Thursday, January 22, 2009

Hindsight and EquaURL: lization

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"...[46] The general principle that emerges from both Domglas, supra, and Ford, supra, is that hindsight information is generally inadmissible and cannot be used as part of the process of establishing the value of shares at a particular date. An exception to this principle is that hindsight, or the actual results achieved after the valuation date, maybe compared against the projected or forecasted corporate results made by valuators and used to test the reasonableness of the assumptions made by those valuators.

[47] A similar consensus respecting the use of hindsight emerges in the family law context when the value of a business for equalization purposes is in issue. See: Harry v. Harry reflex, (1987), 9 R.F.L. (3d) 121 (Ont. Dist. Ct.); Woeller v. Woeller reflex, (1988), 15 R.F.L. (3d) 120 (Ont. Dist. Ct.); Martin v. Martin reflex, (1988), 17 R.F.L. (3d) 78 (Ont. H.C.); and Bobyk v. Bobyk Estate reflex, (1993), 13 O.R. (3d) 559, 47 R.F.L. (3d) 310 at para. 33 (Ct. J. (Gen. Div.)). As stated in Harry, supra, at para. 17, “when evaluating the fair market value of a business hindsight is inappropriate.” However, as in the corporate context, “one cannot entirely ignore events which followed [the valuation date] in assessing the fundamental assumptions underpinning the opinions expressed by [the experts].” Woeller, supra at para. 31.

[48] A case that is particularly relevant to the current appeal is Martin, supra. In that case, the court had to determine the fair market value of a parcel of land owned by one of the spouses. At the date of marriage, the land was zoned agricultural. By the valuation date, the land had been re-zoned commercial, but the re-zoning by-law was under appeal to the Ontario Municipal Board and it faced considerable opposition. Notwithstanding this opposition, the appeal was dismissed a year after the valuation date.

[49] At trial, one of the appraisers had valued the land without considering the appeal, while the other appraiser valued the land as if the re-zoning would fail. In his reasons, the trial judge agreed with the second appraisal, noting at para. 15:

A prudent purchaser on [the V-date] would have been buying land of which the rezoning … was the subject of a hotly contested appeal; he would, in effect, have been buying a lawsuit in this regard. There was no knowledge at that time whether the appeal would be successful or unsuccessful. The fact that it proved to be unsuccessful a year after separation cannot be taken into account.

[50] Martin adopts the approach to the use of hindsight information that conforms to the general principle that one must base valuation on the knowledge available at the valuation date. The first appraiser’s reliance on the ultimate outcome of the appeal was unreasonable because a prudent purchaser would not have paid the higher purchase price for commercially zoned land at that time, as he could not be certain he would be able to use the land for commercial purposes.

[51] While other exceptions may evolve from the jurisprudence over time, I would adopt the Ford articulation of the hindsight rule and the exception I have discussed for valuations under the Family Law Act. In both corporate law and family law, where the goal is to determine the fair market value of the business, perfect accuracy is impossible. As Viscount Simon wrote in Gold Coast Selection Trust Ltd. v. Humphrey (Inspector of Taxes), [1948] A.C. 459 at 473 (H.L.), “Valuation is an art, not an exact science. Mathematical certainty is not demanded, nor indeed is it possible.” The valuator must make assumptions as to how a prospective purchaser would have evaluated the business based on the purchaser’s knowledge at the time in question and the amount of risk the purchaser would likely have been willing to assume concerning a lawsuit. Hindsight information is not admissible on the question of whether that assumption was correct but, as indicated in Ford, supra, it can be used to test whether that assumption was reasonable.

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