Abstract

This article suggests that economic experts should consider moving away from accrual based, accounting centered lost profits1 and toward cash based lost dividends when calculating economic damages in cases where shareholders are looking to recoup past lost profits. It is shown here that when experts rely on cash dividends as the variable of loss to shareholders, a more comprehensive, integrated and just system of calculation is recognized, increasing economic certainty in damage reports and possible subsequent verbal testimony.

Introduction

In commercial damage cases, herein confined to lost profits cases, the court allows a shareholder (plaintiff) that experienced past lost profits to recoup the value of, and the interest (foregone interest) on the profits had the plaintiff been able to invest the lost profits in some capacity, during the period of loss. Although most state courts agree on the concept of providing some form of remuneration for foregone interest in hopes of making the plaintiffs whole, they often disagree on the rate of interest applied. The state based rate of interest is typically statutory in nature, and applied to the yearly lost profits in a simple or compounded manner. Similarly the federal court system allows foregone interest, but unlike the state court system, delegates the development and application of the foregone interest rate to the attorneys and their respective economic experts. However, there appears to a be a gap in the literature with respect to the numeric application of calculated foregone interest to cases where the subject company had accrued past profits but where no cash dividends were paid, and where all of the accrued profits were reinvested in the company for future growth.

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