Fair value ruling exposes expert’s technical weaknesses

Wright v. Irish (Hudson Valley Clean Energy, Inc.), 2014 N.Y. Sup. Ct. Index No. 2111/2014 (Nov. 7, 2014) 

Experts, do your homework! This was the message a court recently sent when it presided over a fair value proceeding in upstate New York that featured experts with glaringly different valuation skills. The case involved a solar energy panel company whose two founders ran into irreconcilable differences over the direction of the company. When the petitioner asked for the company’s dissolution under New York Business Corporation Law Section 1104-a, the respondent opted for a buyout under Section 1118.

Both valuators used income and market approaches to value the petitioner’s interest, but only the petitioner’s expert presented competent analyses. Among the “severe deficiencies” marring the income-based calculation the respondent’s expert offered was its failure to include either a growth rate or management projections. Yet growth and how to generate it was at the center of the partners’ dispute. Prior to the partners’ breakup, the respondent proposed a strategic growth plan to the board that the board adopted over the petitioner’s objection. Among other things, the board decided to reinvest dividends in the company to stimulate growth. Not to account for it in a valuation meant underestimating the company’s own projections, the court said.

The expert’s market-based analysis invited even harsher criticism. He used BIZCOMPS, but at trial it became obvious that he had not followed the BIZCOMPS user guide. The court noted he chose “comparables” that were as little as one-tenth the size of the subject company.

To read more about the court’s reaction and other issues in the case, click here.