Court of Appeals addresses valuation of a closely held business

The November 28, 2018 Court of Appeals opinion in Clark v. Clark is one more data point in the confusion that is South Carolina transmutation litigation. Clark further addresses how one values the minority shares of a closely held business.

The primary issue on appeal involved identifying the marital portion and valuing PCI, a business owned by Husband’s parents at the time of the parties’ marriage. After Husband’s mother died, his father obtained a 75% interest in the business with his sister controlling 25%. Litigation ensued between his father and sister, resulting in his father gifting Husband his 75% interest and sister selling her 25% interest back to the business. Subsequently Wife, concerned about protecting their children’s inheritance should anything happen to Husband, asked Husband to gift her 25% of the shares in the business, which Husband did. At the time of this gift, Wife signed an acknowledgment that the agreement could not be construed as giving Wife “any right to be awarded any further stock other than in the sole discretion of the Board of Directors of the Company.” After Husband discovered Wife in an adulterous relationship with a PCI employee, he fired Wife and the employee and this marital litigation commenced.

At trial Wife claimed 100% of PCI was marital. The family court determined that only the 25% interest gifted to Wife was marital. The Court of Appeals affirmed, finding Husband’s testimony
regarding Father’s gift, coupled with the evidence of Wife’s stock transfer agreement that restricted the terms of Wife’s 25% interest in PCI, sufficient to prove Husband’s interest in PCI was not marital property.

In valuing Wife’s 25% interest–which the family court awarded to Husband–the trial court accepted, and the Court of Appeals approved, the valuation of the PCI provided by Husband’s expert. However it partially reversed the discounting this expert provided for determining the value of Wife’s minority interest. Husband’s expert applied both a marketability discount and a minority or lack of control discount. Wife believed neither discount was appropriate because Husband would now control 100% of the asset. Because Husband had no plans to sell PCI, the Court of Appeals reversed the family court’s application of a 25% marketability discount. However the Court of Appeals affirmed the use of a minority or lack of control discount, finding that the proper valuation was of Wife’s 25% share, and not 25% of the fair market value of the whole company. It reduced the discounting of Wife’s shares from 44% to 30%.

Given the unique facts of this case, I don’t find the Court of Appeals’ analysis on the minority discount convincing. If Wife’s 25% interest was not being transferred to the 75% owner, such a discount would be appropriate. If Wife’s 25% interest wasn’t already marital property, such a discount might be appropriate. But to treat the valuation of the marital portion of a business primarily owned by one party (and due to be solely owned by that party) as having the marketing problems associated with a minor shareholder does not seem justifiable.

Additionally, the Court of Appeals affirmed the family court’s refusal to award attorney’s fees to Wife. It also affirmed the family court determination of child support despite Wife’s argument that Husband under reported his income on his financial declaration. Wife’s only evidence to support this argument was the report of a forensic accounting expert, which the family court excluded because she did not provide it by the discovery deadline. Wife acknowledged at the motion to reconsider hearing that the report was properly excluded. It’s nice to have an appellate court opinion that affirms failure to comply with discovery deadlines can have consequences as such opinions discourage attorney’s from delaying their discovery responses.

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