Fair value calculation exposes gaps in court’s understanding of valuation

Utah Resources International Inc. v. Mark Technologies Corp., 2014 Utah LEXIS 216 (Dec. 23, 2014)

Not all fair value determinations are the same. This was one of the messages the Utah Supreme Court recently sent to a trial court as it struck down the latter’s valuation related to a dissenting shareholder dispute. But the high court’s criticism was spikier than that.

It faulted the lower court for relying on inapplicable prior case law. It also noted that the trial court ignored the testimony of two experienced experts and ordered the court-appointed appraiser to produce a valuation that he later disclaimed, saying it conflicted with standard appraisal techniques.

The case arose out of a decision by two minority shareholders to challenge the company’s share consolidation, which, they said was the “culmination of several attempts” by the company’s president to obtain an “unpaid-for majority position” and “squeeze out” minority shareholders.

In terms of valuation, the crux of the matter was the company’s business strategy. Years before the share consolidation, it began to implement a plan of selling off its assets—mostly undeveloped real estate and some interests in gas mineral leases yielding royalty. Management expected it would take about 10 years to sell the company’s property.

The court-appointed appraiser performed an asset-based valuation and initially applied discounts for transaction costs and trapped-in capital gains taxes. In its fair value determination, the trial court disregarded the company’s operative reality at the time of the transaction and found the marketability discount improperly penalized the dissenters for holding a minority position.

To find out about the state Supreme Court's response, click here.