Wife’s stake in business subject to ‘marketability discount’
Dear Clients and Friends,
One of the most contentious issues that can arise in a divorce is the status of a family business, particularly where a husband and wife hold unequal stakes. A recent South Carolina case shows that having a minority stake can be a disadvantage both in making business decisions and in a divorce.
In that case, the husband owned 75 percent of the business and the wife owned the other 25 percent. During their divorce, a dispute broke out in the context of property division over the value of their respective stakes.
A family court judge ended up devaluing the wife’s stake in the business, pointing out the lack of any evidence that the husband, who controlled the business, planned to sell.
The wife challenged this “marketability discount” and a midlevel appeals court judge reversed the decision.
But the South Carolina Supreme Court disagreed and put the trial judge’s order back in place. The court reasoned that the proper way to value the wife’s interest was based on fair market value, meaning how much she could realistically sell her interest for, rather than “fair value,” meaning 25 percent of the whole company’s value. This, the court said, should result in both a marketability discount and a “control discount.” The court concluded that a 30-percent reduction should apply.
The law, of course, may vary from state to state and from case to case. It is a no-brainer to have an experienced family law attorney in a high asset divorce and much more than a luxury in any divorce. We continue to invite you to call us for a free evaluation of any family law matter that you or yours feel challenged by.