Extraordinary is as Extraordinary Does
The Brown decision (2002) raised the bar for using discounts – the reference here being for discounts for lack of control (minority interest), or lack of marketability – in a business valuation in divorce to a level that requires the finding of extraordinary circumstances. This of course compels us to deal with just what would constitute extraordinary.
The quest for extraordinary circumstances can be a difficult and lonely one. One area that might warrant discounts, even in the face of Brown, is where we are valuing a truly minority interest, a small minority interest. Better yet, a minority position owned by someone who is not active in the business, where the business is controlled by one single majority controlling interest, and there is no established/formal mechanism for buying out a minority interest. Perhaps, if we are talking about a 1% owner, where the business is controlled by say a 60% owner, and our 1% owner is not active in the business, there is no shareholder’s agreement, and no track record of buying out, then this may indeed warrant that cherished sought after designation of extraordinary.
Another possibility warranting the finding of extraordinary circumstances might be a history of adversarial relationships between the shareholders – especially if such has been between the party whose interest is being valued now (and that party owns a minority interest) and someone (group) with a controlling interest. One might argue that the situation would call for additional risk factors because of the possibility of these bad relationships damaging the company. On the other hand, it is certainly possible that one or more of the shareholders at odds with others is not all that important to the operations of the business and therefore, these relationships may not directly negatively bear on the value of the entity – only on the value of a particular interest. On the other hand, is there some form of shareholders’ agreement that gives each of the shareholders a level of protection? It would not be implausible for a discount to also apply to someone who owns a controlling interest – if that individual was heavily reliant on another shareholder for business, operations or the like.
What about if there are restrictions placed on the interest at hand? Of course, one response is it is typical for stock in a closely held business to have restrictions – many times the stock certificate or other evidence of ownership has printed on it the restrictions such as non-transferable, etc. That’s been the case for quite some time, and that type of restriction tends not to be given much respect when valuing an interest – minority or otherwise. Why should it matter now?
With a little effort and imagination, most of us could come up with situations in the extreme where you could justify there being extraordinary circumstances and thereby justify a discount. However, it needs to be recognized that the word extraordinary means exactly that – something that is merely difficult, unusual, and not quite normal, likely doesn’t qualify as extraordinary. Merely being different isn’t extraordinary (a rueful realization for some of us).
