In litigation matters or disputes regarding business valuation of a corporate entity, the goal of establishing fair value by a court includes the discretion as to whether any “discounts” should be applied. Typically, the usual discounts considered are marketability discounts, or control premium discounts.
One of the common scenarios in which the fair value analysis/discount application dichotomy arises is regarding claims for minority oppression by a shareholder or partner. The New Jersey Supreme Court recently addressed this issue in its decision of Sipko v. Koeger, Inc. 251 N.J. 162 (June 23, 2022). The seminal issue in Sipko was whether a marketability discount should be applied to the fair value of plaintiff’s fractional ownership in the defendants, Koeger Distributed Solutions, Inc. and Koeger Professional Services, Inc. There had been a long-standing family dispute as to plaintiff Robert Sipko’s interests in both companies. On the issue of valuation, the Court noted that ascertaining fair value does not involve a rigid application or an inflexible test. The rationale for such discretion is that “no general formula may be given that is applicable to the many different valuation situations”. Sipko, 251 N.J. at 171 citing Bowen v. Bowen, 96 N.J. 36 (1964). Thus, there is no “standard” or requirement that discounts are mandated, or must be applied, under any circumstances including a minority oppression claim. Indeed, whether a corporate entity’s fair value should be reduced by a “marketability discount”, or any other discount, is part of the fair value analysis. 251 N.J. at 173, citing Balsamides, 160 N.J. at 375. The Court specifically espoused:
Balsamides and Lawson underscore the importance of determining the “fair value” of a corporation on a case-by-case basis. Balsamides 160 N.J. at 381 (noting that “although it would be helpful to pronounce a consistent rule regarding the determination of ‘fair value’ and the applicability of discounts under various circumstances, we cannot do so” because “each decision depends not only on the specific facts of the case but should also reflect the purpose served by the law on that context”.
This recent holding by our Supreme Court reiterates that a fair value analysis in a business valuation case, including the issue of whether a discount(s) applies or not, is not determined by any standard, rule or strict application. There is no mandatory requirement to apply discounts. Rather, each case regarding valuation, fair value, and the possible application of any form of discount can only be determined on a fact specific and case-by-case basis. The frequent argument asserted on behalf of majority shareholders/ partners that discounts “must:” be applied in determining fair value is a common. yet misguided, incorrect and faulty argument that has been denounced by our Supreme Court. It is, simply stated, a legal fallacy that is not supported by New Jersey law. Therefore, as set forth clearly in Sipko the issue of whether or not discounts should be applied to fair value in a business valuation remains solely a discretionary decision to be made by the trial court on an individual basis.
Timothy D. Lyons is a senior partner and Co-Chair of the Business Litigation Department of Jardim, Meisner and Susser, P.C. Mr. Lyons specializes in representing business owners in business dissolution and intra-company disputes, and “business divorce” matters at both the pre-litigation and trial stages, Such cases often include the necessity that the court determine the fair value of the subject company.