After all the attention La Verghetta, a New York statutory fair value case, and Walsh, a New Jersey case, have received from the valuation community, what more is there to say about the courts’ DLOM rulings? Perhaps this, says Sylvia Golden, BVR’s legal editor and co-host of a recent BVLaw Case Update webinar that discussed both cases.
Third-party sale issue: The New York courts seem receptive to the argument that a DLOM is inappropriate where the contested interest will never be for sale to the public. In La Verghetta, Judge Scheinkman, referencing the earlier Zelouf decision, says “since the Innocentis [the buying shareholders] are not likely to sell JGJ, La Verghetta should not recover less due to possible illiquidity costs in the event of a sale that is not likely to occur.”
In contrast, when the plaintiff in Walsh makes this argument—that there should be no DLOM because none of the parties planned to sell to a third party—it has no traction with the court. The real issue is equity, the court in Walsh says. “[C]onsistent with the demands of equity, the oppressed shareholder should not be forced to hand the oppressing shareholder the windfall of an undiscounted price, leaving the oppressed shareholder to shoulder the entire burden of the company’s relative illiquidity,” the court says, citing the controlling 1999 Balsamides case. In Walsh, the plaintiff (selling shareholder) was found to be the oppressing shareholder—a ruling neither party in the case ever contested.
In Balsamides, the court dismissed the defendant’s theory—that there was no marketability issue because there was a designated buyer, the plaintiff-oppressed shareholder, who was not buying an interest that might result in a later sale to the public—as an “erroneous assumption.” The problem was that the oppressed shareholder was buying a company “that will remain illiquid because it is not publicly traded and public information about it is not widely disseminated,” the court said. Just because the plaintiff-oppressed shareholder is the designated buyer does not mean he should “bear the brunt” of the company’s illiquidity.
Takeaway: There is no bright-line rule for the use of DLOM, at least not in New York and New Jersey. Much as valuators dislike the vagueness that comes with concepts such as fairness and equity, the courts use them as guideposts when navigating through the waters of valuation.
Extra: Diehards who are looking for more analysis of the La Verghetta case can find it in Chris Mercer’s series on Statutory Fair Value and Business Valuation, Blog Post No. 8. What does Mercer think the future holds for the DLOM in New York statutory fair value determinations? "I don’t know, but we will see,” he says. "I’m guessing that over time, there will be a gravitational pull towards nil or small marketability discounts. Logic doesn’t work for large discounts. And the trend in other jurisdictions is clearly toward no marketability discounts at all."