BVR Logo April 24, 2019 | Issue #199-4

BVWire is your go-to source for the latest in the business valuation profession. Highlights for this week include: 


Unequivocal 'no' to unaffected market price— Delaware Supreme Court strikes down Aruba Networks

In a sharp rebuke, the Delaware Supreme Court recently overturned the Court of Chancery’s controversial decision in the Aruba Networks statutory appraisal case to use the unaffected market price as the sole indicator of fair value. The Court of Chancery obtained the market price by averaging the price at which Aruba stock traded during a 30-day period three to four months prior to the closing of the contested merger. It was $17.13 per share, the lowest value indicator in play.

‘Inapt theory’: Hewlett-Packard (HP) acquired Aruba Networks for $24.67 per share. HP was a strategic buyer. As part of the appraisal proceedings, Aruba (100% controlled by HP) proposed a deal price minus synergies of $19.10 per share. The Court of Chancery, performing its own synergy analysis, arrived at a lower price, $18.20 per share, but declined to use it. Issuing its decision in the wake of the high court’s important Dell and DFC Global rulings, the Court of Chancery decided only the unaffected market price was direct evidence of how the market valued Aruba as a going concern. The deal price minus synergies was flawed in that it required the court to estimate synergies and another layer of value derived from the merger itself. To do so left room for human error.

The Supreme Court disapproved of the Court of Chancery’s rejection of Aruba’s deal price minus synergies, pointing out the price aligned with HP’s and Aruba’s “real-time considerations” and various valuations by Aruba. What’s more, the trial court’s decision was based on an “inapt theory,” which proposed that fair value needed to exclude not only synergies but the value of “reduced agency costs.” There was no evidence that the deal price “involved the potential for agency cost reductions that were not already captured by its synergies estimate,” the high court noted. Synergies “classically involve cost reductions that arise because, for example, a strategic buyer believes it can produce the same or greater profits with fewer employees,” the court said. The Court of Chancery ignored the fact that HP’s synergy analysis already priced agency cost reductions. In effect, the Court of Chancery double counted agency costs, the Supreme Court said.

The high court pointed out that neither party had advocated for the use of the market price until sometime after trial, when the Court of Chancery, on its own, “injected” the idea of awarding the stock price into the proceedings Only then did Aruba disavow the deal price minus synergies method, probably because it realized it might get a more favorable outcome than it had argued for, the high court noted. It also said the Delaware Court of Chancery’s actions raised due process and fairness concerns in that the market price issue was not properly vetted in the pretrial and trial proceedings.

The Supreme Court said it would not “burden the parties with further proceedings” and based the award to the petitioners on the deal price minus synergies, $19.10 per share.

Gil Matthews, chairman emeritus and senior managing director of Sutter Securities (San Francisco), who is a longtime observer of the Delaware courts, says that, “since the valuation date for an appraisal is the date the transaction closes, it is no surprise that the Delaware Supreme Court rejected a valuation based on the pre-announcement price. Moreover, because the acquirer was privy to favorable news that was not yet publicly available, the pre-announcement price did not reflect a key fact.” Matthews provides an in-depth critique of the Delaware Court of Chancery’s decision in the October 2018 Business Valuation Update, which is available as a free resource here.

A digest of Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2019 Del. LEXIS 197 (April 16, 2019) (Aruba III), and the court’s opinion will be available soon at BVLaw.

Subscribers may access digests for Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 Del. Ch. LEXIS 52 (Feb. 15, 2018), and Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 2018 Del. Ch. LEXIS 160 (May 21, 2018) (Aruba II), and the court’s opinions, now.


Questions surround reach of Kress S corp
tax-affecting decision

One of the questions arising in the much-debated Kress gift tax case is how much precedent value the court’s decision has. Valuators want to know whether and how they can use this specific court’s acceptance of S corp tax affecting in future similar cases.

Helpful guidance on the differing authority among the three different types of federal courts appears, of all places, in the U.S. Citizenship and Immigration Services (UCIS) website page.

