The Challenge of Determining Enterprise Value in Volatile Markets The Challenge of Determining Enterprise Value in Volatile Markets

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News Article

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ALM Media, LLC




Arguments about value lie at the heart of many disputes in Chapter 11 cases. Yet, despite how critical it is to the outcome of these cases, bankruptcy courts often have extreme difficulty determining value. This makes valuation a fertile source of litigation.

By examining several cases in which our firm had a meaningful role over the last two years, in particular In re Premier International Holdings (Six Flags), No. 09-12019 (Bankr. D. Del. 2009), we illustrate how short term capital market trends can affect valuation, and the limitations of the two standard approaches courts use to determine value opinions of financial experts and actual market transactions. Where markets are illiquid, the desire to move cases through the system often is in conflict with the goals of maximizing and fairly distributing value to creditors. Where overall values are temporarily depressed, courts need to be cautious that junior creditors are not deprived of their share of the long-term "intrinsic" value a debtor would have under more steady state conditions while senior creditors may receive a windfall.

Given this, courts should approach the valuation issue in a nuanced and balanced fashion cognizant of the difficulties inherent in their task. Practical experience shows that there should be no hard and fast rule as to which approach works in all cases. Rather, courts should allow time for the adversary process to play out and apply their expertise and judgment on a case-by-case basis, conscious of how temporary market conditions can impact value

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