Spring 2019

Thought Leadership in Shareholder Litigation—Breach of Fiduciary Duty and Other Tort Claims
Editor for This Issue: Kevin M. Zanni
Shareholder Controversy Thought LeadershipThought Leadership Discussion:
Standards of Value and Fair Value Decisions in the Chancery Court
Kevin M. Zanni and Chad M. Kirkland
Valuation analysts (“analysts”) who provide forensic valuation services for controversyrelated
purposes should have a fundamental understanding of the alternative standards
of value. Depending on (1) the legal jurisdiction and (2) the nature of the legal claim, the
relevant valuation standard—and how to interpret the relevant valuation standard—may
be an unsettled matter. Because shareholder disputes are typically governed by state law,
analysts should rely on instructions from legal counsel regarding the appropriate standard
of value to apply in the forensic analysis. Nonetheless, analysts who practice in this area
should be generally familiar with all the alternative standards of value, premises of value,
and levels of value. Even when a generally accepted business valuation standard is defined
by statute or judicial precedent, the analyst should select and apply appropriate methods
to develop the conclusion of value. With regard to fair value controversies decided in the
Delaware courts, the analyst should be aware of recent judicial developments—and the fair
value implications of such developments.
The Treatment of Synergistic Value in Dissenting Shareholder Appraisal Rights Matters
Brandon L. McFarland
The Delaware Court of Chancery decisions on the treatment of synergistic value in dissenting
shareholder appraisal rights cases provide meaningful guidance to valuation analysts
(“analysts”), legal counsel (“counsel”), and other courts. This discussion focuses on recent
judicial decisions issued by the Delaware Court of Chancery where synergistic value was a
consideration in a dissenting shareholder appraisal rights matter. This discussion provides
insights related to the treatment of synergistic value within the context of a statutory appraisal
rights fair value controversy.
Valuation Discounts in Dissenting Shareholder Appraisal Rights and Shareholder Oppression Claims
Matt C. Courtnage
In statutory shareholder appraisal rights and shareholder oppression matters, various state
statutes and judicial precedent provide conflicting guidance as to the measurement of fair
value. For the most part, shareholder appraisal rights matters—and shareholder oppression
matters—typically involve the fair value of equity shares determined without consideration of
valuation discounts. In certain matters, however, there is judicial precedent for the inclusion
of a valuation discount. This discussion focuses on fair value valuation analyses, and this
discussion provides examples of judicial decisions regarding the application of valuation
discounts in statutory fair value matters.
Treatment of Nonoperating Assets and Nonoperating Liabilities in Private Company Business Valuations
Jason Bolt
The treatment of nonoperating assets and nonoperating liabilities in a private company
business valuation may have a material impact on the value conclusion. When considering
the treatment of nonoperating assets and liabilities, there are two primary factors that the
analyst may consider: (1) the standard of value and (2) the level of value (noncontrolling
or controlling ownership interest). Based on the facts and circumstances of the valuation,
the analyst may decide (1) whether to adjust the business income to exclude any income or
expenses related to nonoperating assets and liabilities and (2) how much value to assign to
the nonoperating assets and liabilities in the value reconciliation. The analyst should develop
an understanding of (1) the different standards of value and (2) the differences between a
noncontrolling ownership interest and a controlling ownership interest. The analyst should
apply that understanding in deciding how to treat the subject company nonoperating assets
and nonoperating liabilities.
Forensic Analysis and Lost Profits Damages Measurements
Lisa H. Tran and Tia R. Hutton
Damages analysts (“analysts”) are often asked to measure lost profits damages in either
breach of contract claims or tort claims. Typically, a plaintiff will establish three principles in
order to be awarded damages related to a lost profits claim: proximate cause, foreseeability,
and reasonable certainty. While it is the primary responsibility of plaintiff’s legal counsel to
prove a lost profits claim, the analyst can assist counsel with the task. That is, the analyst
can develop a lost profits measurement that is credible and supported by the facts of the
case and by relevant market data. In the Horizon Health Corporation v. Acadia Healthcare
Company, Inc., decision, the plaintiff could not recover lost profits. This is because the court
concluded that (1) the plaintiff’s testifying expert presented an analysis that was speculative
and (2) the evidence was insufficient to support the plaintiff’s lost profits claim.
Post-Acquisition Disputes: Working Capital Adjustments and Working Capital Disputes
George Haramaras
Working capital adjustments are a typical feature in merger and acquisition (“M&A”)
transactions. The working capital adjustment mechanism ensures that both the buyer
and the seller in an M&A transaction are made whole. That is, the buyer realizes the
value of the purchase price. And, the seller does not transfer any excess cash and assets
to the seller—beyond what was paid for in the purchase price. This discussion examines
the mechanics of working capital adjustments. This discussion considers working capital
disputes, and it describes multiple financial accounting considerations in the dispute process.
This discussion provides perspective on the interaction between working capital disputes
and the target company valuation. Finally, this discussion analyzes the implications of an
important Delaware Supreme Court decision involving a working capital adjustment. An
understanding of the financial accounting, valuation, and legal considerations associated
with working capital adjustments and working capital disputes is important to both the
transaction buyer and the transaction seller.
Issues in Estimating the Cost of Equity Capital
John C. Kirkland and Nicholas J. Henriquez
In most forensic-related valuation analyses, one procedure that affects most valuations is
the measurement of the present value discount rate. This discount rate analysis may affect
the forensic-related valuation of private companies, business ownership interests, securities,
and intangible assets. This discussion summarizes three models that analysts typically apply
to estimate the cost of equity capital component of the present value discount rate: (1) the
capital asset pricing model, (2) the modified capital asset pricing model, and (3) the buildup
model. This discussion focuses on the cost of equity capital inputs that are often subject
to a contrarian review in the forensic-related valuation.
Best Practices Discussion:
Fair Market Value Valuations of Not-for-Profit Entity Property Transfers
Kevin M. Zanni
Valuation analysts (“analysts”) are regularly engaged to provide fair market value opinions
related to not-for-profit business entity transactions. Not-for-profit business entities are often
involved in arm’s-length transactions, sometimes with for-profit business entities. Some of
the typical transactions include royalty payments for the use of intellectual property, royalty
revenue earned by licensing intellectual property, sales of assets, and purchases of assets.
If the subject transaction is between a not-for-profit entity and a related party, then the
transaction is required to be a fair market value transaction. This discussion provides an
example of the methods and procedures that analysts can apply to value the transferred
tangible property and intangible property of the not-for-profit entity.
Confronting Behavioral Bias in Financial Projections
Kyle J. Wishing and Ben R. Duffy
This discussion considers the review and assessment of prospective financial information.
Specifically, this discussion describes the behavioral bias that may influence financial
projections. This discussion should inform any party involved in compiling or assessing
financial projections. This discussion is particularly relevant for fiduciaries who may be
involved in the transaction or other investment decision-making process.