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Minority Status: The Question of Control
(Provided by National Legal Research Group, Inc.)

The fundamental reason for use of a minority discount is that lack of control over the business reduces the real economic value of the minority interest. Yet all minority interests do not suffer equally from lack of control. A small minority interest may suffer little from lack of control if the majority owner is friendly; a large minority interest may suffer greatly if the majority owner is hostile. Clearly, the extent to which the minority interest is actually disadvantaged by minority status is an important fact to consider in determining the existence and amount of any discount.

The extent of actual disadvantage is clearly least when both spouses together own more than 50% of the stock, so that the marital estate as an entity has actual control of the corporation. Assume, for instance, that the husband owns 40% of the stock, the wife likewise owns 40%, and a third party owns 20%. Each party has a minority interest, but the marital estate as a whole owns a substantial majority of the stock. If the parties cannot have a harmonious family relationship, they probably cannot have a harmonious business relationship, and it is almost certain that all of the stock in the business will be awarded to one spouse or the other. See generally Brett R. Turner, Equitable Distribution of Property 9.02 nn. 13-16 (2d ed. 1994 & Supp. 2002). In this situation, the interest being divided is really one controlling interest, not two minority interests, and most courts will refuse to apply a discount. See Eyler v. Eyler, 492 N.E.2d 1071 (Ind. 1986) (where parties together owned 90% of corporation, error to apply a minority discount to wife’s portion of the 90%); Siracusa v. Siracusa, 30 Conn. App. 560, 621 A.2d 309 (1993); Nardini v. Nardini, 414 N.W.2d 184 (Minn. 1987); Fisher v. Fisher, 568 N.W.2d 728 (N.D. 1997) (where husband owned majority interest and wife owned minority, court refused to apply minority discount).

Actual disadvantage is also often small when the business is owned and operated by one spouse’s family. In this situation, the court almost always awards the stock to the spouse whose family runs the business; forcing a spouse to do business with the other spouse’s family is likely to result in trouble. E.g., Fields v. Fields, 342 S.C. 182, 536 S.E.2d 684 (Ct. App. 2000) (awarding minority interest in business to wife, where wife’s father owned majority interest and had an actual history of attempting to remove husband from the business).

But if the majority interest is in the hands of friendly family members, the holder of the minority interest may not suffer much actual harm from minority status. In the absence of actual harm, the argument for a minority discount is weak. A number of cases therefore refuse to make a discount where a majority of the stock is controlled by friendly family members. See In re Marriage of Batt, 149 Or. App. 517, 945 P.2d 517, review denied, 326 Or. 233, 952 P.2d 60 (1997) (proper to make no discount, where any sale of family farm would be to other family members for full value); Fields v. Fields, 342 S.C. 182, 536 S.E.2d 684 (Ct. App. 2000) (where wife and her father controlled company, proper to make no minority discount). But see Rattee v. Rattee, 146 N.H. 44, 767 A.2d 415 (2001) (applying 28.5% minority discount in valuing husband’s 49.6% interest in business, even though husband’s mother owned remainder of company; expert testified that discount was appropriate despite family relationship).

Most of the minority discount cases assume that control over the corporation depends upon ownership, so that a minority owner necessarily lacks control. But this may not always be true. For example, in In re Davies, 266 Mont. 466, 880 P.2d 1368 (1994), the minority shareholder spouse was the chief operating officer of a small ranch corporation, and thus had complete control over its actions. The court specifically noted that the husband did not anticipate selling his interest, and that he could reasonably expect to remain in control of the ranch for the indefinite future. On this basis, it refused to apply a discount. Likewise, another court refused to apply a minority discount where the husband had an option to purchase the shares he did not own. In re Marriage of Harrington, 85 Wash. App. 613, 935 P.2d 1357 (1997).

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National Legal Research Group, Inc.

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