Autumn 2011
Shareholder Appraisal Rights Litigation
Editors for This Issue: Kevin M. Zanni and Timothy J. MeinhartShareholder 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 Factiva.com
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 Factiva.com) and (2)
compares and contrasts the data available for free with the data provided by Factiva.com.
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.