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Hypothetical liquidation KO’d in shareholder dispute

In an Iowa case, minority owners of a family farm were to be bought out and the experts for both sides agreed that the net asset method was the appropriate way to value the operation.

Connelly v. United States (II)

The U.S. Supreme Court took on this case because of a split between two circuit courts. In the first case, Blount v. Commr., the 11th Circuit Court of Appeals reversed the Tax Court and excluded the insurance proceeds that accrued as a result of the death of the shareholder. In the Connelly case, the Tax Court once again included the insurance proceeds in the estate. The 8th Circuit affirmed the Tax Court, and the Supreme Court now unanimously affirmed the 8th Circuit, thus negating the decision of the 11th Circuit in Blount.

U.S. Supreme Court Affirms Inclusion of Corporate-Owned Life Insurance in Value of Company for Estate Tax Purposes

The U.S. Supreme Court took on this case because of a split between two circuit courts. In the first case, Blount v. Commr., the 11th Circuit Court of Appeals reversed the Tax Court and excluded the insurance proceeds that accrued as a result of the death of the shareholder since there was a binding liability to pay the proceeds to the estate of the decedent. In the Connelly case, the Tax Court once again included the insurance proceeds in the estate. The 8th Circuit affirmed the Tax Court, and the Supreme Court now unanimously affirmed the 8th Circuit, thus negating the decision of the 11th Circuit in Blount.

Walker v. Daniels

The appellate court was left with two questions: what was the proper date of valuation for the minority shares and what was the proper value of the shares. Three brothers were in a dispute with their two sisters. The sisters were to receive compensation in the form of a buyout of their shares in a shareholder oppression dispute. The appellate court (Iowa) concurred with the trial court and affirmed its judgment.

Iowa Appellate Court Affirms Date of Value and Value of Farming Operation in Shareholder Oppression Suit

The appellate court was left with two questions: what was the proper date of valuation for the minority shares and what was the proper value of the shares. Three brothers were in a dispute with their two sisters. The sisters were to receive compensation in the form of a buyout of their shares in a shareholder oppression dispute. The appellate court (Iowa) concurred with the trial court and affirmed its judgment.

BV News and Trends March 2024

A monthly roundup of key developments of interest to business valuation experts.

Court figures fair value of startup biotech for dissenters

In a dissenting shareholder case in a federal district court in Georgia, neither the Black-Scholes method nor the prior transactions method convinced a court of the value of a startup biotech company.

Abeome Corp., Inc. v. Stevens

The parties did not agree on a fair value of the shares in a dissenting shareholder suit. The court, using information in evidence, including expert witness testimony from both parties’ experts, determined the fair value.

U.S. District Court Determines Fair Value of Shares

The parties did not agree on a fair value of the shares in a dissenting shareholder suit. The court, using information in evidence, including expert witness testimony from both parties’ experts, determined the fair value.

Lone dissenter of medical merger challenges share valuation

In a California case, a physician was a nonexclusive provider to a physician network and was one of 75 shareholders.

Valuation expert’s credibility takes several hits

In a New York fair value case, one of the 50% owners filed for dissolution and the other owner elected to buy him out.

Low buyback value stings departing owners

Shareholder-employees should take a lesson from a recent case and take a fresh look at their buyout agreements—especially the part about the redemption value.

Rosenthal v. Erber

In a New York business dispute, the court analyzed valuation reports from both sides and then determined the fair value of the entity and of the selling shareholder’s 50% interest. Offering criticisms of both reports, she then started with the report of the selling shareholder’s report and discarded the report of the buying shareholder, which had some evidentiary issues as to back rent due and other issues.

Fair Value Decision Analyzes Valuation Issues

In a New York business dispute, the court analyzed valuation reports from both sides and then determined the fair value of the entity and of the selling shareholder’s 50% interest. Offering criticisms of both reports, she then started with the report of the selling shareholder’s report and discarded the report of the buying shareholder, which had some evidentiary issues as to back rent due and other issues.

Physician Shareholder Asserts Transaction Bonuses Breach Board’s Fiduciary Duties—Appeals Court Finds Them Just and Reasonable

A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.

Ghaly v. Riverside Cmty. Healthplan Med. Grp.

A physician shareholder claimed that the fair market value of his one share (of 75 total shares) was undervalued when the physician practice was merged and sold to NAMM California, a company that develops and manages physician provider networks. NAMM paid $18 million in the merger, and over $12 million of that amount was paid to individual physician shareholders in the form of “transaction bonuses.” The remaining almost $6 million was paid pro rata to the shareholders. The plaintiff appealed the judgment of the California trial court, but the appellate court deemed the transaction bonuses as “just and reasonable” and affirmed the trial court.

