Valuation

August 11, 2010

Lawyer Confidence May Be Poor Indicator of Results

Lawyers must evaluate cases and try to predict the most likely outcome. To be successful, to attract and win clients, they must do so with confidence. A recent study of the accuracy of those predictions, however, reveals that lawyers are often overconfident and overly optimistic in their assessments of a client’s case.

A recent study published in Psychology, Public Policy and Law revealed that the more confidence a lawyer expressed in his or her ability to achieve a possible result, the more likely he or she will fail to achieve those results. You can read the full article here (Insightful or Wishful – Lawyers Ability to Predict Case Outcomes.pdf).

The lesson appears to be that clients might want to maintain some skepticism about the results that the supremely confident lawyer predicts, even as they recognize that the statistics don’t tell the whole story. The lawyer who doesn’t believe in a case, or who lacks confidence will have a difficult time being the zealous advocate that is the touchstone of an effective litigator. We may not meet our lofty goals as often, but that is not to say that we don’t do better for our clients when we are confident in the case. In our next post, we’ll take a look at predicting the outcome in a business dispute case.

June 11, 2010

Limited Liability Company Subject to Claims By Former Managers Holding Membership Interests

by Jay R. McDaniel, Esq.

I often find myself counseling caution to business owners that want to use equity to reward or attract key employees. The reason, quite simply, is that if the relationship sours, the employee not only has to be fired but you then have to deal — at best — with a disgruntled former employee as owner or, more likely, he or she likely will have to be bought out.

It’s Not Easy to Fire the Owner-Employee

To get a sense of how difficult these circumstances can be, let’s look at Ross Holding and Management Co. v. Advance Realty Group (Ross Holding v. Advance Realty (Del).pdf), a case recently decided in Delaware construing New Jersey law. Advance Realty Group managed real estate properties on the East Coast and awarded membership interests to key managers. The managers received “Class A” general ownership units and “Class B” units reserved for management. Reading between the lines of the opinion, it seems that a new investor came into the business and the old management team got their walking papers.

May 28, 2010

NJ Entire Controversy Doctrine Bars Claim That Former LLC Member Owns Factory

by Jay R. McDaniel, Esq.

Without John Murray, the former CEO of Crystex Composites, LLC, the Clifton manufacturer of composite materials would likely not exist. It was Murray who bought the plant in a bankruptcy sale and ultimately ended up with nothing for his efforts. Murray’s failure, however, to assert that he was the rightful owner of the Crystex plant was cut off by application of New Jersey’s Entire Controversy Doctrine, which requires that any claim between the parties to a lawsuit be resolved in one action.

This case has a long history. Murray put together a management team, investors, and arranged financing for the reborn of Crystex in 2003, but he was ousted by the other members of the LLC in May 2004 after failing to make a capital contribution of $200,000. Murray sued, alleging that his pledge of stock to secure a line of credit satisfied his obligation to the business and challenging his removal from the business.

The case went to trial in state court in 2006, with claims of misconduct by both sides. Ultimately, the case turned the issue of whether a Memorandum of Understanding, by which Murray agreed to make his contribution by March 2004 or forfeit his interest, was enforceable. Murray lost, with the court finding that he had “never acquired an interest in Crystex.” Murray appealed, but was unable to reverse the trial court’s decision on the core issue of his ownership. Opinion here.

May 27, 2010

Exercise Care in Valuing Interests in New Jersey Business Breakups

by Jay R. McDaniel, Esq.

A court orders a business valuation in a matter involving an oppressed shareholder claim. The appraiser, carefully applying the standards of his profession, sends an engagement letter describing a fair market value determination. The appraisal will value the enterprise as a whole, then apply minority and marketability discounts. The selling shareholder is going to argue for discounts – they always do – but the report will have all the information necessary for a determination either way.

For the minority shareholder, this can be a trap. And it may be the wrong move to wait for the trial to fight out the discount issue and the battle over the definition of fair value should be fought as early in the case as possible. Here are a few reasons why.

The appraiser is going to prepare a report based on the standards of the valuation industry and that standard is fair market value – what a willing buyer would pay a willing seller. He is going to try to avoid the tough issue of whether any discounts should apply. The AICPA’s Statement on Standards for Valuation Services No. 1 relegates the definition of “fair value” to a single paragraph in an appendix as a matter determined by state law in judicial proceedings.