Focus on Forensic Analysis and Dispute ResolutionEditor for This Issue: Aaron M. Rotkowski Forensic Analysis Insights
Best Practices Article:
Intellectual Property Forensic Analysis Valuation Considerations
Robert F. Reilly, CPA
Valuation analysts are often asked to perform intellectual property (patents, trademarks, copyrights, and trade secret) valuations for various purposes. These purposes include litigation and forensic analysis, bankruptcy, financial accounting, federal and state taxation, sale or license transactions, regulatory compliance, and other purposes. Valuation analysts are also asked to provide other opinions related to economic damages, license royalty rate, intercompany transfer price, remaining useful life, and other types of analyses. Before conducting the valuation, damages, transfer price, or other analysis, the analyst should understand how certain general valuation principles relate to the assignment. These principles define the elements of the assignment. And, these principles help ensure that the analyst performs the type of analysis-and prepares the type of report-that best serves the information needs of the client (and the client's legal counsel).
Diligence Interview in Forensic Analysis Engagements
Aaron M. Rotkowski
TThis discussion provides forensic analysts with a road map to follow to conduct effective due diligence interviews. This is an important topic for both novice and experienced forensic analysts. Forensic analysts that have practiced for many years may take the due diligence interview for granted. After all, these analysts may have conducted dozens or even hundreds of due diligence interviews over their careers. However, as summarized in this discussion, the forensic analyst should not be dismissive of the due diligence interview. This is because (1) it can be a "hot topic" during deposition and trial expert testimony cross-examination and (2) a failure to conduct a proper due diligence interview may result in an unfavorable result in a forensic analysis engagement. In forensic analysis engagements, the dollars at stake are often substantial. Therefore, if a management interview is available, the forensic analyst should spend sufficient time (1) preparing for the due diligence interview (and not just relying on his or her past experience with conducting due diligence interviews) and (2) meeting with appropriate company management.
Designations: Evaluating Expert Witness Credentials
Charlene M. Blalock
Legal counsel who hire valuation analysts and other forensic analysts to perform litigation-related services, such as economic damages analyses, intellectual property valuation analyses, business valuation analyses, or other analyses, may find it difficult to navigate the sea of professional designations that such analysts may possess. What are the differences among these professional designations? What education, training, and experience requirements do each professional credential require? The purpose of this discussion is not to endorse any particular professional organization credential. Rather, the purpose of this discussion is to provide an overview of the various professional designations, so that legal counsel may have a better understanding of the background and expertise of credentialed valuation analysts and other forensic analysts.
Standards Codification Topic 450 and the Valuation of Contingent Liabilities
James G. Rabe, CPA
This discussion presents (1) an overview of current and proposed guidance regarding the accounting for loss contingencies, (2) examples of common methods used by valuation analysts to estimate the value of contingent liabilities, and (3) guidance from three judicial decisions that have considered the valuation of contingent liabilities.
Courts Choose Flexibility When Implementing the Statutory Fair Value Appraisal
In the Global GP LP v. Golden Telecom decision (2010), the Delaware Chancery Court opinion provides important guidance for the development of a discounted cash flow analysis conducted during a statutory fair value process. In the subsequent affirmation of the Chancery Court's decision, the Delaware Supreme Court refused to adopt "bright-line" valuation rules. The Delaware Supreme Court reiterated (1) the flexibility of the business or stock appraisal process and (2) the Chancery Court's expertise in analyzing valuation issues. The following discussion summarizes this important judicial decision.
Direct, Inc., Shareholder's Litigation
Scott R. Miller
This discussion of a recent Delaware Chancery Court decision emphasizes the importance of a complete and competent valuation analysis by the expert witness. The primary issue in the case was whether minority shareholders of the target company in a going-private merger received fair value for their common stock shares. According to the Delaware Chancery Court, the judicial decision came down to a battle of the experts. However, unlike the typical case of this type, this judicial decision was entirely one-sided. The Delaware Chancery Court concluded that one expert's opinion was completely unreliable while the other expert's opinion was overwhelmingly persuasive.
Business Breakups: Terminating Ownership Interests in Closely Held Businesses
Robert J. McGaughey, Esq.
In the current market, liquidity is everywhere. Large banks pooled mortgages that converted illiquid mortgage notes into liquid securities. Buying and selling stocks is easier and less expensive than ever. However, one investment class that has not seen increased liquidity is investments in closely held businesses. Although these investments may provide owners with pride, a job, or above-market returns, investments in closely held businesses are among the least liquid investments available. Forensic analysts, legal counsel, business owners, and the Internal Revenue Service are often concerned with how quick, how easy, at what price, and at what cost, the owner of a noncontrolling ownership interest in closely held company can sell his or her shares? This discussion presents some of the more common methods available to both controlling owners and noncontrolling owners to sell or otherwise dispose of their investment in the closely held company. As summarized throughout this discussion, there are limited methods for noncontrolling owners to cash out of their investment in a closely held company. Most methods available to noncontrolling owners involve litigation, which can be costly and can involve an uncertain outcome.
Thought Leadership Article:
Psychology, Technology, and the Art of Expert Witness Persuasion in the Internet Age
Ann T. Greeley, Ph.D.
Jurors are accustomed to receiving information through media-rich sources, and as a result, jurors often require multimedia communications to stay engaged. Jurors, like all of us, are also influenced by psychological factors. Therefore, today more than ever, lawyers and expert witnesses should do more than simply present their evidence. To be persuasive, lawyers and expert witnesses should (1) understand the psychology of juries and (2) effectively use technology to communicate their intended message to juries.
Discovery: Does the Letter "E" Change Everything?
Rebecca James, Esq.
Discovery is an important part of the litigation process. Experienced lawyers may be experts at paper discovery, but many lack the necessary expertise to effectively manage the discovery of electronically stored information. This discussion presents the reader with (1) compelling reasons why electronic discovery is important and (2) a summary of the Electronic Discovery Reference Model, which depicts the discovery process.
Revisited: Post Valuation Appreciation of S Corporation Stock Should Not Be Included in
Built-in Gain Discount
Karl A. Iverson Kaufman, Esq.
The fair market value of S corporation stock is often fiercely contested between the Internal Revenue Service and the taxpayer in gift tax and estate tax controversies. Valuation discounts (such as a discount for lack of ownership control, a discount for lack of marketability, and a discount for built-in capital gains) are particularly contested. This is because small changes in the amount of the discount can have a material impact on the value of the S corporation stock. In the Estate of Litchfield, the Tax Court allowed a built-in gains (BIG) discount for both (1) unrealized appreciation and (2) future appreciation in a recently converted S corporation. In this discussion, the author argues that (1) a discount for unrealized appreciation is appropriate and (2) a discount for future appreciation is not appropriate.