The March 2016 issue of Business Valuation Update (vol. 22, No. 3) has published an article written by William Quackenbush, director of Advent Valuation Advisors, entitled, “DLOMs in N.Y. Statutory Fair Value Cases” in which he addresses the unsettled issue of discounts for lack of marketability (or DLOMs) in this venue. You can read it here…
As an appraiser, I have had the opportunity to prepare many valuations for New York statutory fair value cases, and I have testified in some of them. I’d like to weigh in on the topic of discounts for lack of marketability (or DLOMs) as a follow up to the recent BVWire posting (see sidebar) and the article in Business Valuation Update by Gil Matthews on the topic.
In the 1985 Blake v Blake Agency, Inc.decision, the court stated that the statute designed to “afford a minority shareholder the right to bring a proceeding to dissolve the corporation and to distribute its assets among the shareholders … was enacted for the protection of minority shareholders, and the corporation should therefore not receive a windfall in the form of a discount because it elected to purchase the minority interest pursuant to [statute]. Thus, a minority interest in closely held corporate stock should not be discounted solely because it is a minority interest.” Unfortunately, while in the same decision the court rightly rejected a discount for lack of control, it allowed a discount for lack of marketability without much discussion.
Gil picks up the story in 1995’s Beway case and brings the reader up-to-date on the issue, rightly describing a nearly schizophrenic trail of decisions over the past 20 years regarding DLOMs. I would argue that in this case schizophrenia is contagious, with the court infected by BV testimony with the same symptoms. It is no wonder that Peter Mahler wishes that the BV community would speak with one clear voice on the issue. Indeed, in this instance, poor case law is often the result of bad or weak appraisal work creating poorly informed triers of fact.
I would suggest the following “valuation-speak” in appraising a minority interest under statutory fair value:
| To determine the value of a non-control interest not burdened with the penalties, if any, regarding the subject interest’s lack of control vis-à-vis a control level value, including any illiquidity or lack of marketability attributable to the lack of control nature of the oppressed interest—essentially the value of a pro-rata share of the whole. |
Yet it seems that the New York courts have had trouble accomplishing this goal, in good part because of the valuation work presented to them in expert testimony. I suggest that two issues are in play here that stir up the pot.
First, there continues to be some debate in the BV profession as to whether some DLOM is ever appropriate at the enterprise level. Is a 100% equity ownership interest in a privately held company less liquid than the underlying publicly traded stock data upon which the value is calculated in an income approach (discount rates) or market approach (market multiples) that must be addressed through some sort of valuation adjustment? …. A copy of the complete article is available here.