Opposing responses to New Jersey DLOM ruling

BVWireIssue #174-3
March 15, 2017

In valuing the oppressing shareholder’s (seller’s) interest in a closely held family business, a New Jersey trial court, in line with precedent, recently decided it was appropriate to apply a 25% discount for lack of marketability because the seller’s conduct had created an “extraordinary circumstance,” i.e.,forcing a buyout.

Responding to Michelle Patterson’s earlier critique of the New Jersey courts’ use of "carefully developed valuation concepts and measures as tools of punishment or reward in fair value litigations,” Wayne (Nick) Nichols (Abrams Little-Gill Loberfeld PC) agrees the practice is problematic. Nichols says: “The court is now expecting valuators to become the judge with the responsibility to determine the appropriate DLOM penalty to be assessed in future cases! That should not be our responsibility. Our job is to provide a fair and reasoned valuation to the court, including a clear explanation of the facts and how we applied valuation principles to reach our conclusion. Period.”

Jim Alerding (Alerding Consulting) sees the issue differently. "Actually what is being done here and in other similar cases is the court is using its authority to decide whether a DLOM should be applied in the case of a fair value case,” Alerding says. He notes that the comments to the ABA’s Model Business Corporation Act provide: “In cases where there is dissension but no evidence of wrongful conduct, ‘fair value’ should be determined with reference to what the petitioner would likely receive in a voluntary sale of shares to a third party, taking into account his minority status.” MBCA, § 14.34 comm. 4(b). Alerding concludes: "So the application of DLOMs in these cases is not a distortion of valuation principles but instead is an application of law as to whether or not, with the facts presented, the wrongful conduct of the minority shareholder requires the application of a DLOM. It is not an issue of valuation principles. In fact, courts are empowered to change principles in valuation or otherwise (unless restricted by law from doing so) when they see fit."

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