One of the factors that can complicate a divorce proceeding is when one (or both) of the parties has an interest in a closely held business/corporation.  After an analysis is conducted to determine whether the business is subject to equitable distribution, the major issue becomes one of valuation.  Unlike publicly traded companies, it might be difficult to value how much each share in a closely held corporation is worth.  Yet, it will be nearly impossible to settle a divorce without agreement as to this important issue.

This post is going to briefly examine one element of valuation: the amount of control an individual has in a closely-held corporation.

Often times, experts will be retained to perform an evaluation of a parties’ interest in a closely-held corporation.  While every expert may have their own techniques, there are some commonly accepted principles they should follow.  One principle that might be used is the idea of a discount for minority shareholders.  The thought process behind such a principle is that minority (sometimes call oppressed) shareholders do not have as much power/decision making ability—-and therefore lack the ability to shape the direction of their business.  In short, the minority shareholder’s shares may not possess the value of a majority shareholders.

Parties to a divorce and/or the parties attorneys are free to reach an Agreement regarding valuation and whether a minority discount would apply.  In recent years, however, New Jersey courts have become increasingly reluctant to render a decision taking a minority valuation into account.  The case Brown v. Brown, 348 N.J. Super. 466, 487-88, 792 A.2d 463, 476-77 (App. Div. 2002), provides a great overview of the Court’s mentality.

That said, many appraisers/valuation experts will maintain that a minority discount makes mathematical and logical sense.  A lack of control renders a minority shareholder’s assets less valuable than a majority shareholder.   

In most cases, valuation of a closely held corporation will not be at issue.  In more complicated cases, where the case may turn on such a valuation, careful attention needs to be made to whether a minority shareholder’s shares will be granted a discount in valuation due to their minority status.

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