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THE JUDGE WOULDN’T IGNORE THIS “ROUNDING ERROR”

June 2017 | Issue 86 Background Constellis Group,  Inc. is a private security firm.  In December 2013, the Company formed an Employee Stock Ownership Plan (“ESOP”), which purchased 100% of Constellis’s voting stock.  Wilmington Trust NA was named Trustee of the ESOP.  Less than a year after the ESOP was created, the ESOP sold all […] More...

NEW JERSEY COURT USES VALUATION DISCOUNT TO PUNISH “BAD BOY”

March 2017 | Issue 85 Introduction Richard and Steven Parker are brothers who ran a flower business in Scotch Plains, New Jersey.  Richard is the President of Parker Interior Plantscapes (“PIP”), which installs and services plants and flowers in commercial settings.  Steven is the President of Parker Wholesale Florists (“PWF”), which is a garden center.  […] More...

Dell Appraisal Spawns a Multitude of Valuation Approaches

February 2017 | Issue 84 Introduction A Delaware Chancery appraisal case involving computer company Dell Inc. gave rise to a multitude of valuation measurements.  It is instructive to see how the court sorted through them in coming up with its final appraisal conclusion.  The case is In re Appraisal of Dell Inc., 2016 Del. Ch. LEXIS […] More...

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NEW JERSEY COURT USES VALUATION DISCOUNT TO PUNISH “BAD BOY”

March 2017 | Issue 85

Introduction
Richard and Steven Parker are brothers who ran a flower business in Scotch Plains, New Jersey.  Richard is the President of Parker Interior Plantscapes (“PIP”), which installs and services plants and flowers in commercial settings.  Steven is the President of Parker Wholesale Florists (“PWF”), which is a garden center.  Each are vice presidents of the others’ company and are 50% stockholders in each enterprise.  In addition, they have half interests in real estate holding companies that are used in the business.

On October 21, 2013, Richard filed a complaint against Steven alleging several counts including shareholder deadlock, breach of contract and unjust enrichment.

Steven Parker, on January 19, 2016, filed a counterclaim rebutting Richard’s claims and setting forth grievances of a similar stripe.  Details on this Union County NJ Superior Court case can be found at Parker v. Parker, N.J. Super. LEXIS 2720 (Dec. 22, 2016).

The Court’s Finding

After considering the evidence, the court granted Richard’s request to purchase Steven’s shares in PIP at fair value. (The court believed that PWF had no value.)

Both parties retained valuation experts.  They each used a variety of valuation approaches, including discounted cash flow and asset-based methods.  The court ultimately accepted the Plaintiff’s expert’s value for the whole company of $1,556,000. Steven’s 50% of this value works out to $778,000.  The court then reduced this amount by 25%, representing a discount for lack of marketability.  The court commented on the use of the discount is as follows: “Steven Parker’s wrongful act caused an extraordinary circumstance which requires this court to apply a marketability discount.  Steven Parker, the oppressing shareholder, cannot receive a windfall as a result of his actions. The marketability discount will be applied.”

The court declined to additionally apply a minority discount to the value, stating that it would be inappropriate here where neither party has a controlling interest in either corporation.

The discount for lack of marketability is a blunt tool which was useful to the judge in fine-tuning her value conclusion.