FOCUS ON COMMERCIAL LITIGATION AND SECURITIES FRAUD
Editor for This Issue: Craig A. Jacobson
Commercial Litigation Insights
The Use of Empirical Data to Estimate Discount Rates for Business Valuation and/or Economic Damages Analysis
Craig A. Jacobson
The selection of the discount rate can have a significant impact on the calculation of (1) lost business value, (2) lost profits, or (3) other measures of economic damages. Often, inexperienced analysts merely “plug in” empirical data into a cost of capital formula, without understanding the (1) inputs to and (2) framework of the discount rate calculation. Such a naive application of discount rate analysis methodology can lead to an incorrect and/or unsupportable discount rate calculation.
Effective Business Valuation/Security Analysis Reports for Commercial Litigation Purposes
Robert F. Reilly
Financial advisers are commonly asked to prepare business valuation (or solvency/insolvency, transfer price, or lost profits/economic damages) analyses for various litigation support and dispute resolution purposes. These various litigation purposes may relate to taxation, financing, shareholder, SEC public disclosure, GAAP compliance, intellectual property, contract, joint venture, condemnation/eminent domain, and other controversies. Financial advisers try to make all valuation (or solvency, transfer price, damage, etc.) reports clear, convincing, and cogent. However, this objective is particularly important in reports that are prepared for litigation and expert witness testimony purposes. This discussion presents guidelines and suggestions to valuation analysts (and other damages experts) related to the preparation of written business valuation/security analysis reports. Accordingly, this discussion includes a list of positive attributes that effective business valuation/security analysis expert reports should manifest. And, this discussion includes a list of negative attributes (or common errors) that effective business valuation/security analysis expert reports should avoid.
Research Tools that Valuation/Economic Damages Analysts Use in Commercial Litigation Matters
Victoria A. Platt
In recent years there has been a material increase in the number of commercial litigation claims that involve valuation and related issues, such as lost profits, economic damages, and unjust enrichment. And, these commercial litigation claims often involve complex factors such as industry trends, capital market trends, microeconomic relationships, technology life cycles, and intellectual property royalty rates. The proper use of high quality research tools, both before and after the legal counsel’s selection of the valuation/economic damages analyst, can significantly affect the outcome of the subject commercial litigation claims.
Issues and Challenges Related to Expert Witness Testimony in Commercial Litigation Matters
James G. Rabe and Anna V. Kamenova
In commercial litigation, the expert testimony of the valuation analyst, economist, financial adviser, or forensic accountant can often make or break the case. Therefore, it is important for legal counsel to understand the issues related to (1) the retention of the testifying expert witness and (2) the analysis/report/testimony provided by the testifying expert witness.
The Importance of Financial Statement Analysis in Business Valuations Performed During the Course of Commercial Litigation
JAlan A. Schachter and Alexis A. Dawicki
The rigorous analysis of financial statements is an important procedure in any business valuation analysis. This analysis becomes even more important for a business valuation performed in a litigation context. This discussion summarizes a recent judicial decision in which a valuation expert was disqualified for naively utilizing the company-provided financial statements. And, this discussion presents the type of financial analysis procedures that can help the valuation analyst/expert witness to avoid such expert qualification problems.
The Alternative Standards of Value Applicable in Commercial Litigation Cases
David Hong and Laurie Liu
A common and well known standard of value is fair market value. However, in numerous valuation assignments—particularly valuation assignments performed within a litigation context—fair market value may not be the appropriate standard of value. The selection of the standard of value in litigation matters is often influenced by (1) statutory authority, (2) judicial precedent, and (3) administrative rulings. This discussion presents some differences between the common alternative standards of value.
The Institutional Investor’s Role as Lead Plaintiff—Watch Your Back or You May Pay Dearly
John Halebian, Esq., and Joseph P. Garland, Esq.
This article discusses the fiduciary obligations and the potential financial liabilities of an institutional investor, such as a state pension fund, when it serves as the sole “lead plaintiff” in a complex securities class action. The modern mega-fraud securities class actions—such as Cendant, Enron and WorldCom—often involve (1) multiple classes of securities and (2) numerous legal claims requiring differing standards and degrees of proof. The multiple classes of securities, timing of purchases and sales, and legal theories of recovery inevitably create conflicting interests and competing claims to the funds that are recovered in a settlement or otherwise.
Intellectual Property Litigation Insights
Damages, Injunctions, and Settlements: How eBay May Affect Settlement Negotiations in Patent-Infringement Cases
Russ Emerson, Esq
As patents and other intellectual properties have become a larger component of the business world, litigation involving these assets has increased. In the case of patent-related litigation, the combination of large dollars and the judicial landscape has resulted in some very large settlements. The recent eBay case has significantly changed the environment for patent litigation. It is important for patent owner/operators and for their professional advisers to understand these changes.
Financial Advisory Services Insights
The Role of Solvency Opinions in Leveraged Buyout or Recapitalization Transactions
Peter W. Ketchum
By their very nature, leveraged buyout or recapitalization transactions raise issues of fraudulent conveyance. Therefore, such transactions are at significant risk of being set aside by the courts. A solvency analysis can provide positive assurance that a proposed leveraged acquisition transaction or leveraged recapitalization transaction will not render a company insolvent. Accordingly, a solvency opinion provided by an independent financial adviser will reduce the risk associated with fraudulent conveyance claims in leveraged transactions.
Valuation Consulting Insights
The Valuation Aspects of the Section 409A Rules Regarding the Taxation of Executive Deferred Compensation
Timothy J. Meinhart and Robert F. Reilly
Section 409A—and the currently proposed regulations—provide new rules for the taxation of executive deferred compensation. Section 409A broadly encompasses the taxation of most executive compensation plans. This discussion focuses on the guidance of the Section 409A proposed regulations with regard to the valuation of equity-leased compensation arrangements. Accordingly, this discussion focuses on the Section 409A valuation rules related to: (1) executive stock option and stock appreciation right (SAR) grants and (2) the taxpayer corporation common stock that underlies these derivative securities.
Willamette Management Associates Insights
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