Preface

We have all heard the expression, “Value lies in the eyes of the beholder” (a play on words from the expression, “Beauty lies in the eyes of the beholder”). We cannot imagine a sense in which this could be more true than in the value of a business or an interest in a business. Value has no meaning until it is defined. In the nomenclature of business valuation, these different definitions of value are called standards of value.

In some contexts, the standard of value is mandated by statute or regulations. For example, fair market value is the statutory standard of value for all federal gift, estate, and income taxes. Fair value is the mandated standard of value for financial reporting that is subject to regulation by the Securities and Exchange Commission. The expression fair value is also used as the standard of value in almost every state's statutes for dissenting and oppressed stockholder actions, but the definitions are very different from the definition of fair value for federally regulated financial reporting purposes and differ somewhat from state to state.

Even when the standard of value is statutorily defined, it leaves much room for interpretation in case law. Very few state statutes dealing with property settlements for divorce address any definition of a standard of value. Therefore, in the context of valuations for divorce, virtually all the guidance as to the accepted standard of value is found in the case law, which varies greatly from state to state and even in different jurisdictions within some states.

It comes as a surprise to many people that the same identical shares of stock can have different values in different contexts. For example, one of the authors valued shares in a dissenting stockholder suit and was later retained to value the same shares for the estate when a stockholder died. For the estate tax valuation, the value was considerably less because of minority and marketability discounts, which were not mandated under the standard of value applicable in the dissenting stockholder action.

Standards of value that apply in certain circumstances may also be mandated in company articles of incorporation, articles of partnership, buy–sell agreements, arbitration agreements, and other documents. It is essential that attorneys and others drafting these documents have a clear understanding of the standards of value specified in the document and that they convey this understanding to their clients. How many times have we been confronted with language such as “the fair market value of the shares” and when the triggering event occurred found the shareholder shocked to find that the language did not mean a proportionate share of the total company value, but much less after discounts for minority interest and lack of marketability?

When embarking on a business or intangible asset appraisal assignment, the first thing one needs to know is the definition of value. Yet this is the first full book to comprehensively address this important issue. We address standards of value in several contexts:

• Gift, estate, and income taxes
• Dissenting and oppressed stockholder actions
• Buyout of owners of partnerships, limited partnerships, and limited liability companies
• Marital dissolution proceedings
• Fair value for financial reporting

This book lists each of the major federal statutes and regulations and relevant statutes of all states and territories so that the valuation report can cite the specific authority, and the attorney or valuation analyst can go to the full text of the relevant authority in case of a need to know more.

We have analyzed hundreds of court cases interpreting the various statutes and regulations. From these we have extracted the points that we believe to be most representative of the respective jurisdiction's view on interpretation of various issues and included selected quotations from the case opinions. These range from a sentence to several paragraphs, and collectively include several hundred court case citations. They reveal the many different nuances of interpretation of the standards of value in different jurisdictions.

If there is a “case of first impression” on an issue (an issue that has not been tried before in that jurisdiction), courts sometimes look to precedent from other jurisdictions that have similar statutes.

We do not express opinions (except for our perception of consensus among the business appraisal community) on what the interpretations of the appropriate standards of value should be. Instead, we merely report what the interpretations are as we understand them. We try hard to point out commonalities and differences of interpretation among jurisdictions and, sometimes, within the same jurisdiction.

Business valuations are extremely case specific. Frequently, what may seem like a contradiction from one case to another can be explained by different facts and circumstances. Therefore, it is dangerous to draw broad generalizations from specific case opinions. A study of case precedents, however, is important to provide the attorney or the analyst some conception of the court's thinking on certain issues.

Use of the research compiled in this book as a starting point for understanding the relevant standard of value for a certain type of case in a certain jurisdiction will save attorneys and appraisers a great deal of time. We hope that it will also provide insight into the perspectives of the various courts on interpretation of various issues related to standards of value. Since the nature of the subject material contained in this book is evolving, the authors will attempt to monitor changes in theory, statute, and case law. The reader is invited to forward any questions, concerns, and comments to the authors as they arise.

Jay E. Fishman
Financial Research Associates
Bala Cynwyd, Pennsylvania
[email protected]

Shannon P. Pratt
Shannon Pratt Valuations, Inc.
Portland, Oregon
[email protected]

William J. Morrison
WithumSmith+Brown, PC
Paramus, New Jersey
[email protected]