Fair Market Value or Shareholder Agreement Value in Rhode Island Divorce Case

Editor’s note: John Barrett, CPA/ABV, was a testifying expert for the wife in this case and presented the fair market value of a 2% interest in the husband’s medical practice. John is a very experienced and competent valuation professional. He is a guest blogger for this post.

In this Rhode Island divorce case, the State Supreme Court affirmed the general magistrate’s decision to rely on the value the company’s shareholder agreement determined rather than the fair market value of the entity, as presented by the wife’s expert. It is interesting to note that, in the husband’s previous divorce case, some 22 years prior, the Rhode Island Family Court Chief Justice, at the time, ruled that the fair market value of the company, rather than the shareholder agreement value, was controlling.

Since the husband’s first divorce, the company, Rhode Island Medical Imaging Inc., had grown significantly. At the time of the husband’s second divorce, the company had over 50 owner/physicians and about 30 nonowner/physicians. Over the past several years, at least two or three owner/physicians would buy in/buy out each year, based on the shareholder agreement amount. The shareholder agreement amount was determined by a formula and updated each year. The husband was in his early 70s and planning to retire in the near future. The general magistrate ruled that the shareholder agreement was binding as to the amount the husband would receive when he retired and sold his stock.

This was an interesting case resulting in the Rhode Island State Supreme Court affirming the general magistrate’s decision to rely on the shareholder agreement value rather than the fair market value of the company. However, this case does not necessarily provide a bright line regarding whether a shareholder agreement value or the fair market value of an entity should be relied upon for Rhode Island marital dissolution cases, or in any other state, for that matter. The Rhode Island Supreme Court simply upheld the general magistrate’s decision to rely on the shareholder agreement value rather than the fair market value, in that specific case. Divorce cases are fact-specific. In the Cronan case, there was a history of regular owner/physician buy-ins and buyouts, based on the shareholder agreement. Also, the divorcing physician was about to retire and would likely receive the shareholder agreement buyout amount.

However, cases with different fact patterns could provide different outcomes. For instance, a case with a divorcing 50% shareholder in a company with a significant below-market shareholder agreement with no history of buy-ins or buyouts might be viewed differently than the Cronan case. Also, a shareholder agreement put in place shortly before the beginning of a divorce case might be viewed unfavorably by the courts. Divorce cases are very fact-specific, and unique factors, in one case, may not be determinative in another case. Most state family courts are equity-based courts. This allows the trier of fact a certain amount of latitude in the decision-making process.

John E. Barrett Jr.
March 8, 2024

Editor’s note: John’s analysis is on point. I always make it a point to meet with my client, especially the nonbusiness owner spouse clients, and insist the attorney attend that meeting. I explain to them what it means to be an “equity court” in an equitable distribution state and the fact that the judge has wide latitude in determining an equitable distribution between the parties. I explain that that means that the expert can do an excellent job in valuing the business interest but the judge might still arrive at a different value in order to arrive at what the judge perceives is an equitable distribution of the marital estate. If should also be noted that, under the AICPA BV Standards, VS100 as of Feb. 13, 2024, all valuation conclusions are estimates of value. Actual value cannot be known. All fair market values are hypothetical. This admission was the answer to a “parlor trick” question by the husband’s counsel.