Court Favors “Exceptionally Knowledgeable” Valuation Expert
Posted by Benjamin Schuver on September 21, 2021
In a recent breach of fiduciary duty case, Marion Coster v. UIP Companies, Inc., et al., the Delaware Court of Chancery dismissed the plaintiff’s challenges to a stock sale involving her late husband’s business. The defendants made a proactive move that led to this favorable outcome — hiring a qualified, experienced expert to value the business before the sale.
Tensions Mount
The case involved a real estate investment services company that had been owned equally by the plaintiff’s late husband and his cofounder. After the plaintiff inherited her husband’s 50% interest, she had a series of disagreements with the cofounder regarding a buyout of her interest and the election of directors. So, she filed a lawsuit to obtain a court-appointed custodian.
Subsequently, the cofounder obtained an independent valuation of the company. Then the company sold unissued shares representing one-third of its equity to an executive (and board member) for approximately $41,000.
The plaintiff filed a second lawsuit seeking to invalidate the stock sale. A majority of the board was “interested or lacked independence from a party who was interested in the transaction.” So, the court invoked the “entire fairness” standard of review, under which the defendants had the burden of proving that the transaction was fair in terms of both process and price.
Court Finds no Bias
The plaintiff alleged various process defects that, she argued, compelled a finding of unfairness. A key allegation was that the expert who valued the shares was biased. The plaintiff claimed that the valuator had commented, before conducting his analysis, that “there is no value” to the business.
However, the court found the valuator to be credible and unbiased because he held a senior position at his firm and had obtained many professional licenses. He also had extensive experience valuing real estate entities, making him “exceptionally knowledgeable about the industry.”
In addition, the plaintiff hired a rebuttal expert who attacked several aspects of the business valuation. The court acknowledged that some of the rebuttal expert’s criticisms had a “basis in theory” and that many of the valuator’s conclusions were based on professional judgment.
However, the court found that the valuator’s income approach provided the most reliable indicator of value — particularly in light of the plaintiff’s failure to offer an alternate indicator. Accordingly, the court ruled that the stock sale satisfied the entire fairness standard and dismissed the plaintiff’s claims.
Lesson Learned
Transactions involving a company’s stock sometimes attract lawsuits from shareholders who don’t have control over business decisions. By seeking independent valuation expertise, executives and controlling shareholders can demonstrate that they acted in good faith and conducted thorough due diligence.
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As a manager, Ben’s responsibilities include the valuation of businesses, business interests, and intangible assets for purposes of financial reporting, transaction advisory, and tax planning and compliance. Additionally, Ben’s role includes the performance of various forensic accounting procedures, as agreed upon with clients. Ben’s prior experience includes performing assurance services for publicly traded companies within the aerospace and manufacturing industries, as well as large private companies and the gaming industry. He also has experience in testing and evaluating internal controls over financial reporting.