Considerations in Corporate and Shareholder Litigation

1. Fair Value v Fair Market
& Other Value Standards:
Considerations in Corporate and Shareholder Litigation
Boris J. Steffen, CPA, ASA, ABV, CDBV
Principal & Director
Page 1

2. Overview
» What is fair value?
» Fair value, fair market value and other valuation standards
» Methods to establish fair value
» Treatment of valuation discounts and premiums
» The IMD controversy
» Summary
» Appendix
» Expert profile
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3. What is fair value?
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4. Fair value is a legal standard of value defined by state statutes governing
dissenting shareholder actions and corporate dissolutions
» The legal notion of fair value generally arises in statutory appraisal cases, in cases where
a stockholder’s equity has been eliminated without consent, and in cases of self-dealing
under the entire fairness test
» Within these contexts, a majority of states follow the definition of fair value provided in
the Model Business Corporation Act (“MBCA”), and in its revision (“RMBCA”)
» In 1984, the MBCA defined fair value as
› “The value of the shares immediately before the effectuation of the corporate action to which the
shareholder objects,
› excluding any appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable.”
» Starting in 1999, the RMBCA definition of fair value was changed to
› “The value of the shares immediately before the effectuation of the corporate action to which the
shareholder objects
› using customary and current valuation concepts and techniques generally employed for similar
businesses in the context of the transaction requiring appraisal,
› and without discounting for lack of marketability or minority status except,
› if appropriate, for amendments to the certificate of incorporation pursuant to section 13.02(a)(5).
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5. The framework for determining fair value in Delaware is provided by
statute and decisions by the Court of Chancery and Supreme Court
» Despite revisions to the MBCA, currently there is no clear consensus regarding the
definition of fair value
› Most states use the 1984 definition,
› A few use the 1999 revision or a hybrid of the 1984 and 1999 revision,
› While a minority use the 1984 definition with the phrase
‒ “unless exclusion would be inequitable” deleted, or with
‒ “unless exclusion would be inequitable” deleted, while adding that all relevant factors be
considered
» Many states look to Delaware case law for guidance in dissenting shareholder litigation,
adopting all or some of the opinions of the Delaware Court of Chancery or Delaware
Supreme Court
› Delaware’s dissenting shareholder statute is modeled after the 1984 MBCA, though it omits the
“unless exclusion would be inequitable” phrase, and requires that all relevant factors be
considered
» By comparison, Delaware does not have a minority oppression statute
› Rather, wrongful conduct by the majority is addressed under the entire fairness test, which
considers the
‒ Fairness of consideration ─ Absolute and relative
‒ Procedural fairness ─ Independence, competence and thoroughness
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6. The legal definition of fair value in Delaware is given in Title 8, § 262(h) of
the Delaware General Corporation Law
» As provided in the appraisal statute of the Delaware General Corporation Law,
› “……the Court shall determine the fair value of the shares exclusive of any element of value arising
from the accomplishment or expectation of the merger or consolidation,
› …..In determining such fair value, the Court shall take into account all relevant factors.”
» The details by which fair value is determined, however, are left to the parties and the
Courts, with case law precedent providing guidance
» As described by the Delaware Supreme Court, fair value is “that which has been taken
from [the shareholder], viz. his proportionate interest in a going concern.”
› And in the appraisal process, the corporation is to be valued as an entity, not as a collection of
assets or by the sum of the market price of each share of stock outstanding, and
› as a going concern, taking into account its market position and future prospects
» Similarly, the corporation is to be valued….by means of traditional value factors,
weighted as necessary, ignoring post-merger events or other potential business
combinations.
› The proportionate interest of the dissenting shareholder is determined only after the firm as an
enterprise has been valued
» In sum, fair value is the value of the shares on a pro rata enterprise basis
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7. Fair value, fair market value
and other valuation standards
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8. Fair value as defined for appraisal rights and minority oppression
purposes and fair market value are not equivalent
» While sometimes used interchangeably in other contexts, “The concept of fair
value under Delaware law is not equivalent to the economic concept of fair
market value.”
» Under Delaware law, fair market value is “the price which would be agreed
upon
› by a willing seller and a willing buyer
› under usual and ordinary circumstances,
› after consideration of all available uses and purposes,
› without any compulsion upon the seller to sell or upon the buy to buy.”
