Opinion ID: 1267906
Heading Depth: 3
Heading Rank: 2

Heading: Control Premium

Text: The court received expert testimony from both sides on the question of a control premium in valuation of the entire bank as a unit. The trial court found that a 50% premium was needed to accurately account for the value of control on August 1, 1988, the date from which the lost value award was calculated. Slattery's expert Dr. Finnerty testified that a control premium is not included in the bank's normal stock market capitalization, and that acquirers of a majority interest of the entire corporation are generally willing to pay a premium for control of the enterprise. The government argues that a control premium is only relevant in an acquisition context, not in a suit for breach of contract resulting in a bank's demise. The government contends that a control premium represents additional value to a shareholder who acquires enough shares to control the bank, rather than an inherent aspect of the bank's market value, and that because this is a derivative action on behalf of the bank itself, shareholder value based on control is irrelevant. The government cites tax cases, such as Philip Morris, Inc. v. Commissioner, 96 T.C. 606, 1991 WL 51559 (1991), aff'd, 970 F.2d 897 (2d Cir.1992), where the Tax Court held that the purchase premium paid for control was distinct from the value of the acquired business. Id. at 632. The government also argues that even when a control premium might be appropriate, the courts will look to the particular facts of the acquisition, citing Estate of Newhouse v. Commissioner, 94 T.C. 193, 231, 1990 WL 17251 (1990) (The focus of a valuation inquiry ... is on the existing facts, circumstances, and factors at the valuation date that influence a hypothetical willing buyer and willing seller in determining a selling price.), and Estate of Andrews v. Commissioner, 79 T.C. 938, 940-41, 1982 WL 11197 (1982) (Fair market value has long been defined as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.). Because Slattery did not present evidence of a willing buyer at the valuation date applied by the Court of Federal Claims, the government argues that the court clearly erred in applying a control premium to the valuation. Slattery cites Indu Craft, 47 F.3d at 496, where the Second Circuit held that total franchise value is the best measure of damages when the breach of contract results in the complete destruction of a business enterprise and the business is susceptible to valuation methods. The government points out that instead of applying a multiplier to market value in Indu Craft, the court applied a multiplier to the business' earnings to determine its franchise value. Slattery responds that any reasonable measure of total franchise value suffices, and that clear error has not been shown in the measure selected by the court. Slattery also cites C.A. May Marine Supply Co. v. Brunswick Corp., 649 F.2d 1049, 1053 (5th Cir.1981), in support of the total franchise value theory, while the government points out that the jury's award of damages was based on an alternative lost profits theory. Slattery also refers to the Fourth Circuit's statement that a discount or premium for control can be appropriate in determining fair market value, in Estate of Godley v. Commissioner, 286 F.3d 210, 214 (4th Cir.2002), in the context of valuing for estate tax purposes a closely held corporation that has no ready market for its shares, the court acknowledging that for publicly traded companies [t]he fair market value of a business interest can often be determined simply by examining its market price, id. The authorities cited by both sides provide general valuation guidance, but are not sufficiently on point to provide controlling reasoning with respect to the facts of this case. The trial court's application of a control premium to determine Meritor's fair market value was a fact determination based on extensive and detailed expert testimony and lawyer argument. Slattery's expert, Dr. Finnerty, provided testimony in support of this theory, and the trial court deemed his analysis persuasive. The evidence supported Dr. Finnerty's contention that even an underperforming bank, if it has strong franchise value based on depositor loyalty, such as Meritor, commands a high control premium. The government's damages expert criticized Dr. Finnerty's analysis, and presented an alternative analysis that the Court of Federal Claims found less persuasive. We have not been shown clear error in the court's resolution of competing expert testimony to rule that lost value is reasonably measured by the value of the entire franchise including a control premium. Nor has clear error been shown in the court's findings concerning the amount of the premium, for it was supported by evidence of control premiums that have been paid for weakly performing entities. The award of $276 million for lost value, including the control premium, is affirmed.