Grelier v. Grelier, 2009 WL 5149267 (Ala. Civ. App.)(Dec. 30, 2009)
In what could serve as precedent for states that now apply the broad, equitable standard for valuing businesses in divorce, the Alabama Court of Appeals considered a case in which the husband owned a minority (25%) interest in several closely held, commercial property development companies. A court-appointed expert valued the husband’s interests at just over $1 million; the trial court adopted this value but then considered a 40% combined discount for lack of marketability and lack of control, as was urged by the husband’s expert. In making an equitable distribution of the fair market value of the husband’s interests, the court considered:
- Some of the projects owned by the entities had a negative fair market value;
- The husband had accrued over $1 million of debt in the businesses, for which he was personally liable;
- During the divorce proceedings, the husband (as well as the wife) borrowed substantial sums to pay interim support and expenses; and
- Both parties had lived beyond their means, borrowing six-figure sums from credit cards and family members.
Appeal based on statutory fair value standard. The wife appealed, arguing that it was inappropriate to apply marketability and minority discounts to closely held, ongoing business values in divorce. In addressing the issue of first impression in the state, the Alabama Court of Appeals considered case law from jurisdictions that apply a “fair market value” standard in divorce (permitting discounts under the willing buyer/willing seller scenario), and those precluding discounts.
“Pursuant to [the fair market value] standard,” the court said, “it makes sense to apply minority and marketability discounts because those discounts reflect the economic reality that, unlike the case with publicly traded companies, no ready pool of willing buyers exists to purchase an interest in a private business organization that does not carry with it the ability to control that organization.”
However, Alabama has not adopted the fair market value standard in divorce; determinations of value must simply be “equitable” under the facts of the particular case. “That standard implies that the valuation must be fair to all parties concerned,” the court explained. When spouses hold a minority interest and one contemplates continuing the business after divorce, “it makes little sense to determine fair value by the measuring stick of a hypothetical sales price.” That methodology would artificially reduce the value of the marital asset in almost every case, granting an unfair price to the divested spouse and a windfall to the one retaining the business.
Further, cases from other jurisdictions—led by Brown v. Brown, the 2002 New Jersey Supreme Court decision—have held that liquidity concerns do not apply when the business will continue as a going concern after divorce. The New Jersey court analogized the situation to the sales of a minority, dissenting shareholder’s stock in a closely held corporation. In these cases, “fair value cannot be fairly equated with the company’s fair market value,” the Brown court said, and discounts are not appropriate because they do not fully compensate the minority shareholders.
Like New Jersey, Alabama recognizes the statutory fair value standard in the dissenting shareholder context, and case law precludes discounts because the minority owner is not acting as a willing seller. “Because the Alabama Supreme Court has adopted the same reasoning that is applied in New Jersey in dissenting shareholder cases, it seems reasonable to conclude that it would follow the same reasoning in divorce cases involving minority ownership of closely held business organizations,” the Grelier court held (citing Standards of Value—Theory and Application, by Jay Fishman, Shannon Pratt, and William Morrison (2007)).
Accordingly, it remanded the case for a redetermination of value by the trial court—but its assumption of the state Supreme Court’s ultimate ruling on the issue would seem to leave the door open for an interim appeal. Moreover, a single judge on the appellate panel dissented: “I would prefer to leave the trial courts of this state with the discretion to determine, on the specific facts at issue in each divorce action, whether or not to apply discounts in valuing various types of business interests.” Stay tuned…