Shareholder Issues Arise When Full Enterprise Value Fails to Be Assessed

by Holland & Knight LLP

In dissenters' rights actions, shareholder oppression and member disputes as well as in breach of fiduciary duty cases, the fair value of a company becomes center stage for debate. As shareholders and companies keep an eye out for their livelihood, court proceedings oftentimes lead to discussions of a forced buyout to resolve the dispute. A business' appraised value becomes the remedy to determine what amount each person deserves due to his or her role in the business. As the court decides on a value, the most frequent standard of value applied is a fair value analysis.

Fair Value Issues Emerge Depending on the Type of Analysis Used

To arrive at a fair value, the court generally will have the parties present evidence of the business' value. This evidence is usually in the form of reports and testimony from valuation experts regarding their analysis or conclusions of a business' value. These indications of value will begin with a value for the entire enterprise and then move to the value of the particular equity interest in it. When valuing the enterprise, the view is that it should represent the entire equity or a "control level" of value. From the control level value, the value of the particular interest can then be derived.

In arriving at the indications of value for an enterprise as a whole, experts rely on publicly available or observable data that is most often derived from public, traded company share information. However, since the subject interest being valued in most shareholder disputes is not publicly traded, public or observable data has to be analyzed for its relevance and usefulness.

The application of public company data regarding the privately held company interests presents a number of significant "translation" issues. In particular, to the extent that a shareholder's interest is based on a per share or comparable public companies basis, the value will reflect a minority position that lacks the prerogatives of ownership control. In the determination of fair value, most state statutes and courts will not allow a discount for lack of control. If the public data reflects a minority position, then the question arises as to whether the valuations based on it already contain a discount for lack of control.

Control Premium Considerations

To adjust for this potentially inherent discount, valuation experts will determine a tentative indication of value and then consider applying a "control premium" to it. The consideration of a control premium is seen as necessary to reach the control level of value or, in other words, will eliminate any discount for lack of control in the tentative indication of value.

A variety of responses by courts regarding this consideration of a premium exists, including the decision to:

  • apply the control premium because the base data came from minority interests using the guideline public company method
  • disallow the merged and acquired companies method since it includes synergies that are not reflective of the control value of the company on a stand-alone basis
  • allow or require the adjustment or disallow it on a regular basis
  • leave the issue to be a matter of fact to be determined on a case-by-case basis
  • consider the market approach to value but eliminate the income approach to value

Market Approach Values Scrutinized for Supportable Conclusions

The market approach to valuation involves the use of data from public companies found to be "comparable" to the private company. The techniques include the: guideline public company method involving stock quotes for an individual share; guideline merged and acquired company method that analyzes completed transactions for an entire company; and, past publicly announced transactions that may have involved a minority interest.
The guideline public company method yields information on a minority share basis, which then presents the issue of the application of a "control premium." The guideline merged and acquired method, in contrast, represents a control level value without the need for an adjustment.

Until recently, experts generally would look to the traded share price of a company before and after the announcement of a merger or sale to obtain data to estimate the impact of the control premium. This practice was used because many experts thought that it represented the value that the acquirer ascribes to all of the shares and the prerogative of control that comes with it. However, this seemingly straightforward approach has come under increased scrutiny in recent years. In April 2013, the Appraisal Foundation released a discussion draft titled "The Measurement and Application of Market Participant Acquisition Premiums" that addressed the "control premium" and what it deemed as the best practices in applying this type of premium.

Market Participant Acquisition Premium Terminology Introduced for Financial Reporting

The Appraisal Foundation's discussion draft was intended as guidance on best practices for preparing fair value measurements in financial reporting and was not intended for any other valuation purpose. Rather than use the term "control premium," the draft introduces a new term "market participant acquisition premium" or MPAP. The purpose of the new term is to (1) emphasize the market participant perspective of the value of the prerogatives of control and (2) "distinguish this premium from the more general, and occasionally controversial, notion of the control premium."

This generalized notion of a control premium and the means of determining it have been criticized for including elements of synergistic value that are attributable to the buyer and not the enterprise. In addition, some have concluded that the guideline company transaction indications of value have, at least conceptually, been too high as some experts have shown that data from premiums for control and values from going private transaction are better indicators overall. Others have argued that in an efficient marketplace, the per share market price of a well-managed public company already reflects most if not all of the value of control. As a result, the application of a control premium to valuations in appraisal actions based on fair value has also become the subject of debate.

While the Appraisal Foundation's discussion draft expressly states that it was intended for financial reporting purposes only, it does offer a number of useful discussions on best practices in ascertaining the value of the prerogatives of control. By raising the question of the value of "control," it triggers a discussion of (1) the extent of the MPAP in fair value appraisal actions along with (2) the analysis required to demonstrate what impact opinions submitted in connection with appraisal actions may have.

Because the premium adjustment is fact-sensitive and determined under the approach of the particular court, few generalizations exist. As with other aspects of fair value, fairness will be in the eyes of the beholder in the relevant jurisdiction. For numerous industries that focus on assessing market values of a business, the discussion of the MPAP approach is increasing. The need for reliable valuation measurements and experienced shareholder counsel to forecast how these valuation methods can make an impact is paramount.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Holland & Knight LLP | Attorney Advertising

Written by:

Holland & Knight LLP

Holland & Knight LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.