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Future Expected Investment Strategy Determines Value of FLP Interest

January 2016 | Issue 83 The estate of Helen P. Richmond held a 23.44% interest in Pearson Holding Co. (“PHC”), a family investment company.  The estate valued this holding at $3,150,000, later adjusted to $5,046,000.  The IRS valued it at $7,330,000.  This difference of opinion was aired in US Tax Court in a case called Estate […] More...

Do Attached Strings Affect the Value of a Gift?

October 2015 | Issue 82 Steinberg v. Commissioner, 145 T.C. No. 7 (Sept. 16, 2015) explores how a contingent liability accepted by a donee can impact the value of a gift for gift tax purposes. Introduction In 2007, Petitioner Jean Steinberg, age 89, entered into a net gift agreement under which she gave her four […] More...

Dodgy Fairness Opinion Earns Financial Advisor a Trip to the Woodshed

July 2015 | Issue 81 Vice Chancellor Laster of the Delaware Court of Chancery was underwhelmed, to say the least, by the quality of the fairness analysis put forward by the Conflicts Committee and its Financial Advisor in connection with the approval of the pricing of a major financial transaction between two related public companies. […] More...

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Chancery Court Clears Up Two Valuation Issues

June 2010 | Issue 46


The Delaware Court of Chancery focused on two frequently-encountered valuation issues in a recent appraisal action opinion, Berger v. Pubco Corp., et al. (C. A. No. 3414-CC; May 10, 2010).  The parties to this case had agreed by stipulation to submit two valuation issues to the Court: the control premium issue and the capital gains tax issue.

Control Premium Issue

A control premium in a business valuation is an adjustment designed to incorporate into the valuation the increment of value attributable to a party’s holding a controlling interest in a company rather than a minority interest.  Since the control premium represents the difference between the value of a minority interest and the value of a controlling interest, it is normally applied “on top of” a minority interest value.

In this case, the appraisers had utilized the discounted cash flow method and the book value method of valuation to value Pubco  They had not used the comparable public company method. “Under Delaware law,” the Court said, “it is appropriate to add a control premium when appraisers use a comparable public company methodology.”  Since the comparable public company method was not used by either appraiser in this case, the Court concluded that it was not appropriate to apply a control premium in this case.  The Court went on to say that “cases decided in the Court of Chancery since Rapid-American 603 A.2d 796 (Del. 1992) have clearly held that the addition of a control premium to a discounted cash flow valuation, as here, is not appropriate.”

Capital Gains Tax Issue

The capital gains tax that was at issue in this case was imbedded in a portfolio of securities held by Pubco. The company owned a significant portfolio of securities, some of which had market prices on the valuation date that exceeded their purchase prices.  It was the capital gains tax liability that might be incurred if these securities were sold and the effect that such tax should have on the valuation that was at issue between the parties.

The Court concluded that the value should not be adjusted downward to account for this latent tax liability.  It came to this conclusion because Pubco had no particular schedule regarding the disposition of any securities in its portfolio.  The Court cited Paskill Corp v. Alcoma Corp. 747 A.2d 549 (Del. 2000), a Delaware Supreme Court case, which held that it was improper to apply a deduction to an asset valuation based on speculative tax liabilities attributed to sales that were not specifically contemplated at the merger date.  The Pascal holding was based on the principle of Delaware appraisal law that entitles the dissenter in an appraisal action to receive a proportionate share of the fair value in the going concern on the date of the merger, rather than the value that is determined on a liquidated basis.  Since there was no evidence that any particular Pubco asset would be sold at any particular date, the Court declined to make an adjustment for the potential tax liability.