Case Law Summaries

Brown v. Brown

• Opinion Date: February 28, 2002
• Business Law
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VALUATION; DIVORCE —Minority and marketability discounts are inapplicable in the ordinary division of marital assets.

A husband’s forty-seven and one-half percent interest in a corporate business was a major asset subject to equitable distribution in his divorce. The lower court was faced with determining the value of that interest. The lower court held that marketability and minority discounts were inapplicable because there were no “extraordinary circumstances” to warrant use of those discounts. The rationale for a “fair value, no-discount rule” is that neither a minority shareholder, nor a majority shareholder, nor a veto-wielding shareholder, should be “allowed to exploit the very situation that triggered the right to an appraisal, thereby capturing more than a proportionate share of the corporation’s value and depriving other shareholders of their fair value.” Also, in statutory appraisal cases involving dissenting shareholders, New Jersey requires determination of “fair value,” not “fair market value.” “‘Fair value’ carries with it the statutory purpose that shareholders be fairly compensated, which may or may equate with the market’s judgment about the stock’s value.” According to the Court, the “fair value” concept is inherently inconsistent with discounting value to reflect limited marketability. In the case of the husband’s business, however, liquidity was of little consequence. And, as a between the husband and his brothers (who owned the balance of the company), there was “no evidence of a contemplated sale of all or part of the business, forced or otherwise.” Consequently, under the circumstances, “[t]he distinction between fair value and fair market value appear[ed] to [the Court] equally applicable in the valuation of one spouse’s interest in his family’s closely-held corporation for purposes of equitable distribution.” Further, the husband’s minority interest in the business was protected by the “fair value rule” itself. If the husband “was to find himself at irreconcilable odds with his brothers, he could force a statutory appraisal in which his bloc would be valued at a proportionate share of the whole.” Therefore, the Court found no reason “to reward the spouse who holds title to the shares by allowing him to retain the value of the entire bloc at bargain ‘price,’ that is, crediting a non-owner spouse with less than the owner’s proportionate share of full value when determining equitable distribution of the marital assets.” Allowing a marketability and minority discount would “minimize the marital estate to [the wife’s] detriment and [would be] inconsistent with the concept of equitable distribution.” Although there was no ready market for the husband’s shares, those shares “in the going concern had value to him and to his co-owners that [did] not depend upon a theoretical sale to an outsider and [would not change] as a result of the divorce complaint or judgment.” For that reason, the Court affirmed the lower court’s determination that minority and marketability discounts were inapplicable in this ordinary division of marital assets.

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