In 2019, in the Columbia Pipeline statutory appraisal case, the Delaware Court of Chancery found the unadjusted deal price was the best evidence of fair value. The appraisal litigation, however, did not close the case. The contested merger prompted more actions. In a lengthy opinion, the court recently evaluated claims of breach of fiduciary duty filed by a different set of plaintiffs. The court ruled that the new claims were not subject to the fair value determination from the appraisal proceedings and the litigation could proceed.

Background: The contested merger closed in July 2016. The subject was Columbia Pipeline (Columbia), a midstream company that developed, owned, and operated natural gas pipelines and related assets. The buyer was TransCanada Corp. (TC). The deal price was $25.50 per share.

Columbia’s plan to sell itself attracted a number of possible buyers. The new plaintiffs claim that, once TC emerged as a committed bidder, Columbia’s CEO and its CFO favored TC. The plaintiffs say these executives shut out other bidders and prevented the company from developing other alternatives. The executives, who served as key negotiators, had conflicting interests, held meetings with TC without the board’s approval, and made confidential disclosures to TC about the competition. Ultimately, TC was able to take advantage of the executives’ breaches and force the company to accept a lowered bid.

Same facts, different analysis: In the statutory appraisal litigation, the court, after its exhaustive review of the facts surrounding the sales process, acknowledged that aspects of the sales process were problematic. At the same time, the court found the process was sufficiently sound “to make the deal price a persuasive indictor of fair value.”

In the instant litigation, the defendants argued the statutory appraisal rulings should be binding on the plaintiffs in this action and the court should dismiss the plaintiffs’ complaint. After a lengthy discussion of case law and applicable legal theories, the court found the plaintiffs in the fiduciary litigation were not bound by the prior findings.

The appraisal decision was concerned with determining “whether the petitioners had been exploited in the sense of being deprived of what would fairly be given to them in an arm’s-length transaction,” the court noted. The appraisal decision did not evaluate whether the sales process resulted in the best value reasonably available to stockholders, which applies in the fiduciary litigation. The court said the damages remedy the plaintiffs in the fiduciary case could pursue is the difference between the price the stockholders received and the higher amount TC or another bidder would have paid. The court found the complaint supported “a reasonable inference that the stockholders lost out on a higher valued transaction” because of the actions of the executives and TC.

Moreover, the court said, the complaint supported a reasonable inference that the executives “tilted the sales process in favor of TransCanada and against the other bidders so that they could obtain a cash deal that would enable them to retire with the change-in-control benefits. The favoritism that TransCanada received was persistent and substantial.”

The court denied the defendants’ motion to dismiss.

A digest of the appraisal decision, In re Appraisal of Columbia Pipeline Grp., Inc., 2019 Del. Ch. LEXIS 303, 2019 WL 3778370 (Aug. 12, 2019), and the court’s opinion are available to subscribers of BVLaw.

Extra: In the upcoming May 2021 Business Valuation Update, Gil Matthews (Sutter Securities), a frequent commentator on the Delaware Court of Chancery, provides an extended analysis of the court’s approach to determine value in appraisal proceedings as opposed to fiduciary litigation.

Mercer and Harms tie BV together into one
neat bundle

Business valuation is like one huge jigsaw puzzle, and practitioners can often find themselves focusing too much on the individual pieces. A framework of thinking is needed to help fit all the pieces together successfully. That’s where the “integrated theory” of business valuation comes in. This is a concept put forth by Chris Mercer and Travis Harms (both with Mercer Capital), who explain it in a series of BVR webinars.

It all jells: When you listen to Mercer and Harms, it seems as if everything you’ve learned about business valuation comes together in a very logical and understandable way. They contend that any question or challenge an analyst faces can be answered by paying attention to three elements: cash flow, risk, and growth expectations. True, it may seem as if you’ve heard this before, but not in the way they present it, which makes it all fit together very nicely. They also do a very enlightening demonstration of how the three approaches to value (income, market, and asset) are interrelated.

