As valuation experts, we are also called upon to be advisors. We could simply perform a valuation using the standard of value dictated by the client or attorney; that would certainly fulfill our role as an expert. However, in most cases, our clients are better served when we act as advisors as well.
How Valuation Professionals Add Value
We are often asked to provide valuation services related to shareholders buying shares from another shareholder. Often times these buyouts result in disagreements related to value of the shares. These disputes are generally caused by some perceived economic injustice and frequently pursued by a non-controlling interest holder against a controlling interest holder or group of interest holders. Whether the plaintiff will prevail is often dependent upon more than just the actions of the parties which gave rise to the dispute. Frequently, the real deciding factors are governing statutes and the wording of the agreement by which the interest holders are bound. Understanding how agreements and statutes work together and affect valuation is important in performing any valuation in these circumstances. Recognizing and communicating that understanding is even more important.
In the event of a shareholder dispute, lawyers for both parties generally look first to existing operating agreements to direct them in how to proceed. A well-written operating agreement can control how disputes are settled, how buy-outs are effected, and how valuations are to be performed under different circumstances. For instance, an agreement may direct the opposing sides to hire an independent appraiser who is directed to apply the Fair Market Value standard in determining the value of any shares in dispute. Agreements like this tend to be well constructed, fairly straightforward, and cover many different contingencies.
If no agreement exists between the parties, their attorneys will look to state statutes to determine how to proceed. In this situation, like the scenario above, there is relatively clear direction on what to do. The direction generally includes some standard of value for the determination of the value of the underlying shares, and often includes some discussion about the application of “valuation discounts”.
The trickier situations are those in which agreements exist, but are not completely clear. For example, consider a situation in which a non-controlling shareholder (the plaintiff) believes she has been cheated by the controlling shareholder and is a victim of “minority oppression.” Assume the operating agreement does not specifically address this situation, but does have a provision for the valuation of shares in case of the death of a shareholder. If a shareholder dies, the agreement specifies repurchase by the company at Fair Market Value. The agreement goes on to define Fair Market Value using language that is not typical for the definition and differs from what most valuation experts would recognize. In addition, suppose that the statute allows the application of Fair Value in cases of minority oppression. What valuation standard should be applied? What is the difference?
While no valuation expert should make the legal determination of which valuation standard should apply in this scenario, it is important for the expert to recognize and explain the various possibilities. Equally important is for the expert to advise the client and the attorney that differences exist and the potential implications for the valuation of considering one versus another. Many firms can provide valuations; however, you will be better served in seeking professionals who will add value through solid advice.
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