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Asset Valuation | Monday, May 16, 2016 | S5
the place of operation in order to check their records. Again, while not reporting to the SeC, the operations arm of the entity more than likely is reporting to various governmental agencies. For instance, intellectual property is usually registered with the government, as are business registrations, licenses, and real estate filings, among other essential corpo- rate assets.
The diligence expert and counsel should also interview suppliers, customers, vendors, and other parties with business or invest- ment relationships to the firms to investigate their contracts and verify the financial data gathered through the mechanisms discussed herein.
In addition to operational and financial data, information about competitive com- panies in the same geographic region and known comparable transactions is essential to produce a reliable fair value or strategic value. Such information can sometimes be obtained from Bloomberg terminals, if the market in question and transactions within it are relatively transparent. however, in cer- tain markets—including emerging and “dark” markets— you will again need to enlist the assistance of local experts to find and estab- lish a marketplace of competitive enterprises and transactions of the type similar to the transaction contemplated in your “but for” world. Investment bankers working in the area are often an excellent source for this kind of information.
If you are a minority investor, the core question is: What would the market bear for other minority interest sales in a com- parable industry and comparable transac- tion type? once known, multiples can be generated and applied back to a particular metric. For instance, earnings from the tar- get company can be applied to the price-to- earnings multiple generated from the list of comparable transactions, and this application may approximate a strategic value for the enterprise. likewise, once your investigator has generated a group of comparable com- panies, a multiple such as price to earnings or price to revenue can be calculated and
applied back against a metric from the target company to derive fair value.
At a hearing or trial on damages, your investigatory expert will have to attest to the type of business or transaction at issue, in detail, to demonstrate that they are putting forward appropriate comparable transactions
experts they assembled used the last reported financial statements to determine Cngl’s last reported book value per share. The plaintiff’s team also took 16 comparable companies in the same industry as Cngl, and found their average price-to-book value. They then took the average price-to-book, and multiplied that
the company have anti-takeover provisions that would have prevented the plaintiff from obtaining the shares required to change the composition of the boards and complete the takeover. If the corporation is an offshore entity, the takeover proponent will want to use a lawyer with expertise and licensing in that foreign jurisdiction to demonstrate that for specific reasons applicable under foreign law, the “poison pill” would not have worked as alleged to stop the takeover.
The defendant may also allege that offshore subsidiaries (such as those in the China-based foreign owned entity discussed earlier) have transferred ownership in part or whole. of course, this would discount the value of the entity because it goes to its ownership and cash flow. here, the proponent of the takeover and attendant damage model will need to use facts gathered through its investigator and foreign counsel to prove that the transfer did not occur—or that if it did occur, it is not enforceable.
A well-prepared plaintiff presenting a damage model will seek in advance to iden- tify potential discount factors and call the appropriate witnesses to debunk them—e.g., a quantitative financial analyst or mathemati- cian discussing availability of shares in the marketplace for a takeover; a market ana- lyst demonstrating the suitability of certain investments; and/or a legal expert or financial industry specialist to discuss the conversion of American depository Shares to ordinary shares for voting purposes.
While it may at first blush seem impossible to value companies that have failed to report and are operating in opaque markets, building an appropriate international team of profes- sionals to assist with diligence and market building will enable persistent plaintiffs, and their lawyers, to pursue litigation that will make them whole.
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1. The author has represented plaintiffs who have presented valuations of dark companies that have been accepted by courts in delaware, nevada and new York.
2. Schiff v. China Nutrifruit Group, Index no. 151540/2014 (n.Y. Sup. Ct. Feb. 3, 2015).
In seeking to value companies that have gone dark, the challenge is to obtain by indirect means information that will satisfy traditional valuation methods.
or companies. The transactions are generally investigated by company size, position sold in the company, and the industry and geo-region the company competes in as compared to the target transaction. As discussed herein, the trading comparables and company com- parables are generally assessed by the size, geographic location, and type of company by industry as compared to the target company.
Case Study: Valuing China Nutrifruit
An example of how such investigations may lead to a valuation upheld in U.S. courts can be found in Schiff v. China Nutrifruit Group,2 a case in which the author represented the plaintiff investors in China nutrifuit (Cngl). a nevada corporation with operations in China. In September 2009, euro Pacific, a broker- dealer led by Mr. Schiff, purchased a minority position in Cngl. Cngl “went dark” in mid- 2012, violating the SPA by which the company was required to keep available adequate and current public information. In February 2014, euro Pacific, Schiff and associated investors filed a complaint against Cngl in new York, seeking, inter alia, relief entitling the plaintiffs the option to “put” their shares in Cngl at fair market value. on Feb. 3, 2015, the n.Y. Supreme Court awarded the “put” option for $7.13, accepting the plaintiffs’ book value and comparable company analysis. on behalf of the plaintiffs, the authors and the team of
value by Cngl’s last reported book value, yielding an assumed price per share of $7.13 for Cngl. The court also awarded $1,000,000 in reputational damages to euro Pacific, predicated on the economic losses caused by investor dissatisfaction and diminution of intangible assets, including goodwill.
Debunking the Attacks on Your Valuation
A party opponent will often attack your valuation. As proponent of the model, the plaintiff will need to put on significant proofs and survive aggressive cross-examination. The presentation of comparable transactions should create the impression of a robust market where the securities would in fact have been saleable. To prove the transac- tions are real and verifiable, the underlying documents on the transaction should be submitted through your banking expert to the extent possible.
Your opponent is likely to argue that vari- ous hurdles would have derailed your invest- ment strategy. If the defense falls short of proving that the investment strategy was not executable, the defense will likely argue that hurdles amount to risk, and risk discounts the value of your damage model.
For example, if the plaintiff’s damage model posits that the investor sought to take over the corporation and was wrongfully prevent- ed, the defense may argue that the bylaws of
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