Clarity in valuation report writing is critical. A Wisconsin case arising out of the buyout of a minority shareholder illustrates how an expert report that was ambiguous on a number of key issues, including the use of a minority discount, contributed to prolonging the litigation. To be fair, uncertainty over some of the trial court’s instructions and findings also escalated the family fight.
No constraints on appraiser: The subject company dealt in farm equipment and technology. The father was the majority shareholder and the son the only minority shareholder. A corporate redemption agreement (CRA) gave the company the option to buy back the son’s stock for $1,000 per share. This price was subject to reappraisal under certain conditions. After the son left the company in 2008, several disagreements developed into different lawsuits. The instant case centered on the valuation of the son’s 510 shares in the company.
The company paid the son $510,000 based on the price stated in the CRA. The son sued for a revaluation. He lost in trial court but won on appeal.
On first remand, the parties argued over who should perform the appraisal, what should be the scope of the valuation, whether to apply discounts, and whether the designated appraiser should treat bonuses paid to the father as reasonable compensation or as retained earnings.
For example, the son argued the CRA required a valuation of the entire corporation. The trial court’s response was ambiguous. The court noted the CRA “just basically talks about value of the corporation,” but also said it was “not going to put constraints upon the accountant or the appraiser who’s doing the evaluation.” The valuator should “use his professional judgment and discretion in determining the fair market value of the stock of the company” and whether a discount accounting for the minority status of the son’s interest should be used.
The appraiser valued the son’s interest in the company at $615,000.
On second appeal, the reviewing court agreed with the son that under the CRA the trial court should have ordered the appraiser to value the entire corporation rather than the son’s minority interest. The son also claimed the appraiser improperly applied a minority discount. The appeals court said it was unable to determine whether that was what the expert did. The expert report contained language suggesting he did not, but other statements indicated the expert’s “initial valuation was affected by the fact that [the son] owned a minority interest in the corporation,” the appeals court said. This was one of several issues mandating another remand. The appeals court was clear: In his revaluation, the expert was not permitted to use a minority discount.
The case is Swiderski Equip. v. Swiderski, 2017 Wisc. App. LEXIS 91 (Feb. 14, 2017). A digest of the decision and the court’s opinion will be available soon at BVLaw.