Many shareholder disputes involve minority, i.e., noncontrolling, shareholders who feel they have been treated unfairly.
Valuations in this area typically arise under one of two different state statutes:
- dissenting shareholder actions
- minority oppression/dissolution actions
Valuators who work in this area must be familiar with statutes and caselaw in the applicable jurisdiction. Because of the litigious nature of these types of engagements the valuator must, of course, be well-versed in providing expert witness services, especially providing expert witness testimony.
The valuation analyst must work closely with legal counsel in understanding the implications and guidance from statutes and caselaw.
Issues there that arise in these types of engagements involve:
- Standard of value. In almost all states, the standard for shareholder disputes is fair value. This standard has implications for the application of minority and marketability discounts, which are generally disregarded in the context of shareholder actions. Therefore, if an appraiser erroneously used a different standard of value—one that treated such discounts differently—there would not only be implications for the resulting value of the business, but it is almost certain that the appraiser’s valuation testimony would be disregarded due to the use of an incorrect standard of value.
- Valuation date. For shareholder actions, use of the correct valuation date is critical. Use of the incorrect date would have serious implications for the company’s value. The appraiser works closely with legal counsel to determine the correct date.
- Future appreciation or depreciation. In a dissenting action, the dissenting shareholders are generally not entitled to any increase in value that would occur as a result of the action to which the shareholders are dissenting. Similarly, the value does not contemplate any depreciation in value. Such shareholders however are typically entitled to their share of the value that would have increased in the normal course of business i.e., without considering the company change from which they are dissenting. The appraiser must therefore carefully contemplate only the financial projections and other factors that are appropriate.
- Forensic accounting. In some cases, wrongdoing by the part of the controlling shareholders is sometimes alleged. The appraiser must therefore be able to apply appropriate forensic techniques to quantify the amount of misappropriated monies, or deal with other types of irregularities or damages.