Using Independent Valuation to Avoid Litigation

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There was a time when the paths of corporate officers and directors and those of independent business valuators rarely crossed. Occasionally an independent fairness opinion was required by law or regulation, but little else. The fact is that valuators have been providing independent advice for acquisitions, reorganizations, tax purposes and potentially litigious situations for a very long time. Today we find valuators are in high demand to provide independent valuations and fairness opinions for corporate governance purposes and to ultimately avoid legal action.

In order to comply with the valuation-related demands of existing and proposed legislation both in Canada and the U.S., independent expert valuation advisors who understand current international accounting standards and technical valuation requirements are extremely important to avoid potential litigious situations. Corporate directors and officers need to comprehend fair value measures and their impact on financial statement/accounting disclosure. Valuation can have a significant impact on whether or not a board of directors can recommend a transaction to shareholders. Valuation can also influence the accounting results for operations and/or shareholders' equity, as they relate to purchase price allocation and the impairment assessments of intangible assets. In most cases, valuators can provide information that directly impacts shareholders and ensures all parties are on the same page.

Given the possible subjectivity of fair value measures and impact on financial statements, corporate directors and officers must ensure that material valuations are obtained from a credible, objective and independent source. Independence, both in fact and appearance, is relevant both in and out of the courtroom and professional valuators are bound by extensive professional standards and codes of ethics that among other issues prohibit fees for opinions based on outcome.

Potential situations where independent valuation can be a deciding factor between whether a company has to go to court or not are numerous; for example:

  • Blocked mergers: When minority shareholders threaten to block a merger, a fairness opinion from independent valuators can be critical to ensure the deal goes through. Valuators in this case can provide the important documentation to strengthen legal positions and support a company's merger recommendation even before getting in front of a judge.
  • Unsolicited offers for all of the shares of a public corporation: Using independent valuation advisors, companies are able to determine whether or not a price offered is adequate thus containing possible litigious situations from shareholders and other relevant stakeholders.
  • Hostile takeovers: In a hostile takeover situation an independent valuation and/or fairness opinion can provide additional corroboration, better compliance with standards, and enhanced transaction support for officers and the board of directors of the target company.
  • Reorganization plans: With the support of an independent valuation opinion, relevant parties are able to quickly and successfully reorganize the capital structure of a business. Companies can carry on without adverse consequences, and creditor losses can be minimized.
  • "Down round" financing: The valuations upon which follow-on financing are based can raise significant conflicts, given the potential for dilution of those not participating. Independent valuation advice can assist with determining the pre-money value in "down-round" financing and avoid conflicts of interest to result in new financing that is accepted by all parties.
  • Accounting for intangible assets in a transaction: On the purchase of a business, the price paid for tangible and intangible assets must be properly allocated to specific balance sheet accounting categories. Improper valuation can affect operating results for many years. Valuations of assets with significant potential value or profit and loss amortization impact should be performed, or supervised, by qualified independent valuators, to ensure that errors are not made. An independent valuation opinion can provide comfort for company auditors, officers and the board of directors.

Valuation is now of critical importance in the governance of corporations. The use of fully independent expert valuation advice can provide comfort in both fact and appearance for boards of directors and officers and stand up in court. In these times of heightened shareholder activism, and demands for strong corporate governance, the use of credible, independent valuation advice can be an important tool.

There are many more traditional valuation-related areas — such as strategic planning and value creation, tax planning and reorganization, assessment of financial claims for commercial litigation and shareholder disputes that can have a positive impact on the operations and life of a corporation. We believe it is critical that officers and directors be aware of the benefits that a credible independent objective valuation can provide.