Divorce court adopts fair value standard, sort of

BVWireIssue #89-1
February 3, 2010

The husband was a commercial real estate developer in Alabama; during his divorce, a court-appointed expert valued his minority (25%) interest in several entities at just over $1 million. Based on evidence from the husband’s expert—including negative values for some entities and over $1 million in debt—the trial court applied a 40% combined discount for lack of marketability and lack of control to value the businesses at approximately $602,000. To do otherwise would be to “ignore the reality of the financial condition” of the parties and the properties, the court said.

The wife appealed, claiming that marketability and minority discounts should not apply to closely held, ongoing business values in divorce. No Alabama court had addressed the issue—so the Court of Appeals considered case law from states that have applied a “fair market value” standard in divorce (permitting discounts under the willing buyer/willing seller scenario), and those precluding discounts, including Brown v. Brown (N.J.), which adopted the statutory fair value standard (no discounts) from the dissenting shareholder context.

In general, Alabama divorce courts apply the broad, “equitable” standard, requiring the valuation to be “fair to all parties,” the appellate court explained. However, “like New Jersey, Alabama law recognizes the concept of ‘fair value’ in the dissenting-shareholder context,” the court added. Thus, when the divorcing parties do not plan to sell the marital business, “it makes little sense to determine fair value by the measuring stick of a hypothetical sale price.” To do so would artificially deflate the business value, causing a windfall to ongoing owner and an unfair, reduced price to the minority spouse, the court held.  It cited Standards of Value, by Jay Fishman, Shannon Pratt, and William Morrison (2007). A single judge dissented, so the case appears ripe for appeal to the state Supreme Court. Read the complete digest of Grelier v. Grelier, 2009 WL 5149267 (Dec. 2009) in the next (March 2010) Business Valuation Update™; a full-text of the court’s opinion will be available at BVLaw™.

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