In a crucial decision on the use of discounts when valuing a spouse’s minority interest in a closely held business, a majority of the South Carolina Supreme Court rejected a bright-line rule, noting it would limit the flexibility family courts must have in apportioning marital assets. Other considerations also militated against a fixed approach, the majority explained. The opinion triggered a dissent.
Disagreement over DLOM: During the marriage, the husband came to own 100% of the stock in a family business. Most of it was found to be a gift from his father and not marital property. In 2009, the husband transferred a 25% equity interest in the business to the wife. A stock agreement contained a transfer restriction. In 2012, the husband filed for divorce. The flashpoint was the valuation of the wife’s 25% interest.
The husband’s expert applied a discount for lack of marketability and lack of control. She explained the DLOM by noting a closely held company was less marketable and less liquid than a publicly traded business. She also pointed to the transfer restriction. A minority discount was appropriate as the interest holder would not have control over the company.
The wife’s expert initially used a DLOM, but, upon learning that the husband did not intend to sell the company, found it was inappropriate. He valued the entire company and divided the result by four.
The family court credited the husband’s expert. Acknowledging a “debate as to whether … discounts should apply in a divorce setting as the business is not actually sold,” the court noted the applicable standard, fair market value, which assumed a hypothetical sale between a willing buyer and a willing seller.
The Court of Appeals reversed on the DLOM. It said the marketability discount was based on the fiction of an anticipated sale, which, under the applicable law, was no longer recognized when there was no evidence of an intent to sell the business, as was the case here. Also, the stock restriction was of no consequence where one spouse intended to retain ownership. The court relied on Moore v. Moore, a pivotal Supreme Court decision that primarily dealt with goodwill. In Moore, the state’s high court found the facts of the case did not justify a DLOM, while declining to make a bright-line rule as to whether DLOM was ever appropriate in divorce proceedings.
The Court of Appeals upheld the use of the minority discount.
Emphasis on FMV: On review with the state Supreme Court, a majority of justices emphasized that FMV was the applicable standard of valuation. The majority also noted a longstanding tension between “proper business valuation principles” and a trial court’s goal of apportioning marital assets “fairly and justly.”
Certainly, if we value flexibility in how the family court apportions the parties’ marital assets—which we clearly do—we should consider that court’s decision when it has chosen to accept the parties’ expert testimony that a marketability discount applies and when the court has found one party’s expert more credible.
Not to do so, the high court's majority suggested, would mean imposing a bright-line rule that the high court earlier had rejected. The majority said Moore was clear that the use of DLOM required a case-by-case analysis. Here, the Court of Appeals “effectively established a bright-line rule disallowing this discount,” the court's majority said. Doing so was error. The facts of the case supported the trial court’s use of a marketability discount. Further, minority status “certainly affects an asset’s fair market value, and therefore, it is proper for courts to consider the propriety of this discount.”
Dissent: The dissent agreed that Moore did not create a bright-line rule as to the DLOM. But the facts here were “not meaningfully different from the facts in Moore,” the dissent said. In both cases, a minority interest, by order of the court, was transferred to the spouse owning the entire remaining interest, and, in both cases, the owner-spouse had no intent to sell the business. Likewise, under the facts of the case, use of a minority discount was inappropriate, the dissent said. Writing for the dissent, Justice James noted he was not abandoning the FMV but, “when facts and common sense dictate, courts should avoid an approach that results in a fictional value being assigned to the asset.”
A digest of Clark v. Clark, 2020 S.C. LEXIS 69 (May 13, 2020), and the court’s opinion, will be available soon at BVLaw. A digest of Moore v. Moore, 414 S.C. 490 (2015), and the court’s opinion are available to BVLaw subscribers.