It’s a common courtroom scene in stock valuation proceedings:  two credentialed business appraisers locked in a “battle of the experts,” ostensibly describing the same company using the same raw data, offering two conclusions of value light years apart.  Former Vice Chancellor Steele of the Delaware Court of Chancery, in a case called Gilbert v. MPM Enterprises, Inc., 1997 WL 633298 (Del. Ch. Oct. 9, 1997), described the phenomenon thusly (keep in mind this was written in Apple’s dark days, before it launched the iPod):

One might expect the experts’ desire to convince the Court of the reasonableness and validity of their assumptions and financial models would produce a somewhat narrow range of values, clearly and concisely supported, despite the individual parties’ obvious conflicting incentives.  Unfortunately, as this case and other cases most decidedly illustrate, one should not put much faith in that expectation, at least when faced with appraisal experts in this Court . . .. Reading petitioner’s submissions, one might easily conclude that MPM was poised to become the Microsoft of the SMT industry.  By contrast, respondent’s submissions give the impression that a more likely comparison, given MPM’s myriad management, technical and legal problems, is Apple.  In sum, one report is submitted by Dr. Pangloss, and the other by Mr. Scrooge.

Closer to home, in one of the earliest reported decisions to address the problem under New York’s buyout statute (BCL 1118), the court in Matter of Taines (Gene Barry One Hour Photo Process, Inc.), 123 Misc. 2d 529 (Sup Ct NY County 1983), aff’d, 108 AD2d 630 (1st Dept 1985), disregarded the testimony of both sides’ experts, whose determinations of the fair value of the subject company’s shares differed by almost 30,000 percent, writing as follows: 

As it turns out, I find both experts’ reasoning fallacious and their conclusions preposterous, and I give no weight whatsoever to either of their ultimate conclusions as to the value of the business. The petitioner’s expert valued the business, as of August 27, 1981, as $20,700,000. The respondent’s expert valued the same business, as of the same day, at $71,000 — a difference of nearly 30,000%!  The petitioner’s expert’s $20 million figure is predicated upon a number of hypotheses which are at best unsupported by the evidence and at worst sheer fantasy. It is based, inter alia, upon the assumption that the company could obtain unlimited credit at will. . . . The testimony of the respondent’s witness was equally absurd. As noted, he valued the corporation at $71,000. He reached this result by ignoring the facts to the same extent as petitioner’s expert, but in the opposite direction. He failed to seriously take into account certain salient factors tending to increase the value of the corporation.

On such occasions the courts can appoint a neutral evaluator (at the parties’ expense) or, using the data submitted by the discredited experts, reach its own valuation based on appropriate methodology.  A good example of the latter is former Justice Stephen Crane’s work in Matter of Cohen (Four Way Features, Inc.), 168 Misc 2d 91 (Sup Ct NY County 1995), aff’d, 240 AD2d 225 (1st Dept 1997), in which he recognized that neither side has the burden of proof in a statutory fair value proceeding and that, rather, it is the court’s statutory duty to decide fair value.

But it’s naive to rely solely on the expertise of a judge to come to the “right” determination of fair value.  Also keep in mind, the provisions of the Business Corporation Law and Civil Practice Law and Rules governing dissolution and buyout proceedings authorize the judge to appoint a referee or judicial hearing officer (JHO) to determine the facts (BCL 1108 and CPLR 4301).  Appointment practices can vary from county to county, and the expertise and resources of those appointed in business valuation matters likewise can vary widely.

So the answer is, in all cases engage a qualified appraiser to prepare an independent evaluation of the shares set forth in a valuation report that complies with applicable appraisal standards, and who will give credible testimony that reflects professional — not partisan — rigor.  

The price for not doing do can be heavy, especially when both sides’ experts fall short.  Recent case in point: Matter of DeAngelis (AVC Services, Inc.), 2008 NY Slip Op 10621 (2d Dept Dec. 30, 2008), in which a JHO’s report, valuing at $625,000 the petitioner’s shares in a veterinary practice, was confirmed by the trial court only to be vacated on appeal and sent back down for a new valuation hearing.  The petitioner’s expert failed to offer an opinion as to the shares’ value, testifying instead that the company’s books and records were difficult to understand because officer compensation was paid through a variety of separate companies owned by the respondent shareholder.  The respondent’s expert, who testified that the value of petitioner’s shares was zero, failed to address the veterinary practice’s payments to various companies owned by the respondent’s separate companies for equipment rental, veterinarians’ salaries and rental of the building housing the practice’s clinic.  On top of these failures, the JHO’s report didn’t explain how he determined that the petitioner’s shares were worth $625,000.  Stating that “the record is insufficient to determine the value of AVC’s shares,” the appellate court had no choice but to order a new valuation hearing.

The respondent shareholder undoubtedly was relieved by the appellate decision, but a do-over two years after the first hearing is no victory for anyone.