Chancery’s unusual recipe for achieving fair value

How do you generate a reliable indicator of value in a world of uncertainty? In a recent statutory appraisal action, the Delaware Court of Chancery decided to blend the results of three “imperfect techniques.”

Sold in a hazy climate: The subject was a payday lending company that was headquartered in the United States but operated in 10 countries. Around the time of the transaction, the company experienced two pressure points: potentially tighter restrictions from regulatory authorities, especially in the U.S. and the United Kingdom, and competition. Concerns over regulatory change, management succession, and the company’s high leverage led to a sale to a private equity buyer for $9.50 per share. The transaction triggered a fair value petition from dissenting shareholders, which the court’s chief judge, Chancellor Bouchard, handled.

Three valuation techniques were in play: the discounted cash flow analysis, the multiples-based comparable company analysis, and the transaction price. The court said all methods suffered from limitations related to not knowing how, if at all, the company would weather the shifting regulatory landscape in key markets. At the same time, there was no doubt that all methods provided “meaningful insight” into the company’s value. No one technique produced a superior result. But, by giving equal weight to the results from the three different analyses, the court was satisfied it achieved fair value. The price was $10.21 per share, the court concluded.

The case is In re DFC Global Corp., 2016 Del. Ch. LEXIS 103 (July 8, 2016). A digest of the case and the court’s opinion will be available soon at BVLaw.

back to top

Do the new Sec. 2704 regs redefine fair market value?

The IRS is attempting to eliminate DLOM and DLOC for the vast majority of family-controlled entities for estate, gift, and generation-skipping transfer (GST) tax purposes (prior coverage here). To do this, its proposed IRC Section 2704 regs would treat the lapse of voting or liquidation rights as an additional transfer and disregard certain restrictions on liquidation in determining the fair market value of a transferred interest.

Different perspectives: “In my opinion, this is a legislative attempt to redefine the fundamental premise of fair market value.” says Ronald Seigneur (Seigneur Gustafson LLP), in an article in the September 2016 issue of Business Valuation Update, “Experts Size Up Controversial IRS Estate Valuation Regs” (subscription required). Michelle Gallagher (Gallagher Valuation & Forensics PLC) agrees. “They are changing the definition of fair market value,” she says, pointing to the Federal Gift Tax Regulations (Treas. Reg. Sec. 25.2512-1), which define fair market value as:

[T]he price at which property would change hands between a willing buyer and a willing seller, when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.

It seems that the proposed regs carve certain types of transfers completely out of the FMV definition, she observes. These transfers include those made within three years of death, between family members, and resulting in the lapse of liquidation rights. Gallagher and Seigneur are on the AICPA task force studying the regs in order to prepare and submit formal comments to the IRS by the due date of November 1.

“The IRS is not proposing changing the definition of fair market value,” says Bryce Erickson (Mercer Capital). “However, when applying fair market value under the constructs as contemplated in the proposed 2704 changes, there would be a smaller (or perhaps no) value delineation for minority interests as compared to enterprise value of an entity.” This would support the IRS’s goal of preventing taxpayers from “undervaluing” transferred interests among family members, Erickson points out. “This, of course, runs in stark contrast to the marketplace, of which fair market value is supposed to be a reflection,” he says. “The marketplace’s long track record on this is abundantly clear—it differentiates for minority interests as compared to the value of entire enterprises.” He sees the proposed regulations as essentially circumventing the levels of value for family members as defined in a “controlled entity.”

There will be a public hearing December 1 at the IRS. BVWire will be in Washington to cover this hearing.

Extra: Curtis Kimball (Willamette Management Associates) will conduct a BVR webinar on September 29: The IRS’ Proposed Section 2704 Regulations: The Impact on and the Future of Estate and Gift Valuation.

back to top

Reasonable comp ensnared in growing tax woes at nonprofits

Last year, we alerted you to a case of a nonprofit hospital in New Jersey that lost its property tax exemption because of overly lavish compensation of its executives, improper deals with physicians, and other factors (prior coverage here). We pointed out that this case could trigger similar actions from other municipalities—and that is just what has happened.

