July 13, 2020

Determining Date of Valuation and Subsequent Implications

Current Issues in Closely Held Businesses Series: Part 6
Holland & Knight Shareholder Rights Blog
Michael J. Zdeb
Shareholder Rights Blog

In any appraisal, whether conducted as a result of a breach of fiduciary duty or oppression, the date of valuation has to be established. In fact, after establishing the definition of "fair value" to apply, the determination of the date of value is of critical importance, as valuation results can vary substantially depending upon the date chosen. Independent of the operations and fluctuations in earnings, over time, the cost of capital changes, projections of future revenue fluctuate, comparable company transactions and pricing change, customer and supplier vagaries arise, and markets expand or contract.

Alternative Dates

The usual choices are the date of the acts the subject of the action, a date of a court filing or during the subsequent litigation, and in the case of an election to purchase, the day before the filing.

Election to Purchase

Most statutes that provide for a buyout, rather than dissolution for acts of oppression, include an election by the defendants or the corporation to buy the plaintiff's shares. The election is made within 90 days after the filing, with the valuation date specified as the day before the filing. The election allows the defendant the opportunity to decide whether a purchase is financially desirable or possible.

This election is seen as a way of limiting the time and expense of first finding that oppression occurred.

The efficiency expected by the use of this election is not frequently achieved. Complaints of oppression often will include claims of a breach of fiduciary duty. These claims are not affected by the election. Although the court may stay the matter to avoid having to hear about the same conduct that was both potentially a breach of fiduciary duty and oppression.

The election, if made, is irrevocable (subject to the equitable authority of the court to reverse it) and requires the purchase to be made at the value determined by the court. However, if the corporation later decides that the determined value is not acceptable, then dissolution is mandated.

There have been cases in which the time between the "bad acts," the filing and the appraisal action has been years. In one instance in which counsel was substituted, the case had lingered for four years before the new counsel's appearance. Opposing counsel then argued for the day before the complaint was filed. Unfortunately for opposing counsel, the court observed that the defendants had missed that opportunity. The court stated that the election was available earlier and could have been made but had not. In that matter, the court ordered a date that was the last audited statement of the corporation. As a consequence, the valuation date was about a year before the trial. The value of the corporation had increased substantially during the case.

Presumptive Date of Value

In some jurisdictions, the date of filing a petition or complaint is the presumptive date of value. It is that date on which the shareholder has decided to be purchased. On that date, what is known or knowable becomes the data which influences all decisions. The alternative of the uncertainty of a "bad acts" date is avoided. Of course, with a presumptive date, the court considering the equities could move the date.

Changes in Value

Cases have lasted for years with intervening appeals stretching out the time between acts of the parties or the filing date and an appraisal trial. The risk for the plaintiff is that the corporation could suffer losses in value; or, in the alternative, value could increase and not be captured.

One corporation was valued as of the complaint filing, and the appraisal result several years later was a substantial amount. Unfortunately, the entire industry of the corporation had lost value. The appraisal award amount nearly equaled the present value of the entire corporation. The appraisal award later became a claim in the bankruptcy proceeding.

Some decisions have used the date of the "bad acts" and not allowed either the increase or decrease in value that subsequently occurred. The intervening conduct of the parties, in some cases, influenced the date, such as competing with the business or business conditions changing.

Another of the difficulties of using the "bad acts" date is that oppressive conduct can occur over long periods of time, with some acts being more severe than others. The establishment of the date would then likely require a hearing and determination of its own.

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