Purpose

Often an economic expert is engaged by an attorney to determine the value of a minority shareholder’s interest in a commercial or family dispute. Many times these disputes are related to some form of disagreement over the value of a minority shareholder interest. Occasionally the economic claims to a minority shareholder are associated with a temporary loss of future profits of the Company in which the minority shareholder has a claim (Scenario T), and at other times the economic claim may be associated with a permanent loss of profits or simply, the loss of asset value in an enterprise (Scenario P).

The central difference between Scenario T and Scenario P is the amount of time in the future to calculate lost profits. In Scenario T, an expert will frequently calculate the difference between pre-allegation forecasted profits and actual or post-allegation forecasted profits over a finite period of time.1 These forecasts will include historical and/or future profits.2 In Scenario P, an expert would most likely perform a valuation of the minority shareholders interest in the company. A valuation is performed because the loss is permanent, and based on an infinite period of time. Despite the differences in the period used to calculate the damages to the minority shareholder, various state courts apply different standards to calculate the claims to the shareholder depending on whether the loss is temporary permanent.

In a state like New Jersey, temporary economic damages for lost profits and permanent losses for loss of value to a minority shareholder are calculated different. The differences in calculating either type of loss, permanent or temporary, creates a system based on partial justice with respect to the calculation of pecuniary damage awards to the plaintiffs. This paper will demonstrate this dichotomy.

To present this contradiction by the court and to explain its economic impact, this paper will progress in the following manner. Section II provides definitions of fair value and fair market value standards and how they are typically applied in Scenario P. A suggestion will be advanced, proposing the intent of the court with respect to the fair value (FV) standard. Modifications to the FV rule will also be presented with hopes of offering modifications of the rule to better fulfill the intentions of the New Jersey Court. Section III will then present an argument that for the same reasons the Court established a FV standard for Scenario P, it should adopt a similar rule to Scenario T. Section IV will conclude with a summation of the arguments, and suggestions for experts and the court when contemplating the best approach to calculating FV commercial damages claims.

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