The use of the marketability discount in divorce valuations has been a source of confusion in Tennessee owing to some court rulings. A recent amendment to the Tennessee Code promises to provide clarity to valuators practicing in this jurisdiction.
House bill 348, effective July 1, 2017, provides that, for purposes of achieving an equitable division of marital assets, the court, tasked with determining the interest in a closely held business, may consider “valuation methods typically used with regard to such assets without regard to whether the sale of the asset is reasonably foreseeable.” This includes the use of the lack of marketability discount, discount for lack of control, and a control premium, “if any should be relevant and supported by the evidence.”
The new provision seems to take aim at the 2007 case, Bertuca v. Bertuca, in which the Tennessee Court of Appeals rejected the use of DLOM because the owner-spouse did not indicate an intention to sell his interest in the business. “Thus the value of the business is not affected by the lack of marketability and discounting the value for non-marketability in such a situation would be improper,” the court said.
In the 2016 case, Grant v. Grant, the same court revisited the DLOM issue but, if anything, muddied the waters. The focus was on valuing the husband’s minority interest in three real estate development partnerships. The husband’s expert applied both a minority discount and a marketability discount even though the husband did not plan to sell his stakes in the partnerships. According to the expert, the DLOM served as “the gauge of a readily available market to turn a particular interest into cash.” The wife’s expert agreed with the use of a minority discount but not the use of a DLOM. The trial court found DLOM was appropriate in valuing one interest, where the husband might be compelled to sell some portion of the asset to comply with the court’s property division order. But the court rejected the use of DLOM for partnerships where the husband did not intend to sell.
The Court of Appeals said: “Generally, applicability of the use of a lack of marketability discount depends on the characteristics of the ownership interest being valued, not whether the owner of the interest actually intends to sell the interest.” This language suggested the appeals court disagreed with the trial court’s reasoning. But the appeals court added that, “in many instances, the decision to apply the discount is seen as discretionary” and depended on the facts of the case. Questions of fact are the province of the trial court, the appeals court said. Finding no abuse of discretion, the appeals court upheld the lower court’s valuation findings, leaving it unclear when to apply DLOM. The new law should answer this question.
Digests of Bertuca v. Bertuca, 2007 Tenn. App. LEXIS 690, and Grant v. Grant, 2016 Tenn. App. Lexis 327, as well as the courts’ opinions, are available at BVLaw.
Extra: The text of the new law is available here, courtesy of Robert Vance (Forensic & Valuation Services PLC).