Implied minority discounts: How to help the doctrine die
What do you do when the courts have yet to catch up to the appraisers? That’s one of the problems with precedent-based jurisprudence; by nature, it depends on prior decisions and takes a long time to turn around, even when new applications have gained common acceptance by experts in the field. Such is the case with the current doctrine of implied minority discounts (IMD) in statutory appraisal law. “The IMD posits that, no matter how liquid and informed the financial markets, all publicly traded shares trade in the market at a substantial discount relative to the going concern value using a DCF,” writes Professor Lawrence Hamermesh, in his recent (Dec. 2009) article for BVUpdate. “The IMD amounts to a statement that financial markets consistently price shares significantly below pro rata going concern value.”
The problem: When a company issues public shares, it creates agency costs, Hamermesh explains. “Pubic traders price those additional costs going into the investment as part of the company’s ‘operative reality.’” How does the IMD justify paying minority dissenters the value of control when they already belong to a larger shareholder class to which control has been dispersed through public ownership? Put another way, if shareholders were truly entitled to getting the value of control in a statutory fair value appraisal, then appraisers would likely adjust the DCF values upward to account for reduced agency costs.
How can business appraisers help turn the courts’ opinions? “Cite the current positions,” says Gil Matthews, “and point out the fallacies of courts continuing to apply the IMD.” And tune into “Implied Minority Discounts in Statutory Fair Value: The Doctrine that Won’t Die”, a 100-minute BVR teleconference featuring Matthews and Professor Michael Wachter (frequent co-author with Hamermesh, and his co-director at the Univ. of Penn. Inst. for Law & Economics). These two top IMD experts will explain the theoretical and practical gap between the courts and appraisers— and how to forge new connections with better content and communications. Find out more and register here.