Virginia court nixes challenge to appraisal done according to valuation agreement

BVWireIssue #191-2
August 8, 2018

dissenting shareholder
fair value, standard of value, redemption, stock buyback

In the category of buyout disputes notwithstanding a valuation agreement, a recent Virginia case stands out for showing the evidentiary hurdle a challenger must overcome to defeat a third-party appraisal done in accordance with a controlling agreement. The court found the plaintiff did not satisfy the applicable “palpable error” standard.

Exercising business judgment: The two founders of a gourmet salumeria made an agreement that required the company to buy the defendant minority shareholder’s stake in the company. The contract called for an independent appraiser to calculate the enterprise value of the company. Ultimately, the company rejected the value determination and instead sued, urging the court to invalidate the appraisal because it allegedly contained numerous “palpable” errors. The appraiser misinterpreted the agreement, was biased in favor of the defendant, and made errors of commission and omission, the plaintiff contended. At trial, both parties offered testimony from highly qualified valuators as to the alleged palpable errors, but neither expert prepared an independent valuation. The appraiser also testified.

Where a valuation contract exists, it is not the court’s role to substitute its judgment for that of the appraiser or to decide which testifying expert was correct, the court explained. Instead the court must determine whether the appraiser understood and executed the provisions of the valuation contract. And, under the palpable error standard, a court may only set aside a valuation for “errors apparent on its face, misconduct on the part of the [valuators], some palpable mistake or fraud in one of the parties.”

The court found no evidence that bias infected the valuation and concluded the appraiser’s interpretation of the agreement was justified as a “fair and reasonable exercise of business judgment.” Moreover, on the stand, the appraiser addressed the alleged errors of commission and omission and was able to show in each instance that he used his professional judgment “fairly and reasonably.” And, since the company’s expert did not do his own appraisal, the company was unable to show that any of those claimed errors were material to the value calculation, the court said. It declined to vacate the appraisal.

Takeaways: For the party defending the appraisal, having the appraiser available at trial to explain why certain choices represent a reasonable exercise of judgment is critical. For the party attacking the appraisal, asking its trial expert to do an independent valuation to show the alleged errors seriously affected the valuation is money well spent.

Thank you to Brian Burns (Dixon Hughes Goodman LLP), who was the expert for the prevailing defendant and brought this case to our attention.

A digest of Olli Salumeria Americana, LLC v. Vosmik, 2018 Va. Cir. LEXIS 72 (Jan. 5, 2018), and the court’s opinion will be available soon at BVLaw.

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