016P 2017P Terminal
EBITDA $15,019.4 $15,245.8 $15,696.4 $16,644.1 $17,642.8 $18,172.1
Less: Depreciation and Amortization (317.8) (408.0) (448.0) (448.0) (448.0) (496.9)
EBIT $14,701.6 $14,837.8 $15,248.4 $16,196.1 $17,194.8 $17,675.2
Less: Income Tax (3,338.7) (3,369.7) (3,462.9) (3,678.1) (3,904.9) (4,014.0)
Unlevered Net Income $11,362.9 $11,468.1 $11,785.5 $12,518.0 $13,289.9 $13,661.1
Plus: Depreciation & Amortization 317.8 408.0 448.0 448.0 448.0 497.0
Less: Capital Expenditures (1,200.0) (700.0) (300.0) (300.0) (300.0) (497.0)
Less: Additional Working Capital (25.7) (104.6) (43.8) (45.0) (45.0) (63.0)
Unlevered Free Cash Flow $10,455.0 $11,071.5 $11,889.7 $12,621.0 $13,392.9 $13,598.1
Partial Period Adjustment 0.66 1.0 1.0 1.0 1.0 1.0
Unlevered Free Cash Flow $6,900.3 $11,071.5 $11,889.7 $12,621.0 $13,392.9 $13,598.1

Present Value of Distributable Cash Flows
WACC 14.13% 14.13% 14.13% 14.13% 14.13%
Discount Period (mid-year convention) 0.33 1.16 2.16 3.16 4.16
Present Value Factor 0.96 0.86 0.75 0.66 0.58
Present Value of Distributable Cash Flows $6,605.8 $9,497.8 $8,936.9 $8,312.1 $7,728.4

Enterprise Value Terminal Value Tax Rate
PV of Distributable Cash Flows (2013-2017) $41,081.0 Residual Cash Flow $13,598.1 22.71%
PV of Residual Cash Flows $70,502.0 WACC 14.13%
Cash and Equivalents $12,984.0 Less: Residual Growth Rate 3.00%
Enterprise Value $124,567.0 Capitalization Rate 11.13%
Nate's Stock $42,165.92
(33.85% ownership, 1,320,000 shares) Residual Cash Flow $122,175.65
Present Value Factor 0.58
Present Value of Residual Cash $70,502.00