The first installment of the webinar series gave an overview of the integrated theory, and the second installment examined enterprise cash flows. The third and final installment of the series will be April 21, when they will delve into shareholder cash flows. BVR Training Passport holders have access to archive recordings of the first two, and they have a pass for the third. This series will definitely become a classic!

Extra: An excellent companion to the webinar series is the new, third edition of Business Valuation: An Integrated Theory, by Mercer and Harms.

New association formed for healthcare compensation pros

The American Association of Provider Compensation Professionals (AAPCP) is a new nonprofit group whose members advise and lead healthcare organizations on provider compensation, contracting, planning, recruitment, retention, strategy, and, yes, valuation. The fair market value of physician compensation and related arrangements is an area subject to increasing scrutiny amid complex regulations. The determination of FMV is handled by staffers at healthcare systems as well as external valuation experts, and both these groups are among the ranks of AAPCP members.

BVWire spoke with Alex Krouse, JD/MHA, who is legal counsel at Parkview Health and one of the key people behind the formation of the AAPCP. He told us that the organization will develop a body of knowledge, resources, best practices, and training for individuals and firms engaged in provider compensation. Plans also include providing certification and an interactive forum. They were planning their first annual conference last spring, but the pandemic derailed that event, which will be rescheduled. The agenda included topics of interest to all healthcare valuation experts, such as:

• A regulatory overview for provider compensation professionals;

• Nuts and bolts of FMV and commercial reasonableness;

• Compensation surveys and updates; and

• FMV for “thorny” deal scenarios.

The fledgling AAPCP looks like it’s off to a great start!

Extra: BVR has a call for papers on the new Stark regs and healthcare valuation. Proposals are due April 15. Click here for details.

McKinsey examines consumer goods and retail in the wake of COVID-19

Consulting firm McKinsey has some very useful economic and industry reports, research studies, and regular briefings. The latest briefing (dated March 17) assesses the long-term effects of COVID-19 on the consumer goods and retail sectors. In consumer goods, company performance has been “all over the map” as growth soared in 2020 but with the large firms capturing the lion’s share. In retail, success in a post-COVID-19 world will require “hastened progress” on several long-standing imperatives and some new strategies. One of these long-standing mandates, of course, is the shift to “omnichannel,” led by digital shopping. Too many retailers are still making decisions based on a brick-and-mortar mindset.

A lot of free material is available from McKinsey on economic and industry analyses, particularly with respect to the COVID-19 crisis. For example, one chart shows projected small-business recoveries by industry (click here to view), and another shows the most likely scenario for COVID-19’s impact on domestic GDP in various countries (click here to view). All of this material is free, and you can sign up for regular alerts on the McKinsey website.

Data breaches threaten brand values, says study

A recent study from Infosys and Interbrand analyzes the maximum risk of brand value loss in case of data breaches. For the “100 Best Global Brands” ranked in the 2020 Interbrand list, the maximum risk amounts to a loss of 11% of brand value. “While this figure doesn’t look dramatic, it can translate to more than 100% of net annual income, depending on sectors,” the folks at MARKABLES said in a statement. MARKABLES is a provider of data designed to support the valuation of IP assets. The authors of the study suggest that brand owners should re-evaluate “hygiene” aspects of customer experience, such as cybersecurity. MARKABLES adds that brand owners should establish the value of their brands, quantify the risk they are exposed to, and rethink their approach to both risk avoidance (cybersecurity) and risk management (brand insurance coverage).

Extra: For some emerging ideas and techniques in this area, see the BVR briefing Cybersecurity in Business Valuation: Addressing the Impact of Data Breaches on Value.