In its Adjudicator’s Field Manual, the agency explains:

The decision of a court has precedent value only within the court’s territorial jurisdiction. For example, the opinions of the Supreme Court have precedent value nationally because all lower courts must follow its decisions. The decisions of a court of appeals bind the courts within the circuit’s jurisdiction. However, decisions of a federal district court are not binding on federal courts in any other district.

District courts are the trial bodies of the federal court system. Some states have only one district court while other states have several district courts. Decisions by judges within the same district can influence rulings in similar cases.

Appeals from a district court are taken to the courts of appeal in 13 circuits. Again, decisions by one of these courts are binding only upon the district and circuit court judges within that circuit. While an interpretation of law is binding only on judges in that circuit, judges can look to other circuits for decisions which are similar to cases being decided within their circuit. (emphasis added)

The Kress case was tried in federal court in the Eastern District of Wisconsin in front of the chief judge. We don’t know yet whether the government will appeal the decision with the U.S. Court of Appeals. Typically, when appealing a district court ruling, a party has 30 days to file a notice of appeal. When the government is a party to the case, as is the case here, notice of appeal must be filed within 60 days from entry of the judgment. The judgment was filed on March 26.

As it stands, the court’s opinion is precedent in the Eastern District of Wisconsin. However, don’t underestimate its importance as persuasive authority on judges in other circuits.

Stay tuned: A digest of Kress v. United States, 2019 U.S. Dist. LEXIS 49850; 2019 WL 1352944 (March 26, 2019), and the court’s opinion will be available soon at BVLaw.

Latest paper on the vanishing size effect

A new academic paper, “Why Has the Size Effect Disappeared?,” explores the disappearance of the small-firm effect after the early 1980s. The authors conclude that the reason is a combination of three empirical facts: (1) the size effect is significantly positive only at the trough stage of a business cycle; (2) the conditional size effects have not gone through any structural changes after 1983; and (3) the duration of the business cycle lengthens so that the trough stage occurs less frequently. “The less frequent occurrences of troughs, due to prolonged business cycle length, are shown to be responsible for the dissolution of the size effect,” the authors say in the paper. The paper is in the May 2019 issue of the Journal of Banking & Finance.

Extra: There appears to be no resolution in sight among BV practitioners and academics as to the existence of the size effect. Two articles in the May 2019 issue of Business Valuation Update illustrate this ongoing debate.

NACVA adds to CVA ranks

Newly minted CVAs numbered almost 120 in the first quarter of 2019, according to an announcement from the National Association of Certified Valuators and Analysts (NACVA). These members completed the training, exam, and credentialing process.


ASA eyes new governance model

The American Society of Appraisers is considering a transition from an operations-driven governance model to a policy-driven governance model, based on the “Carver model.” In a nutshell, this model enables the board of governors (BOG) to focus on the “ends” (organizational vision and strategy) and leave the “means” (implementation and execution) to the CEO and staff. “This is also intended to avoid ongoing confusion over roles, responsibilities, authorities, and accountability of the CEO, the Executive Committee, the BOG, and the Discipline Committees, and other standing committees and the historical resulting gridlock and lack of forward movement,” says the ASA in a release.

Conference season! BVWire hits the road

What blooms in spring? BV conferences, of course! And BVWire will be on the scene to bring you key takeaways from a slew of excellent events. First up, we’ll be in New York City for the American Society of Appraisers (ASA) 2019 Fair Value Conference—New York on April 30. Then, we head west for the Energy Valuation Conference on May 2, presented by the Houston Chapter of the ASA. Next, we hop over to Las Vegas for the BVR/AAML National Divorce Conference May 8-10. Then, it’s back east for the Business Valuation Conference the New York State Society of CPAs will put on May 20 in New York City. We stick around New York City because June kicks off with the RICS Business Valuation Symposium on June 3. Right after that, we’re off to Salt Lake City for the 2019 Annual Consultants’ Conference June 5-7 presented by the National Association of Certified Valuators and Analysts (NACVA) and the Consultants’ Training Institute. Continuing west, we’ll get more fair value insights at the ASA/USC 14th Annual Fair Value Conference in Los Angeles on June 20. That’s it for now, but there will be more great events later in the year. Stay tuned here for capsule coverage, and there will be more in-depth treatment of key issues in future editions of Business Valuation Update.

