The New Jersey Appellate Division recently issued a ruling in a minority shareholder oppression case which reinforces the concept that the best way to resolve a minority shareholder oppression case is through settlement. The decision, Wisniewski v. Walsh, et al. (A-2650-13T3), is an unreported case but reaffirms that the finder of fact, whether it be jury or judge, is not bound by, or required to accept, the testimony of any expert and may, in fact, make its own determination of value, as long as it is based upon facts in the record.
Wisniewski v. Walsh is a case that has been in the courts for 20 years on a variety of legal issues. The issues in this particular ruling concerned whether a marketability or illiquidity discount had been imbedded in the valuation experts’ determination of the value of the company and, if not, what discount should be applied. On a prior appeal the Appellate Division had ruled that Norbert Walsh, the oppressing shareholder, was to be bought out and that a marketability discount should be applied to the value of his shares to reduce the purchase price and ensure that he, as the oppressing shareholder, did not receive a windfall by having the purchasing shareholders bear the full burden of the company’s illiquidity.
In this case the dueling experts had used different methods of valuation, one had used a discounted cash flow method of valuation while the other had used a market approach, and the trial court during the valuation aspect of the case had found the discounted cash flow approach more reliable and sound and adopted the first expert’s approach for valuation. The discounted cash flow approach involves estimating the company’s revenues over a period of time, normalizing its expenses and then discounting the resulting income stream to a present value at an appropriate rate. When determining the valuation, the trial judge accepted the first expert’s estimation of future revenues, but rejected his analysis of the company’s expenses, adopting instead the second expert’s approach to normalizing adjustments. The valuation trial judge then accepted the first expert’s discount rate of 12% for purposes of determining the present value of the resulting income stream.
In the present decision, the trial judge determined that neither valuation expert had imbedded a marketability discount into their valuation of the company. The first expert who had used the discounted cash flow method had opined that no marketability discount should be applied. The second expert had opined that after the value of the company had been determined through the market approach, then a separate marketability discount of 35% should be applied.
While the first expert evaluated some of the same risk factors in his determination of the discount rate that the second expert used in determining the appropriate marketability discount, the trial court found that did not constitute the inclusion of an imbedded marketability discount in the first appraiser’s valuation of the company. The trial court found that various factors have dual considerations, one being the impact they have on the overall value of the company and the other being the impact they have on the marketability of the company.
Ultimately, the trial court determined that no imbedded marketability discount had been included in either expert’s valuation of the company and ruled that a separate marketability discount must be applied as instructed by the Appellate Division on remand. Then the trial court considered the positions offered by the experts, alternatively that the discount should be zero or thirty-five percent, rejected them both, selecting and applying a marketability discount of 25%. The trial court’s decision on the marketability discount was upheld by the Appellate Division as fair, equitable and supported by the record of the case.
Thus, while you may have a great expert and the most solid of rationales for their professional opinion, the trial court is still not bound to accept that opinion. You will need to be careful to build the factual record in the case to support your expert’s opinion. Of course, you will also need to try and exclude as much information as possible that could support the other expert’s opinion and, in the final analysis, it will come down to a reasonableness and credibility determination by the trial judge.
With that uncertainty inherent in each case that goes all the way to trial, it becomes extremely important to try and reach a negotiated resolution through settlement where you can control exactly what the outcome of the case will be.