On the bandwagon: Almost half of the state's nonprofit hospitals (26 out of 62) are now caught up in tax court cases over property tax exemptions, according to NorthJersey.com. Last year’s case has set a precedent, and it’s a certainty that the issue of reasonable compensation is under the microscope in this new wave of legal actions.

Last year, the Morristown (NJ) Medical Center lost its property tax exemption because its activities were so intermingled with for-profit doings and questionable deals with physicians that it no longer resembled a charitable institution. Plus, the hospital failed to establish that executive salaries were reasonable. Its CEO was paid $5 million in 2005, including perks such as an automobile stipend, a cell phone plan, and a golf club membership. The hospital’s attempt to show that its salaries closely compared to other similar hospitals fell short and was labeled as "wholly self-serving" by the court. The hospital now faces a property tax liability of $2.5 million per year.

Of course, not only nonprofit hospitals are at risk here—nonhealthcare organizations are being targeted. For example, Princeton University is in court over this same issue after it failed to get the case against it dismissed. "The whole country is watching New Jersey in this area," says David Thompson, vice president of the National Council of Nonprofits.

back to top

Comments due on second exposure draft for 2018-19 USPAP

After reviewing submitted comments, The Appraisal Foundation’s Appraisal Standards Board (ASB) has issued the Second Exposure Draft of proposed changes for the 2018-19 edition of the Uniform Standards of Professional Appraisal Practice. Some of the proposed changes deal with the definition of report and communication of assignment results. The ASB is also proposing a revision of the definition of appraisal review, as well as splitting the existing Standard 3 into two standards to be consistent with the other standards in USPAP. Written comments are requested by Oct. 14, 2016, and can be sent to ASBComments@appraisalfoundation.org.

back to top

More firms footing the bill for professional certifications

A majority (72%) of CFOs say their company will cover all or some of the cost of obtaining a professional certification, reveals new research from Robert Half. Plus, 76% of companies say they help in maintaining such certifications once they're earned. These figures are up from previous years.

New for BV: The timing of this trend nicely coincides with the newly introduced Certified in Entity and Intangible Valuations™ (CEIV™) credential. It’s for valuation experts, CPAs, and other finance professionals who perform fair value measurements for public-company financial reporting purposes in the U.S. For more information on that credential, click here.

back to top

Trugman: A broad range of topics at ASA’s advanced BV conference

It’s conference season! And there is “something for everyone” at the ASA Advanced Business Valuation Conference, Gary Trugman (Trugman Valuation Associates Inc.) tells BVWire. The conference is September 11-14 at the fabulous Boca Raton (Florida) Resort & Club and is being held in conjunction with the ASA 2016 International Appraisers Conference that covers other appraisal disciplines (such as real property and machinery and equipment).

Great mix: Trugman, who is the conference chair, tells us that attendees will find sessions from the very basic (such as how to navigate your valuation report through the accreditation process) to highly technical topics (such as adjusting betas for leverage). What’s more, you’ll find some new speakers and perspectives, such as an investment banker talking about valuations for M&A purposes. Of course, there will also be well-known experts such as Roger Grabowski (Duff & Phelps), Robert Schweihs (Willamette Associates), Nancy Fannon (Meyers, Harrison & Pia Valuation and Litigation Support), Ashok Abbott (West Virginia University), John Finnerty (Alix Partners), and Pablo Fernandez (University of Navarre)—just to name a few.

BVWire congratulates Trugman on putting together a powerhouse agenda, and we will definitely be there! You can check it out and register if you click here.

