Oppressive Shareholder Value Slashed by New Jersey Court

Oppressive Shareholder Value Slashed by New Jersey Court

By Cynthia L. Jones, CFA March 15, 2017

In a recent decision in New Jersey Superior Court[1] involving cross claims of shareholder oppression pursuant to N.J.S.A. §14A:12-7, the Court found it appropriate to apply a marketability discount to the value of the privately-held company stock at issue in determining the buyout price to the oppressive shareholder.  As New Jersey is typically a “Fair Value” jurisdiction, marketability discounts are applied only under what is found to be “extraordinary circumstances,” such that failure to do so would unjustly enrich the oppressing shareholder or otherwise fail to adequately compensate the prevailing party. 

The circumstances in Parker v. Parker were found to be extraordinary, and a marketability discount of 25% was applied to the determined “Fair Value” of the enterprise.  The Court here acknowledges that the valuation of a privately-held company is based on the set of facts and circumstances unique to the subject entity, and, that valuation methods which are generally recognized within the financial community are applicable in a courtroom. 

 We first review the standards of Fair Value and Fair Market Value.  Fair Market Value is defined by the IRS as the price at which the company in question would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having reasonable knowledge of relevant facts.[2]  Fair Value is similar to Fair Market Value, however, it does not typically include the application of discounts for minority interest and lack of marketability.  Fair Value is most commonly used in determining the value of an enterprise in commercial and matrimonial litigation in New Jersey.  However, since the New Jersey Supreme Court decided Balsamides v. Protameen, 160 N.J. 352 (1999), along with its companion case, Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 338 (1999) (dealing with minority oppression), the case has become a statewide, if not nationally recognized, seminal decision concerning business valuation and the applicability of minority and marketability discounts in oppressed shareholder cases.

 We review the Opinion and provide our thoughts on the valuation issues in the full Court Case Summary, however, valuation experts should be mindful of a few of the takeaways, as follows:

  • Stick to the Facts (and Circumstances) – Rely on client specific, industry and macroeconomic information as it existed on or about the valuation date;
  • Know the Purpose - Apply standard valuation methods, as appropriate to the entity and purpose of the valuation; and
  • Know Your Limits - Avoid making any legaldetermination as to whether minority and marketability discounts should be applied.

[1] Parker v. Parker, 2016 N.J. Super Unpub. LEXIS 2720 (Dec. 22, 2016).

[2] Treasury Regulations 20.2031-1(b) and 25.2512; Rev. Rul. 59-60, 1959-1 CB 237.

About MPI

MPI is a business valuation and advisory firm that was founded in 1939. MPI provides business valuation and advisory services primarily to closely held companies and partnerships for a variety of purposes including estate and gift tax, income tax, charitable contributions, litigation support, buy-sell agreements, ESOPs, and exit planning. MPI provides fairness opinions, sell-side and buy-side advisory services, intangible asset valuation, purchase price allocations, goodwill impairment testing, valuations for equity-based incentive plans, and blockage and restricted stock studies. MPI conducts every project as if it is going to face the highest level of scrutiny, and its senior professionals have extensive experience presenting and defending work product in front of financial statement auditors, management teams, corporate boards and fiduciaries, the IRS, other government agencies, and in various courts.