» Examples of fair market value may include the price
› at which a stock trades in an active and liquid public market
› or determined in an active and competitive bidding process for privately held shares
» Given these differences with the definition of fair value, the fair value of
petitioners’ shares in an appraisal action can be adjudicated as higher or lower
than that of their fair market value
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9. Fair value for appraisal rights and minority oppression cases also differs
from fair value in financial reporting, intrinsic value and investment value
the value of the shares immediately before the
effectuation of the corporate action to which the
Fair value (appraisal rights)
dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action
the price (exit) that would be received to sell an asset
or paid to transfer a liability in an orderly transaction
Fair value (financial reporting)
between market participants at the measurement date
the “true” value of an investment based on a
Intrinsic value fundamental analysis of its inherent attributes, that
will become the market value when other investors
have the same insight and knowledge as the analyst
the value to a specific owner based on that owner’s
Investment value unique situation, abilities, knowledge, motivation and
expectations, considering factors including available
synergies, risk tolerance, required return and tax status
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10. Fair value in appraisal rights may also differ from fair value in financial
reporting, fair market, intrinsic and investment values based on premise
Valuation Premise Operational Premise
Value in exchange Value to the holder Going concern Liquidation
Value of a business or Value of a business or Value of a business in Orderly – value of
interest in a real or interest maintained in continued use as an assets sold piecemeal
hypothetical sale its current form by its assemblage of income with normal market
present owner producing assets exposure
Considers discounts Discounts and Accounts for value Forced – value of
for lack of control and premiums are not added relationships assets sold piecemeal
marketability and considered between tangible and with less than normal
premiums for control intangible assets market exposure
Typically applies to Typically applies to Assembled, in place Assemblage of assets
fair market value fair value and and operational plant, - value of assets sold in
investment value work force, licenses, place but not in
systems and current use in the
procedures production of income
or as a going concern
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11. Fair value in appraisal rights may also differ from fair value in financial
reporting, fair market, intrinsic and investment values based on level
» The level of value of an interest is a function of the degree of control and
marketability of the underlying shares
» Control refers to the ability to direct the management and policies of a
business
› The ability to appoint management, set operational and strategic policy, acquire and
divest assets and declare and pay dividends, etc., etc.
» Marketability refers to the ability to convert a property to cash quickly, with a
minimum of transaction costs and a high level of certainty
› By comparison, some analysts think of marketability as relating to the ability to make
a sale, and liquidity as related to the timing and certainty of receiving the cash
proceeds
› The IRS defines lack of marketability as “the absence of a ready or existing market
for the sale or purchase of the securities being valued.”
» In practice, discounts for lack of control are taken before discounts for lack of
marketability
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12. The greater the degree of control and liquidity of the shares, the higher
the level of value
Strategic, investment or acquisition value
Strategic
Synergies
Premium
Financial control value
Minority interest Control
Agency Costs discount Premium
Publicly Marketable, minority interest
Traded
Discount for lack
Public, of marketability
Restricted
Privately Non-marketable, minority interest
Held

13. Methods to establish fair value
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14. The determination of fair value in Delaware is guided by the statutory
principle that the Court “shall take into account all relevant factors.”
