Autumn 2015
Focus on Dissenting Shareholder Appraisal Rights and Shareholder Oppression Litigation
Editor for This Issue: Timothy J. MeinhartShareholder Dispute Litigation Insights
The Rise of Appraisal Litigation: Will the Fire Spread?
Eli Richlin, Esq., and Tony Rospert, Esq.
Appraisal actions allow shareholders who believe they will receive inadequate consideration in a merger transaction to dissent and petition the court to appraise the fair value of their shares. The Delaware courts have seen a sharp increase in shareholder rights appraisal litigation in recent years. This increase may be due to liberal standing requirements and the emergence of specialized hedge funds and activist investors that have learned how to make effective use of the appraisal remedy. This discussion (1) provides an overview of appraisal actions, (2) highlights several recent appraisal decisions in Delaware, (3) addresses potential reform efforts, and (4) analyzes prospects for future growth in appraisal actions in Delaware and in other jurisdictions.
Dissenting Shareholder Appraisal Rights and Shareholder Oppression Claims
Lisa H. Tran and Irina V. Vrublevskaya
Over the past three decades, the number of both dissenting shareholder appraisal rights
claims and shareholder oppression claims increased significantly. This increase has created a
demand for forensic-related business and security valuation services. Valuation analysts are
not legal counsel, of course. However, valuation analysts who practice in this area should
be generally familiar with both the economic and the legal differences between dissenting
shareholder appraisal rights issues and shareholder oppression issues. While taking specific
legal instruction from legal counsel, valuation analysts should have a general familiarity
with the professional guidance provided by the American Bar Association, the American Law
Institute, state statutes, and relevant judicial precedent in order to perform forensic-related
valuation services.
Shareholder Oppression Claims in Texas: Current Developments, Considerations, and What Remains
Paul R. Genender, Esq., and Jack J. Stone, Esq.
On June 24, 2014, in Ritchie v. Rupe, the Texas Supreme Court changed the landscape
of shareholder oppression claims in Texas, refusing to recognize a common-law cause
of action for shareholder oppression and limiting relief to a receivership under the
receivership statute. This discussion examines the history of shareholder oppression law
in Texas, and this discussion considers the current state of the cause of action in light of
this Rupe decision.
Fair Value of Banks and Depository Institutions in Dissenting Shareholder Appraisal Actions
Justin M. Nielsen and Stephen P. Halligan
A bank or depository institution may be the subject of a dissenting shareholder
appraisal rights action or a shareholder oppression action, similar to any other
corporation. In estimating the fair value of the bank or other depository institution,
the valuation analyst should consider the unique characteristics associated with these
types of entities. There are special considerations related to (1) segregating operating
and financing activities and (2) estimating the effects of the regulatory environment
on the subject industry. These special considerations require the valuation analyst to
understand the valuation impact of these and other characteristics that are important
to the bank and depository institution industry. This discussion addresses shareholder
appraisal rights actions and provides insight into the special considerations appropriate
to estimate the fair value of a bank or other depository institution.
Thought Leadership:
Rescissory Damages in the Delaware Court: A Viable Remedy for Stockholders or Just an Illusion?
Jennifer Sarnelli, Esq.
Seeking a full and fair recovery for stockholders who have been harmed by a board of
directors that has breached its duties is the paramount goal in Delaware stockholder
actions. Rescissory damages have often been alluded to as a possible remedy to resolve
these breaches, but they are rarely granted. Understanding the pitfalls of achieving
rescissory damages can lead to larger recoveries for stockholders.
