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Delaware Chancery Case on Shareholder Dissent Likely to Raise Eyebrows

A practitioner’s commentary on the Cellular case focuses on the tax-affecting issues in the case.

Cellular Telephone: An Interesting Decision for Valuation Practitioners

A recent Delaware decision in a breach of fiduciary duty case awarded more than triple the amount originally paid to partners who were squeezed out of their collective 1.881% interest in a partnership. Several aspects of this decision are of particular interest to valuation practitioners, especially those whose practice includes litigation services. The case is: In Re Cellular Tel. P’ship Litig.; 2022 Del. Ch. LEXIS 56 (Cellular).

Delaware Chancery rejects partnership valuation in a freeze-out

In a coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, the court found that AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price.

In Re Cellular Tel. P’ship Litig.

In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.

Delaware Chancery Court Rejects Partnership Valuation in a Freeze-Out as Unfair to Minority Partners

In this coordinated action involving 13 partnerships that were involved in freeze-out transactions by AT&T of minority shareholders, AT&T breached its fiduciary duties and effectuated the freeze-out through an unfair process and by paying an unfair price. The freeze-out was subject to the entire fairness standard of review. AT&T bore the burden of proving that the freeze-out was entirely fair to the minority partners. AT&T failed in that proof and thereby sought to capture future value for itself. AT&T did not employ any procedures that insured fairness to the minority partners. The lead partner of the valuation firm had a long-standing relationship with AT&T, and internal AT&T personnel influenced the outcome of the valuation. The court determined the fair value of the interest as a remedy to the situation.

Cont'l Investors Fund LLC v. TradingScreen Inc.

The defendant did not breach its redemption agreement because a committee of directors, “properly engaged in the judgment-laden task of determining the amount of funds that the company could use for redemptions … [and] determined that using a greater amount of cash to redeem more shares threatened the company's ability to continue as a going concern.” As a result, interest on the asserted obligation back to 2013 was not allowed at 13%, the amount per the agreement.

Company Did Not Breach Its Redemption Agreement Because of Diligence of Directors

The defendant did not breach its redemption agreement because a committee of directors, “properly engaged in the judgment-laden task of determining the amount of funds that the company could use for redemptions … [and] determined that using a greater amount of cash to redeem more shares threatened the company's ability to continue as a going concern.” As a result, interest on the asserted obligation back to 2013 was not allowed at 13%, the amount per the agreement.

Court of Appeals Sides With Taxpayers on Right to Vet IRS Expert Valuation

Court of Appeals finds Tax Court held mistaken view of burden of proof and erred in declining to evaluate taxpayers’ multiple challenges to IRS’s expert valuation; on remand, Tax Court may consider new valuation evidence, appeals court says.

Cavallaro v. Commissioner (Cavallaro II)

Court of Appeals finds Tax Court held mistaken view of burden of proof and erred in declining to evaluate taxpayers’ multiple challenges to IRS’s expert valuation; on remand, Tax Court may consider new valuation evidence, appeals court says.

Court of Appeals Sides With Taxpayers on Right to Vet IRS Expert Valuation

Court of Appeals finds Tax Court held mistaken view of burden of proof and erred in declining to evaluate taxpayers’ multiple challenges to IRS’s expert valuation; on remand, Tax Court may consider new valuation evidence, appeals court says.

Expert dubbed "unpersuasive" rebuts Judge Laro's rejection

I have reviewed the write up of Estate of Kaufman in the May issue of your newsletter, and I am very concerned that it unfairly portrays me as having not done a credible valuation because it takes Judge Laro's criticisms of my report at face value.

Court Judges Assessment of Risk Factors, Marketability Discount Evidence

The issue in this consolidated case was the fair market value of two minority nonvoting stock interests in Schwan's Sales Enterprises Inc. (SSE), one as of Dec. 31, 1992 (date of gift) and the other as of Dec. 31, 1994 (date of charitable contribution).

Okerlund v. United States (I)

The issue in this consolidated case was the fair market value of two minority nonvoting stock interests in Schwan's Sales Enterprises, Inc.

40% 'Aggregate' Discount: Marketability, Control, and Unrealized Capital Gains

The IRS determined that decedent's estate owed amounts for estate tax and gift tax deficiencies.

Estate of Dailey v. Commissioner (I)

At issue are the valuation of certain retained and gift interests in a Family Limited Partnership (FLP).

Valuation uncertainty continues – the Ninth Circuit reverses the Tax Court

The recent enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001 1 (Act) poses new challenges and opportunities alike to owners of substantial estates and their profess ...

9th Circuit Vacates and Remands Tax Court's Valuation in Mitchell

In this ongoing estate tax proceeding, the Estate of Paul Mitchell (Estate) appealed the U.S. Tax Court's decision allowing the Commissioner of the IRS to assess an additional $2,404,571 in federal estate taxes.

Estate of Mitchell v. Commissioner (II)

Estate claimed Tax Court erred by failing to provide a detailed explanation of the methodology used to calculate FMV, miscalculating the value, and failing to shift the burden of proof.

9th Circuit Reverses Kaufman; Actual Sales Best Evidence

This case is the 9th Circuit Court of Appeals' decision on appeal of Estate of Kaufman v. Commissioner, T.C. Memo 1999-119 (1999), which was abstracted in the May 1999 Business Valuation Update.

Federal cases challenge financial experts on basis of Daubert/Kumho tests

Daubert v. Merrell Dow Pharmaceuticals, Inc. , the U.S. Supreme Court defined the trial court's gatekeeping duty under FRE 702 with respect to the admission of expert opinion testimony. In Kumho Ti ...

Protect clients against liability in buyout deals

I never cease to be amazed at the huge damage awards in breach of fiduciary duty liability suits in conjunction with company buyouts. Most of these awards could have been prevented. Last issue we ha ...

Morrissey v. Commissioner

FOR PUBLICATION UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT JAMES J. MORRISSEY; ALAN S. BERCUTT, C.P.A.; DIANE FANTL, Co-executors of the Estate of Alice Friedlander Kaufman, No. 99-71013 Deceased, Tax Ct. No. Petitioners-Appellants, 17050-97 v. OPINION COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Appeal from a Decision of the United States Tax Court Argued and Submitted February 14, 2001--San Francisco, California Filed March 15, 2001 Before: Procter Hug, Jr., John T. Noonan, and William ...

Transactions Occurring Shortly After the Valuation Date Are Probative

The U.S. Court of Appeals for the 9th Circuit considered the Tax Court’s valuation of an Oklahoma company holding a uniform manufacturer in Estate of Kaufman v. CIR, T.C. Memo. 1999-119.

IRS proposes new rules for reporting gifts; Statute of limitations welcome, but some proposed requirements difficult

Certainly taxpayers welcome the provision of the Taxpayer Relief Act of 1997 that starts a three-year statute of limitations on revaluation when a proper gift tax return is filed, whether any gift tax ...

ABA panel calls for elimination of ancillary business restrictions

By Shannon Pratt and Yazhi Li The theme of the ABA Tax Section Plenary Session was whether to do away with the rules prohibiting law firms from engaging in ancillary businesses with non-lawyer ...

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