Answer on PE standard of value: It depends

BVWireIssue #55-3
April 18, 2007

In answer to last week’s query on the applicable standard of value to the buyout of an international PE fund (BVWire #55-2), Gil Matthews (Sutter Securities, San Francisco) writes: “The first question is whether the dissenter has a right to be bought out.  If so, this would appear to be the equivalent of a statutory appraisal, and I would expect the standard to be FAIR VALUE (a pro rata share of enterprise value with no premiums or discounts–generally net asset value for an investment company) rather than fair market value, where one could apply a discount for lack of marketability.”  If the shareholder does not have appraisal rights, but is being redeemed at the option of the company to avoid litigation, “then it would appear to be a question of arms-length bargaining, and fair market value would be a reasonable compromise.”

However, Matthews adds, “enterprise value could include a portfolio discount reflecting discounts applicable to securities owned by the investment company," and he suggests taking a look at the 1950 Delaware Supreme Court case Tri-Continental v. Battye.

Matthews' opinions are not legal advice, of course, but his reference to the long-standing Battye precedent is not hard to come by—at least not for subscribers of BVLaw™ at, who have access to over 1,600 federal and state valuation cases (updated monthly). We found the full-text opinion in a flash—and have made a copy available here.

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