Goodrich v. Goodrich
| Decision Date | 02 July 1992 |
| Docket Number | No. 90-270,90-270 |
| Citation | 613 A.2d 203,158 Vt. 587 |
| Parties | Julia H.L. GOODRICH v. Reginald G. GOODRICH. |
| Court | Vermont Supreme Court |
Agnes S. Hughes, Lamb & Hughes, P.C., Springfield, for plaintiff-appellee.
Jeremy Dworkin, South Londonderry, for defendant-appellant.
Before ALLEN, C.J., and GIBSON, DOOLEY, MORSE and JOHNSON, JJ.
Defendant husband appeals from the property award in this divorce, challenging the court's valuation of plaintiff's interest in a closely held family corporation. We affirm.
The parties were married in 1969 and separated in 1988. They have two children. Neither party brought substantial tangible assets into the marriage, but plaintiff later received from her mother and grandmother a total of 4,000 shares of the stock of Jamison Door Company, a company founded by plaintiff's great grandfather. These shares represented a little more than 5% of the total outstanding stock. All shares in the corporation are held by members of plaintiff's family. In addition to this stock, plaintiff inherited about $130,000 from her grandmother.
Plaintiff has worked outside of the home since 1973, mainly in clerical positions. Defendant received a college education during the marriage and in the course of nearly twenty years has had fifteen different jobs and business ventures, including his own carpet business, work for an excavating company, a tile business, a grinder company, a collection agency, a metals company, his own building business, and a hot tub business. The parties acquired a residence early in their marriage, and both worked to expand and remodel what was a camp into a home. The trial court found that defendant in 1986 or 1987 used about $20,000 from the corpus of a trust, which his aunt had set up for the parties' children, to support his building company and to purchase two family automobiles.
The trial court awarded the $37,000 net equity in the parties' home to defendant, but denied his request for a portion of plaintiff's Jamison Door shares, which the court valued at $97,000. The court made no adjustments to the parties' plan for the payment of marital debts.
Defendant's principal claim on appeal is that the trial court's valuation of the Jamison Door stock was erroneous because the court applied inappropriate appraisal criteria. Defendant's expert, a certified public accountant, testified that a company of the size of Jamison Door should be appraised on the "formula method"--a computation based on the fair market value of the underlying net assets of the business. Using this method, the expert placed a value of $12,021,000 on Jamison Door, including good will. Based on that figure, the value of each share would be $153.46, making plaintiff's shares worth a total of $613,840.
The court rejected defendant's approach and accepted plaintiff's view that the valuation of the stock should reflect what a willing buyer would pay for the stock from a willing seller. Plaintiff's expert, also a certified public accountant, testified that the company had paid $1.97 in dividends in 1988 and $1.90 in 1989. He used the $1.97 figure to reach an annual income for the 4,000 shares of $7,880. Applying the current interest rate on U.S. Treasury bills, he calculated the sum that would be needed to yield that amount of income as $97,404 and offered that figure as the value of the stock, viewed from a "return on investment" perspective. The court accepted this figure as what a willing buyer would pay a willing seller. It declined to accept a higher valuation ($171,000) based on liquidation value, or a lower valuation ($37,000) based on the testimony of plaintiff's expert that the purchaser of such a small interest in a family business would expect a return of twenty-one percent. The court did not ignore defendant's position that an asset-based valuation should be applied. It stated in Finding 26:
(d) ... While it is true that the tangible assets and good will of the Jamison Door divided by the number of outstanding shares would place an equity value of $153.46 for each share of stock, the Court does not view this as the price a willing buyer would pay for each share to obtain a 5% interest in the company.
(e) The Court finds that a more equitable manner of determining fair market value of the 4,000 shares would be based on the return on investment value approach. The Court finds that a willing buyer would look to his return on investment in making the purchase of such a small fraction as 5% of the total stock of the company.
On appeal defendant urges this Court to mandate a single methodology--the "formula method"--for determining the value of an interest in a closely held company. This we decline to do. The court's valuation was supported by credible evidence in the record, and thus is not clearly erroneous. Morissette v. Morissette, 143 Vt. 52, 61, 463 A.2d 1384, 1389 (1983); Victor v. Victor, 142 Vt. 126, 129, 453 A.2d 1115, 1117 (1982). Valuation of closely held stock is never an easy task. See, e.g., Righter v. United States, 194 Ct.Cl. 400, 439 F.2d 1204, 1207 (1971); In re Marriage of Hewitson, 142 Cal.App.3d 874, 882, 191 Cal.Rptr. 392, 397 (1983). As the New Jersey Supreme Court has recognized:
There are probably few assets whose valuation imposes as difficult, intricate and sophisticated a task as interests in close corporations. They cannot be realistically evaluated by a simplistic approach which is based solely on book value, which fails to deal with the realities of the good will concept, which does not consider investment value of a business in terms of actual profit, and which does not deal with the question of discounting the value of a minority interest.
Dugan v. Dugan, 92 N.J. 423, 432, 457 A.2d 1, 6 (1983).
Defendant acknowledges that five alternative valuation methods were presented to the trial court, and the testimony of plaintiff's expert reflected that different approaches to valuation may be appropriate in different cases. The best method of valuation will necessarily depend on particular facts and circumstances, and federal Revenue Ruling 59-60, 1959-1 C.B. 237, heavily relied upon by defendant, reflects this proposition. It sets forth a nonexclusive list of fundamental factors affecting fair market value, including:
(a) The nature of the business and the history of the enterprise from its inception.
(b) The economic outlook in general and the condition and outlook of the specific industry in particular.
(c) The book value of the stock and the financial condition of the business.
(d) The earning capacity of the company.
(e) The dividend-paying capacity.
(f) Whether or not the enterprise has goodwill or other intangible value.
(g) Sales of the stock and the size of the block of stock to be valued.
(h) The market price of stocks of corporations engaged in the same or a similar line of business having their stocks actively traded in a free and open market, either on an exchange or over the counter.
In the present case, plaintiff's stock represents a minority interest in the corporation. This factor supports a discount because the shares are not readily marketable and could not convey a controlling interest in the company. A purchaser of plaintiff's interest would not receive guarantees of future dividends, and the record does not reflect any special rights or powers attending the minority interest. As one commentator has said about the dilemma of the minority stockholder whose interests are not being served by the majority:
He can sell the stock to another outsider, in which event the price is likely to reflect a substantial discount by reason of the "captive" position of the investment in the corporation, or he can sell to the insiders. While there may be buyers at a favorable price if the insiders regard it as desirable to eliminate outside participation in the affairs of the corporation, the insider market is normally restricted. On balance it is fair to conclude that the price obtainable by the outsider for the minority shares normally will be substantially less than the pro rata asset and income values.
Feld, The Implications of Minority Interest and Stock Restrictions in Valuing Closely-Held Shares, 122 U.Pa.L.Rev. 934, 936-37 (1974); see also Schreier and Joy, Judicial Valuation of "Close" Corporation Stock: Alice in Wonderland Revisited, 31 Okla.L.Rev. 853 (1978). Here, defendant's expert did not consider the minority-interest factor in his appraisal.
Defendant relies on Bowen v....
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