Do analysts have a duty to disclose draft reports?
A new case examines the age-old question: how to handle draft valuation reports prepared in litigation. Should analysts continually overwrite all electronic versions, or are the drafts subject to expert disclosure requirements? Should they email drafts to the attorneys on the case—and are these emails discoverable? At what point must analysts preserve all copies of and correspondence related to draft reports?
In Univ. of Pittsburgh v. Townsend (March 30, 2007), scientific experts for the plaintiff admitted to having destroyed draft reports on advice of counsel; they’d also failed to retain copies of the e-correspondence relating to the revisions. The defendants claimed that not only was all this evidence discoverable—but experts generally have an affirmative duty to turn over all draft reports as part of their disclosure requirements under Rule 26 of the Federal Rules of Civil Procedure. If they don’t, the sanction should be to preclude their testimony at trial.
The District Court (E.D. Tenn.) didn’t give the defendants everything they wanted, but it did exact an apology from plaintiff’s counsel; and its decision answers many questions experts and their attorneys may have—including how to pass a Daubert challenge, which the plaintiff’s valuation expert did with flying colors. An abstract of the case will be published in the next issue of the Business Valuation Update™, and a copy of the full-text court opinion is currently available to subscribers of BVLaw™ at BVLibrary.com.
New resources on preserving/managing e-evidence
Cases like Univ. of Pittsburgh and last month’s Morgan Stanley v. Coleman (see BVWire # 55-2), in which the mega-investment firm was penalized for destroying mega-files of emails, have arisen in the wake of the Internet Age and the virtual warehouses of electronically stored information (ESI). In response, amendments to the Federal Rules of Civil Procedure became effective last year; changes include requiring litigation parties to discuss e-discovery issues early in the case, how to preserve as well as manage ESI. For a recent ABA report on the new rules, click here.
Another resource: Just last month, the Richmond Journal of Law & Technology (JOLT) released its third annual survey of electronic discovery. Included is an article that directly addresses the onset and scope of ESI preservation obligations under the new Federal Rules; for a copy, click here.
For BV professionals and their attorneys: Be sure to tune into BVR’s telephone conference “Emerging Issues in Electronic Evidence, Document Retention and Spoliation for BVFLS Practitioners,” featuring Ron Seigneur, Melinda Harper, Shari Lutz and Ed Aro on July 25, 2007. To register, click here.
PCFRC meeting agenda now available
In preparing for its inaugural meeting May 10-11 in Chicago (see BVWire # 55-3), the Private Company Financial Reporting Committee has just posted its agenda and accompanying materials. The bulk of the meeting provides an open forum to discuss the Committee’s objectives (existing and prospective GAAP standard setting) and operational/outreach efforts.
The materials link contains several interesting resources, including a 2006 survey of private company and bank management by the Financial Executives Research Foundation, “What Do Users of Private Company Financial Statements Want?” Check out the meeting and all materials at the PCFR website.
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Reconciling 409A with FAS 123R
The implementation of IRC 409A (effective January 1, 2008) requires the strike price of stock options and stock appreciation rights to be at least equal to the fair market value of the underlying stock—or the company could incur significant tax as well as penalties. FAS 123R, which has been around since 2005, requires private entities to expense compensation-related stock options at fair value. Thus, a company’s tax need (under 409A) and financial reporting need (under 123R) could create inconsistent stock valuations—and private equity firms may be particularly vulnerable to any conflicts, given the significant changes in equity values their portfolio companies often experience.
Or consider the audience for these appraisals: While the IRS is comfortable with marketability and other discounts, the SEC is oriented toward rules for financial reporting. The company’s auditor understands the need for a credible report, while the Board of Directors may display varying levels of financial sophistication; the ultimate recipient wants a relatively low but risk-free value, while potential acquirers may be looking for a liability.
How to reconcile the different methodologies and meet all the company’s needs? Tune into today’s telephone conference, “409A Compliance—Issues, Approaches and Mistakes Not to Make,” featuring Bob Duffy, Scott Beauchene, and Joel Johnson. There’s still time to register by clicking here.
When buy-sell agreements go bad: tales from the trenches
“Any lawyer who advises people entering into a business venture and who fails to urge the adoption of a buy-sell agreement is guilty of malpractice,” says the teacher’s manual to the Business Associations casebook. Adds co-author Stephen Bainbridge (William D. Warren Professor of Law, UCLA), “Chris Mercer’s new release, Buy-Sell Agreements: Ticking Time Bombs or Reasonable Resolutions?, offers a tremendously useful guide to these remarkably important contracts” for business people, their financial advisors and attorneys.
Without this guidance, the lack of a buy-sell agreement—or one that’s poorly-drafted—can result in costly litigation and a painful falling out between business partners and/or family members. Two recent cases highlight what happens when a buy-sell goes bad: In the first, shareholders of a small company debated a buy-sell for years, but failed to put the final terms in writing—until one of them died. In the second, disagreements about the appraisal process turned a legally viable provision into a lengthy lawsuit. For the case abstracts, originally published in the February BVU, click here.
What’s your war story? Email the BVWire editor with your tale from the buy-sell trenches, and we may feature it in the three-part teleconference series this summer led by Chris Mercer. For more information on the exclusive Buy Sell series with Mercer Capital, click here.
Where to get tomorrow’s valuation research today
Valuation Methods and Shareholder Valuation Creation is one of the most popular BV downloads at the Social Science Research Network, (over 1000 copies downloaded), followed by DCF Business Valuation with Imputed Interest on the Stock of Equity (over 180 downloads) The site (“Tomorrow’s Research Today”) posts academic working papers as well as those accepted for publication, in an effort to achieve “rapid worldwide dissemination of social science research.” The site boasts nearly 150,000 complete papers, and has accommodated 14 million free downloads. Our quick search for “business valuation” turned up the two cited papers on a list of more than 250, including one of the most recent—posted in March, “Valuation in Emerging Markets” by researchers at University of Virginia’s Darden School of Business Administration.
First quarter V.C. investment reaches record levels
Venture capital funding reached its highest level in six years, according to the latest computations. First quarter 2007 saw V.C. disbursements of over $7.05 billion, led by investments in the software, biotech, and medical devices/equipment sectors. Compare this to the quarterly range of investment in 2006 ($6.21 - $6.93 billion) and 2005 ($5.09 - $6.34 billion). Breakdowns of the data available are by industry, sector, and geographic regions—including Congressional Districts. Compiled by PricewaterhouseCoopers, Thomson Financial, MoneyTree, and NCVA (National Venture Capital Association), current and historical reports are available here.