When the owner of a long-time, family-run heating and sheet metal company began making plans for retirement, he began talking buyout strategies with his most trusted employee. They agreed on a plan whereby, for tax reasons, the owner and his wife would start giving shares to the employee and his wife in amounts equal to the then-applicable federal gift tax exclusion ($10,000). But when the latter’s marriage started falling apart, the gifts stopped, leaving the employee and his wife each owning roughly 12% of company stock. At their divorce trial, both parties’ experts agreed that approximately 35% in combined discounts for the nonmarketable, minority interests should apply; they really only disagreed on net asset value versus market and income approaches. The court also heard testimony from the husband and the owner that the entire company was worth up to $3.9 million.
Despite the trial court’s express wish to find the shares’ “true market value,” it said the experts’ opinions were “not overly helpful.” In fact, it was clear from the experts that “there is no true fair market value for these shares,” the court said, and in particular, no “actual” buyer for the wife’s 12% interest. Instead of reaching any value, it ordered the parties to each take their shares—and the wife appealed.
After considering the entire record, the appellate court affirmed. “It is clear that the corporation has value,” the majority opinion emphasized. “However, both experts made clear that [the] wife’s ten shares are not currently marketable separately from the corporation; thus, the evidence supports the trial court’s finding that, in and of themselves, [the] wife’s shares carry no market value, discounted or otherwise.”
An impassioned dissent believed that the majority not only contravened the applicable fair market value standard and the “overwhelming evidence” that the wife’s shares had value, but it also violated the courts’ equitable imperative to “disentangle” the parties financially and, above all, to do no economic harm. Read the complete digest of In the Matter of the Marriage of Gay, 2012 Ore. App. LEXIS 622 (May 16, 2012) in the September Business Valuation Update; the court’s opinion will be posted soon at BVLaw.