This study is unmatched in the industry due to the depth and quality of its underlying data, which are obtained, reviewed and audited by our staff. The study contemplates nine out of a tested 50 company specific and market specific factors on the transaction date, allowing for a customized discount in any situation. This effort is all for the benefit of our clients, who can expect highly defensible conclusions and positive audit results.
Authors Alon Brav and J.B. Heaton bring to light some of the problems evident in the use of event studies in securities litigation in their recent article.1 As every expert knows, Courts have become enamored with event study methodology for ascribing information effects to stock prices. An expert’s opinion on market efficiency and/or damages is at risk if it is devoid of a supporting event study analysis.
A common issue in the valuation of closely held businesses is the taxation of pass-through income derived from S corporations, limited liability companies and limited partnerships. Generally speaking, pass-through entities are not subject to tax at the entity level, but rather the income is passed through or allocated to the owners of the entity based on their ownership percentages, and includable on the owners’ personal income tax returns.
Private Client Valuation Update – Commentary on Tax Law, Court Cases, Market Multiples, Discounts, Interest Rates and More
What a difference a few months and an unusual election season can bring. Let’s recall what was, or was not, going through our collective brains on those hot summer days in late July 2016. Many of you were likely on the beach, and giving little thought to the potential for proposed 2704 regulations to disrupt the second half of 2016 or for the Presidential election to go the way of Donald J. Trump. In early August, the Treasury issued potentially far-reaching proposed regulations under Section 2704 of the Internal Revenue Code, and as Summer turned to Fall, Mr. Trump cut into Hillary Clinton’s projected lead and went on to a resounding electoral college victory.
IRS Takes Aim at an Estate-Planning Strategy
IRS Proposes Additional Rules Applying to Private Equity Management Fee Waivers
Carried Interest Planning—From Structure to Valuation
The Asset Management Industry is in the midst of a recovery: Revenue grew at a compound annual growth rate of 5.3% in the traditional space in the last five years through 2015 and 7.7% in the alternative space over the same period. Revenue for both traditional and alternative managers surpassed pre-recession highs in 2012. However in fiscal 2015, traditional asset manager stock prices decreased 27.8%, and alternative asset manager prices declined 23.1%. Presently, the following trends are shaping the industry.
Preliminary real GDP growth for the third quarter measured 1.5%, yet again fueled by strong consumer spending. Second quarter real GDP estimates were revised upward and measured 3.9% following an original estimate of 2.3%. Looking forward, U.S. real GDP is expected to grow at an annualized rate of 2.8% in the fourth quarter of 2015 and first half of 2016.
This publication focuses on major events, developments and trends happening within the brewery, wine and spirits and non-alcoholic beverage (such as soft drinks and energy drinks) segments of the Beverage Industry.
This publication focuses on major events, developments and trends within three segments of the Broadcast Industry: radio broadcasting, television broadcasting and cable programming. Each of the Broadcast Industry segments is dominated by a few sizable players, and most firms operating in the Broadcast Industry are in the mature stage of their business lifecycle. The Broadcast Industry faces the primary challenge of limited advertising dollars, which is a key driver to revenues, and has resulted in significant consolidation among industry participants in recent periods.
This publication focuses on major events, developments and trends happening within the natural and organic, retail, distribution, protein processing, snack products, agricultural, and ingredients segments of the Food Industry. Most of the companies operating within the Food Industry are currently in the mature stage of their lifecycles. Nonetheless, volatile input prices, evolving consumer preferences and key merger and acquisition activities have spurred divergent recent performance and a changing competitive landscape.
This publication focuses on major events, developments, and trends within the following segments of the Healthcare Services industry
This publication focuses on major events, developments and trends happening within the aluminum, steel, specialty metals and service center segments of the Metals Industry. The Metals Industry consists of companies in both growth and mature lifecycle stages. Metals sub-sectors vary from highly fragmented (recyclable material wholesaling), to dominated by a few sizable players (aluminum manufacturing).
As shown on the charts below, 2016 quarterly merger and acquisition activity was down from prior year-over-year activity in each quarter, except for Q4’ 2016. Transaction volume in the latest quarter increased to an observed period high of just over $700 billion. The spike in transaction volume in the latest period is the result of several large deals announced during the quarter.
The Delaware Court of Chancery recently determined the value of ISN Software Corporation stock to be $98,783 per share, 158% more than the merger price. ISN did not rely on a financial advisor, investment bank, or fairness opinion, but self-determined that its stock was fairly valued at $38,317 per share. Petitioners Polaris and Ad-Venture objected, and promptly filed suit. With experts for all parties submitting wildly different valuations, the Vice Chancellor was forced to rely on his own, hybrid discounted cash flow (“DCF”) analysis, and ultimately pegged ISN’s fair value well above the merger price. Litigators would be remiss in neglecting to glean insight from the published opinion, which covers critical valuation parameters, including cash flow projections and discount rate factors.
