Forensic Accounting Expert Witness On Corporate Securities Lawsuits Part 3
In EFFECTIVE VALUATION & LITIGATION SUPPORT IN CORPORATE SECURITIES LAWSUITS, forensic accounting expert witness Richard M. Squar, CPA, CVA, ABV, CFF, MBA-Taxation, writes:
The appropriate standard of value to apply is where the expert often begins.
STANDARDS OF VALUE
• Fair Market Value
• Investment Value
• Intrinsic Value
• Fair Value
The purpose and objective of the valuation determines the applicable standard of value. For many of the corporate securities valuation issues, the applicable standard of value is mandated by law and continuously refined based upon court decisions. This can present some concern. Why? Not only is the law fluid and ever-changing, but the facts and circumstances assumed in the determination of value can differ by state, which creates confusion and inconsistent application.
Fair market value is the amount at which property would change hands between a willing seller and a willing buyer when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. Investment value is substantially the same as in real estate terminology as “value to a particular investor based on individual investment requirements.”
Intrinsic value reflects a value determination from examination of the corporation by stock analysts tempered by how noted particular attributes are viewed by one analyst versus another.
For stock studies, intrinsic value is used by a security analyst to determine the appropriate price for a stock. A “fundamental analysis” of the company’s assets, earning power, and other pertinent factors to the specific circumstances is performed. Intrinsic value is a key factor in determining damages relating to corporate securities fraud. One primary theory of calculating damages in fraud cases, the “Market Model” method, focuses on dividing the market price of the shares on the relevant date(s) into: (1) the security’s intrinsic value, the value that would be the market price if not for the fraud; and (2) the fraud component, which is the amount of the market price less its intrinsic value. Application of calculations and differences occurring at dates of alleged fraud and company corrective disclosures are used to determine damages.
Fair value is a legally created standard of value that applies to certain specific transactions. When there is actual or possible stockholder dissent, research of the legal precedents applicable to each case is necessary.
In most cases, a definition of fair value will not be clear and concise. California is amongst a few states with dissolution statutes (California Code Section 2000) in which minority shareholders can trigger a corporate dissolution under certain circumstances. A study of case law and precedents, however, does not necessarily lead one to the same definition of fair value using dissolution statutes in comparison to dissenting shareholder statutes.
Richard M. Squar has over 23 years experience in public accounting providing expert advice in the areas of business valuations and litigation support; corporate, partnership and individual tax planning and representation before taxing authorities; and profit enhancement.