Opinion ID: 2375637
Heading Depth: 2
Heading Rank: 3

Heading: Net Asset Value

Text: Generally net asset value should not be heavily weighted in stock valuation unless the valuation being made is for liquidation purposes. Where the acquired business will be continued as a going concern, the value of the corporate assets bears little or no relation to the value of the stock of the corporation. A recent decision of a Delaware court noted: There is good reason for not taking the asset-value factor seriously. The average market price of a common stock over the years depends chiefly on the earnings power and the dividend payments. These, in turn, usually do not bear any close or reasonably consistent relation to the asset value. . . . Investors and speculators have found that the asset value is typically no guide at all to earning-power value or average market price. Hence they have gradually come to give the asset-value factor practically no weight. Gibbons v. Schenley Industries, Inc., 339 A.2d 460, 473 (Del.Ch. 1975), quoting from Graham, Dodd, Cottle & Tatham, Securities Analysis 217 (4th ed. 1962). To have its maximum persuasiveness in finding the fair value of Libby stock, net asset value should have been determined by a current appraisal of all the corporation's property, tangible and intangible. No such asset appraisal was made in the case at barby either petitioner or the dissenting shareholders. As a substitute for net asset value, both sides relied on net book value determined from Libby's audited balance sheet. [14] The net value of corporate assets reported on the balance sheet in accordance with accounting convention represents principally historical cost less book depreciation. Book value of property would be equal or even close to its actual current value only by sheer coincidence. There is nearly complete agreement that book value does not accurately represent the fair value of corporate assets. Note, Valuation of Dissenters' Stock, 79 Harv.L.Rev. 1453, 1457 (1966). As Judge Learned Hand stated over fifty years ago: The suggestion that the book value of the shares is any measure of their actual value is clearly fallacious. It presupposes, first, that book values can be realized on liquidation, which is practically never the case; and second, that liquidation values are a measure of present values. Every one knows that the value of shares in a commercial or manufacturing company depends chiefly on what they will earn, on which balance sheets throw very little light. Borg v. International Silver Co., 11 F.2d 147, 152 (2d Cir. 1925). In the opinion of petitioner's expert, net asset value should receive a weight of 20%, only half the weight accorded each of the other two factors. The dissenting shareholders' expert, however, contended that net asset value should be the sole criterion for determining fair value; that is, should receive a weight of 100%. Recognizing that net asset value was the weak link in the chain of appraisal factors and that there were dangers inherent in the use of book value as a valuation tool, the appraiser agreed with petitioner's expert. We believe the court should accept the appraiser's recommendation. The shareholders' expert placed exclusive weight on net asset value because of his belief that stock market price and investment value were unreliable indicators of fair value in this case. We have already indicated, however, that in our view stock market price and investment value, although here subject to deficiencies as indicators of fair value, were properly assigned weights of 40% each. In view of the obvious imprecision of using book value as a measure of asset value and also in view of the fact that net asset value, even if accurately appraised, is in the words of Judge Hand in Borg v. International Silver Co., supra at 152, little indication of what people will pay for the shares, the weighting of 20% recommended by the appraiser is, if anything, on the high side.