June 2013 | Issue 67
Wisniewski v. Walsh, 2013 N.J. Super. Unpub. LEXIS 724 (April 2, 2013) describes an 18-year-long family fight in the New Jersey courts over the ownership and control of a company called Retail Transportation, Inc. (“RTI”). What makes this case interesting to people involved in the business valuation profession is that it touches on and analyses three kinds of discounts/premiums frequently encountered in the valuation of privately-held companies.
The action was commenced in the NJ Chancery Division in September 1995 by Patricia Wisniewski against her brothers, Norbert and Frank Walsh. The three were equal co-owners of RTI, a trucking and freight consolidation company. The 1995 suit was followed in January 1996 by a shareholder oppression suit filed by Norbert against Patricia and Frank.
In 2000, following a lengthy trial, the Chancery judge found that Norbert was actually the oppressing shareholder. The judge ordered Norbert to sell his one-third interest in RTI back to the company, or to Frank and Patricia, at fair value, to be determined after receipt of expert reports. The valuation date was set at January 31, 1996, the date Norbert had filed his complaint.
In an opinion dated November 7, 2001, the judge fixed the fair value of Norbert’s interest at $12,400,000.
There followed some further litigation which resulted in the valuation date being changed to November 29, 2000, the day that Norbert departed the company. This was followed by a 12-day hearing on the question of value, and the determination of a value of $32,200,000 for Norbert’s one-third interest.
These findings were appealed and cross-appealed to the Appellate Division by Norbert, Patricia and Frank’s Estate (Frank had died on February 24, 2009).
The Parties’ Positions
Patricia and Frank’s Estate (the “Buyers”) raised a number of objections to the Chancery court’s findings, including the following:
- The trial court should have applied a marketability discount in determining the fair value of RTI.
- The trial court should not have accepted Norbert’s expert’s “unreliable” income (discounted cash flow) approach.
Norbert (the “Seller”), raised the following points, among others:
- The trial court erred in applying a 15% “key man” discount to reduce the value of the company to account for Frank’s importance.
- The trial court should have applied a 20% “control premium” to the value of the company.
The Superior Court, Appellate Division, addressed these points as follows:
The Court on Discounted Cash Flow
Norbert’s expert, Gary Trugman, used a discounted cash flow approach to value. This involved projecting future revenue and expenses and applying a discount rate to the future cash flows to yield the present value of the income stream.
The buyers’ expert, Roger Grabowski, undertook a market approach, estimating the value of the company as extrapolated from data pertaining to sales of comparable entities.
The trial court found Trugman’s approach to be relatively more reliable and more consistent with the applicable legal standard of fair value. The Appellate court concluded that since the trial court had heard the testimony of the experts, the trial court’s determination in this matter is entitled to deference. The matter was remanded, however, to clear up a possible inaccuracy in the calculations.
Patricia contended that a marketability discount should have been applied to the valuation of Norbert’s interest in the company. The trial judge disagreed. The Appellate court felt otherwise, saying that “Norbert should not be rewarded when his conduct not only harmed the other shareholders but necessitated this forced buyout.” The Appellate court remanded for the application of a marketability discount.
Norbert contended that a control premium should have been added to the value of the company. The trial judge rejected this, concluding that the discounted-cash-flow approach that Norbert’s own expert used already yielded the fair value of a controlling interest in the company, without the need for an additional premium.
The Appellate court remarked on the fact that New Jersey courts have not dealt extensively with the application of the control premium, but that they have found Delaware’s jurisprudence instructive. Delaware courts, it was pointed out, have usually rejected application of the control premium in cases where the valuation has been performed by means of a discounted cash flow analysis.
The trial judge concluded that Trugman’s approach had already reached a control value and that therefore no premium was appropriate. The Appellate court concurred.
The trial judge had settled on a 15% valuation adjustment (key-person discount) to account for the fact that the company had a singular reliance on Frank for its success. Norbert argued that such a discount should not have been applied.
The trial judge felt “quite strongly” that a key-person discount should apply here. He felt that Frank was uniquely responsible for the company’s success. He credited Grabowski’s testimony that any buyer would demand a key-person discount under these circumstances, and adopted the 15% discount that Grabowski suggested would be appropriate.
The Appellate court pointed out that Norbert does not challenge the court’s conclusion that Frank was a key person. Nor does he dispute that it was appropriate for Trugman, his expert, to increase the discount rate in his cash flow analysis to account for the company’s dependence on Frank. He argued only that the trial judge should not have applied a separate key-person discount to the valuation.
The Appellate court found no merit in Norbert’s argument, and concurred with the trial court that a key-person discount should be applied.
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