» Fair value may be determined by any technique or methodology generally
considered acceptable in the financial community and admissible in court
» Implicit to this interpretation is that no one particular method fits all facts and
circumstances
» Regardless of method, however, all relevant factors must be considered
› Asset value, dividend record, earnings prospects, and any other factor affecting the
firm’s financial stability or growth
» Within this framework, the Court is free to adopt, adjust and or correct the
opinions, frameworks and methods of the parties’ experts in reaching its own
» The Court may not accept one party’s valuation in its entirety simply because
it is more reasonable, however, as in a valuation proceeding it falls to the
Court to determine the value of the
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15. Delaware courts typically use one or both of the income and market
approaches to determine fair value
Valuation
Approaches
Income Market Asset
•Present value of future •Comparable firms and •Value of individual
economic benefits transactions assets net of liabilities
— Discounted cash flow — Guideline public — Net asset value
company
— Capitalized cash flow — Excess earnings
— Guideline mergers and
acquisitions

16. The income approach is used to derive an indication of fair value based on
the projected future income of the firm being valued
» While no one method is preferable per se, Delaware courts appear to favor the
discounted cash flow (“DCF”) method in appraisal proceedings
› First the appraiser calculates the cash flows for each period of the specific projection
provided by the subject firm’s management
‒ Delaware law prefers valuations based on projections prepared by management given
management’s first-hand knowledge of a firm’s operations
› The value of the subject firm attributable to its cash flows in the post-projection
period is then estimated to derive a terminal value
‒ Delaware courts have used both the perpetual growth rate model and the exit multiples
model to estimate terminal value, expressing a preference for the former if it can be reliably
used given the circumstances of the specific valuation
› In turn, the cash flows over the specific projection period and the terminal value are
discounted to the valuation date to calculate fair value
» Notwithstanding, the Court of Chancery has noted that a DCF analysis is only
as good as the model inputs, which are necessarily speculative
› There are cases where the DCF method has been used exclusively, and others in
which it has been rejected totally
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17. Comparison of the DCF valuation method using Gordon Growth model
and exit multiple model terminal value calculations
Present Value of
Present Value of FCF Over Explicit Forecast Period Terminal Value FCF
Gordon Growth Model
FCFn x (1 + g)
FCF1 + FCF2 + FCF3 + ….. FCFn + (k - g)
1 2 3 n n
( 1 + k) ( 1 + k) ( 1 + k) ( 1 + k) ( 1 + k)
Present Value of
Present Value of FCF Over Explicit Forecast Period Terminal Value FCF
Exit Multiple Model
FCF1 + FCF2 + FCF3 + ….. FCFn + FCFn x FCF multiple
1 2 3 n n
( 1 + k) ( 1 + k) ( 1 + k) ( 1 + k) ( 1 + k)
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18. The market approach is used to derive an indication of fair value based on
market multiples of publicly traded comparable firms
» The market approach, also referred to in Delaware law as the “comparable,”
“comparative” or “guideline” company approach, is thought of in the financial
community as a valuation method
› The first step is to identify publicly traded firms comparable to the subject firm, i.e.,
‒ Size, product and geographic markets, growth, profitability, capital structure, maturity,
ownership
› Appropriate market-based pricing multiples are then calculated from the guideline
public company trading prices and earnings measures, adjusting for differences with
the subject firm
‒ No single multiple has been recognized as the most reliable, with the courts using multiples
of EBIT, EBITDA, book value, net income and gross revenue
› The market-based pricing multiples from the guideline public companies are then
applied to the earnings measures of the subject firm to calculate fair value
» Given the subjectivity inherent to the selection of comparable firms and
appropriate multiples, reliance by the Delaware courts has been based on
demonstrating that the
› Comparable firms are in fact comparable to the subject firm
› Earnings measures are relevant to the industry
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19. The market approach is used to derive an indication of fair value based on
market multiples of publicly traded comparable firms (continued)
» In applying the market approach, the Delaware courts have considered it
alternately as either
› just one element among others in an integrated valuation analysis, or
› as a check on the reliability of some other approach
» And as with the income approach, the Delaware courts have also
› relied on the market approach exclusively in certain cases,
› while rejecting it as even one factor where material differences existed between the
subject firm and the comparable companies
» The Delaware courts have also found that the market approach results in an
indication of value that includes an implicit minority discount that must be
backed-out in determining fair value, in contrast to what is generally done in
the financial community
» In practice, the market approach relies on a one-year forward projection of
future income
Vt = 0 = FCFt = 1 x FCF market multiple
