A blog post by New York attorney Peter Mahler (Farrell Fritz) in the New York Business Divorce blog discusses an article in Business Valuation Update, ”NY’s Unfair Application of Shareholder-Level Marketability Discounts,” written by Gil Matthews (Sutter Securities). New York's out-of-step position is a hotly debated issue, and Mahler gives his perspective on the issue and says that it “would be nice if the business valuation community could speak with one, clear voice on the issue.” BVWire asked Mahler to elaborate.
Need a ‘right’ answer: “It’s important for lawyers to be able to advocate, and for judges to decide, whether both in theory and practice, it’s equitable to apply DLOM in fair value cases from both a legal and appraisal standpoint,” Mahler says. “Mercer [Chris Mercer of Mercer Capital] and others argue it’s never fair (in the sense of nondiscriminatory among shareholders of the same class), and that there exists no reliable empirical basis (pre-IPO and restricted stock studies included) to determine DLOM at the financial control level of value. Matthews also argues strongly that DLOM is never fair at the shareholder level but seems comfortable when DLOM is factored into the discount rate as in the Seagroatt case. [Shannon] Pratt writes in Chapter 1 of Business Valuation Discounts and Premiums (2nd ed. 2009) that ‘[c]ontrol shares in a privately held company may also be subject to some discount for lack of marketability, but usually not nearly as much as minority shares.’ Given these variations, I think we could use some additional clarity in articulating and supporting applicable appraisal doctrine and methodology in support of fairness-based legal arguments in order to get to the ‘right’ answer when it comes to DLOM in fair value cases.”
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