Katherine A. Gilbert and Weston C. Kirk
Avoiding, or at least minimizing, the potential for intrafamily shareholder litigation is constantly on the minds of wealth planning advisers. Wealth planning advisers include trust and estate attorneys, accountants, financial advisers, bankers, and valuation analysts. This discussion addresses the best practices for high net worth families to avoid such intrafamily litigation. Such best practices may be implemented both by the high net worth family members and by their wealth planning advisers. Valuation Issues to Consider for Large Block Minority Shareholder Redemptions
Jeffrey S. Burns and Nathan P. Novak
The purpose of this discussion is to identify certain issues to consider when performing a valuation analysis for the purpose of a closely held company shareholder redemption. Specifically, the focus of this discussion is on certain qualitative and quantitative factors that commonly arise when a closely held company is going through the process of redeeming or buying out an ownership interest of a significantly large but noncontrolling shareholder. Several considerations that are unique to large block noncontrolling shareholder redemptions are discussed below. Additionally, an example is provided to illustrate how certain of the issues can occur and can be handled in a hypothetical, but realistic, situation. Entity-Level versus Ownership-Level Valuation Adjustments
Terry G. Whitehead and Charles A. Wilhoite, CPA
Shareholder oppression and dissenting shareholder appraisal rights cases (“dissenter cases”) generally are characterized by a circumstance in which an owner maintaining a less-than-controlling ownership interest leaves the ownership group under less than ideal circumstances, typically requiring the valuation of the separating owner’s equity interest in the subject business. Legal statutes and judicial precedent typically dictate the valuation process that reasonably can be relied upon to estimate the value of the separating owner’s equity interest. Two of the most contentious issues addressed in a dissenter case from a valuation perspective relate to whether it is appropriate to apply a discount for lack of control (DLOC) and a discount for lack of marketability (DLOM) when estimating the value of the dissenter’s equity interest. While the courts generally have moved in the direction of disallowing the DLOC and DLOM, valuation analysts still consider and address certain “entity-level” adjustments that affect equity value to all owners, equally. Defining “Value” in Ownership Agreements
Scott R. Miller and Charles A. Wilhoite, CPA
Shareholder oppression and dissenting shareholder appraisal rights cases (“dissenter cases”) generally are characterized by a circumstance in which an owner maintaining a less-than-controlling ownership interest leaves the ownership group under less than ideal circumstances, typically requiring the valuation of the separating owner’s equity interest in the subject business. Legal statutes and judicial precedent typically dictate the valuation process that reasonably can be relied upon to estimate the value of the separating owner’s equity interest. Two of the most contentious issues addressed in a dissenter case from a valuation perspective relate to whether it is appropriate to apply a discount for lack of control (DLOC) and a discount for lack of marketability (DLOM) when estimating the value of the dissenter’s equity interest. While the courts generally have moved in the direction of disallowing the DLOC and DLOM, valuation analysts still consider and address certain “entity-level” adjustments that affect equity value to all owners, equally. Contract Litigation Insights The Deal That Allegedly Never Died: Defending Against a Claimed Option to Purchase
Alexander C. Chae, Esq., and Audrey F. Momanaee, Esq.
The case of M7 Capital, LLC, v. Ted Miller, which was tried in late 2013, is an example of the jury getting it right. In that case, the plaintiff, M7 Capital, LLC (“M7 Capital”), by and through its principal, John Miller, claimed to have a perpetual option to purchase an ownership interest in a company. The trial, which involved the theatrics of a crying John Miller of M7 Capital, lasted two weeks, and resulted in a verdict for Ted Miller, with M7 Capital taking nothing. In the case, the jury did not decide the value of the company at issue. This is because the jury found that there was no agreement to hold the purchase option indefinitely. Had the jury found the existence of such an agreement, however, issues of the appropriate valuation would have been paramount. Health Care Valuation Insights Valuations of Health Care Entity Property or Services Transfers
Robert F. Reilly, CPA
Health care providers comply with a myriad of professional regulations. Health care providers also comply with a myriad of administrative regulations. This is because most health care providers are regulated by—and receive reimbursements for their professional services from—numerous government organizations. Such health care provider entities are subject to the regulatory regime of the various Medicare fraud and abuse statutes and the various Stark statutes. In addition, tax-exempt health care entities are subject to regulation by the Internal Revenue Service and by state attorneys general. Valuation analysts (“analysts”) consider this regulatory environment when health care entities enter into transactions related to the transfer of property (e.g., the purchase of a professional practice or hospital) or the payment for services (e.g., an employment agreement or professional services agreement). This is because analysts are called on by the parties to such a health care property or services transfers. The analysts are asked to perform fair market value valuations related to the proposed health care transaction. This discussion summarizes what analysts (and transaction participants) need to know about the fair market value valuation of health care entity transfers of property or services.