The role of the expert is to enlighten and inform the court, says Gill Matthews (Sutter Securities Inc.), and this mandate is particularly true with regards to the Implied Minority Discount (IMD). The Delaware Chancery Court typically adjusts the comparable company analysis (CCA) upward, based on an IMD derived from control premiums. But the “IMD rationale used by the Chancery Court is inconsistent with modern finance techniques,” says Michael Wachter (University of Pennsylvania) in the “Implied Minority Discounts in Statutory Fair Value: The Doctrine that Won’t Die”, a 100-minute BVR teleconference.
Matthews identifies two sources of error in this approach; not only is there a misunderstanding of going concern value, but there is a statistical bias in the acquisition premium studies that the courts use.
“The phrase ‘control premium’ is ambiguous,” says Matthews, The ambiguity can be avoided if experts used the levels-of-value model set forth in Chris Mercer’s Business Valuation: An Integrated Theory. Mercer makes a clear distinction between financial control premium (FCP), strategic control premium (SCP), and acquisition Control Premium (ACP). The Delaware Court uses ACP, and it is the expert’s role to education the Court on the differences between the levels of control and why IMD is no longer accepted by valuation experts. Matthews urges experts to read and apply Mercer’s integrated theory of business valuation.
For further reading on the subject read last week’s BVWire, or "What we have here is a failure to communicate” in the December 2009 issue of Business Valuation Update. The teleconference is also available for download.
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