Court of Appeals Holds That "Fair Value" of an Interest in a Closely-Held Family Limited Partnerships is Not the Discounted "Fair Market" Value
The Court of Appeals, per Judge Glover, has held that when determining the "fair value" value of a withdrawing partner's interest in a closely-held family limited partnership, a trial court should not apply a discount reflecting the difficulty of selling such interests on the open market.
The case, involving timber land in Union County held in the Winn Family since 1848, is Winn v. Winn Enterprises, Limited Partnership, No. CA-06-1375.
The partnership was formed in 1984 for the express purpose of keeping the land in the Winn family. . . . [and] provides that a partner may withdraw upon six months’ notice to the partnership and the other partners. Upon withdrawal, the withdrawing partner “shall be entitled” to receive the “fair value” of that partner’s interest in the partnership as of the date of withdrawal. The partnership agreement was amended in October 2002 to provide that the partnership shall have a “right of first refusal” if a partner desires to sell his or her interest to someone outside the family.
Some of the partners withdrew from the partnership and litigation ensued over the value of the "fair value" of their interests. The trial court agreed with the withdrawing partner's expert as to the dollar value of their interest, but agreed with the defending partner's expert that a discount should be applied to that amount reflecting the interest's lack of control of the partnership and the difficultly in selling such interests on the open market.
The Court of Appeals held that discounts should not be applied when valuing these types of interests. The Court analogized to cases involving the valuation of the interest of a dissenting corporate shareholders:
In both instances, the individual (whether a dissenting shareholder or a withdrawing partner) is exercising a statutory right to withdraw from the entity and the entity is absorbing that interest. If discounts are applied, the entity obtains the withdrawing shareholder or partner’s interest for less than that interest would be worth in the hands of the withdrawing shareholder or partner. Further, because the two situations are analogous and the General Assembly used the term “fair value” in both statutes to specify the type of value the withdrawing partner or shareholder is to receive for his or her interest, we hold that the “fair value” provided for in section 4-43-604 does not include discounts for lack of control or lack of marketability.
The Court cited a Maryland case and also a string of law review articles and an American Law Institute study on the subject: "The American Law Institute and various commentators are also in agreement that discounts should not be applied in determining the “fair value” of a dissenting shareholder’s or withdrawing partner’s interest." (citing Am. Law Inst., Principles of Corporate Governance: Analysis and Recommendations § 7.22(a) (Standards for Determining Fair Value) & cmt. e (1994); Harry J. Haynsworth IV, Valuation of Business Interests, 33 Mercer L. Rev. 457, 459 (1982); Joseph W. Anthony & Karlyn V. Boraas, Betrayed, Belittled . . . But Triumphant: Claims of Shareholders in Closely Held Corporations, 22 Wm. Mitchell L. Rev. 1173, 1186 (1996); and Barry M. Wertheimer, The Shareholders’ Appraisal Remedy and How Courts Determine Fair Value, 47 Duke L.J. 613, 636-37 (1998).
