Valuation litigation plays out in a number of different business contexts. Readers of this blog will be well familiar with one of them: appraisal rights (a/k/a/ dissenters rights) actions brought when a public company is being acquired by another entity. But valuation disputes requiring the determination of fair value come up in many other contexts often not involving public companies, but instead private businesses. Recent discussion in the Delaware appraisal space focusing on Aruba, and its predecessor cases, discussing topics of market efficiency, “unaffected stock price”, whether the merger price is presumptively fair, etc. all presume an active, open, and at least on-first-glance well-functioning market for the stock of a company. But for private companies, there is usually no market to speak of, or, if there is one, defining it and understanding it is solely the province of economic and valuation experts. With no unaffected stock price, a ‘merger price’ almost always set by the dominant shareholder, and no real market check on value, there private valuation cases present an entirely different side to appraisal rights/dissenters rights.
This blog post details a New York dissolution proceeding where valuation was at issue. New York has a fair value statute, within its Business Corporation law, with respect to dissolution proceedings (§1118) which shares connection to New York’s appraisal rights section (§623). The post provides a blow-by-blow of a valuation dispute in New York, going through the case facts, the Net Asset Value (NAV) of the relevant entity, and then how NAV links to “fair value” (at least per the author). The post also has an extensive discussion of the application of discounts for lack of marketability (“DLOM”) in New York fair value proceedings. (For a discussion of DLOMs and DLOCs, see a guest post here.) Delaware-concerned readers may recall that Vice Chancellor Glasscock analyzed DLOMs in the case Wright v. Phillips, a deadlock case in Delaware. And we’ve written before how discounts in general come up in many fair value proceedings.
The blog post concerning New York goes through an analysis of why a DLOM (or other discounts) may not be appropriate in the dissolution case being analyzed, and notes that the opposing expert was setting out a 35% DLOM. Thus, the battlelines were set: 0% DLOM on one side; 35% DLOM on the other. Since the value at issue was in the millions, in turn, the DLOM level was worth millions (about ~$1.5MM after all was said and done according to the post).
According to the post, the matter eventually settled before trial, with a number reflecting an ‘in-between’ (though higher than 50%) of the 0% DLOM and 35% DLOM view.
The entire post is worth a read for its blow-by-blow of the valuation analysis and the underlying analysis. It bears repeating that appraisal disputes with private businesses involve an entire set of fair value considerations often different from the public-company-appraisal that captures headlines and academic attention.