“There is no greater impediment to the advancement of knowledge than the ambiguity of words.” The appellate court’s decision in Swiderski Equipment, Inc. v. James Swiderski demonstrates how 18th century philosopher Thomas Reid’s words remain highly relevant in 21st century litigation. The case, in which the expert’s initial valuation report was discarded due to its ambiguity on a key issue, displays the risk of a lack of clarity in valuation reports and highlights how vague valuation reports can prevent an accurate assessment of value, prolong litigation and increase client costs in a variety of ways.
In December 1986, James Swiderski became the only minority shareholder of Swiderski Equipment (“the Company”). His father, Alex Swiderski, was the president, sole director and majority shareholder of the Company. James was an employee of Swiderski Equipment at the time he received the shares, and both he and Alex signed a corporate redemption agreement (“CRA”) granting the Company the option to purchase the shares held by the Shareholder in the event a shareholder leaves the Company. The shares were valued at $1,000 per share unless they were revalued at a later date in accordance with terms in the agreement.
James terminated his employment with Swiderski Equipment in 2008. Following his departure, Swiderski Equipment sought to redeem James’ 510 shares. James and his wife, Sandra, were in the midst of a contentious divorce and Sandra opposed the redemption. Swiderski Equipment responded by filing a lawsuit to enforce the CRA in September 2008. Sandra and Swiderski Equipment, however, soon reversed their positions.
In July 2009, Sandra moved to require Swiderski Equipment to purchase the 510 shares at $1,000 per share. The Company maintained it had the right but not the obligation to repurchase the shares and no longer wished to repurchase the shares due to a downturn in the economy. The court sided with the Company stating that James and Sandra are “bound by the CRA” and that the Company “has the right, but not the obligation, to redeem the stock.”In July 2010, the final judgement was entered and both parties waived their rights to appeal.
James requested a share revaluation in November 2010 pursuant to the CRA. The Company denied his request and argued that the share price was set at $1,000 as a result of the final judgment. Two years later, James repeated his request for share revaluation but received no reply. In January 2013, Swiderski Equipment chose to redeem James’ shares and issued a check for $510,000. James contested the value.
The circuit court ruled that the stock should be valued at $1,000 per share because the parties had not implemented a new certificate of agreed value. However, the appellate court reversed the circuit court’s earlier decision and ordered a stock revaluation.
Revaluation & Analysis
The circuit court then ordered an accountant from Swiderski Equipment’s accounting firm to perform the valuation. The accountant was instructed to use his professional discretion in applying discounts for minority interest and lack of marketability. Based on the outcome of previous litigation, however, the court instructed the accountant to assume that all executive compensation including bonuses paid to Alex Swiderski from 2005-2012 was reasonable compensation, and therefore should not be considered retained earnings for the purposes of the valuation.
The accountant submitted a report in which he concluded a valuation of $615,000 for the 510 shares as of December 31, 2012. On June 26, 2015, the court ordered the Company to pay James an additional $105,000, equal to the difference between the amount previously paid and the accountant’s valuation. James once again appealed.
While several issues surrounding the revaluation were disputed, two issues surrounding ambiguity in valuation report arose:
- The report was ambiguous with regard to its analysis of executive compensation.
James argued that the circuit court erred when it directed the accountant to presume the compensation paid to Alex Swiderski between 2005-2012 was not excessive. Swiderski Equipment asserted that the issue is moot because the accountant independently concluded that the compensation was not excessive. While the accountant’s valuation report referenced an independent analysis of the compensation, the report was ambiguous regarding the details and extent of his analysis.
For example, the accountant’s report stated that in general, “excessive benefits to officers, including pension and profit sharing” would be a cause to adjust corporate earnings. However, the accountant did not make any adjustments in this particular valuation due to the court’s ruling which required him to assume reasonable compensation. The accountant’s report further stated that “based on our own analysis, we have concluded that the historical officer’s compensation is within industry ratios.” The problem arose in that the report contained no further information on the industry ratios he considered, nor did the record contain any testimony by the accountant regarding an independent analysis of compensation.
- The report was ambiguous as to whether a minority discount was applied.
James argued that the accountant erred in applying a minority discount in his initial valuation. The report stated, “The value derived from the income approach is considered a value based on a minor[i]ty cash flow. Therefore, this method arrives at a fair market value calculated on a non-controlling basis and a separate discount for a non-controlling position is not necessary.” While it is clear that the accountant did not apply a minority discount after calculating the value of the shares, the report implied but was ambiguous as to whether the model took minority interest into account in the cash flow.
Decision and Takeaway
The appellate court determined the circuit court erred in its decision regarding the assumption of reasonable executive compensation citing insufficient evidence to conclude that the jury had determined the bonuses paid to Alex were reasonable. As a result, an analysis of whether the compensation was reasonable or excessive would be necessary to determine the appropriate valuation of the Company. Due to the ambiguity in the accountant’s report on the extent of his compensation analysis, the court reversed the order adopting the accountant’s valuation and the payment of an additional $105,000 to James. It remanded the accountant to conduct a new valuation, in which he must independently determine whether the disputed compensation is excessive, and if so, how it should impact the valuation.
The appellate court’s censure on ambiguity did not end there. Though the case was remanded for revaluation based on ambiguity in the executive compensation matter alone, the judge took the opportunity to address the ambiguity in the application of a minority interest discount as well and ordered that on remand, a minority discount may not be applied in any form.
The case of Swiderski Equipment v. Swiderski firmly demonstrates that clarity in valuation reports is not just good practice, it may prove essential to the credibility of the valuation and the outcome of litigation. The judge’s message was loud and clear: ambiguity in valuation reports will not be tolerated in the courtroom.
This article was authored by Debra Jacobs, a senior associate at Duff & Phelps.
 Reid, Thomas. Essays on the Intellectual Power of Man. Tyler & Reed, 1843.
 Swiderski Equipment, Inc. v. James Swiderski, Court of Appeals of Wisconsin, District Three, Appeal No. 2016AP700 (February 14, 2017).
 Per paragraph 8 of the CRA. Id at 2-3.
 Swiderski Equipment, Inc. v. James Swiderski, Court of Appeals of Wisconsin District III, Appeal No. 2013AP1545 (May 6, 2014) at 2.
 Per paragraph 8 of the CRA, “…during the ninety (90) day periods following the last day of the Corporation’s fiscal year ending with the calendar years 1988, 1990 and within each subsequent second year thereafter, any party may request that a study be undertaken to arrive at a new fixed price to be agreed upon by the parties.” Swiderski Equipment, Inc. v. James Swiderski, Court of Appeals of Wisconsin, District Three, Appeal No. 2016AP700 (February 14, 2017) at 2.
 Swiderski Equipment, Inc. v. James Swiderski, Court of Appeals of Wisconsin, District Three, Appeal No. 2016AP700 (February 14, 2017) at 6.
 Id. at 10.