Navigating Reversed Valuation Dilemmas: SME Enterprises Nationalized in 1950s Poland - A Case Study

Abstract

The publication describes a problem that often arises in court cases regarding the valuation of SME forcibly nationalized in the 1950s. Valuation of compensation to previous SME owners is an ongoing court debate in Poland. The authors proposed an approach that took into account the economic conditions at that time and complied with the principle of paying compensation for the actual losses incurred, and not for the potential losses that could be incurred as a result. At the same time, the publication analysed other similar judgments in cases regarding compensation for nationalized enterprises. The practical and scientific value of the publication lies in the fact that it addresses an existing practical problem and its solution. Research Design & Methods: the paper presents a conceptual proposal of the SME valuation method in unique circumstances, complemented by a detailed case study illustrating the application of this valuation approach. Findings: When calculating the compensation for nationalization or other forms of expropriation courts use various methods of valuing net assets (fair market value, book value, recreation value) plus separately determine the value of intangibles, such as licenses, based on the discounted average profits from such assets for a reasonable period of time. If indexation was employed (for historical cost valuation), it used either average interest rates in the economy, the cost of capital of a company, or the cost of lost opportunities for a particular company. Using discounted cash flow valuation for the entire business was uncommon and even if it was included in the bilateral investment treaties (which were meant to protect investors from expropriation) it was considered by the tribunals as speculative and unreliable. Our approach proposes net asset value approach with the use of inflation or average salaries for indexation (to calculate current values of assets) and a combined approach of historical values if they were known at the moment of nationalization and modern estimates of values of remaining assets (that belonged to the company but their value was not provided in the original documentation). Implications & Recommendations: The analysis of historical compensation decisions and bilateral investment treaties suggests that the most popular approach to valuing a loss from expropriation is the fair market value approach and net assets approach with a separate valuation of significant intangible assets provided that they gave certainty of profits for the investor. Contribution & Value Added: The practical and scientific value of the publication lies in the fact that it presents an existing practical problem of court calculation of compensations to owners of forcibly nationalized SMEs in Poland and its solution together with methodological framework that can be used in the future