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20. Relationship between the capitalization rate, market multiple and
discount rate
Capitalization Rate = c = k - g Market Multiple = 1 / c
k = disount rate, whether cost of equity or weighted average cost of capital
g = long-term sustainable growth rate in measure of income from subject asset
Cost of Equity = re = rf + β (rm - rf) WACC = (re x WE) + (rp x WP ) + (rd [1 - Tc] WD)
rf = rate of return on a risk-free security r e = cost of common equity
β = beta, a measure of systematic risk WE = proportion of common equity in capital structure
reflecting the correlation of the returns of a
at market value
stock and the market
(rm - rf) = the market risk premium; difference r p = cost of preferrrd equity
between the return on the market and risk-free
security
WP = proportion of preferred equity in capital structure
at market value
r d = cost of debt capital
W D = proportion of debt in capital structure at market
value
Tc = marginal income tax rate
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21. The transaction approach is used to derive an indication of fair value
based on market multiples of comparable mergers and acquisitions
The transaction approach, also referred to in Delaware law as the “comparable
transaction” or “comparable acquisition” approach, is thought of in the financial
community as a valuation method
As compared to the market approach, which uses prices from the trading of
marketable minority interests in the stock market, the transaction approach use prices
from the sale of controlling interests in the merger market, which can include the
entire capital structure, and reflect publicly traded as well as privately held firms
•The first step is to identify comparable guideline mergers and acquisitions i.e.,
•Size, industry, date, type, approach, consideration, completion
•Appropriate market-based pricing multiples are then calculated from the guideline merger and acquisition
transaction prices and earnings measures, adjusting for differences with the subject firm, and for economic
and industry conditions between the date of the transaction and valuation i.e.,
•Multiples of EBIT, EBITDA, book value, net income and gross revenue
•The market-based pricing multiples from the guideline mergers and acquisitions are then applied to the
earnings measures of the subject firm to calculate fair value
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22. The transaction approach is used to derive an indication of fair value
based on market multiples of comparable mergers and acquisitions (continued)
» Judicial decisions concerning the appropriate use of the transaction approach
indicate that the results of the approach must be adjusted, with Delaware
courts finding that
› Fair value is not equal to the pro rata value of the highest price available in a sale to a
third party
› A control premium derived from merger and acquisition data includes post-merger
value arising from potential synergies or better management that cannot be included
in fair value
› The results of the transaction approach must be adjusted to eliminate any portion of
shared synergies implicit to the comparable transactions
» As with the income and market approaches, the use of the transaction
approach by the Delaware courts has varied
› Certain courts have treated the approach as one indication among others in an
integrated valuation, or as a check on the reasonableness of another approach
› Others have relied on it totally, or excluded it completely due to reliability and
transaction comparability concerns
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23. Liquidation value is an indication of the value shareholders would be
entitled to if the firm ceased operations and its assets were sold piecemeal
Neither a valuation approach nor method in the financial community, liquidation
value assumes a firm’s assets will be sold in a mass assemblage, or in an orderly or
forced liquidation
•As liquidation value is not reflective of a going concern, it is not interchangeable with, or a substitute for, fair
value
•Notwithstanding, liquidation value is regarded as an acceptable measure and relevant factor to consider with
others in the adjudication of fair value, particularly for a firm whose value derives from its underlying assets
Also referred to as net asset value, liquidation value is equal to the market value of a
firm’s assets, including cash, minus its outstanding liabilities, debentures and
preferred stock
•The first step in the net asset value method under the asset approach is to obtain a GAAP-based balance sheet
dated as close as possible to the valuation date
•Next, actual or contingent off-balance sheet assets and liabilities are identified
•Each asset and liability is then analyzed and revalued or valued as necessary, recognizing a deferred tax
liability for the built-in gain on appreciated assets
•A market-value based balance sheet is then constructed using the restated values, with the net of the assets
and liabilities equal to the market value of the equity
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24. The level of value resulting from a valuation method may differ based on
assumptions implicit to the method or imputed to the cash flows
Relationship between Valuation Methodology Affects the Resulting Value
Method Assumption Level of Value
Discounted Cash Flow Control cash flows Controla
Minority cash flows Marketable, minority
Guideline Merger & Acquisition Control transaction Controla
Guideline Company Control cash flows Controla
Minority cash flows Marketable, minority
Net Asset Value Control over assets Control
