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Law Alert | July 13, 2010 | www.BusinessValuationLaw.com | Issue 11-1

Bilski affirmed, adding value to “business method” IP

In one of the most highly anticipated, long-awaited patent decisions, the U.S. Supreme Court finally decided Bilski v. Kappos just last Monday. The Court held that the Federal Circuit Court’s so-called “machine or transformation” test is not the only test for a patentable process (requiring it to be tied to a particular machine or apparatus, or one that transforms an article into a different state or thing). Business methods can also be patentable under the current statutory scheme (35 U.S.C. 273), the Court ruled.

Under this interpretation, the Court still threw out the Bilski patent, which explained through a series of mathematical steps how commodities buyers and sellers in the energy market could protect, or hedge, against the risk of price changes. “This is an unpatentable abstract idea,” the Justices held. By doing away with the machine or transformation test as the sole test for determining whether an invention is patentable subject matter, “the Supreme Court has kicked open the door and will not allow it to be closed on new technologies and innovations that we cannot today imagine,” says a recent posting by the Practicing Law Institute.

Lawyers and financial experts will meet in Chicago on Sept 15-16 at BVLaw’s Summit on Best Practices in Valuing Intellectual Property.   Attend live or at your desk via webcast.   Need a legal primer on BV and IP?  Learn More.

SC Supreme Court persuaded regarding use of normalization adjustments

First the trial court found that two shareholders in a South Carolina medical supply company had been diverting funds to pay themselves excessive salaries. Next, it ordered the shareholders to buy-out the dissenting owners and appointed a business appraiser to determine statutory fair value. In his engagement letter, the appraiser agreed to comply by the AICPA’s Statement of Standards for Valuation Services as well as NACVA’s professional standards. Per the parties’ instructions, he also agreed to use the income approach. When he valued the company at $34,000, however, without adjusting the owners’ salaries, the dissenting shareholders appealed. The appraiser not only failed to abide by the court’s prior findings (that the salaries were excessive) but he also failed to apply the agreed-on income approach. Moreover, both the AICPA and NACVA professional standards require normalization adjustments as a “key step” in the income approach, the plaintiffs said—but the state appellate court disagreed, finding the trial court had “no evidence” that the appraiser prepared his report incorrectly.

The plaintiffs took their appeal to the S.C. Supreme Court—which reversed. The trial judge was presented with the appraiser’s report, which clearly did not normalize the corporate salaries; the AICPA and NACVA standards were also evidence of appropriate valuation adjustments, which the trial court simply “declined to consider.”  At a minimum, the plaintiffs showed that the defendants’ salaries were excessive, and pursuant to the agreed-on income approach, “some normalization adjustment was required,” the court held, and vacated the fair value appraisal.

Read the complete digest and court's opinions in Blackburn v. TKT and Associates, Inc., 2010 WL 2035369 (S.C.)(May 24, 2010) at BVLaw™ later this month.

Valuation of hedge fund GPs complex and ambiguous

“The formulas by which GP limited partners are compensated are complex, and the stakes are frequently high,” says Don May (Marks Paneth & Shron) in his recent article “Strategies for Avoiding Valuation Disputes in Connection with Breakups of Hedge Fund General Partnerships” in the Hedge Fund Law Report. And when the GP limited partner wants to leave a hedge fund GP, and the hedge fund holds illiquid or esoteric investments, the challenge becomes even more complex.  May outlines two principals to follow in this type of valuation:

  • Have agreed-upon guidelines in place prior to the formation of the GP
  • Categorize different asset types and investments strategies

“Guidelines for the valuation of investments—a fundamental input   into the valuation of the general partnership—must be linked to the assets in which the fund invests and the fund’s investment strategy. Such guidelines are necessary for any breakup agreement,” says May.

For the full text of the article click here.

Update on fairness opinions – learn from the experts

This Thursday, July 15, valuation expert Craig Jacobson (Citrin Cooperman & Company) and attorney Jeffery Rothschild (McDermott Will & Emory) will join BVR for “Fairness Opinions: Judging Transactions in Today’s Economy.”  Through their 100-minute webinar, Jacobson and Rothschild will review how changes in regulation, case law, and the economy have changed the landscape for fairness opinions, thereby increasing the challenges inherent in this already difficult field.  It all begins at 10:00 am PT/1:00 pm ET.  Two CPE credits are available.  Click here for more information or to register.


Statutory fair value guide now available

The 2010 update of BVR's Guide to Fair Value in Shareholder Dissent, Oppression and Marital Dissolution is now available. In addition to the print copy, the guide provides additional online access that includes real time updates to recently published court opinions and case abstracts, new articles, conference presentations, podcasts, news and blog feeds. The Guide is also available in digital format and can be loaded onto any eBook reader. The 2010 edition features:

  • Articles from leading experts such as Jay Fishman, Bruce Silverstein, and others.
  • A reference chart summarizing the shareholder dissent/oppression statutes in all 50 states, categorized according to how the state’s courts typically address the application of discounts in fair value appraisals
  • Complete transcript of the teleconference "Standards of Value," with experts Jay Fishman, Shannon Pratt, and William Morrison
  • Abstracts of all the most recent, leading statutory fair value cases (originally published in the Business Valuation Update™).
  • Each case abstract also comes with the full-text of the court’s opinion—along with other “landmark” decisions in the statutory fair value realm.

We’ve also just released our Divorce Case Law Compendium, which focuses specifically on state-by-state digests of key decisions addressing business valuation in matrimonial cases.

How will healthcare reform impact your subject company’s valuation?

The answer is "it depends, and ‘depends’ is always good from a healthcare valuation perspective,” Elliott Jeter (VMG Health) said in last week’s BVR webinar on healthcare reform and business valuation with co-presenters Don Barbo (Deloitte Financial Advisory Services) and Mark Dietrich, CPA/ABV. Barbo agreed, adding that health care reform presents a “wonderful opportunity” for healthcare valuation professional services, “not only because of the increase in activity but because of how we can help guide our clients through this.”

The impact of healthcare reform depends a lot on the business you are valuing. When valuing a healthcare entity, “look for things that might affect reimbursement …and the things that might have fees that are specific to that industry,” says Barbo.  Elliott also asks “how does the reform impact the payer mix…is it favorable or unfavorable?” For example, Barbo reports healthcare reform is not necessarily favorable to the home healthcare market because of government efforts to reduce reimbursement.

For more information on the webinar click here.


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In This Issue

Bilski affirmed, adding value to "business method" IP

SC Supreme Court persuaded regarding use of normalization adjustments

Valuation of hedge fund GPs complex and ambiguous

Update on fairness opinions - learn from the experts

Statutory Fair Value guide
now available

How will healthcare reform impact your subject
company's valuation?

Estate & Gift Guide

Y&S Advisory Services

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