Summer 2011
Focus on Forensic Analysis and Dispute Resolution
Editor for This Issue: Aaron M. Rotkowski Forensic Analysis InsightsBest 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).
The Due
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.
Professional
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.
Accounting
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.
Delaware
Courts Choose Flexibility When Implementing the Statutory Fair Value Appraisal
Process?
Hestian Stoica
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.
Hanover
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 Is
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.
Litchfield
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.