Excess Earnings Control over assets Control
a
If synergies involved, could be investment value
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25. Treatment of valuation discounts and premiums
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26. While not permitted at the shareholder level, valuation discounts and
premiums must be considered at the corporate level
» The objective of a Delaware appraisal is to determine the fair value of 100
percent of the company, and to give the dissenting shareholder his or her
proportionate share of that amount
› A shareholder of a large block of stock is therefore not entitled to a premium, while a
dissenting minority shareholder may not be penalized by a discount
» Applying a discount to a minority interest is also contrary to the requirement
that the firm be valued as a going concern rather than in a sale
› The appraisal process assumes that the shareholder would have held his or her
interest regardless of size but for the merger
› Discounting a minority shareholder’s proportionate interest also imposes a penalty
for lack of control, potentially enriching the majority unfairly
» In contrast to the treatment of shareholders, discounts and premiums must be
considered at the corporate level
› A discount may be required to derive a going concern value, but once determined, it
should not be discounted based on the minority interest of the shareholder
› The fair value of a holding company includes a premium to reflect the value of
control over its majority- or wholly-owned subsidiaries
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27. While not permitted at the shareholder level, valuation discounts and
premiums must be considered at the corporate level (continued)
Minority Discount
Not permitted at the shareholder level in either a statutory
appraisal or entire fairness proceeding, though allowed to
value securities held by a firm that was itself being valued
Marketability Discount
Not permitted at the shareholder level in a statutory
appraisal proceeding, despite approval of the small stock
premium in the discount rate of the DCF method given that
small firms have higher rates of return than large firms
Private Company or Liquidity Discount
Not permitted at the corporate level given perception that a
private company or liquidity discount is in substance a
marketability discount applied to all shares

28. While not permitted at the shareholder level, valuation discounts and
premiums must be considered at the corporate level (continued)
Company-Specific Risk Premium Control and Synergy Premiums
» Appraisers sometimes add a risk » The Court may consider a transaction
premium to the discount rate used in a price in determining fair value
DCF valuation in an effort to reflect » At the shareholder level, however, the
company-specific risk they believe is value of the control and or synergy
not reflected by the company’s beta premiums must be eliminated
and small size premium » In contrast, the fair value of a holding
» The Court of Chancery, however, will company includes a premium for
not adopt a company-specific risk control
premium unless supported by fact- » Factors affecting the size of the control
based evidence premium include the character of non-
operating assets, discretionary costs,
existing management, available but
unexploited opportunities and the
ability to integrate the acquired firm
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29. The IMD controversy
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30. The Delaware courts adjust values derived from the guideline company
method by applying a control premium to eliminate what is known as the
“implicit minority discount”
“The comparable companies analysis
…..includes an inherent minority
Concurrently, and inconsistently, the
trading discount, because the method
Delaware courts continue to accept and
depends on comparisons to market
adopt DCF valuations that incorporate
multiples derived from…..minority
terminal values calculated using exit
blocks of the comparable
multiples derived from market
companies…..the court must correct
multiples of comparable companies
this minority trading discount by
adding back a premium…”
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31. The “implicit minority discount” was first adopted in Delaware not by
adversarial or judicial process, but by default
The implicit minority discount (“IMD”) first appeared in Delaware in the matter
of In re Radiology Associates (1991)
•Plaintiff’s expert submitted valuations based on DCF and comparable company analyses (“CCA”), the
latter of which was rejected
•The expert’s opinion that it was necessary to add a 30 % premium to the value derived from the DCF
analysis as it included an IMD due to the use of returns from minority interests to derive a discount
rate was also rejected
Following in 1992, the Court rejected a 15 % premium added to a CCA to correct
for an IMD argued in Salomon Brothers Inc. v. Interstate Bakeries Corp.
That same year, the vice chancellor that rejected the IMD in Salomon approved it
in Hodas v. Spectrum Technology, Inc., and not because of further analysis
•The defendant’s expert in Hodas was the plaintiff’s expert in Radiology
•As in Radiology, the expert, this time advocating a lower valuation, opined that it was necessary to add
a 30 % premium to adjust for the IMD , albeit in the CCA
•This adjustment met no opposition from the respondent, who stood to benefit from it, and the IMD
ended up being adopted by the vice chancellor absent any comment or evaluation
