When using the market approach in the wake of the coronavirus, the approach may depend on the valuation date and the date the impact of COVID-19 was felt in the market. It’s generally recognized that mid-February was the point when the virus began to impact the capital markets. Therefore, “when the valuation date occurs after mid-February, analysts may wish to consider whether adjustments to the analysis are appropriate,” according to Daniel R. Van Vleet and his colleagues at the Griffing Group, who offer alternative market-based methods to consider for valuation dates occurring after mid-February.

Example: For the guideline M&A method, here is one alternative to consider if the purchase price of the target reflects the impact of COVID-19 (affected purchase price) but the earnings used in the calculation of multiples do not (unaffected earnings):

1. Calculate the multiples based on the affected purchase price and unaffected earnings of the target. This calculation will provide the affected M&A multiples.

2. If COVID-19 has affected the earnings of the subject company (affected earnings), adjust the affected earnings to quantify the unaffected earnings of the subject company.
3. Apply the affected M&A multiples to the unaffected earnings of the subject company to estimate the value of the subject company as affected by COVID-19 (COVID-19 value).

An article in the upcoming June 2020 issue of Business Valuation Update, “Alternate Valuation Methods in the Era of COVID-19,” offers optional ways to adjust the guideline M&A method and guideline public company method. It also discusses considerations for the income approach and cost of capital. In addition to Van Vleet, the authors of the article are Joseph W. Thompson, William P. McInerney, and David J. Neuzil.

They also offer this advice: “Analysts may want to revisit some of the valuation distortions that occurred during the Great Recession of 2008. It appears that the initial economic impact of COVID-19 may be at least as severe as the Great Recession. However, it also appears that the duration of the damage period may be shorter. Let’s hope so.”

Supreme Court rules on willfulness requirement to obtain infringer’s profits

In a trademark infringement case that turned on whether the plaintiff had to show willful infringement by the defendant to obtain the infringer’s profits, a unanimous U.S. Supreme Court recently answered no. The case went to the Supreme Court because a number of U.S. Courts of Appeals had been split on whether willfulness was a precondition under the applicable section of the Lanham Act.

The plaintiff was Romag Fasteners, which sells patented snap fasteners under a registered trademark. The defendant was Fossil Inc., which designs, markets, and distributes fashion accessories. It does not manufacture products but has contracts with overseas factories, including in China. Fossil and Romag had an agreement that Fossil would use Romag’s fasteners in its products. Later Romag discovered that certain Fossil products (handbags) made in factories in China used counterfeit snaps.

Romag sued Fossil, alleging patent and trademark infringement and asking for injunctive relief and monetary damages, including a court order to hand over profits Fossil had made by infringing Romag’s trademark. The district court rejected the request, noting Romag did not prove the infringement was willful, and, in “this” circuit (2nd Circuit), “a finding of willfulness remains a requirement for an award of defendants’ profits.” The Federal Circuit Court of Appeals affirmed. At the same time, some other circuits did not agree with the 2nd Circuit’s willfulness rule.

Romag asked the U.S. Supreme Court for review. This was a statutory-interpretation case. The Lanham Act prohibits unfair competition, fraud, and the “deceptive and misleading use of [trade] marks.” Section 35 of the Act specifies remedies for certain trademark violations, including the plaintiff’s right to the defendant’s profits (besides actual damages and attorney’s fees).

The Supreme Court said the statutory language was clear. It required a showing of willfulness for a profits award for a section 1125(c) violation. But the statute “has never required a showing of willfulness for a violation of section 1125(a).” Romag proved a violation of section 1125(a), “a provision establishing a cause of action for the false or misleading use of trademarks,” the high court noted.

The Supreme Court emphasized that, “in cases like that, the statutory language has never required a showing of willfulness to win a defendant’s profits.” The court went on to say that reading into a statute words that aren’t there is something the court was careful to avoid, particularly “when Congress has (as here) included the term in question elsewhere in the very same statutory provision.” In other words, the absence of the term meant something.

The court was not receptive to policy arguments from either side and amici. For example, Fossil argued that a showing of willfulness should be required, if only to serve as a deterrent to “baseless” trademark suits. Romag argued that its position, against requiring willfulness, would promote greater respect for trademarks in the “modern global economy.” The court was not the venue for reconciling competing policy goals, Justice Neil Gorsuch wrote. The court’s role was limited “to read and apply the law [] policymakers have ordained.” The task in this case was clear, the court said.

The Supreme Court’s opinion can be found here.

No act of God excuse for Victoria’s Secret buyer—February agreement excepted pandemic

In the wake of COVID-19, a number of buyers have resorted to force majeure (aka act of God) clauses to withdraw from deals. But, as the New York Times recently reported, this was not an option for the buyer of Victoria’s Secret because of a salient exception in the acquisition agreement.

According to the Times, the buyer, Sycamore Partners, a private equity firm, and the seller, L Brands, signed the agreement on February 20, one day after the stock market indexes hit their all-time highs. Lawyers for L Brands, the seller, even then had the foresight to include specific exceptions to acts of God, “including a pandemic.” Therefore, a pandemic would not be an excuse for the buyer to walk away from the $525 million deal. Courts take contracts seriously and are not inclined to find loopholes where none exist, particularly where both parties are sophisticated deal-makers and represented by sophisticated lawyers.

