Yet another voice, that of Greg Barber, CFA, of Barber Analytics in San Francisco, has joined the growing debate in business valuation and legal circles over the controversial application of the discount for lack of marketability in New York statutory fair value proceedings involving dissenting shareholder appraisals and elective buy-outs of minority shareholders in dissolution cases.
Greg is a corporate valuation expert who focuses on valuations for statutory and mediated minority shareholder buyouts. Greg published a thought-provoking article in the October 2016 New York State Bar Association Journal entitled Marketability Discounts in New York Statutory Fair Value Determinations in which he critically analyzes the leading New York appellate decisions applying the marketability discount in fair value cases — namely, Blake, Seagroatt, and Beway — and highlights what he argues are the “misunderstandings, miscommunications, and inconsistences” entangling the discussion among appraisers, attorneys, and the courts. A copy of Greg’s article is available on his website here.
I followed up Greg’s article with an interview of him for my Business Divorce Roundtable podcast, a link to which appears at the bottom of this post.
Greg’s article eschews a dogmatic approach to the issue. Commenting on Blake‘s rationale for applying the marketability discount (“because the shares of a closely held corporation cannot readily be sold on a public market”) and for distinguishing it from the banned minority discount (“Such a discount bears no relation to the fact that the petitioner’s shares in the corporation represent a minority interest”), Greg’s article observes that the common practice of “using minority interest marketability studies for controlling interests is a poor substitute for an analysis of marketability discounts in controlling interests in companies with similar characteristics and similar expected holding periods” and that the “appropriate analysis would examine the sales of controlling interests that could be sold immediately with sales of controlling interests that are sold in the normal time period of a few to several months.”
The problem is, Greg adds, no such studies are possible “because there are no controlling interests that sell within a few days because even if a buyer stands ready to buy the target company, the due diligence and negotiation of the merger or sale agreement takes time.”
The Beway decision by New York’s highest court also comes under Greg’s microscope, leading him to opine that its analytic admixture of controlling and minority interest values has endowed the New York courts’ approach with a “split personality” creating confusion with appraisers in dealing with interests that “don’t exist in actual markets between unrelated, informed parties.”
Greg departs from other critics’ categorical denouncement of New York’s approach and instead adopts an entrepreneurial economist’s perspective in favor of what he calls a “flexible role for discounts in fair value determinations” in which courts should sparingly use discounts to discourage non-productive, oppressive shareholder behavior. He favorably cites the approach adopted by the New Jersey Supreme Court in the Balsamides case as an example of a marketability discount being applied in a buyout by the 50% oppressed shareholder of the 50% oppressing shareholder’s interest.
All of which leads Greg to recommend that business appraisers provide the court values with and without discounts, and that:
As the application of discounts is primarily a matter of law in any event, it seems better to leave the discount decision to the court. If the role of the courts is viewed as simply to contribute to the “rules of the game” for entrepreneurs and investors to maximize wealth-creation behavior, the debate of whether to apply discounts in shareholder buyouts becomes a little less difficult.
In my podcast interview, Greg amplifies his views on the marketability discount in fair value proceedings in a clear and distinctive voice, without getting bogged down in detailed case analysis. I encourage business appraisers and lawyers involved in valuation proceedings to give it a close listen. And for those who want to dive deeper, you also should treat yourself to my interview of Chris Mercer on the marketability discount in the first two episodes of my podcast.