Florida court declines to adopt “fair value” in Erp

A recent Florida divorce decision, Erp v. Erp, considered the valuation of an RV dealership acquired by the husband and wife during their marriage. The dealership was organized as a subchapter “S” corporation, of which the husband and wife each owned 40% of the stock. Husband’s son from a prior marriage and wife’s son from a prior marriage each owned 10% of the stock, so that no decisions could be made without the consent of husband and wife, or one of the spouses and both children.

In addition to the divorce action, the wife commenced a simultaneous court proceeding for dissolution of the corporation.

The husband’s expert found an enterprise value of $4.56 million, while the wife’s expert found $12.5 million. The differences in the experts’ opinions were primarily due to (1) tax-affecting “S” corporation income; (2) regression analysis; (3) working capital adjustment; (4) A/R accounting convention; and (5) marketability discount. After discounts, the husband’s expert found that wife’s 40% share was worth $720,000. The wife’s expert found that her 40% share was worth $5 million.

The trial court arrived at an enterprise value of $6.2 million. This figure was based upon the testimony of the husband’s expert, after restoring cash flow to its pre-tax basis, scaling back the working capital reduction of cash flow, applying a LIFO convention to accounts receivable, and applying a 10% marketability discount. The trial court valued the husband and wife’s 80% interest at $4.96 million, of which the wife’s share was worth $2.48 million.

On appeal, the wife attacked the trial court’s marketability discount, arguing that a marketability discount should never be applied in matrimonial actions. Wife pointed to the state statute that mandated a “fair value” standard in shareholder suits, and a statute that prohibited discounts in such cases.

Rather than adopting a standard of value, the Florida appeals court held that the trial courts have discretion to accept or reject the testimony of valuation experts. The Florida appeals court noted that the state statute that adopts a “fair value” standard applies only to oppressed shareholder cases, and not to matrimonial actions.

The Court wrote: “In this case, the Wife is not the victim of majority shareholder oppression. From her perspective, there has been no involuntary change in the fundamental nature of the corporation.”

The Florida court noted that marketability discounts were discretionary (not prohibited) in cases involving corporate dissolution. Perhaps it was significant that the trial court in Erp had reduced the marketability discount to 10%. Finding no abuse of discretion, the appellate court affirmed.