I do very little damages valuation work, and as a result, I am always extremely careful to make sure I understand and confirm the standard of value that applies to those matters.
In a recent case, plaintiffs were squeezed out of minority interests in a public company (domiciled in Delaware) that was acquired. The attorney advising them failed to file the appropriate paperwork on a timely basis to allow them to exercise dissenters’ rights. As a result, they were forced to accept the (cash) tender price. To his credit, the attorney admitted his error and advised his former clients to seek legal representation to claim damages incurred due to his malpractice. They did so, and the malpractice attorney who took the case called me for help.
My first question was “What damages are the plaintiffs claiming?” The answer was the lost opportunity to receive a potentially higher price by filing a dissenting shareholders’ suit. This helped a great deal: when I Googled “fair value in Delaware, the first entry that came up was a wonderful piece by none other than Chris Mercer, which can be found at:
http://valuationspeak.com/fair-value-statutory/statutory-fair-value-1-an-introduction/
Chris artfully describes the Delaware fair value standard in these words:
“…take the fairly common cases of a squeeze-out merger or a reverse stock split. The effect of either transaction is to attempt to force minority shareholders to receive the consideration offered by the controllers. If the right to dissent is triggered, affected owners can dissent to the transaction and petition the courts in their states to determine the fair value of their shares.
Fair value in such situations is a willing buyer, unwilling seller concept.
Fair market value is an objective standard. Fair value, on the other hand, is an equitable standard. Equitable is defined in YourDictionary.com as: “Fair, under widely held moral principles, often embodied in court precedents; or referring to a remedy available in a court of equity.”
A “court of equity” is defined in Wikipedia.com (footnotes omitted) as:
… A court that is authorized to apply principles of equity, as opposed to law, to cases brought before it.
These courts began with petitions to the Lord Chancellor of England. Equity courts “handled lawsuits and petitions requesting remedies other than damages, such as writs, injunctions, and specific performance.” Most were eventually “merged with courts of law.”
United States bankruptcy courts are the one example of federal courts [that] operate as courts of equity. Some common law jurisdictions–such as the U.S. states of Delaware, Mississippi, New Jersey, South Carolina, and Tennessee–preserve the distinctions between law and equity and between courts of law and courts of equity.
The point of this seeming diversion to talk about fair market value, equity, and courts of equity is to illustrate that there is potential tension between objective valuation standards and the standard of fair value as it might be interpreted based on equitable considerations by a court.
As a business appraiser, I can provide objective valuation evidence to a court in a fair value proceeding.
As a business appraiser, I cannot consider equitable issues in providing valuation evidence unless instructed by a court.”
THAT is extraordinarily on-point advice, and I thank you, Chris!
Now I knew what the standard of value was and how to interpret it: my job was to act as though I were the expert in a dissenting shareholder suit and to do the same thing (determine fair value according to Delaware law) in the damages case.
I discussed this with the attorney and he was in agreement with me. From additional research, I knew that I would be able to use the Market and Income Approaches, and had a game plan for the valuation and more than enough data to do the job right. Everything was copacetic…
Until a couple of nights later, when I woke up, as I often do, with a new thought. I knew I could develop a supportable fair value of the minority shares…but there was a twist. Just because I opined it, was there not a risk that the judge who heard the case might come to a different conclusion? What if the expert on the other side did a good job and came up with a lower value? The judge might not accept my opinion of value. Was this an additional risk? If so, was it relevant to my opinion? How would I assess it and adjust my opinion for what I called “judge risk?”
Fortunately, I have friends who do a lot of damages work. They told me that judge risk is not part of the damages opinion. I confirmed that with the attorney.
It is now a week later, I am in the middle of my engagement, and have slept well since that fateful night. I hope to keep doing so, but I never know, my subconscious seems to run 24/7!