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Fundamentals of BV in PA: Glosser Bros.

by bvertz on Jul 7, 2008 • Comments Closed • , ,

This post is the first of series aimed at reviewing the historical legal decisions concerning business valuation in Pennsylvania. Since these are state court cases, most arise from shareholder disputes, divorces, and condemnation cases. Some are stale, some vital, and some questionable, but all are worth reviewing. The first installment, concerning Glosser Bros., will be presented in two parts:

One of the leading cases on business valuation in Pennsylvania is In re Glosser Bros., Inc., 555 A.2d 129 (Pa.Super.1989), a dissenting shareholder action arising from the management-led buyout of a regional chain of discount department stores, outlet stores and grocery stores. Three of the company’s shareholders filed suit against the acquirer, claiming that the share price paid by acquirer was too low and seeking an appraisal of the stock. The standard of value in such cases is “fair value” as provided by Section 515 of the Pennsylvania Business Corporation Law of 1988.

Glosser Brothers was a publicly-traded stock listed on the American Stock Exchange. In the months immediately preceding the merger, the shares traded around $14 per share. The stock had never traded for more than $19 per share. The company that acquired Glosser Brothers in 1985 paid $20 per share.

The Cambria County trial court did not appoint an appraiser, but took expert testimony about the methods of determining fair value, including net asset value and investment value. The trial court found the stock was worth $31 per share, which was determined by assigning 65% weight to the company’s net asset value and 35% weight to its investment value. The company appealed on several grounds, including the trial court’s refusal to consider its market share price.

The Superior Court agreed that it was an error to disregard the price at which the stock traded on the American Stock Exchange. The Court cited back to O’Connor Appeal, 452 Pa. 287, 304 A.2d 694 (1973), which required the courts in shareholder appraisal actions to consider actual market value as well as net asset value and investment value. The Court also held that the traditional “Delaware block” method of valuation (in which the court would only consider the three traditional methods of valuation, assigning a percentage weight to each) would yield to a broader consideration of generally accepted valuation techniques. (Business valuation was, at that time, a new and developing science.)

The Superior Court held that market value, while relevant, was not controlling. While it might be deemed extremely reliable in cases where there were many transactions providing extensive data, it might be less reliable in cases where the transactions were few and data scarse. Still, the Court held that market value should be totally disregarded only in cases where there was competent and substantial evidence to support the conclusion that the value at which the stock is trading is not at all reliable in gauging its intrinsic going concern value. For instance, where a high percentage of shares is held by an individual or small group, or thinly traded, the market value might be deemed unreliable.

The Superior Court in Glosser Bros. held that the trial court should not have totally disregarded the market trading price. By its ruling, the Superior Court attempted to pull away from the holding of O’Connor, in which the Supreme Court held: “[Shares of] a closely-held family corporation having unlisted stock and … no public market … [are] sold too infrequently for market value to play any part in [valuation].” In Glosser Bros., the Superior Court remanded to the trial court to consider market value among other valuation methods.

In Part II, which will be posted next week, we will discuss the other issue raised by Glosser Bros.: the expert’s ability to give opinions based upon hearsay evidence of the type ordinarily relied upon in the practice of business valuation.

Mercer Capital Publication: Buy-Sell Agreements

by bvertz on Jul 1, 2008 • Comments Closed • , ,

A recent edition of Value Matters, a periodical published by Mercer Capital Group, illustrates the reasons for having a buy-sell agreement and what options might be available. Buy-sell agreements are advisable for the same reason as prenuptial agreements: they structure the consequences of a possible future incident such as shareholder disharmony, death, or divorce.

The valuation provisions of a buy-sell agreement, which may dictate the share price in the event of partner withdrawal, death or divorce, must reconcile competing concerns. On one hand, a book value formula might be desirable in the event of divorce or the buyout of a withdrawing shareholder. On the other hand, a below-market share price may result in excessive estate taxes for the beneficiaries of a deceased shareholder. An agreement can provide different formulas for different situations, but must presumably reconcile those inconsistencies or suffer close scrutiny of the courts or IRS.

