SHARE-HOLDER Divorce.

• Author: LUTTRELL, MARK S.

When a shareholder wants out, the buyout price is a hotly contested issue

CPAs are frequently called upon to provide valuation services in connection with marital dissolution matters. But divorce between husband and wife isn't the only dissolution that requires CPA expertise. Increasingly, CPAs are being called upon to provide valuation services for corporate dissolution.

In the simplest terms, a corporate dissolution action commences when a shareholder (or group of shareholders) proves the existence of certain facts set forth in Chapters 18 or 19 of the California Corporations Code and brings an action for corporate dissolution. Examples of factual requirements include the extent of share ownership and proof of issues such as voting deadlock, persistent and pervasive fraud, mismanagement, or unfairness by the remaining shareholders.

If the complaining shareholder prevails in the action to dissolve the corporation, the remaining shareholders, or the corporation, may purchase the complaining shareholder's shares under CCC Sec. 2000. The valuation assignment that arises from this action requires that the CPA possess expertise beyond the more typical fair market value assignment.

The standard of value in a Sec. 2000 engagement is "fair value," not "fair market value."

Fair value is a well-known valuation standard, but by its very definition it does not have a universal meaning. Fair value was created to facilitate valuations performed under specific instructions promulgated by a legislative body or other overriding source, often in the context of litigation. For example, valuations performed in the context of marital dissolution are subject to the fair-value concept. In that instance, the meaning of fair value varies with the law from state to state. Thus, the appraiser must understand the pertinent legal issues in a given jurisdiction before commencing work. The meaning of fair value in a Sec. 2000 engagement is similar in this regard.

Since fair value is subject to interpretation and is typically encountered in litigation matters, the appraiser may receive contradictory explanations of its meaning. For this reason, it is important for the appraiser to develop an independent understanding of the term.

If appraisers solely rely on the attorney who hired them to explain the meaning of fair value, they risk performing a valuation that could be challenged due to a misapplication of the law. An exaggerated, but not entirely unrealistic, portrayal...