Fair value contributes to big jump in audit
woes in Canada

Significant audit deficiencies in Canada more than doubled in 2018 compared to 2017, according to the inspection report of Canada’s audit regulator, the Canadian Public Accountability Board (CPAB). The report found that significant audit deficiencies increased from 15 in 2017 to 34 in 2018.

CPAB defines a significant audit deficiency, or “finding,” as “a deficiency in the application of generally accepted auditing standards that could result in a restatement.” Deficiencies related to auditing fair values in business combinations, impairment of assets, and revenue recognition represented approximately half the significant findings of CPAB’s 2018 inspections cycle. The other half related to significant but noncomplex account balances and transactions streams where basic audit procedures were either not performed or not performed appropriately.


BV movers...

People: Joe Orlando, ASA, has joined California-based Exit Strategies Group Inc. (ESGI) as vice president of valuation services in the firm’s new Portland, Ore., office; some of his focus areas have been technology (software, e-commerce, and online content), wineries, craft beverages, and sports … Martin Drummond has joined Alvarez & Marsal (A&M) as a managing director in its valuation services group in the U.K.; he comes to A&M after over 20 years with the Big Four … Raymond Platz, CPA, CFE, has joined Whitley Penn’s Houston office as an associate director in the Forensic, Litigation, and Valuation group; he has more than 25 years of diversified experience in restructuring and bankruptcy consulting, forensic accounting investigations, fraud investigations, litigation support, and financial advisor roles … Paul Balynsky, CFA, CPA/ABV, a managing director at Valuation Research Corp. (VRC), has been appointed to the AICPA’s Forensic and Valuation Services Executive Committee (FVSEC); Balynsky is a senior member of VRC’s Portfolio Valuation practice.

Firms: Boston-based CFGI, a provider of high‐end technical accounting and finance advisory services, has acquired Pine Hill Group, an accounting and transaction advisory firm with offices in Philadelphia, New York City, and Princeton, N.J.; CFGI is a portfolio company of The Carlyle Group … Charlotte, N.C.-based Dixon Hughes Goodman continues to expand in Manhattan, moving three times, but staying at the World Trade Center (WTC); the firm has just signed a 12,000-square-foot lease at 3 WTC and will move there from 4 WTC in Q4 2019; before that, it was at 7 WTC … Calgary, Alberta-based MNP, Canada’s fifth-largest accounting firm, has announced that it will add Thomson & Hamilton of Parkhill, Ontario, on July 8 … Pathway Forensics, the digital forensics firm of Houston-based Briggs & Veselka Co., is opening an office in downtown Houston … Princeton, N.J.-based WithumSmith+Brown extended its ties with the University of Central Florida (UCF) and its College of Business to establish a new learning lab to help cultivate the next generation of business advisors and accountants.

Please send your professional and firm news to us at

Upcoming BVR training events

New and trending LinkedIn discussions

Using a Calibration Model for an Early-Stage Enterprise Investment

The Absence of a Size Effect Relevant to the Cost of Equity

OPM Backsolve and Convertible Debt Financing

Your discussion could be featured here—BVR’s LinkedIn group is a place for valuation professionals to share, discuss, and learn about compelling BV topics. If you’re not already a member, request to join today.

We welcome your feedback and comments. Contact Andy Dzamba (Executive Editor) or Sylvia Golden, Esq. (Executive Legal Editor) at:

LinkedIn Icon
Twitter IconYouTube Icon

Business Valuation Resources, LLC
111 SW Columbia Street, Suite 750, Portland, OR 97201
1-503-479-8200 |

© 2019. All rights reserved.