Opinion ID: 4533826
Heading Depth: 2
Heading Rank: 2

Heading: Lack of Control Discount

Text: Wife contends the court of appeals erred in applying the lack of control discount because Husband will own 100% of the company after the apportionment. Husband asserts the preponderance of the evidence supports applying the discount to ascertain the fair market value of Wife's 25% interest. We agree a lack of control discount applies here. A lack of control discount—also commonly referred to as a minority discount—accounts for the minority interest's inability to control the business. The minority status certainly affects an asset's fair market value, and therefore, it is proper for courts to consider the propriety of this discount. We have previously done so in other contexts. See Dowling v. South Carolina Tax Commission, 312 S.C. 194, 439 S.E.2d 825 (1993). In Dowling, five children received stock from their parents as a gift. The IRS believed the parents had undervalued the stock, but the trial court disagreed and accepted the 30% discount for lack of control. This Court affirmed and noted, The majority of courts have found that minority interest discounts are appropriate within the familial context. Id. at 198, 439 S.E.2d at 828. The Court concluded, We decline to hold that as a matter of state law, minority stock discount for family-held corporations are not allowed.4 Id. Wife contends the court of appeals erred by not following its precedent, specifically Fields v. Fields, 342 S.C. 182, 536 S.E.2d 684 (Ct. App. 2000). In Fields, the husband was a minority shareholder in three privately-held businesses, one of which he served as vice president. The wife's father was the controlling shareholder of that business, and the family court awarded the husband's 18% interest to the wife because she could readily sell that portion to the controlling shareholder—her father. Conversely, if the husband retained ownership of the stock, he likely would be squeeze[d] out, as the wife's father had already removed him from the board and fired him. Id. at 189, 536 S.E.2d at 688. The husband's expert testified that usually a minority discount is appropriate to account for the minority 4 We disagree with the dissent that Dowling, grounded on different facts, is irrelevant to our decision. We find the basic principle expressed in Dowling—that we do not impose a categorical rule prohibiting lack of control discounts in the familial context—is sound and applicable here. Accordingly, our analysis turns on the facts of this case, including the experts' testimony and the family court's credibility determinations. Concerning credibility, we recently explained that a factfinder may not give artificial importance to a credibility determination when credibility is not a reasonable and meaningful basis on which to decide a question of fact. Crane v. Raber's Disc. Tire Rack, Op. No. 27951 (S.C. Sup. Ct. filed April 29, 2020) (Shearouse Ad. Sh. No. 17 at 26). Unlike the reliance on a credibility determination that had no basis in the record and where objective medical evidence rebutted the Workers' Compensation Commission's findings, the family court's credibility determination was thorough and relevant to valuing Wife's 25% interest. Further, the determination of fair market value in domestic litigation is a question of fact that almost always involves expert testimony. See Lewis, 392 S.C. at 391, 709 S.E.2d at 655 (noting the determination of fair market value is a question of fact). Because we are easily able to discern the family court's credibility determination from the record and that finding is paramount in weighing the competing expert testimony, we reject the dissent's willingness to discard it. shareholder's lack of control, but that the stock's value would be higher if allocated to the wife because she could consolidate it with her father's controlling interest. On appeal, the wife contended the family court erred in accepting this testimony, which implicitly rejected a lack of control discount, because there was no way to know what the father would do in the future. Id. The court of appeals affirmed the family court's decision, noting the discretion afforded in selecting competing valuations. Ultimately, the court of appeals found the family court did not abuse its discretion, the applicable standard of review at the time. Id. at 190, 536 S.E.2d at 688. We agree with the court of appeals that Fields is best limited to its facts and cannot be read as barring discounting the value of a spouse's minority interest anytime the other spouse owns (or is aligned with the owner of) a majority of the closely held business. Clark, 425 S.C. at 464, 823 S.E.2d at 206. The court did not examine the concept of fair market value, and therefore, there is no evidence whether the family court deviated from this standard when apportioning the marital property. Moreover, as is the case for marketability discounts, our valuation standard is fair market value, not fair value. See Brown v. Brown, 792 A.2d 463, 476 (N.J. Super. Ct. App. Div. 2002) ('Fair value' is not the same as, or short-hand for, 'fair market value.' 'Fair value' carries with it the statutory purpose that shareholders be fairly compensated, which may or may not equate with the market's judgment about the stock's value. This is particularly appropriate in the close corporation setting where there is no ready market for the shares and consequently no fair market value.). We profoundly disagree with Wife's and the dissent's assertion they are not abandoning the principles of fair market value because they are removing the fundamental aspect of fair market value—projecting the value attributed by a willing buyer and seller in a hypothetical sale. Further, the dissent’s conclusion that a discount for lack of control is improper fails to consider the impact on the value of Wife’s 25% share and would essentially change our State’s approach to valuations to a fair value standard. Although the family court retains discretion to reject this discount in other cases, here, the court chose to accept Stoddard's opinion, finding Stoddard more credible than Wife's expert. Moreover, Wife's expert never attempted to value the 25% interest separately, as he incorrectly assumed that Husband's 75% stake was marital. Instead, he merely calculated the value of the business as a whole and divided it by four. A hypothetical buyer would certainly require more than a simple mathematical exercise given the inability to exert control. Because the buyer would be at the whim of the majority, it would be difficult to find a buyer willing to pay a proportionate amount. These considerations all affect the asset's fair market value, which drives valuation. Accordingly, our review of the record supports the family court's decision to apply a lack of control discount. Nevertheless, as a matter of arithmetic, we agree with the court of appeals that Stoddard mistakenly applied a 44% discount rather than a 30% reduction. Husband acknowledged at oral argument that he did not challenge this reduction; accordingly, the 25% share of Pure Country is valued at $86,226.5