Valuing Minority Interests in Close Corporations Upon Divorce

Before dividing marital property in a divorce case, the court must first value it. One of the most difficult assets to value in the real world is a minority interest in a close corporation. Such interests clearly have value, both to the owner and on the open market. Actual sales are uncommon, however, and different accounting formulas can reach greatly disparate results when applied to the income and other financial statistics of the business. "Placing a fair market value on the [close] corporation is an art, not a science." In re Marriage of Gunn, 233 Ill. App. 3d 165, 183, 598 N.E.2d 1013, 1025 (5th Dist. 1992).

Among the many points which the court must confront when it values a close corporation is the size of the interest being valued. There is no doubt that the size of the interest at issue has a major effect on the price which the interest would command in an open-market transaction. If fair market value on the open market is the standard for value, a minority interest must certainly be discounted.

The early trend in all states was to apply a minority discount routinely. As courts have become more sophisticated in valuing close corporations, however, they have begun to apply the discount much less frequently. Close corporations are often not sold on the open market; they are given or sold to close family members. To apply a strict market value standard to close corporations is to some extent applying an artificial measure of value. Moreover, a growing number of courts are questioning the entire notion that the measure of value for divorce purposes is transferable value. Many nontransferable assets are routinely given substantial value in divorce cases; the most common examples are unvested retirement benefits and unvested stock options. If transferable value is not the standard, then the case for a minority discount becomes much weaker. This article will review recent case law on the status of the minority discount in divorce cases.

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