Thursday, October 18, 2018

Fair Value in Kentucky: Fair to Whom?

Elizabeth Egan
Author position
Investment Banking Analyst

We recently concluded a business valuation project for a Kentucky company relating to the sale of one of its major divisions. The project required us to consider carefully the nuances of the fundamental valuation concepts of “fair market value” and “fair value” in Kentucky. The distinction proved crucial in a subsequent dispute between our client company and some of its dissenting shareholders, who sought a far higher price per share than they had been paid.

Fair Market Value vs. Fair Value

These two concepts may sound identical, but they are not:

  • Fair market value (FMV) is defined as the “probable price at which a willing buyer will buy from a willing seller when (1) both are unrelated, (2) know the relevant facts, (3) neither is under any compulsion to buy or sell, and (4) all rights and benefit inherent in (or attributable to) the item must have been included in the transfer” (
  • Fair value is defined by statutory provisions and state case law. In Kentucky, as in other jurisdictions, the definition of statutory fair value has evolved over time.

In disputes between corporations and shareholders complaining about the price per share they were offered or paid, it is “fair value” that should prevail. The statutory premise Kentucky statutory law defines “fair value” in the context of dissenting shareholders’ rights as “the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable” (Ky. Rev. Stat. § 13.13-010(3) (2014)).

How case law has treated “dissenters’ rights” in Kentucky

For decades, a 1982 Court of Appeals decision in a dissenters’ rights action stood as the defining precedent of fair value, permitting the use of a 25% marketability discount. Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky. App. 1982). But the Court of Appeals overruled Ford in 2010, in Brooks v. Brooks Furniture Mfgrs., Inc., 325 S.W.3d 904 (Ky. App. 2010). There the court rejected the use of a marketability discount as well as the use of the net-asset-value method.

A year later, the Kentucky Supreme Court decided Shawnee Telecom Resources, Inc. v. Kathy Brown, 354 S.W.3d 542 (2011) (“the Shawnee Decision”). In that decision, the Court clarified the definition of fair value in dissenters’ rights cases, focusing on entity-level adjustments rather than shareholder-level ones:

  • Having thoroughly considered the statute and its underlying purpose, we conclude that “fair value” is the shareholder’s proportionate interest in the value of the company as a whole and as a going concern. Any valuation method generally recognized in the business appraisal field, including the net asset and the capitalization of earnings methods employed in this case, can be appropriate in valuing a given business….
  • As for applying a marketability discount when valuing the dissenter’s shares, we join the majority of jurisdictions which, as a matter of law, reject this shareholder-level discount because it is premised on fair market value principles which overlook the primary purpose of the dissenters’ appraisal right – the right to receive the value of their stock in the company as a going concern, not its value in a hypothetical sale to a corporate outsider. However, generally recognized entity-level discounts, where justified by the evidence are appropriate because these are factors that affect the intrinsic value of the corporate entity as a whole. (Emphasis added.)

How ‘fair value’ was determined in our case (spoiler alert – we were right)

Taking the company as a whole and going concern in a business appraisal requires the consideration of a multitude of factors relating to financial performance and condition. Following the guidance provided by the Shawnee Decision and using standard, accepted valuation techniques in this project, Hilliard Lyons determined a fair value of $90 per share of the company in our recent project.

Nevertheless, three months after the division sale closed, several disgruntled shareholders contacted our client, claiming that their shares were worth far more than the $90 per share they had been paid. Some claimed the company owed them at least $700 per share. Unable to resolve this disagreement informally, the company filed a declarative judgment lawsuit, asking the court to affirm that the shares’ fair market value was $90 at the time of their valuation.

The court found the dissenters’ appraisal failed to assess the company as a whole and as a going concern. The dissenters’ appraiser had taken a simplified approach, omitting important aspects such as selling, general, and administrative (SG&A) expenses and debt. Using this approach, that expert found the fair value of common stock in the company increased significantly and thus gave shareholders the impression that $90 per share was an unfair valuation. A battle of experts commenced, with stacks of discovery and numerous depositions.

The current definition of fair value requires considering a business as an ongoing entity to incorporate the various moving parts of a living, illiquid business.

After a three-day bench trial, the court ruled in the company’s favor, finding no support for the dissenters’ demand of $700 per share and confirming Hilliard Lyons’ fair-value appraisal of $90 per share.

This ruling demonstrated the Court’s understanding of business appraisal levels of value. Working to protect against both upward and downward bias in fair-value determinations, the current definition of fair value requires considering a business as an ongoing entity to incorporate the various moving parts of a living, illiquid business.

If you have questions about this case or would like details, please contact Andy McKay, Hilliard Lyons’ Director of Investment Banking, at

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