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Business 'divorce' and discounts

Matthew McKinney is an attorney at BrownWinick Attorneys at Law. PGP_1038

 

Ownership in a business (whether a limited liability company or a corporation) is often shared among many individuals.

As a result, in businesses across Iowa most owners do not control and do not own more than half of the business. In other words, they are noncontrolling owners, bound by the "vows" they've accepted in the business's governing documents.

In the eyes of a court, such owners are often referred to as "minority owners." Unfortunately, in the same manner that some married couples seek a divorce before a court, so too do business owners appear before a court seeking divorce from their fellow owners.

In a business divorce, however, a court is not calculating alimony or child custody; rather, it is often valuing ownership in the business. During this valuation process, majority owners frequently seek to impose a minority or "lack-of-control" discount on the value of the minority owners' interest.

Consequently, a familiar question frequently arises both in and out of court: Should minority discounts apply in such circumstances?

Iowa's appellate courts have repeatedly found minority or "lack-of-control" discounts do not apply when valuing a minority owner's interest in such cases. In fact, in July the Iowa Court of Appeals reiterated this important point when it clearly stated "the fair value of (the minority shareholder's) shares should not include a minority discount." Baur v. Baur Farms, Inc., No. 14-1412, 2016 WL 4036105, at *4 (Iowa Ct. App. July 27, 2016) (emphasis added).

In reaching its decision, the Iowa Court of Appeals relied upon the Iowa Supreme Court and its prior holdings, which provide in relevant part: "(O)ur legislature made a policy decision when it adopted the current definition of “fair value.” By not allowing a discount for lack of marketability or minority status ..."  Nw. Inv. Corp. v. Wallace, 741 N.W.2d 782, 787–88 (Iowa 2007); "Such a discount in effect would let the majority force the minority out without paying it its fair share of the value of the corporation." Sec. State Bank, Hartley, Iowa v. Ziegeldorf, 554 N.W.2d 884, 889 (Iowa 1996).

In sum, before divorcing your business partner and selling your shares in an Iowa business at a discount, you should consider contacting a licensed attorney.  

Comments

Matt,

Nice and relevant article. Well done in a concise way.
Hope you're well and would love to catch up over coffee sometime.

Take Care,
Brian Thompson

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