ASA adds two events to the spring conference season

The American Society of Appraisers (ASA) will present a brand-new event—and a popular ongoing one. The 2021 ASA Complex Securities Virtual Conference will be held online on May 20 and will cover such topics as SPACs, volatility, contingent consideration, NFL contracts, and more. On June 10, the 2021 ASA Fair Value Virtual Conference is back and will also be online with an agenda that will—as it has in the past—feature presentations from nationally recognized speakers covering a range of fair value measurement and valuation topics, as well as other current and future expected trends regarding the FASB, SEC, and international accounting standards. BVWire will attend both these events. Please join us!

Extra: As a reminder, BVR will host a live webcast of the ASA Houston chapter’s 2021 Energy Valuation Conference on May 12. Early-bird pricing is available through March 31.

Registration opens for CBV Congress 2021

The full agenda is now available, and you can now register for the CBV Congress 2021, held by the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO). This is a three-day event that will be online June 16-18. The first day is devoted to business valuation, and there will be a keynote by Dr. Aswath Damodaran (New York University Stern School of Business). The second day will examine the world of litigation, and the third is devoted to recent trends in M&A. You can check out the full agenda if you click here.

BV movers . . .

People: Bill Barnard, CPA/ABV/CFF, ASA, CBA, JD, has joined Huselton, Morgan & Maultsby PC (Dallas) as a shareholder to start the firm’s new service line for business valuation and litigation support; he brings with him Michelle Barton, CPA/ABV/CFF, ASA, who joins the firm as senior manager … There were several promotions to manager and senior manager levels at Miami-based Kaufman Rossin in its forensic, advisory, and valuation services practice: Alexandra Coupet, CFE, is a manager who works with clients on various consulting matters, including commercial litigation, economic damages, and lost profit calculations; Jayni Current, CFE, is a manager who assists clients with forensic investigations and complex business litigation matters; Elan Sternberg is a manager who executes commercial litigation support engagements and performs financial forensic analyses for economic damage calculations; and Charnele Ramphal, CPA, is a senior manager whose experience includes deal advisory, financial reporting, tax advisory, mergers and acquisitions, corporate strategy, tax compliance and planning, and allocation of value among equity securities … Rachel Lee, CPA, CBV, a manager in the transaction advisory services practice at EY (Calgary, Alberta), is the recipient of the Scholastic Achievement Award for excellence during 2020 in the CBV Program of Studies; the Chartered Business Valuators Institute (CBV Institute), Canada’s valuation professional organization (VPO), administers the CBV program … John A. Hudson has been appointed a senior managing director at FTI Capital Advisors LLC; he has over 20 years of experience completing sell-side/buy-side transactions involving technology and intellectual property (IP) assets and IP-rich companies, valuing intangible assets, technology licensing, and providing IP strategic management and related risk mitigation advisory services.

Firms: Alvarez & Marsal (A&M) has launched an environmental, social, and governance (ESG) services practice, led by managing director Julie Hertzberg … McPherson, Kan.-based Swindoll, Janzen, Hawk & Loyd LLC and Houston-based Sproles Woodard LLP have joined the BDO Alliance USA, a nationwide association of independently owned local and regional accounting, consulting, and service firms that now has 222 CPA member firms in over 570 locations nationwide.

CPE events

• Fair Market Value Opinions and Business Valuations for the Ambulance and EMS Industry: Help Is on the Way. March 30, 10:00 a.m.-11:15 a.m. PT/1:00 p.m.-2:15 p.m. ET. Featuring: Darcy Devine (Buckhead FMV) and William Hamilton (BuckheadFMV). Part of BVR’s special series presented by the BVR/AHLA Guide to Healthcare Industry Finance.

Relatively few hospitals own or operate ambulance systems, so they enter into service agreements with ambulance and medical transport companies. Speakers will discuss the determination of the fair market value of these types of agreements.

• Evaluating and Applying Control Premiums. March 31, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Timothy Meinhart (Willamette Management Associates) and Nate Novak (Willamette Associates).

Amid greater scrutiny on valuation analysts’ selection and use of control premiums, the speakers will discuss the proper quantification and application of acquisition premiums and control premiums.