Last week, we reported on a recent forced buyout case out of New Jersey in which the trial court said it was “fair and equitable” to apply a marketability discount in determining the fair value of the oppressing shareholder’s interest in a company in which he owned 50%. The oppressing shareholder must not benefit from his actions, the court said, referencing precedent.
Michelle Patterson, an attorney and frequent commenter on valuation issues, is one of the readers troubled by the New Jersey courts’ use of carefully developed valuation concepts and measures as tools of punishment or reward in fair value litigations. She believes that the use of the DLOM as a legal penalty voids a long-thought-out valuation measure of its meaning and separates it from its economic basis. The DLOM application should not become contingent on the character of the parties but be based instead on the actual value factors of marketability. She says: "We can understand and sympathize with a court's desire to pursue equity in these forced buyout situations. We also can agree that the party who oppresses or coerces should not gain a windfall. However, a profession cannot support the attainment of a worthy goal by allowing the misuse of its practitioners’ hard-thought-out and developed concepts. The objective, both noble and necessary, of the evolving profession of business valuation is to develop measures which are accurate, consistent, and appropriate in order to assess an economic entity as it is at a given point in time."
Patterson adds: "We may do the courts and the profession a favor by paying attention to Chris Mercer’s view that accurate valuators take account, within their value determination, of the entity’s economic metrics, which ordinarily include factors of marketability. If the valuation accounts for those factors and a later DLOM is applied—whether for advocacy, valuation, or, worst of all, for inherently unrelated economic variables such as bad behavior—the validity of the valuation is being undermined."
Patterson and her frequent collaborator Gil Matthews (Sutter Securities Inc.) expect to expand on this topic in a forthcoming issue of Business Valuation Update.
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