You’ve probably seen the headline: minority partners in a Delaware squeeze-out got three times the amount AT&T paid them. Vice Chancellor Laster’s 2022 opinion in In Re Cellular Tel. P’ship Litig. has been making the rounds in valuation and litigation circles since it was published. Most of the commentary focuses on the outcome — $714 million in fair value versus AT&T’s $219 million valuation. That’s a dramatic number. It’s also a deliberately plaintiff-friendly one: because Laster found AT&T had breached its duty of loyalty, the valuation was a remedial award, and the court resolved every close call against AT&T. But the most useful part of the case for litigators isn’t the number — it’s why AT&T’s valuation fell apart.
The specific failures in that case — the ones that cost AT&T half a billion dollars — are the same ones I see in freeze-out and appraisal disputes all the time. They’re preventable. And if you’re advising a controlling shareholder on a transaction, or representing a minority interest in one, knowing what went wrong here gives you a concrete checklist of what to look for.
The Independence Problem Nobody Flagged
Before getting to the valuation methodology, it’s worth understanding the process failure that set the stage. AT&T retained a valuation firm to determine fair value for the freeze-out. That firm’s lead partner had a long-standing relationship with AT&T. Internal AT&T personnel influenced the outcome of the valuation. There was no special committee, no independent bargaining agent, no one with the ability to veto the deal on behalf of the minority.
Under Delaware’s entire fairness standard, AT&T bore the burden of proving both fair dealing and fair price. The process alone would have been enough to put AT&T in a difficult position. But the valuation compounded the problem.
If you’re advising a controller, this is the part that matters most. The cheapest insurance in a freeze-out is procedural: an independent committee, an independent appraiser, and a clear record that the minority’s interests were represented. Skip those steps and you’ve handed the plaintiffs’ counsel a structural argument before the valuation expert even takes the stand.
The Valuation Methodology Gap
Both sides presented expert testimony on the value of the partnerships. The plaintiffs’ expert, J. Armand Musey, used a discounted cash flow analysis. AT&T’s litigation expert, Carlyn Taylor of FTI Consulting, relied primarily on market-based approaches. The court found the DCF more persuasive — and the reasoning is where it gets instructive.
AT&T timed the freeze-out to capture the smartphone-driven explosion in wireless data revenue. This wasn’t speculation. AT&T’s own executives had been telling investors about the growth potential in data services. The company was investing heavily in connected devices and new product lines. The minority partners’ share of that future value was exactly what the freeze-out was designed to capture.
A market-based valuation that relied on comparable transactions from the voice-dominated era couldn’t reflect that potential. The court found those comparables inadequate because the partnership’s value was, in large part, its participation in a growth story that hadn’t yet shown up in historical transactions. The DCF — built on management’s own projections for data revenue — captured it.
The lesson isn’t “always use a DCF.” It’s more specific than that: when the controlling party’s own internal documents show it expects the business to be worth significantly more than the transaction price, a backward-looking market approach is going to have a credibility problem. Any competent opposing counsel will subpoena those internal projections and put them next to the valuation. If the numbers don’t match the story the company was telling its own board, the expert has a problem on cross. And in a case like Cellular, where the court is already resolving close calls against the breaching party, every debatable assumption in the DCF goes the wrong way. The process failures didn’t just create liability — they tilted the valuation itself.
The Tax-Affecting Trap
For valuation practitioners, the most technically interesting issue in Cellular is the tax treatment of partnership cash flows — and it created a trap that AT&T’s expert walked straight into.
The partnerships were pass-through entities. The question was whether to “tax affect” the cash flows in the DCF — that is, whether to deduct hypothetical entity-level taxes from the projected cash flows before discounting them. If you do, you reduce the cash flows by roughly a third, which translates directly into a lower value.
This issue has been bouncing around the valuation profession since the Tax Court’s Gross decision in 1999, which held that you couldn’t deduct hypothetical taxes from pass-through entity cash flows. Delaware Chancery had moved away from Gross in some prior rulings. But in Cellular, Vice Chancellor Laster came back to it, declining to allow tax affecting.
Here’s where it gets technical, and where the real mistake happened. The court adopted a WACC-based discount rate. The standard WACC formula includes the after-tax cost of debt — you multiply the cost of debt by (1 minus the tax rate), which reduces the discount rate to reflect the tax shield on interest. AT&T’s expert tax-affected the cost of debt in the WACC calculation but didn’t tax-affect the cash flows. That’s internally inconsistent. You can’t claim there’s no entity-level tax when computing cash flows and simultaneously claim a tax benefit when computing the discount rate. The court noticed.
For litigators who aren’t valuation specialists: this is the kind of technical inconsistency that destroys an expert’s credibility on cross-examination. You don’t need to be able to build a DCF model. You need to know enough to ask: “Did you treat the tax rate the same way in the numerator and the denominator?” If the answer is no, your expert — or the opposing expert — has a problem.
When You Don’t Need an Expert to Spot the Issue
Not every squeeze-out valuation dispute requires a deep dive into WACC methodology. Before you engage an expert, there are a few threshold questions that can tell you whether the valuation is likely to hold up or fall apart:
Does the valuation reflect what the controller actually believed the business was worth? In Cellular, AT&T’s internal documents showed the company valued the growth opportunity in data far above the freeze-out price. If there’s a gap between the internal view and the transaction price, that’s your case — and you can find it in board presentations, investor decks, and management forecasts without a valuation expert.
Was the valuation independent? If the appraiser had a pre-existing relationship with the controlling party, or if the controlling party’s personnel influenced the valuation process, that’s a process argument you can make at the motion stage. You don’t need your own DCF to argue that the other side’s DCF wasn’t independent.
Is the methodology internally consistent? The tax-affecting issue in Cellular is one example, but inconsistency shows up in other ways too: using one set of projections for the cash flows and a different growth assumption in the terminal value, or applying a minority discount when the standard of value calls for fair value on a controlling basis. An experienced litigator can spot these in the expert report without retaining their own expert first.
If all three of those look clean, you may be looking at a genuine difference of professional opinion on value rather than a flawed process. Those cases are harder and the outcome is less predictable.
What to Take Away
In Re Cellular is a big case with a big damages number, but the principles are straightforward. Valuation in squeeze-out litigation comes down to three things: the independence of the process, the consistency of the methodology, and whether the valuation reflects what the parties actually knew about the business at the time. AT&T failed on all three, and the $500 million gap between its price and the court’s value is the result.
For litigation counsel, the practical takeaway is this: the best time to evaluate the valuation is before the transaction closes, not after the complaint is filed. If you’re advising a controller, invest in the process — independent committee, independent appraiser, arm’s-length documentation. If you’re representing the minority, start with the internal documents. The gap between what the controller knew and what the controller paid is usually where the case lives.
We put together a litigation valuation checklist for squeeze-out and appraisal disputes — covers methodology selection, independence documentation, and the common inconsistencies that come up on cross. Happy to share it if it would be useful.
