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September 15, 2015
Brattle Authors Deal Points Article on Delaware Court’s Reaffirmation of S Corporations Valuation Premium

Brattle principals Yvette Austin Smith and Torben Voetmann and senior associate David McKnight recently co-authored an article in the American Bar Association’s Deal Points journal on a recent appraisal case in the Delaware Court of Chancery which reaffirmed that S corporations enjoy a valuation premium relative to C corporations.

The article, “Delaware Appraisal Case Reaffirms Valuation Premium for S Corporations,” discusses the implications of the court’s decision in Owen v. Lynn Cannon, et al. and demonstrates that the premium valuation exists even when corporate earnings are used to reinvest in the business.

In his opinion, Chancellor Bouchard found that the fair value of the subject company, an S corporation, was nearly twice that of the value proffered by the defendant’s expert. The Chancellor identified the tax rate differential between an S corporation and a C corporation as a main factor in determining his valuation conclusion.

In their article, the Brattle authors discuss adherence to the Kessler model, which reasons that “[a]n S corporation structure can produce a material increase in economic value for a stockholder and should be given weight in a proper valuation of the stockholder‘s interest.”

The authors argue that this model provides a balanced and well-reasoned approach to quantifying the tax benefit of an S corporation when determining fair value in the context of an appraisal action, and should therefore settle the long-standing debate among experts as to whether an S corporation shareholder is entitled to a valuation premium in the context of an appraisal action.

The article can be read on the ABA website.