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Business Valuation Considerations During Periods of Market Turmoil

Assessing the Impact of COVID-19 in Complex Disputes and Restructurings

By John E. Rollins, Mike St. Martin, Mike Kennelly, Gene L. Deetz

May 1, 2020

COVID-19 is impacting all corners of everyday life, including businesses across every industry. The economic impact of our necessary response to this global pandemic creates adverse circumstances for operations, financing, and viability. These circumstances will lead to a wide variety of disputes and litigation.


Introduction

The COVID-19 outbreak has increased market volatility and disrupted the worldwide economy.

In a matter of just a few weeks, the S&P 500 Index saw an abrupt price decline, retreating by more than 30 percent in the span of 23 trading days after reaching an all-time high on February 19, 2020.[1] The market subsequently recovered over half of those losses, within a similarly short number of days. Moreover, according to data compiled by the Federal Reserve Bank of St. Louis, the COVID-19 outbreak has resulted in levels of financial stress not seen since the 2008-2009 financial crisis.[2]

Significant uncertainty remains regarding the depth and duration of the economic dislocation stemming from a global health crisis. The long-term impact of fiscal and monetary policy responses enacted by governments across the globe will not be clear for years.

Business Valuation in Complex Disputes and Restructurings

Based on our experience following past major market and economic disruptions, such as the savings and loan crisis of the early 1990s, the burst of the “dot-com” bubble in 2000-2001, the 9/11 terrorist attacks, and the 2008-2009 financial crisis, companies will face heightened risks for litigation and other disputes involving business valuations. These contentious matters will include business valuations that were prepared for a variety of purposes, including mergers and acquisitions, venture capital and private equity deals, tax assessments, transfer pricing, litigation, bankruptcies and reorganizations, and financial reporting. While the initial impact from COVID-19 may have affected industries like healthcare, retail, and travel and leisure, companies across industries and geographies may face financial and operational stressors such as delays and other complications with transactions, reduced revenue and earnings potential, disruptions to supply chains, and reductions in workforce, among other challenges.

Steering through these complex issues will require experienced legal counsel and financial expertise. The increased scrutiny of business valuations to come should serve as a constructive reminder to both valuation practitioners and those that rely on these analyses of the vital importance of careful and critical consideration of valuation inputs and assumptions. It is also important to remember that business valuations are dependent on the individual facts and circumstances surrounding each subject company and/or asset under analysis.

Considering this landscape, it is helpful to review key areas where disputes arise as we emerge from the initial shock of the current crisis.

Areas of Potential Disputes

Business and partnership disputes
  • Business interruption, loss, impairment, and destruction claims – These claims may include alleged business losses or diminution in business value following a policy triggering event.
  • Breach of contract claims – These claims may include but for economic damages due to an alleged breach of contract and any impact on firm equity or enterprise value resulting from disruptions caused by COVID-19.
  • Merger, acquisition, and divestiture transactions – Includes purchase price disputes for ownership interest(s) transferred in a sale to correct for errors, misrepresentations, and/or disputes regarding the proper accounting treatment for revenue, expense, and/or cash flow items.
  • Partnership and buy-sell agreement disputes – Value of a business in connection with disputes over the correct application of the valuation methodology specified in a partnership or buy-sell agreement and/or the achievement of financial earnout targets.
  • Material adverse change litigation – Consideration of the impact of COVID-19 and the applicability of Hexion v. Huntsman.[3]
  • Fraud or misappropriation – Value of allegedly misappropriated property or the diminution in business value due to alleged fraudulent activity.
  • Business and joint venture separation or dissolution – Value of ownership interest(s) in property to be divided as of the date of separation or dissolution.
Shareholder litigation
  • Appraisal rights, dissenting shareholder, and minority shareholder oppression actions – Value of ownership interest(s) in dissenting shareholder or minority shareholder oppression matters.
  • Securities litigation – Includes corrective disclosure and stock price drop cases.
  • Derivatives and other complex financial instrument valuation disputes – Includes valuation issues in ISDA close-out disputes.
  • U.S. GAAP and IFRS financial reporting and financial statement misrepresentations – Response to regulatory or shareholder actions alleging errors or misrepresentations involving valuation estimates and/or other financial reporting issues.
Bankruptcy and reorganizations
  • Solvency, fraudulent conveyance, and/or preference actions in connection with companies facing financial distress.
  • Financial advisory services.
  • Fresh start accounting – Includes application of ASC 852 for businesses emerging from bankruptcy reorganization.
Tax matters
  • Federal tax controversy – Includes transfer pricing litigation, tax valuation issues, and specific disputes related to the proper application of certain IRC guidance, as well as practitioner responsibilities under TD Circular No. 230.

How We Can Help

Business valuation and related disputes require additional considerations in times of financial crises. For example, projecting the future depths of the COVID-19 pandemic and the timing of recovery in the context of a business’ facts and circumstances is a complex analysis requiring significant technical capabilities, experience, and rigorous analysis. Additionally, understanding what was known or knowable as of the valuation date will require careful analysis as well.

Ankura’s experts advise clients and their legal counsel when disagreements and uncertainty arise regarding the quantification of value, price, and/or economic damages. Our experience includes assisting with all phases of a litigation, including initial factfinding, case assessments, valuation/damages theory, case strategy, expert witness testimony, trial consulting, and/or settlement, and mediation.

Our valuation dispute analysis professionals possess the expertise to serve as a consultant, testifying expert witness, neutral arbitrator, or mediator in U.S., cross-border, and international disputes involving a broad variety of valuation-related matters. Our experience allows us to help respond to complex challenges and disputes we anticipate arising in the wake of the global COVID-19 outbreak. 

Our Difference

We work with leading law firms and senior management throughout the world providing expert consultation and testimony on complex valuation matters. Our professionals are well-credentialed, experienced in valuation, finance, economics, and accounting, with many holding one or more professional certifications or advanced academic degrees, such as ABV, ASA, CFA, CFF, CFLC, CIRA, CLP, CPA, CVA, MBA, and Ph.D.

We bring multi-disciplinary and diverse backgrounds from global valuation firms, Big Four accounting firms, economics consulting firms, intellectual property consulting firms, investment banks, international management consulting firms, healthcare consulting firms, and federal government policy advisory councils. We leverage the deep industry and functional expertise in our company to bring the right combination of skills and experience to each client’s specific situation.


[1] Per S&P Capital IQ data as of April 24, 2020.
[2] Federal Reserve Bank of St. Louis, “Financial Stress Index.” (https://fred.stlouisfed.org/graph/?graph_id=716399; see also https://fredblog.stlouisfed.org/2020/03/tracking-the-u-s-economy-and-financial-markets-during-the-covid-19-outbreak/, last accessed April 24, 2020).
[3] Hexion Specialty Chems., Inc. v. Huntsman Corp., 2008 Del. Ch. LEXIS 143 (Del. Ch., Sept. 29, 2008).