Squeeze-out litigations: An incorrect choice of the valuation approach

In valuations for the purpose of justifying the amount of adequate consideration for minority shareholder shares, we can sometimes encounter the assertion that certain valuation approaches are inadmissible for this specific purpose. However, are such opinions of experts or parties to the dispute justified? How can we verify the relevance of such arguments? And what about the legislation?

In the area of valuation for the purpose of determining adequate consideration and in subsequent litigations, we commonly encounter arguments that are unfounded from an economic and legal perspective and, as a result, erroneous. One of the most common is the arbitrary exclusion of certain valuation approaches.

Specific methods have no basis in case law

In our analysis, Valuation approaches for squeeze-out purposes, we focused on the fact that there is a common opinion among experts who carry out valuations for squeeze-out purposes that they cannot use certain methods. Quite commonly, when justifying valuation methods, it is possible to come across statements such as “due to the purpose of the valuation, we do not find the application of other premiums at a discount rate sufficiently justifiable and well-founded”. That is the practice.

However, settled case law and the methodology of the financial market supervisory authority (formerly ZNAL, now OCE) only mention specifically targeted restrictions on discounts for limited tradability and for a minority interest in the definition of the key concept of “fair value of a share”. The definition of the value of a share therefore does not interfere in any way with the expert’s choice of valuation method or the use of certain valuation concepts.

In our analysis, we found that any adjustment to otherwise common valuation methods with reference to the supposedly specific purpose of valuation is typically unfounded. In other words: there is no reasonable reason for it. For the purpose of determining the adequate consideration, the expert should, in principle, proceed as in the normal estimation of the market value of the assets, with an emphasis on the maximum quality of the valuation and using methods according to the highest scientific knowledge (de lege artis).

Practical example: market vs. fair value

In the case study, we pointed out the confusion of concepts when choosing a method and the standard of value. This particular error has long appeared in a number of review valuations ordered by the courts. Specifically, it is a seemingly usual scenario-based valuation consisting of the calculation of two scenarios. The difference lies in the use (or non-application) of the size premium in the cost of equity:

  • The first variant in which size premium is applied shall be marked as market value.
  • The second variant in which the size premium is not applied shall be marked as fair value.

However, the designation of these variants is confusing, since the values calculated under both variants inherently do correspond to the definition of a fair value standard defined by the case law and methodology of the supervisory authority. However, using misleading concepts, the expert indirectly ‘encourages’ the recipient of their valuation to choose a ‘fair’ variant where the size premium is not applied, even though there is no single reason for not applying it from an economic or case-law point of view. With regard to the complexity of the issue, it is quite difficult to explain this error comprehensibly, which has a fundamental impact on the outcome of the valuation.

The analysis and its conclusions were published in the journal Obchodněprávní revue No. 3/2021.

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