Extra: This conference recently added a new session on the controversial new proposed IRC Sec. 2704 regs on estate valuation discounts.

back to top

Global BV news: Pratt keynotes NACVA’s global conference in Toronto September 26-28 Shannon Pratt (Shannon Pratt Valuations) will deliver a keynote address at NACVA’s International Business Valuation Conference that will focus on global valuation issues, standards, and trends. It will be held in Canada, where NACVA has a chapter, the Canadian Association of Credentialed Valuators and Analysts (CACVA). This conference is one of a series of regional specialty conferences presented by NACVA. Another keynote address will be from Neil J. Beaton (Alvarez & Marsal): Nuances of International Valuation Procedures and Discovery. Other speakers and sessions include: Transfer Pricing and Valuing International Entities and Global Intangibles (Guy Sanschagrin); Current Update in Valuations (Garth Tebay), a full-day session; The Influence of U.S. Valuation Practices, Court Cases, and Professional Standards on Canadian Business Valuation (Richard Wise); and More, including valuing oil and gas interests, linking the market and income approaches, how to avoid overvaluation, intangibles, and cost of capital. Discount code: BVR is pleased to sponsor this event and offers special discount codes to use when you register. The codes are: 16BVR (a $50 discount for a one-day specialty conference registration) and 16BVR2 (a $100 discount for a two-day specialty conference registration). Both codes expire Dec. 7, 2016. Please jot down the codes for when you go to register, which you can do if you click here. back to top BV in a topsy-turvy global world International issues are now touching all appraisers, and they present new challenges. This has prompted two groups to come together to examine international operations, the global economy, global competition, and the convergence of valuation standards. The result is Business Valuation in an Upside Down World, a two-day conference in Atlanta on September 30-October 1. Troubling topics: The Southeast Chapter of Business Appraisers (SECBA) and the International Association of Consultants Valuators and Analysts (IACVA) have joined forces to present this event. Topics include an international update on peer review and standards, cost of capital, current economic research, and more. There will also be an expert panel on “troubling topics” including tax-effecting PTEs, recent IRS developments, and changes to database methodologies. Panel members include Linda Trugman (Trugman Valuation Associates Inc.), Curtis Kimball (Willamette Associates), Bob Morrison (Morrison Valuation & Forensic Services LLC), and moderator Marcie D. Bour (Yip Associates). BVR is pleased to sponsor this event. BVWire will be there—will we see you? For details and to register, click here. back to top

BV movers . . .

People: GBQ Consulting LLC announced that Tom De Filippe joined its New York City office as director of practice growth in the Valuation and Financial Opinion Services Department … Joel Glick was promoted to director in the forensic and business valuation practice at the Miami firm Berkowitz Pollack Brant Advisors and Accountants.

Firms: Himmelwright, Huguley & Boles, with offices in Auburn and Opelika, Ala., announced its impending merger on Jan. 1, 2017, with Barfield, Murphy, Shank & Smith, expanding the footprint in Alabama of Birmingham’s largest locally owned accounting firm. The firms will consolidate under the brand Barfield, Murphy, Shank & Smith LLC … Weltman Bernfield LLC, based in the Chicago suburb of Buffalo Grove and just a few years shy of its 100th year, announced its merger with the Milwaukee-based Wipfli LLP on September 1. This merger solidifies Wipfli’s Chicago presence and is the latest in a series of mergers or acquisitions for the firm, including the January merger with Chicago-based Steinberg Advisors.

Please send your professional and firm news to us at editor@bvresources.com.

back to top

CPE events

Cost of Capital: An Anti-Cookbook Approach to Understanding (August 24), with Michael Crain (The Financial Valuation Group).

Valuing Hospital-Based Coverage Arrangements (August 30), with Schaeffer Smith (Horne LLP) and Christy Street (Horne LLP). This is Part 4 of BVR's Special Series presented by the BVR/AHLA Guide to Healthcare Industry Finance and Valuation.

Income Inaccuracies: Common Errors and Tips to Avoid Them (September 1), with Bethany Hearn (CliftonLarsonAllen LLP) and Sahan Totagamuwa (CliftonLarsonAllen LLP).

Report Writing: Do’s and Don’ts (September 8), with Stuart Weiss (Stuart Weiss).

Important note to webinar attendees: To ensure that you receive your dial-in instructions to BVR’s training events, please make sure to whitelist bvreducation@bvresources.com.

back to top

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden (Executive Legal Editor) at: info@bvresources.com.