Court Rules That Fair Value Isn't Always Fair
Fair warning: if business valuation and resolution by litigation are foreign or arcane to you, perhaps you should simply receive this as a greeting from me and move on to something else. However, if those topics do resonate with you, here is something I think you should consider.
A recent decision by the Superor Court of New Jersey, Appellate Division, raises questions with potentially far-reaching implications involving litigated business valuations.
Wisniewski v. Walsh is a long-running shareholder oppression case in a closely-held business. A Chancery judge determined that one of the three shareholders was the oppressor and that his actions had harmed the other shareholders, but not the company. The judge ordered this shareholder to sell his shares to the company or the other two shareholders at fair value, which was to be determined with the assistance of experts.
“Fair value” is one of the primary standards of business value; “fair market value” is another. Fair market value is directed at the transactional worth of an interest and is well-defined by tax and legal rulings. Fair value is broader and incorporates the notion of equitability. Fair value has prominence in particular types of litigation and affords courts greater latitude. Though there is not a tight definition of fair value, the concept was expressed in an old shareholder dissent case as “that the stockholder is entitled to be paid for that which has been taken from him."
Though a fair market value might incorporate discounts for lack of marketability or a minority holding, courts have expressed the view that imposing such discounts on unwilling sellers was unfair. Thus, some courts have applied fair value (without such discounts) in instances of shareholder oppression and (in some jurisdictions) in marital cases.
In its recent ruling the New Jersey court ruled that since the shareholder being bought out was the oppressor, it would be unreasonable to impose the higher fair value on the purchaser because that would effectively reward the bad behavior at the expense of the oppressed. Thus, the court applied fairness in overriding the use of fair value.
This decision warrants attention and consideration as it could be a harbinger of change in the application of fairness by weighing the actions leading to litigation and determining the application or omission of discounts so as to avoid rewarding bad behavior.
If you need assistance in determining the fair market value or the fair value of a business call on me. I guarantee that you will receive an even-handed, reliable determination.
Certified Valuation Analyst