In a May 13, 2020 opinion in Clark v. Clark, 430 S.C. 167, 843 S.E.2d 498 (2020), a closely divided South Carolina Supreme Court approves both a marketability and lack of control discount to a business in which Husband ultimately owned a 100% interest. While the majority holds that such discounts are to be applied on a “case-by-case basis,” it is hard to believe that this was the appropriate case for a lack of control discount.
The family history described by the Supreme Court is pretty lurid but the basic factual issues on appeal are simple. During the parties’ marriage Husband started working for his family-owned business. At some point he was gifted 75% of the stock from his father. He purchased the remaining 25% of the stock from his sister, which he subsequently gifted to Wife. At the time of this gift, the parties entered an agreement that this 25% interest could only be sold to family members. Thus the parties collectively had sole ownership of the business but only 25% of the business was marital. At trial, in valuing and dividing the 25% interest in the business, the family court applied both a marketability and lack of control discount to that interest and awarded it to Husband–giving him sole control of the business. Wife, unhappy with how these discounts lowered the value of a marital asset that was awarded to Husband, appealed these, and numerous other issues, to the Court of Appeals. The Court of Appeals affirmed the lack of control discount but reversed the marketability discount. Both parties sought certiorari, which the Supreme Court granted as to the application of these two discounts.
In a 3-2 decision the Supreme Court held such discounts should be applied on a “case-by-case basis” but applied both discounts to this case. A marketability discount is often applied to small businesses due to the difficulties in finding a willing buyer. In Clark there was an additional marketability issue created by the agreement that Wife’s 25% interest could only be sold to family members. At trial both parties’ experts testified that a marketability discount should apply, with Wife’s expert backpedaling when her attorney asked whether such a discount should apply if no sale was contemplated. The majority found these facts sufficient to apply the marketability discount. The dissent would have rejected this discount because no sale was contemplated. It further noted (I believe correctly) that “even if some marketability discount is appropriate, the stock transfer restrictions should not be a factor. Once Wife’s shares are transferred to Husband, there will be no motivation for Husband to keep the restrictions in place; therefore, the financial relevance of these transfer restrictions is illusory.”
The majority further approved the lack of control discount. Although Husband would own 100% of the business upon the parties’ divorce, the majority held the proper method of valuing the 25% interest was to value it separately–rather than valuing the whole company and dividing that figure by four. The dissent, noting prior case law that “a minority discount should not be allowed when the aggregate of the family holdings creates a majority interest in the corporation,” argued “that courts should not apply minority discounts at the expense of uncontroverted facts.” Given Husband’s 100% ownership of this company, I believe the dissent has the better argument.
An insane amount of litigation occurred to value a 25% interest in a company worth $736,000 (the valuation Husband’s expert placed on the company, which was adopted by the family court, and not challenged in the Supreme Court). The Supreme Court valued this 25% marital interest at $86,226. Absent application of these discounts the valuation would have been $97,774 higher and Wife’s equitable distribution award (assuming a 50/50 division of the marital estate–both the Court of Appeals and Supreme Court opinions are silent on the percentage division of the marital estate) $48,887 greater.
Yet, one understands why Wife fought these issues. There is no lack of control for someone who own 100% of a business. Further, even if the marketability discount was appropriate it should not have included the discount for a stock transfer limitation agreement that Husband could unilaterally extinguish. Since Clark holds such discounts should be applied on a case-by-case basis, the import of this (I believe incorrectly decided) opinion is limited. Still I believe the dissent’s analysis was the correct analysis.
