Court condemns calculation report as indicator of company’s fair value

There goes the evidence! As BVWire has reported  on various occasions, a calculation of value has its purpose, but it cannot substitute for a full appraisal in proving value in court, as a recent decision in a shareholder dispute shows.

Backstory: The plaintiff founded a company providing management services to ambulatory surgical centers. He hired the defendant as the company’s president. Several oral and written agreements between the parties provided for the plaintiff’s granting the defendant 300,000 membership units in the company. This amounted to a 10% interest and was given in exchange for the company’s right to buy back the shares if it terminated the defendant for cause or he resigned from the  company. At some point, the defendant sold 30,000 shares to two investors for $10 per share. He also proposed a buy-sell agreement that mentioned a $10-per-share  price, but the plaintiff never accepted it or signed on to it. When the relationship between the parties broke down, the plaintiff sued to establish the fair value of the company’s stock, both to determine the value of the  defendant’s interest and to exercise his right to repurchase the stock. The  defendant counterclaimed to enforce his right as 10% shareholder of the company. He insisted he should receive $10 per share.

Both parties presented experts. However, the  defendant’s appraiser testified that he had only been hired to prepare a “calculation of value,” not a full appraisal. The defendant had not furnished  the numerous materials necessary to perform a valuation, and “more work should have been done” for a fair valuation of the company at the date of termination, he said. He added that the defendant’s proposed buy-sell agreement would be “part of the consideration” if he were to value the defendant’s shares alone but not if he were to assess the company’s worth on the termination date. The  plaintiff’s expert dismissed the $10-per-share price as an “arbitrary amount” that was based on unreliable projections. He concluded that the company’s fair  value was $4.2 million and the fair value of the defendant’s interest in the  company was $368,700.

Falls  far short: The trial court agreed with the plaintiff’s  expert. It flatly rejected the buy-sell agreement as evidence of value and also  dismissed the opinion of the defendant’s expert since his “calculation of  value” was nothing more than an agreement between the appraiser and the client  “as to the manner in which the appraiser’s work is to be done.” By the  defendant expert’s own account, his calculation fell far short of the work  necessary for a report that contained an “actual fair valuation of [the  company].” The trial court’s ruling meant that the plaintiff expert’s valuation was  uncontested. The appellate court affirmed, finding the lower court provided sound reasons for excluding the defendant expert’s opinion. Since the  plaintiff’s expert used the proper methodology, the trial court could rely on his valuation.

Read more about Surgem, LLC v. Seitz, 2013 N.J. Super. Unpub. LEXIS 2491; 2013 WL 5629149 (Oct. 16,  2013) in the March issue of Business Valuation Update; the court’s opinion will appear soon at BVLaw.