Like many states across the country, Kentucky first enacted a dissenters’ rights statute in 1972 as part of its adoption of the Model Business Corporation Act (MBCA). The statute entitled dissenting shareholders to the “fair value” of their shares without specifically defining the term, and was silent regarding the application of minority and marketability discounts. A 1982 decision by the Court of Appeals permitted a trial court to apply a marketability discount to the net asset value of a closely held company, based on the facts and circumstances of the case. Because the state declined to adopt the 1999 amendments to the MCBA that specifically preclude discounts in statutory FV appraisals, Kentucky remained one of a handful of jurisdictions that permitted their application.
Now comes a new case in which a father and son disputed the statutory fair value of their respective majority/minority interests in a closely held furniture manufacturing company. The company’s appraiser applied a 30% unspecified discount, based on certain risk factors that a hypothetical buyer would consider, including declining revenues and liquidation costs. The son’s appraiser believed discounts were inappropriate, and the trial court resolved the dispute by adopting a 20% discount. On review, the Court of Appeals reviewed the “plethora” of decisions by other states during the last decade and ultimately found “no facts to justify a deviation from the rule prohibiting a marketability discount in a dissenters’ rights action in a closely held corporation,” except in extraordinary circumstances.
Dissent continues controversy. Four judges on the panel dissented, based on the facts of the case—in particular, the trial court’s application of a marketability discount at the enterprise rather than shareholder level, due to the inherent risks of the business. The case is ripe for appeal to the state Supreme Court; read the full digest of Brooks v. Brooks Furniture Mfgrs., 2010 WL 4290068 (Ky. App.)(Oct. 29, 2010) in the current Business Valuation Update. The court’s decision is posted at BVLaw.