Campbell, Iridium, and the Future of Valuation Litigation

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday December 7, 2012 at 8:59 am
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Editor’s Note: The following post comes to us from Michael W. Schwartz and David C. Bryan, of-counsel and partner, respectively, at Wachtell, Lipton, Rosen & Katz. This post is based on an article published by the authors in The Business Lawyer, Vol. 67, Issue 4 (August 2012). The views expressed are those of the authors only, and should not be attributed to the firm or its clients.

Five years ago, two landmark federal court valuation decisions, VFB LLC v. Campbell Soup Co., 482 F.3d 624 (3d Cir. 2007), and In re Iridium Operating LLC, 373 B.R. 283 (Bankr. S.D.N.Y. 2007), held that contemporaneous market evidence—rather than discounted cash flow or other after-the-fact analyses created by paid experts for purposes of litigation—should be relied upon to value corporations for purposes of litigation. While a number of decisions have since followed Campbell and Iridium, the full potential of these decisions to make business valuation litigation less costly and less susceptible to hindsight bias has yet to be realized.

Courts presiding over business valuation disputes can and should take greater advantage of the full panoply of types of market evidence relied upon by the trial courts in Campbell and Iridium—evidence that ordinarily is equally available in other business valuation disputes, whether or not the subject company has publicly traded securities. Such market evidence includes the contemporaneous actions of executives and directors, who make career and investment decisions based on their views of value; the contemporaneous actions and views of lenders, creditors, investors, and other market participants; and the contemporaneous views of expert advisors expressed at or near the valuation date. Such contemporaneous evidence is of extremely high probative value: it reflects what real people with close knowledge of the business and a real financial stake in the enterprise actually did at the time of the valuation. It is thus immune both from the criticism that the actors had inadequate knowledge of the business, and from the injection of legally-impermissible hindsight into the valuation analysis.

For these reasons, courts should not routinely permit litigants to retain and present paid valuation experts in valuation disputes; this practice subjects courts and litigants to massive expense and delay that is very often both unhelpful and unnecessary, given the availability and reliability of contemporaneous market evidence. Accordingly, a litigant wishing to present expert testimony in a valuation dispute should first be required to establish by motion—made at the conclusion of fact discovery, but before the expensive and time-consuming expert witness process has gotten underway—that the non-expert contemporaneous market evidence is insufficient to permit the finder of fact to make a reasoned determination of value. No longer should it be a matter of course that, as is now common practice, expert reports are filed within a short time after fact discovery has closed, automatically setting into motion a costly sequence of expert reports and depositions, followed by rebuttal reports and more depositions, and setting the stage for a substantial commitment of valuable trial time—all for a species of evidence that may be wholly unnecessary to a just and reasoned decision of the case.

The Federal Rules provide a firm foundation for imposing such a requirement. The proposed motion would be made principally under Federal Rule of Evidence 702(a), which permits the presentation of expert testimony only when it will “help the trier of fact to understand the evidence or to determine a fact in issue.” Given the availability of contemporaneous market evidence in a great many business valuation cases, the proponent of expert testimony will have to show that such evidence is untrustworthy, lacking in credibility, or otherwise insufficient to enable the trier of fact to reach an intelligent decision as to value without hearing from the proponent’s expert. Likewise, the proposed motion requirement would not cause any significant change in the vesting of the expert “gatekeeping” function to the discretion, judgment, and wisdom of the trial court. Rather, it would merely initiate the exercise of that gatekeeping function at an earlier stage in the proceedings—producing in many cases substantial net savings of time, cost, and judicial resources that, in current practice, is left to the unchecked judgments of the parties.

Finally, in addition to promoting a more efficient and effective litigation process, the motion practice requirement advocated here will also produce valuable benefits during the planning stages of corporate transactions. Eliminating, or greatly reducing, the threat of ex-post-facto expert-witness-fueled valuation contests will strengthen the ability of corporate decision makers to structure and execute with certainty transactions that make sound business sense to them at the time, and to which contemporaneous market participants and knowledgeable observers attribute positive value.

The full article is available for download here.


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