How does a court account for a husband’s fractional interests in companies when the measurement for purposes of equitable distribution is the intrinsic value? This was one of several valuation issues at the center of a recent divorce case.
The husband held varying interests in several companies that owned and operated hotels and properties. At divorce, both parties introduced experts (three in all) to determine the value of his investments. The primary focus was on two entities in which the husband had a 33 1/3% and a 40% ownership interest, respectively. The wife’s expert and one of the husband’s two experts used an income approach to value each hotel. But the husband’s second expert performed a fractional interest appraisal of his shares in the companies.
To determine the net equity value of each company, he first determined the real estate values of the hotels the companies owned and then added the companies’ other assets and subtracted their liabilities. Next, he multiplied this value by the husband’s ownership percentage to arrive at the pro rataequity value, which he discounted to account for factors related to fractional ownership. These factors might include the ups and downs of the real estate market, the number of owners, income characteristics, lack of control, “sometimes partition ability, finance ability, and the overall marketability,” the expert stated.
To arrive at an equitable distribution, the circuit court adopted the values the wife’s expert proposed for the hotels themselves. But it then factored in other assets the companies owned (specifically, cash reserves). Finally, the court subtracted the companies’ debts. Yet even though the court accepted the method the husband’s second expert applied to valuing the pro rata equity value of the companies, it expressly declined to include his proposed discounts, stating that to do so would not be “proper” under the intrinsic value review that state law requires.
The husband challenged this—and other findings—in the Virginia Court of Appeals. Courts valuing marital property to make a monetary award must determine the value that represents the asset’s intrinsic worth to the parties, the appellate court stated with emphasis. “The intrinsic value is a very subjective concept.… The methods of valuation must take into consideration the parties themselves and the different situations in which they exist,” it explained.
Subject to this standard, the lower court already considered the fact that the husband’s partial interests were not liquid or easily transferable. The court was right not to include the fractional discounts the expert applied within the context of his different analysis, the Court of Appeals decided.
Find a comprehensive analysis of Patel v. Patel, 2013 Va. App. LEXIS 110 (April 9, 2013) in the July issue of Business Valuation Update; the opinion will be available soon at BVLaw.