Fair Value In Corporate & Shareholder Litigation

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Fair Value In Corporate & Shareholder Litigation

Transcript of Fair Value In Corporate & Shareholder Litigation

Microsoft PowerPoint - Boris J. Steffen Fair Value in Corporate & Shareholder Litigation Presentation.ppt [Compatibility Mode]

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Fair Value v Fair Market& Other Value Standards:Considerations in Corporate and Shareholder Litigation

Boris J. Steffen, CPA, ASA, ABV, CDBVPrincipal & Director

Overview

What is fair value?

Fair value, fair market value and other valuation standards

Methods to establish fair value

Treatment of valuation discounts and premiums

The IMD controversy

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The IMD controversy

Summary

Appendix

Expert profile

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What is fair value?

Fair value is a legal standard of value defined by state statutes governing dissenting shareholder actions and corporate dissolutions

The legal notion of fair value generally arises in statutory appraisal cases, in cases where a stockholders equity has been eliminated without consent, and in cases of self-dealing under the entire fairness test

Within these contexts, a majority of states follow the definition of fair value provided in the Model Business Corporation Act (MBCA), and in its revision (RMBCA)

In 1984, the MBCA defined fair value as The value of the shares immediately before the effectuation of the corporate action to which the

shareholder objects,

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shareholder objects,

excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.

Starting in 1999, the RMBCA definition of fair value was changed to The value of the shares immediately before the effectuation of the corporate action to which the

shareholder objects

using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal,

and without discounting for lack of marketability or minority status except, if appropriate, for amendments to the certificate of incorporation pursuant to section 13.02(a)(5).

The framework for determining fair value in Delaware is provided by statute and decisions by the Court of Chancery and Supreme Court

Despite revisions to the MBCA, currently there is no clear consensus regarding the definition of fair value

Most states use the 1984 definition, A few use the 1999 revision or a hybrid of the 1984 and 1999 revision,

While a minority use the 1984 definition with the phrase unless exclusion would be inequitable deleted, or with unless exclusion would be inequitable deleted, while adding that all relevant factors be

considered

Many states look to Delaware case law for guidance in dissenting shareholder litigation,

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Many states look to Delaware case law for guidance in dissenting shareholder litigation, adopting all or some of the opinions of the Delaware Court of Chancery or Delaware

Supreme Court Delawares dissenting shareholder statute is modeled after the 1984 MBCA, though it omits the

unless exclusion would be inequitable phrase, and requires that all relevant factors be considered

By comparison, Delaware does not have a minority oppression statute Rather, wrongful conduct by the majority is addressed under the entire fairness test, which

considers the

Fairness of consideration Absolute and relative Procedural fairness Independence, competence and thoroughness

The legal definition of fair value in Delaware is given in Title 8, 262(h) of the Delaware General Corporation Law

As provided in the appraisal statute of the Delaware General Corporation Law, the Court shall determine the fair value of the shares exclusive of any element of value arising

from the accomplishment or expectation of the merger or consolidation,

..In determining such fair value, the Court shall take into account all relevant factors.

The details by which fair value is determined, however, are left to the parties and the Courts, with case law precedent providing guidance

As described by the Delaware Supreme Court, fair value is that which has been taken from [the shareholder], viz. his proportionate interest in a going concern.

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from [the shareholder], viz. his proportionate interest in a going concern.

And in the appraisal process, the corporation is to be valued as an entity, not as a collection of assets or by the sum of the market price of each share of stock outstanding, and

as a going concern, taking into account its market position and future prospects

Similarly, the corporation is to be valued.by means of traditional value factors, weighted as necessary, ignoring post-merger events or other potential business combinations.

The proportionate interest of the dissenting shareholder is determined only after the firm as an enterprise has been valued

In sum, fair value is the value of the shares on a pro rata enterprise basis

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Fair value, fair market valueand other valuation standards

Fair value as defined for appraisal rights and minority oppression purposes and fair market value are not equivalent

While sometimes used interchangeably in other contexts, The concept of fair value under Delaware law is not equivalent to the economic concept of fair

market value.

Under Delaware law, fair market value is the price which would be agreed upon

by a willing seller and a willing buyer under usual and ordinary circumstances,

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under usual and ordinary circumstances, after consideration of all available uses and purposes,

without any compulsion upon the seller to sell or upon the buy to buy.

Examples of fair market value may include the price at which a stock trades in an active and liquid public market

or determined in an active and competitive bidding process for privately held shares

Given these differences with the definition of fair value, the fair value of petitioners shares in an appraisal action can be adjudicated as higher or lower

than that of their fair market value

Fair value for appraisal rights and minority oppression cases also differs

from fair value in financial reporting, intrinsic value and investment value

Fair value (appraisal rights)

the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action

Fair value (financial reporting)

the price (exit) that would be received to sell an asset or paid to transfer a liability in an orderly transaction

between market participants at the measurement date

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Intrinsic value

the true value of an investment based on a fundamental analysis of its inherent attributes, that

will become the market value when other investors have the same insight and knowledge as the analyst

Investment value

the value to a specific owner based on that owners unique situation, abilities, knowledge, motivation and expectations, considering factors including available synergies, risk tolerance, required return and tax status

Fair value in appraisal rights may also differ from fair value in financial reporting, fair market, intrinsic and investment values based on premise

Value in exchange

Value of a business or interest in a real or hypothetical sale

Value to the holder

Value of a business or interest maintained in its current form by its present owner

Going concern

Value of a business in continued use as an assemblage of income producing assets

Liquidation

Orderly value of assets sold piecemeal with normal market exposure

Valuation Premise Operational Premise

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Considers discounts for lack of control and marketability and premiums for control

Typically applies to fair market value

present owner

Discounts and premiums are not considered

Typically applies to fair value and investment value

producing assets

Accounts for value added relationships

between tangible and intangible assets

Assembled, in place and operational plant, work force, licenses, systems and procedures

exposure

Forced value of assets sold piecemeal with less than normal market exposure

Assemblage of assets- value of assets sold in place but not in current use in the production of income or as a going concern

Fair value in appraisal rights may also differ from fair value in financial reporting, fair market, intrinsic and investment values based on level

The level of value of an interest is a function of the degree of control and marketability of the underlying shares

Control refers to the ability to direct the management and policies of a business

The ability to appoint management, set operational and strategic policy, acquire and divest assets and declare and pay dividends, etc., etc.

Marketability refers to the ability to convert a property to cash quickly, with a

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Marketabilit