MSG-Mahler Interview Part I.wmv

[Music] welcome to forensic perspectives the legal community's online resource for the latest in forensic accounting business valuation and financial litigation support your host for this podcast is Mark gotle in addition to being a certified public accountant Mark has also obtained many professional accreditations in forensic accounting and business valuation as one of the tri-state's leading Financial experts Mark is also a frequent lecturer and writer without any further Ado please welcome the host of forensic prospectives mark gotle thank you and welcome to today's podcast my guest today is Peter mer Mr mer is a partner with the law firm Farrell Fritz in their New York City offices Farrell Fritz is a well-known multi-is law firm with offices in New York City New York and unale Long Island Peter is a recognized Authority on dissolution and valuation proceedings involving closely held businesses he has authored numerous articles and has lectured and testified as an expert witness on what he likes to call business divorces Peter also publishes a log entitled New York business divorce Peter welcome and thank you for appearing on Forensic perspectives thanks Mark it's great to be here there are times when the accounting and legal professions meet and form a Synergy that complements one another but there are also times when terms and definitions may be distinguished and defined based upon facts and circumstances the concept of fair value is one of those terms fair value can be defined in a number of ways and each definition may be correct but unlike the standard of value known as fair market value which is defined by the Internal Revenue Service fair value is considered to be defined by various authorities and statutes today I'd like to talk with Peter about the concept of fair value as it applies to sharehold descent and oppression cases so Peter why don't we first start by discussing what is fair value and where can you point our audience that provides the most common definition that's used in shareholder descent cases the fair value is a term that's used in the descending shareholder statute and the oppression statute as the measure of value unfortunately the statutes don't Define what fair value is so it's really left to the courts and there are many Among Us who will say that fair value is whatever the court says it is it's a very elusive definition and the courts have applied it very flexibly and some might even say inconsistently in the case law well if that's the case can you tell us what the court looks for or what circumstances it identifies when it tries to Define fair value there's some case law going back really to the 80s which in many ways mimics the definition of fair market value the cases even refer to the revenue rulings of the IRS which uh deal with far fair market value the biggest difference really is in discounts uh the fair value standard consistently the courts say does not include any minority discount that is really the single most important distinguishing factor between fair value as used in these cases and fair market value well what is the purpose for not considering discounts it's the minority discount there was a case called Blake decided in the mid 80s that really set the precedent against application of minority discount based on essentially public policy grounds that it was an a wi it would be a windfall for the purchasing majority shareholder particularly in oppression cases to get the advantage of the minority discount where the minority shareholder has come into court pleading oppression it sounds like to me that that application or lack of application is trying to determine some type of an equitable computation I think that's exactly right I think there is an overarching uh concept of fairness that is reflected in the Court's decision not to use a minority discount I should add that the marketability discount is very much alive and well under the fair value standard as would be other miscellaneous discounts that pop up in the cases from time to time all right so let's continue talking about discounts are these discounts applied or not applied because they're trying to favor one party to the other you know we're talking about in the context of a dissolution case to individuals that are shareholders of the same business and whether the individuals have both worked together side by side or one was a worker and one was maybe a a money partner if that term we can use that term is the purpose of applying or not applying discounts to try to favor one of these parties over another well I think one could argue that the uh non-application of the minority discount clearly favors the minority shareholder who's been bought out I don't think that there is any attempt by the courts or as a matter of public policy to put the thumb on one side of the scale or the other with respect to the other discounts that I think just becomes a uh function of the contest between the dueling experts and they bring to bear their expertise their arguments for or against particular discounts I don't think it's an issue of fairness any any general policy of fairness in the beginning of the podcast I tried to make the distinction between fair value and fair market value and I told the audience that fair market value is defined by the Internal Revenue code and for those in the audience that are familiar with this it's Revenue ruling 59-60 but as we both know the fair value standard is not defined as such and so the question that comes to mind is does the court Define or apply the fair value standard consistently from Judge to judge or courtroom to courtroom I would say no it's in the state New York State Court which is where uh I practice I find great inconsistency both in the skill sets shall we say of the judges and the referees who often are assigned the evaluation matters there are some very fine judges who can analyze the expert testimony in a case just as competently as some of the tax Court judges or some of the fine opinions you see out of the Delaware courts but unfortunately we find many many decisions particularly at the referee level where uh one could objectively say they really don't know what they're doing so there is great inconsistency there I think much of the outcome of these decisions is driven by the underlying equities of the case particularly in the oppression cases where the referee Will Come Away with a sense that the minority shareholder has been given a raw deal and then in essence wherever they have the ability to make a judgment call or exercise their discretion on on a discount or a capitalization rate they will simply adopt the the testimony of the expert favorable to the minority shareholder it can work the other way too well I'm not going to ask you which judges are inconsistent because I don't want to get you into trouble but I will ask you do you feel that professionals like attorneys and accountants have the same inconsistency in defining the fair value standard I think there's such a broad spectrum of talent that is reflected in the experts that test in these State Court proceedings many of these cases perhaps driven by the economics of the case you could have a party who hires their CPA who really doesn't have the business appraisal credentials or the background in in valuation and that's reflected in the quality of their testimony and there are other cases of course particularly with the higher amounts at stake where some of the best and brightest of our business appraisers will testify and um do a wonderful job of advocating uh application of the appropriate valuation standards so I don't know that the inconsistency is solely the driven by the the differences in the quality of the judges it's probably more driven by the inconsistency and the quality of of the experts that testify in these cases well taking that in consideration could you point us to a few key components that one should consider in defining or considering the fair value standard I think again in in New York State Court the safest thing to do is to look at the preceden which really you know talk about the three basic approaches of liquidation and uh market and income approaches and follow those approaches make sure that each approach is accounted for in the appraisal report even if it's simply to say that the expert isn't going to rely on a certain one go through the process look at the marketability discount the lawyer who handles the case is going to be ought to be familiar with the uh case precedence and the range of marketability discounts that the courts tend to uphold and really that's the way to go it the case law gives a pretty good road map of what the lawyer and the expert need to do that being said let me force you to play Devil's Advocate is there an argument in not applying or using the fair value standard in a Shir the dissolution case the statute uses the term fair value so For Better or Worse you're stuck with fair value and as I think I said before the as a practical matter the cases that Define ver value adopt even make Express reference to revenue ruling 5960 which is a fair market value definition so as I said I I think you're essentially dealing with fair market value with certain exceptions being minority discount and I think one could argue the big discount that is the discount for built-in capital gains affecting C corporations that's another one where there is some variance from fair market value case law