Trigger events, valuation method, and purpose are some of the important elements of a successful buy-sell agreement. Extensive details are provided, presumably, by Chris Mercer’s book, Buy-Sell Agreements.

Big Surprise: Mortgage Business Bankrupt!

by bvertz on Jun 28, 2008 • Comments Closed • , ,

In Wilson v. Wilson, 2008 WL 2312726 (Ky.App.2008), a man started a mortgage brokerage business with his high school sweetheart in 2004. Soon the business blossomed, and so did the romantic relationship between the man and his classmate, who unfortunately was not his wife. The business expanded from Kentucky to Florida and paid all of the classmate’s living expenses. Soon the business floundered, the man bought out his partner, and he filed for divorce and bankruptcy. A discharge order was entered shortly thereafter, the bankruptcy court finding that the business was insolvent and no assets existed.

In the divorce action, a court-appointed valuation professional determined the value of the business as an ongoing concern as of September 2005, one year before the bankruptcy. The trial court accepted the valuation but assigned no value to the business as marital property, since it was bankrupt and worthless a year later. The business owner’s wife appealed, arguing that it should be assigned the value given by the expert.

On appeal, the Kentucky Court of Appeals affirmed, holding the trial court did not commit an error by assigning no value to the bankrupt business. The expert and the court did not seem to violate the principle that facts not known or knowable on the date of valuation may not be considered. Rather, the date of the expert’s valuation did not appear to coincide with the date used by the court. The lesson, perhaps? Make sure the date of expert’s valuation is the same date that the court will consider at trial.

Under Pennsylvania law, the same result probably would have occurred. Under Sutliff v. Sutliff, 518 Pa. 378, 543 A.2d 534 (1988), the proper date for valuing marital assets is presumed to be the date of distribution. There are cases, however, in which the courts of Pennsylvania have adopted an earlier date, such as where there has been intentional dissipation of marital assets. See, Nagle v. Nagle, 799 A.2d 812 (Pa. Super.2002); Smith v. Smith, 653 A.2d 1259 (Pa.Super. 1995). For some reason, the Kentucky courts rejected that logic.

Valuation Held Preferable to Judicial Sale

by bvertz on Jun 11, 2008 • Comments Closed • , ,

In Parker v. Parker, 980 So.2d 323 (Miss.App. 2008), the Mississippi Court of Appeals held that the trial court should not have ordered a judicial sale of businesses that were marital property in a divorce action. The trial court sold the businesses because the parties failed to comply with an order directing them to obtain accurate and up-to-date business valuations. On appeal, the Mississippi court held that the trial court could have appointed a business valuation professional or divided the property in kind.

Battle of the “Rules of Thumb” in North Dakota

by bvertz on Jun 1, 2008 • Comments Closed • , ,

In Evenson, a recent decision of the North Dakota Supreme Court, the business which was implicated in a divorce action was an insurance agency. The business owner sold multi-peril crop insurance through local banks for which the owner had previously worked. Both valuation experts agreed that insurance agencies are generally valued by applying a multiplier to the agency’s gross commissions over a period of time.

The wife of the insurance agent testified that a 1.75 multiplier should be applied to an average of gross commissions over the best three consecutive years in the agency’s five year history. (Yes, I said that the wife herself testified.) Her expert testified that 1.5 would be an appropriate multiplier, and 1.75 was “in the upper range.”

The husband testified that a multiplier of 1.0 should be applied to the agency’s gross commissions over the first four years (including the agency’s worst year). The trial court instead applied a multiplier of 1.0 to the agency’s gross commissions in the most recent year (which was neither the best nor the worst, but closer to the worst than to the average). The trial court chose the 1.0 multiplier based on evidence of growing loss ratios, a steady decrease in commission rates, and the testimony of an insurance manager that 1.0 would be an appropriate multiplier under current market conditions.

Finding sufficient evidence to support the verdict, the appellate court sustained the trial court’s decision.