• No discounts in New Jersey shareholder buyout case

  New Jersey is one of several states that allow discounts for lack of control and marketability in fair value situations if it is proven that the discounts are fair and equitable, but, in a recent case, the trial court disallowed the discounts—and an appellate court agreed.

  Not wrongful: The case is a shareholder dissent matter involving a New Jersey partnership that owns a shopping mall. The defendants argued that the discounts should be allowed based on the premise that the dissenting partners’ dissociation was wrongful (and damages were owed to the partnership), so the discounts are fair and equitable. But the trial court did not find that the dissociation was wrongful, and the appellate court came to the same conclusion. Therefore, there was no justification to apply either discount.

  There are other issues in the case, which is Robertson v. Hyde Park, 2022 N.J. Super. Unpub. LEXIS 848, and a case analysis and full opinion are available on the BVLaw platform.

  Extra: Tune in today, July 13, for the BVLaw Case Update webinar—attorney Drew Soshnick and valuation experts Jim Alerding (BVLaw editor) and Jim Ewart will give their insights on some of the most consequential recent valuation and financial litigation decisions.

  Takeaways from the ASA’s first ESOP conference

  The American Society of Appraisers hosted the inaugural ESOP Virtual Conference on June 21, and here are some notable bits of information we learned:

• There is proposed legislation designed (among other things) to hold the DOL “to the fire” and finalize proposed regulations the valuation community has been waiting for—since 1988(!);
• The landmark Bowers case could represent a turning point for ESOP valuations (see the last issue for more details);
• While DOL litigation may have leveled off (although some do not have that perception), class action litigation by private plaintiffs has increased;
• The No. 1 issue raised in ESOP litigation is the concern over projections;
• Many ESOP transaction trustees now avoid valuations with control premium adjustments, but they also want to see some representative discount/haircut in the valuation to recognize the lack of full and unfettered control; and
• ·         An ESOP stock purchase transaction typically requires five to six months to execute (less time if third-party debt is not needed).

• A full recap with more details is in the August issue of Business Valuation Update.

  Feedback wanted on ‘social value’

  The Social Value Working Group at the International Valuation Standards Council has released its second paper in a series that examines whether “social value” can be a basis of value, the difference between social value and the social component of ESG, and whether the existing valuation principle of highest and best use can apply to social assets and social value. The group is also seeking feedback from valuers by posing a number of questions:

• Do you think that the definition for highest and best use within a social value context needs to be expanded or reframed, and, if so, how would you revise the existing definition?
• Should governments and charities be maintaining a social value balance sheet in addition to their traditional balance sheets?
• Do you consider that the current discussions on ESG adequately addresses social value concepts in both a for-profit and not-for-profit world? If not, what would give this discussion more prominence and stimulus?
• With the information that is presently available, is it possible in most situations to quantify and measure social value accurately? If yes, how, and, if not, what is missing?

You can take the survey if you click here.

Is the IRS Job Aid on reasonable comp still relevant?

Released in 2014, the “Reasonable Compensation Job Aid for IRS Valuation Professionals” is an internal IRS document designed to help review compensation reported on federal tax returns. Reasonable comp remains on the audit radar at the IRS, and, when it litigates cases on this issue, it usually wins. But is the document out of date?

Still good: In a blog post, former IRS manager Michael Gregory (Michael Gregory Consulting LLC) says: “Personally, I would encourage anyone working the issue to download both the IRS Reasonable Compensation Job Aid and the associated Appendix. Together they provide real insight into the issue and how the IRS approaches the issue.” Gregory, now in private practice, worked on the job aid while he was with the agency. In the blog, he also discusses other IRS papers on reasonable comp as well as some procedural issues that arise when the IRS conducts an examination.

The job aid is available as a free download from BVR (login required).

Global BV News

2022 market risk premium and risk-free rate indications from Pablo Fernandez

The results of Professor Pablo Fernandez’s latest survey of the market risk premium (MRP) and risk-free rate (RF) used in 95 countries in 2022 has been released. Many business valuers refer to this longstanding survey in their cost of capital analyses. For example, based on UK-only responses, Fernandez found a market risk premium of 6.1% (a median of 6.0%). As is typical, these rates are marginally higher than the averages for the US (at 5.6% and 5.5%, respectively). Also, not surprisingly, countries such as Ukraine, Argentina, and Venezuela lead all nations, with rates between 28% and 35%. The paper also contains the links to all previous surveys, 2008 to 2021. Fernandez is a professor of finance at the IESE Business School.

Valuation opportunities in the MENA region