The vertiginous swings of the stock market can be harrowing, but they at least provide a constant signal about how much a publicly-traded company is worth, and make their shares triflingly easy to sell. Valuing and selling privately held companies is trickier, though, and so courts may discount the value of stakes in them when valuing marital assets, even if the stake is being transferred to a spouse who has no plans to sell it, a divided South Carolina Supreme Court has ruled.
George Clark inherited a 75 percent interest in his father’s custom weaving and tapestry business and later purchased the remaining 25 percent from his sister. In 2009 he transferred a 25 percent interest to his wife, Patricia, subject to a restriction that barred her from selling her stake to anyone other than George or his children. Their marriage unraveled a few years later, however. The Clarks stitched together a deal under which George would sew back up full control of the company, and the two sides went to trial to attach a proper value to Patricia’s cut of the business.
At trial both sides offered expert testimony, and the late Greenville County Circuit Court Judge Harry Phillips found George’s expert more persuasive. She valued the company at $736,000, but opined that Patricia’s piece was nevertheless worth just a threadbare $75,000. The expert discounted the value of Patricia’s share twice, once for marketability—accounting for that friction inherent in trying to sell a privately held company—and a second time to account for the fact that Patricia, as a minority stakeholder, lacked the ability to assert control over the business.
The Court of Appeals reversed the application of the marketability discount, finding that since there was no evidence that George had any plans to sell the business, applying such a discount was a bit of legal fiction that’s no longer permitted under South Carolina law. But it affirmed the application of the lack-of-control discount, thus giving both sides something to appeal. Justice Kaye G. Hearn, writing for a narrowly divided court in a May 13 ruling, reversed in part, holding that both discounts had been properly applied.
Hearn wrote that, contrary to the Court of Appeals’ implication, there is no rule against applying a marketability discount to the stake of a privately held company when valuing marital assets, even if neither side has any intention to sell their holding. Rather, decisions about whether to apply a discount must be made on a case-by-case basis, and the facts of the Clarks’ case justified applying such a discount to the value of Patricia’s share.
“Certainly, if we value flexibility in how the family court apportions the parties’ marital assets—which we clearly do—we should consider that court’s decision when it has chosen to accept the parties’ expert testimony that a marketability discount applies and when the court has found one party’s expert more credible,” Hearn wrote. “The family court’s flexibility in its equitable apportionment must go both ways; otherwise, we risk effectively imposing a bright-line rule where we have previously declined to do so.”
As for the lack-of-control discount (sometimes called a minority discount), Hearn wrote that it accounts for the minority interest’s inability to control the business, which certainly affects an asset’s fair market value, and it’s therefore proper for courts to consider applying the discount. Courts may choose to reject the discount based on the facts of a case, but it was appropriate in the Clarks’ case, Hearn ruled.
Justice George C. James, joined by Justice John Cannon Few, dissented from both parts of the court’s ruling. James wrote that valuing the stake in the company based on a hypothetical sale was improper given that, in reality, George would walk away with 100 percent of the company. As such, both lack of control and marketability would immediately be rendered meaningless, and thus George stood to reap a windfall by application of the discounts.
David Wilson of Wilson & Englebardt in Greenville represented George Clark.
David Collins Jr. of Collins Law Firm in Greenville and Ken Lester and Catherine Hendrix, of Lester & Hendrix in Columbia represented Patricia Clark.
The 17-page decision is Clark v. Clark (Lawyers Weekly No. 010-037-20). The full text of the opinion is available online at sclawyersweekly.com.
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