In April 2016, the Tax Court entered a summary judgment on Estate of Clara M. Morrissette v. Commissioner of Internal Revenue. The case centered on two split-dollar life insurance arrangements entered into by the decedent’s revocable trust and three distinct trusts in 2006. The revocable trust contributed $29.9 million to the trusts. The trusts used these funds to purchase life insurance policies covering the decedent’s three sons. In 2013, the IRS issued a notice of deficiency against the estate in the amount of $13,800,179 plus a penalty of $2,760,036. 1 The IRS characterized the $29.9 million contribution as a taxable gift, and classified the split-dollar life insurance arrangements as loans.2 The estate challenged this classification, arguing that the arrangements should be governed by the so-called “economic benefit” regime.3 The Tax Court agreed with the estate, issuing a partial summary judgment under Rule 121(a) of the Tax Court Rules of Practice and Procedure that the economic benefit regime applies to the split-dollar arrangements in this case.
Vice Chancellor Laster’s recent decision in the Delaware appraisal action involving Dell, Inc. determined that Dell’s stock was valued at $17.62 per share, or some 26% above the going private offer worth $13.96 per share.1 The four day trial included testimony from both Petitioners’ and Respondent’s valuation experts, as well as testimony from the investment bankers who originally advised Dell’s board of directors. Ultimately, the Vice Chancellor developed a hybrid valuation model, selecting what was deemed to be the most reliable data from each of the experts, in arriving at his opinion on the value of the shares. Litigators would be remiss in neglecting to glean insight from the published opinion which speaks to critical valuation parameters, including financial forecasts, growth rates, taxes, and the cost of capital.
The Honorable Yvonne Gonzalez Rogers, in the Northern District of California, issued an order last week granting class status to an action brought under Rule 10b-5 of the Securities Exchange Act against Advanced Micro Devices, Inc. (Babak Hatamian, et al. v. AMD, et al., 14-cv-00226 YGR). Judge Gonzalez Rogers referenced Halliburton II standards, among others, in deciding two key issues – namely, whether Plaintiffs are entitled to invoke a presumption of reliance under the “fraud-on-market” theory to show reliance classwide; and whether Plaintiffs can show that a common damages methodology can be applied to all class members.
In December 2015, the Tax Court rendered its opinion on Sumner Redstone v. Commissioner of Internal Revenue. The focus of the dispute was whether a stock transfer made by Sumner Redstone in 1972 was a gift for Federal gift tax purposes, or, as Sumner Redstone claimed, was a transfer for “adequate and full consideration in money or money’s worth.”1 Following an examination that concluded in early 2013, the IRS issued against Sumner Redstone a gift tax deficiency of $737,625 for the calendar quarter ending September 30, 1972.2 In addition, the IRS determined an additional $368,813 for fraud,3 $36,881 for negligence, 4 and $184,406 for failure to file a timely gift tax return. 5 Ultimately, after a trial, the Tax Court found that the transfer was a taxable gift but Sumner Redstone was not liable for any additional penalties.
According to the Ninth Circuit, the answer to the question above is “Absolutely.” This case involved a limited partnership owning timberlands that was formed 15 years prior to Mr. Natale B. Giustina’s death. After the family’s lumber mills were sold, timberlands owned for decades within the family’s business entities were transferred to a new partnership in order to effect a family ownership and management restructuring. The timberlands continued to be held and managed by the partnership and there was no desire or intention to liquidate these assets at the time of Mr. Giustina’s death. In Tax Court, Judge Morrison opined that 25% weight ought to be given to the liquidation value of the partnership, and 75% weight ought to be given to its going concern value, which was determined through a capitalization of cash flow method.
In a recent decision in New Jersey Superior Court involving cross claims of shareholder oppression pursuant to N.J.S.A. §14A:12-7, the Court found it appropriate to apply a marketability discount to the value of the privately-held company stock at issue in determining the buyout price to the oppressive shareholder. As New Jersey is typically a “Fair Value” jurisdiction, marketability discounts are applied only under what is found to be “extraordinary circumstances,” such that failure to do so would unjustly enrich the oppressing shareholder or otherwise fail to adequately compensate the prevailing party.
The chief financial officer of a publicly traded specialty chemical company was referred to MPI by the company’s audit firm, a top 10 CPA firm with a global presence. The company had acquired a small niche distributor of chemical supplies.
MPI was contacted by a major law firm in the Southeast. Their client, a television and radio broadcasting company, had been informed by its CPA firm that management’s internal impairment analysis would not meet the qualifications required for a successful audit. The CPA firm recommended that the impairment test be prepared by an independent third party.
I reviewed what has been said and written in the wake of Thursday’s release of the Trump Tax “Plan”, and watched a video of the Cohn/Mnuchin press conference. There appears to be a lack of detail in what amounts to a one-page plan containing core philosophies / talking points / bargaining positions. The “Plan” focuses on corporate taxes and individual income tax rates, but also calls for immediate repeal of the death tax. There is no mention of gift tax, GST, carryover basis, or otherwise. Therefore, it is difficult from an estate planning perspective to draw too many conclusions from this “Plan.”