Laurilliard v. McNamee Lochner, P.C.

The plaintiffs, minority shareholder employees in a law firm, brought suit against their firm for breaching their employment contracts. The court determined that the plaintiffs were at-will employees and that there was no breach of their agreements when they were terminated. The court also determined that the under-market-value payment under their repurchase agreements was allowable since they were at-will employees.

New York Court Allows Enforcement of Under-Market-Value Buy-Sell and Approves At-Will Termination of Shareholder-Employees

The plaintiffs, minority shareholder employees in a law firm, brought suit against their firm for breaching their employment contracts. The court determined that the plaintiffs were at-will employees and that there was no breach of their agreements when they were terminated. The court also determined that the under-market-value payment under their repurchase agreements was allowable since they were at-will employees.

In re Tesla Motors Stockholder Litig.

At issue was a 2016 acquisition of Solar City Corp. by Tesla. Some Tesla shareholders claimed that Musk caused Tesla to overpay for Solar through his alleged domination and control of Tesla’s board. The primary focus of the shareholders was that Solar was insolvent at the time of the acquisition. The court applied the “entire fairness” standard. The Court of Chancery found the acquisition to be “entirely fair.” The Delaware Supreme Court affirmed the Court of Chancery decision.

Delaware Supreme Court Upholds ‘Entire Fairness’ of a Tesla Acquisition

At issue was a 2016 acquisition of Solar City Corp. by Tesla. Some Tesla shareholders claimed that Musk caused Tesla to overpay for Solar through his alleged domination and control of Tesla’s board. The primary focus of the shareholders was that Solar was insolvent at the time of the acquisition. The court applied the “entire fairness” standard. The Court of Chancery found the acquisition to be “entirely fair.” The Delaware Supreme Court affirmed the Court of Chancery decision.

Hoensheid v. Comm’r (In re Estate of Hoensheid)

The taxpayers made a valid gift of stock, but they realized and recognized gain because their right to the proceeds from the sale occurred before the gift was made. They also were not entitled to a charitable contribution deduction because they did not procure a qualified appraisal. The taxpayers were not liable for an underpayment penalty.

Petitioners Not Allowed a Charitable Contribution—Did Not Use a Qualified Appraiser

The taxpayers made a valid gift of stock, but they realized and recognized gain because their right to the proceeds from the sale occurred before the gift was made. They also were not entitled to a charitable contribution deduction because they did not procure a qualified appraisal. The taxpayers were not liable for an underpayment penalty.

Tax Court (Grudgingly) Allows Tax Affecting Under the SEAM Method

This was a gift tax valuation case the U.S. Tax Court decided. Gifts of minority interests in The Biltmore Co. were made from the its shareholders, the Cecils, to their children and grandchildren. The IRS audited the gift tax returns and assessed deficiencies for reporting too low fair market values of the gifts of The Biltmore Co. stock. Both sides presented experts to value the gifted interests. The experts agreed that the cash flows should be tax affected. The court accepted the tax affecting while allowing that it was not an admission by the Tax Court that tax affecting should apply in all cases. The Tax Court made changes to the values presented and cobbled together a final value that resulted in refunds to the taxpayers/petitioners.

Estate of Cecil v. Comm’r

This was a gift tax valuation case the U.S. Tax Court decided. Gifts of minority interests in The Biltmore Co. were made from the its shareholders, the Cecils, to their children and grandchildren. The IRS audited the gift tax returns and assessed deficiencies for reporting too low fair market values of the gifts of The Biltmore Co. stock. Both sides presented experts to value the gifted interests. The experts agreed that the cash flows should be tax affected. The court accepted the tax affecting while allowing that it was not an admission by the Tax Court that tax affecting should apply in all cases. The Tax Court made changes to the values presented and cobbled together a final value that resulted in refunds to the taxpayers/petitioners.

Jayawardena v. Daka

This case involved a shareholder dispute among four shareholders of a physician practice (Ferncreek Cardiology PA) and two real estate LLCs. There were buy-sell provisions for each of the three entities. As to Ferncreek, the buy-sell provision was essentially an increase in book value provision, as the regular account determined in “good faith.” Payment provisions were also included in the agreement. The two real estate LLCs had a buy-sell provision that provided for either a single agreed-upon appraiser or three appraisers if no agreement was made. The plaintiff made the decision to exit the practice, triggering the buy-sell provisions. The parties were not able to agree on certain provisions as they worked through the buy-sell agreements. The trial court entered partial summary judgments on some claims of both parties. This appeal dealt with these partial summary judgments and was filed by the plaintiff.

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