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32. Though now required by Delaware law, finance theory is not generally
supportive of the IMD
» Consistent with the DCF method, finance theory holds that the value of a firm
as a going concern equals the net present value of its expected free cash flows,
discounted at a risk-adjusted cost of capital
» No adjustments are taken in a DCF analysis for premiums or discounts
› The premium paid by a third-party acquirer reflects the value of synergies, the
benefits of control or both
› Agency costs arising from the separation of ownership and control are embedded in
the free cash flows
» For an all-equity financed firm, the result of a DCF analysis is the value of its
equity
› The pro rata value of the enterprise as a going concern is derived simply by dividing
by the number of shares
» Given that a CCA is in essence a short-form DCF analysis with expected future
cash flows the same in each year, but with growth and discount rates
estimated using rates implicit to the market multiples of comparable firms,
adjusting a CCA valuation for the IMD is theoretically and procedurally
inconsistent
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33. Though now required by Delaware law, market evidence is not generally
supportive of the IMD (continued)
No matter how liquid or efficient, the IMD assumes implicitly that
publicly traded shares trade at a discount to their proportionate share of
the value of the firm
Strong: security prices reflect all
information; historical, public
and private
Semi-strong: security prices
reflect all historical and public
information
Weak: security prices reflect all
historical information
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34. Though now required by Delaware law, market evidence is not generally
supportive of the IMD (continued)
» Firms are acquired at a premium to their going concern value as opportunities
not available to or pursued by the firms independently make them more
valuable to bidders
» In an arms-length transaction with a third-party, the premium reflects the
value of expected synergies and or benefits of control; not an IMD
» In a going-private transaction, the premium represents the benefits of control,
whether the ability to reduce agency costs and or improve management; not
an IMD
› In an efficient market, agency costs are factored into the prices at which shares trade
and are purchased by minority shareholders
› The opportunity to improve management and reduce agency costs would not be
available but-for a change in control
» That the majority of publicly-owned and traded firms are not acquired also
indicates that their stock does not trade at an IMD
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35. That control shares trade at a premium to non-control shares does not
mean that non-control shares trade at an IMD
» The value of a share of stock to a shareholder depends on the specific
attributes of the ownership interest
» With respect to control rights, the most valuable is at the level of strategic
control, followed by financial control, marketable minority (stock price
equivalent) and nonmarketable minority levels
» While identical in dollar-value, the difference between a financial control
interest and marketable minority interest is viewed as a
› control premium from the marketable minority interest perspective
› minority discount from the financial control interest perspective
» The difference between the value of a financial control interest and marketable
minority interest then equals the difference between a valuation that assumes
control, and one that assumes the firm continues as is as a going concern
» It follows that the effect of the minority discount is to eliminate the value of
control, and that there is no need to adjust a marketable minority value for an
IMD as it represents the value of the firm as a going concern
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36. Comparison of discounted cash flow, comparable company and
transaction approach valuations excluding IMD
XYZ, Inc. Valuation Summary
Valuation as of September X, 2009
Low High Mid-point
Value of XYZ Class A Shares1 $55.06 $73.78 $64.42
Value of XYZ Class A Shares from Discounted Cash Flow Analysis $59.85 $77.93 $68.89
Value of XYZ Class A Shares from Comparable Public Companies Analysis2 $47.52 $67.36 $57.44
Value of XYZ Class A Shares from Precedent Transaction Analysis $57.83 $76.04 $66.93
Note:
[1] Value of XYZ Class A Shares is calculated by weighting equally the Value of XYZ Class A Shares from Discounted Cash Flow Analysis, the Value of XYZ Class A Shares
from Comparable Public Companies Analysis and the Value of XYZ Class A Shares from Precedent Transaction Analysis.
[2] Exclusive of control premium of 30%.
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37. Comparison of discounted cash flow, comparable company and
transaction approach valuations including IMD
XYZ, Inc. Valuation Summary
Valuation as of September X, 2009
Low High Mid-point
Value of XYZ Class A Shares1 $56.64 $76.01 $66.33
Value of XYZ Class A Shares from Discounted Cash Flow Analysis $59.85 $77.93 $68.89
Value of XYZ Class A Shares from Comparable Public Companies Analysis2 $61.77 $87.57 $74.67
Value of XYZ Class A Shares from Precedent Transaction Analysis $57.83 $76.04 $66.93
Note:
[1] Value of XYZ Class A Shares is calculated by weighting equally the Value of XYZ Class A Shares from Discounted Cash Flow Analysis, the Value of XYZ Class A Shares
from Comparable Public Companies Analysis and the Value of XYZ Class A Shares from Precedent Transaction Analysis.
[2] Inclusive of control premium of 30%.
