Autumn 2011


Shareholder Appraisal Rights Litigation

Editors for This Issue: Kevin M. Zanni and Timothy J. Meinhart

Shareholder Dispute Litigation Insights

Best Practices:
Common Procedures in Successful Shareholder Dispute Matters—An Attorney’s Perspective and a Valuation Practitioner’s Perspective
Michael J. Zdeb, Esq., and Kevin M. Zanni
This discussion presents commonly employed procedures used in successful shareholder litigation matters. This discussion provides two points of view based on the authors’ respective experience. In order to provide illustrative case examples, this discussion summarizes and compares a few recent judicial decisions involving shareholder disputes. For each judicial decision, and in our opinion, commonly practiced procedures may have led to a better judicial result—at least for one of the litigant parties. Admittedly, we do not purport to know all of the circumstances surrounding each judicial decision. However, we use these illustrative case examples as support for our recommended procedures.

Bridging the Gap between the Delaware Block Framework and Generally Accepted Valuation Methods
Chip Brown, CPA, and Steve Whittington
The fair value of common stock in a dissenting shareholders’ rights case has often been examined within the Delaware Block framework since its creation by the Supreme Court of Delaware over 60 years ago. While the use of the Delaware Block framework is no longer commonly relied on in Delaware Chancery Court decisions, it has not disappeared in some other jurisdictions. The traditional Delaware Block framework, however, may need to be modified to incorporate the current generally accepted valuation methods.

Perspective from a Securities Attorney-Expert Interview
Kevin M. Zanni

Directors’ Duties to Common versus Preferred Shareholders—The Aftermath of the Delaware Chancery Court’s Decision in the In re Trados Inc. Shareholder Litigation
Gary V. Mauney, Esq.
By way of its path-breaking 2009 decision in In re Trados Incorporated Shareholder Litigation,1 the Delaware Chancery Court held that where the interests of the common stockholders diverge from those of the preferred stockholders, a board of directors member may be held liable for breach of fiduciary duty if he favors the interests of the preferred over the interests of the common.2 According to Trados, in the context of merger or other corporate liquidation event, a director must, therefore, favor common stockholders as a general rule and confine considerations to preferred stockholders only to those preferences specifically conferred by contract.

Shareholder Forensic Analysis Insights

Thought Leadership:
Daubert in the Realm of Financial Damages Experts
Jonathan M. Dunitz, Esq.
In many litigation engagements, such as those involving (1) lost profits damages, (2) breach of contract, and (3) business valuation, forensic accounting experts are often involved. Whether you are a practicing attorney or forensic accounting expert, it is strongly recommended that you understand the common reasons why a forensic accounting expert’s report/testimony may be excluded at trial. At a minimum, it is imperative that practitioners understand Daubert, Joiner, and Kumho and the nuances arising out of the case law interpreting them. It is typically not the trial court’s role to determine whether an opinion is correct, only that it is reliable and relevant.

The Rise of SEC Investigations and Shareholder Lawsuits Involving Chinese Companies Listed on U.S. Stock Exchanges
Paul R. Bessette, Esq., Yusuf Bajwa, Esq., and R. Adam Swick, Esq.
Regulatory investigations and private securities actions against Chinese companies listed on U.S. stock exchanges have significantly increased in the past 18 months amid allegations that certain companies have accounting improprieties and ineffective internal controls. Regulatory bodies seem especially concerned about the increased use of “reverse mergers.” These transactions allow Chinese companies to go public without the traditional safeguards that come with the IPO process. These concerns may not be bad if it flushes out the bad companies. However, there are certainly some very good companies that are being hurt. In any event, the increase of activity against Chinese companies has dramatically affected the securities litigation landscape—affecting not only Chinese companies, but also their accountants and investment bankers.

The Canary Sings: Using an Internet Tool to Mine for Financial and Business Data at
Victoria A. Platt
With the ever expanding success of Google, the common assumption that everything is available for free on the Internet continues to be prevalent. And, free information may be especially appealing to forensic analysts due to the rapidly increasing cost of feebased databases. Users of financial data should weigh the costs and benefits of using free information against the cost of fee-based information. This discussion (1) presents a summary of one fee-based database (Dow Jones & Company’s and (2) compares and contrasts the data available for free with the data provided by

Levels of Control
Robert P. Schweihs
The type and the amount of appropriate valuation discounts and/or premiums are often matters of significant contention in business valuation controversies. The issue of the lack of ownership control covers a broad spectrum of factors that influence a business/security value. Both (1) the degree of ownership dispersion or concentration and (2) the degree to which the controlling shareholder can potentially divert economic income or perquisites from the noncontrolling stockholder to the controlling stockholder are important considerations in the application of a discount for lack of control.

Dissenting Shareholder Valuation

Significant Valuation-Related Issues as Decided by the Delaware Court of Chancery
Timothy J. Meinhart and Kevin P. Carey
The Delaware Chancery Court routinely decides on valuation issues relating to shareholder dissent matters. Given its sophistication in this area, the Chancery Court’s decisions are closely followed by both lawyers and valuation analysts who practice in areas involving shareholder litigation. This discussion describes several recent Delaware Chancery Court decisions, and it provides insights into the business valuation aspects of each decision.