In a buyout dispute involving a limited liability company, the Oregon Court of Appeals recently overturned a trial court’s decision to apply discounts when valuing the departing member’s minority interest. The controlling operating agreement required a valuation of the plaintiff’s proportional interest in the value of the entity’s assets, not a valuation of the plaintiff’s specific interest in the company, the appeals court found.
The plaintiff owned 25% interests in two LLCs, which separately owned and operated franchise hotels. Three fellow LLC members each owned equal shares in the remainder interests. The plaintiff felt unfairly treated by the other members and sued, alleging a number of claims, including minority oppression. The plaintiff also asked to have the LLCs buy out his two interests. The defendants filed counterclaims, asking for the right to expel the plaintiff from the companies.
‘Subtle but significant’ distinction: The trial court found that there was no oppression and that, under the entities’ operating agreements, the defendants had the right to expel the plaintiff. The court also found the operating agreements were controlling in terms of how to determine the compensation due to the plaintiff for his respective interests. Under the one agreement, the buyout price was to be determined “by multiplying the member’s percentage ownership interest by the fair market value of all LLC assets.” Under the second agreement, the buyout price was to be based on the company’s book value.
A valuation expert testified he was retained to determine the fair market value of the plaintiff’s 25% interest and that it was appropriate to apply a 10% discount for lack of control and a 20% discount for lack of marketability. The expert calculated that the fair market value of all of the company’s assets was $5.5 million and the value of the plaintiff’s undiscounted 25% interest was almost $1.4 million. The use of discounts reduced the value of the plaintiff’s interest by $385,000. The trial court adopted the expert’s value determination.
The plaintiff appealed, arguing, among other things, that, in the fair market value determination, the application of discounts was inappropriate.
The Court of Appeals agreed. It found that the operating agreement was controlling and the language as to how to value a departing member’s interest was unambiguous. The plaintiff was to be compensated “for his share in the fair market value of all the assets of the LLC, not for the fair market value of his share of the company,” the reviewing court emphasized. “The distinction is subtle but significant.” The court said the agreement did not provide a basis on which to justify discounts to reflect that the plaintiff’s ownership interest was a minority interest in a closely held company. Consequently, the trial court erred when it adopted this part of the expert’s value determination.
At the same time, the reviewing court dismissed the plaintiff’s challenge to the trial court’s determination of book value to compensate the plaintiff for his interest in the second LLC.
A digest of Patel v. Siddh Hospitality LLC, 312 Ore. App. 347 (June 16, 2021), and the court’s opinion will be available soon at BVLaw.