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38. Summary
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39. Summary
» Fair value is a legal standard of value governing appraisal and fairness actions,
the framework for which is provided by state statutes and case law
» Under Delaware law, fair value is equal to the value of a holder’s shares in a
firm, valued on a pro rata, going concern, enterprise basis, considering all
relevant factors, but excluding any element of value attributable to the merger
» The legal standard of fair value differs from the standards of fair value for
financial reporting, fair market value, intrinsic and investment value
» Fair value may also differ from other standards based on premise, whether in
exchange, to a holder, as a going concern or in liquidation, and based on level,
strategic, financial, marketable minority or non-marketable minority
» Delaware courts typically use one or both of the income and market
approaches to determine fair value
» The income approach relies on the projected future income of the firm being
valued to derive an indication of value, while the market approach uses
market multiples derived from publicly traded comparable firms or
comparable mergers and acquisitions
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40. Summary (continued)
» While not permitted at the shareholder level due to the principle that the firm
is to be valued as a going concern, valuation discounts and premiums must be
considered at the corporate level
» A company-specific risk premium to account for risk not reflected by firm’s
equity beta and small size premium may not be added to the cost of capital
unless factually supported
» At the shareholder level, the value of synergies and control must be
eliminated, while the fair value of a holding company includes a premium for
control
» Delaware courts apply a control premium to values derived from comparable
company analyses to eliminate the “implicit minority discount” thought to
arise from the use of market multiples based on minority interests
» The IMD is generally at odds with finance theory, market evidence and
practice in the financial community. That control shares are more valuable
than minority shares reflects the value of control and not an IMD to the value
of the enterprise as a going concern.
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41. Appendix
Page 41

42. Comparison of invested capital and equity cash flows
Invested Capital Cash Flow Equity Cash Flow
Revenue Revenue
─ Cost of Sales ─ Cost of Sales
─ Operating Expenses ─ Operating Expenses
= Operating Income (EBIT) = Operating Income (EBIT)
─ Interest Expense
= Pretax Income
─ Taxes on EBIT ─ Income Taxes
= Net Operating Profit After Tax = Net Income
+ Depreciation & Amortization + Depreciation & Amortization
= Gross Cash Flow = Gross Cash Flow
─ Change in Working Capital ─ Change in Working Capital
─ Capital Expenditures ─ Capital Expenditures
+/- Change in Debt Principal
= Invested Capital Cash Flow = Equity Cash Flow
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43. Relationship between enterprise value and market value of equity
Calculation of Enterprise Value
= Market value of common equity
+ Market value of interest bearing debt
+ Preferred stock
+ Minority interest
─ Cash and cash equivalents
= Enterprise value
─ Market value of interest bearing debt
= Market value of equity
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44. Expert profile
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45. Boris J. Steffen, CPA, ASA, ABV, CDBV
(202) 538 – 5037
boris.steffen@naviganteconomics.com
» Boris Steffen is an expert in financial and managerial accounting, corporate finance and valuation
with significant multi-industry, multi-company and cross-border experience in operations, finance,
strategy and litigation. As an advisor in financing, investment and restructuring transactions and
claims, matters in which he has consulted or testified include antitrust and competition policy,
bankruptcy, restructuring and solvency, contracts, intellectual property, international trade and
arbitration, mergers and acquisitions, business valuation, pricing, costs and profitability, securities
and taxes.
» As a corporate development executive and consultant, Mr. Steffen has advised in transactions and
claims valued in excess of $100 billion. Sectors in which he has consulted include the aerospace,
automotive, beef processing, biotechnology, business services, cable network, chemical, consumer
product, defense, document management, electronic imaging, financial services & banking, food &
beverage, healthcare, independent power, information technology, insurance, internet, newspaper,
magazine, pharmaceutical, oil & gas, printing, pumps & controls, retail, semiconductor, software,
steel, telecom, tobacco and electric utility industries.
» Mr. Steffen has held positions in finance, public policy, corporate development and consulting with
Inland Steel Industries, the FTC, Bureau of Competition, U.S. Generating, and LECG. He holds a
Master of Management degree with specializations in accounting and finance from the Kellogg
School of Management of Northwestern University, and a Bachelor of Science degree in Finance and
Bachelor of Music degree in Applied Music from DePaul University. He is an Accredited Senior
Appraiser, Certified Public Accountant, Accredited in Business Valuation, Certified Distressed
Business Valuation Analyst, and member of the AICPA, ABA, ABI, Insol International, AIRA, ASA
and American Finance Association.
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46. Fair Value v Fair Market
& Other Value Standards:
Considerations in Corporate and Shareholder Litigation
Boris J. Steffen, CPA, ASA, ABV, CDBV
Principal & Director
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