Future of BV in litigation may turn on one word: ‘Fair’

BVWireIssue #122-1
November 7, 2012

The article on the “Future of Valuation Litigation”—which we’ve been discussing the past couple of weeks—essentially argues that courts should rely on contemporaneous market evidence rather than “testimony of paid litigation experts” to determine the value of public as well as private companies in bankruptcy disputes.  (By the way, one of the authors has posted the article as part of his firm bio; go to Wachtell Lipton and search under the attorney tab for “David Bryan.”)

Yet, not once does the article discuss or even footnote the predominant standard of value in bankruptcy as well as tax, contract, shareholder dissent, and other “economic wrong” cases. After all, legislators, as well as the courts and the common law, could have imposed a “market value” standard in civil litigation, yet they chose to add the word “fair”—and in statutory appraisal actions, to eliminate the term “market” altogether—not only to preserve all-important policy concepts of fairness, but also judicial discretion and flexibility. As Ron Seigneur (Seigneur Gustafson) reminds us, the fair market value (FMV) standard is “not a real concept. It's what the Canadians and the English call a ‘notional concept’ because it assumes ground rules that may or may not be true in the marketplace.”

“Although judges are often interested in hearing what an experienced transaction person has to say,” agrees Jim Alerding (Alerding Consulting), “most are also in tune with the fact that ‘fair market value’ and ‘transaction value’ are two entirely different concepts. FMV is a hypothetical value and not one which can ever be ‘proven’ to be correct or exact. It is an ‘opinion’ that should include consideration of the universe of hypothetical buyers and sellers. The valuation expert should be careful to make that distinction to the trier of fact.”

“The fair market value standard is a theoretical standard used to value interests in an objective way that, especially for a small business, may never be achievable or desirable in a real world context,” says Scott Leslie (Leslie & Assoc.). “Real-world transactions always included the ‘noise’ of items specific to the transaction, which ‘taints’ ever knowing whether a consummated transaction is truly FMV or not.”

“Of course there is genuine value in considering transactional data, and it’s an important part of the analysis in nearly every engagement,” writes Wayne Nichols (Abrams Little-Gill Loberfeld). “But I’m always concerned that transactional data are too far removed from the FMV standard of value.” For example, the price may include an intrinsic synergistic goodwill component, or it may involve a liquidation sale or a transaction that failed within a year because the buyer overpaid. “Is that truly a ‘market comparable?’”

“Without question, contemporaneous market evidence of value, such as actual sale prices or market trading prices, provides excellent, if not paramount, evidence of value,” says attorney John S. Stockdale Jr. (Schafer and Weiner). “However, [such] evidence is not available in the majority of bankruptcy cases. Thus, the role of the expert valuation witness in bankruptcy cases will continue to be significant,” to help determine disputed values, he says. “Further, the process advocated by the authors will simply add an additional, costly, and time-consuming layer to the majority of bankruptcy cases.”

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