How could L Brand’s lawyers know and why didn’t the buyer’s lawyers push back? Contract lawyers are supposed to anticipate unforeseeable events, the Times article says, while noting that no one at that moment knew how devastating COVID-19 would be to the economy.

Once the effect of the virus started to become evident, the buyer engaged in negotiations with the seller to “adjust” the purchase price. When these talks went nowhere, the buyer filed suit in Delaware, creating a number of other arguments for why it should not have to go through with the deal. The buyer was aware that it could not use force majeure as an affirmative defense.

The Times quotes Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, saying he had never seen a reference to a pandemic “in that context.” The law firm representing L Brands (Davis Polk & Wardwell) “earned its fee,” Elson added.

March EOU tracks beginning of tough financial times

The Leading Economic Index (LEI) decreased 6.7% in March, the largest monthly decline in the 60-year history of the index, according to the March 2020 Economic Outlook Update (EOU). Here are a few other highlights from the report:

• Retail sales fell 8.7% in March, the largest monthly decline since the beginning of the data series in 1992;

• The national median existing-home price for all housing types was $280,600 in March and is up 8.0% from a year ago;

• The Consumer Confidence Index fell sharply in March, by 12.6 points, to 120.0, as the economic impact of the coronavirus deteriorated the short-term outlook of the U.S. economy; and

• The Small Business Optimism Index decreased 8.1 points, to 96.4, in March, with the global spread of the coronavirus causing the largest monthly decline in the survey’s history. The survey noted that nine out of the 10 index components declined and that the economic disruptions are causing small-business owners to struggle to keep their businesses open.

The 42-page March 2020 EOU contains expansive research from leading authoritative resources, which you can use in your valuation reports as long as you give proper attribution. The EOU is published monthly and quarterly.

BV conference season revs up today—online

It’s that time of the year again—the BV conference season is beginning but is in online-only mode for the safety of everyone. Here are some events of note coming up soon, including one that starts today:

• May 13: Energy Valuation Conference, Houston Chapter of the American Society of Appraisers, full day, webcast provided by BVR;

• May 14: How to Grow Your Business Virtually (Free Webinar), NorCal Chapter ASA;

• May 18: Business Valuation/Litigation Services Conference, The New York State Society of CPAs; webcast-only format; full day; and

• June 15-20: NACVA and the CTI’s 2020 Business Valuation and Financial Litigation Super Conference; virtual format; will repeat August 3-7.

First edition of European BV standards from TEGoVA

The first edition is available of the European Business Valuation Standards (EBVS) developed by the European Group of Valuers’ Associations (TEGoVA). These standards are tailored to the needs of real estate valuers who also undertake business valuations as well as real estate valuers seeking to diversify into the field of business valuation. The standards are effective immediately, but, given the current restrictions on movement, the formal launch event will take place this October. TEGoVA is a European nonprofit association composed of 72 valuers’ associations from 38 countries representing more than 70,000 valuers in Europe.

ASA Signs an MOU with Nigerian VPO

The American Society of Appraisers (ASA) and The Nigeria Society for Professional Valuation (SPV) have signed a Memorandum of Understanding (MOU). The intent of the partnership is to pursue future collaboration in the areas of education, publications, research, and standards.

BV movers . . .

People: William Redpath, ASA, CFA, CPA/ABV, has joined New York-based Summit Ridge Group LLC as a managing director in the firm’s media and telecom valuation and financial consulting practice; he heads the firm’s Chicago office … Ronald D. DiMattia, CPA/ABV, CMA, has become an adjunct instructor at the University of Akron’s GW Daverio School of Accountancy; he is the president of Corporate Value Partners Inc.

Firms: MG Valuation LLC has announced that Adroit Valuation Services Pvt. Ltd. has joined the MG Valuation Alliance, a global group of highly experienced international professionals known worldwide for its top-tier valuation work … New York-based EisnerAmper has acquired consulting firm Compensation Resources Inc. (CRI) of Upper Saddle River, N.J. … Stout has become a sponsor and member of the International Valuation Standards Council (IVSC) … New Philadelphia, Ohio-based Rea & Associates will acquire two nearby firms in 2020: Jones Battles Group of Concord, Ohio, on June 1, and Wooster, Ohio-based Dyer Roche & Co. on November 1; the new additions will help Rea expand its accounting and consulting services in the manufacturing, construction and real estate, dental, not-for-profit, healthcare, and government industries … Duff & Phelps is now a member of the International Association of Restructuring, Insolvency and Bankruptcy Professionals’ (INSOL) Group of 36 (G36); INSOL is an association of accountants and lawyers who specialize in turnaround and insolvency.

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

CPE events

• Houston’s ASA Energy Valuation Conference: A BVR Webcast. May 13, 6:30 a.m.-3:10 p.m. PT/9:30 a.m.-4:10 p.m. ET. See agenda for sessions and speaker information.

This conference has been converted from in-person to online-only due to COVID-19 and will, as in prior years, feature presentations from nationally recognized speakers who are profession leaders, covering a range of important topics in the industry. The conference provides eight hours of CE/CPE.

• Structure, Valuation & Tax Insights for Logistics & Trucking Companies. May 20, 10:00 a.m.-11:40 a.m. PT/1:00 p.m.-2:40 p.m. ET. Featuring: Ricky Castillo (Castillo CPA PLLC) and Jaclyn Burket Franks (Valuation Fraud & Forensics LLC).

A discussion of industry-specific adjustments to consider along with specific questions to ask business owners about economic, governmental, and location factors that impact valuation.