The partnership retained a certified public accountant, who relied on a forester’s appraisal of the timberland at just under $1.5 million to arrive at a total fair market value for the FLP of $1.63 million. Because he believed that it was “common” to apply discounts to minority partnership interests, he also applied a 30% discount for lack of control and a 15% discount for lack of marketability. Although he acknowledged that the partnership agreement called for applying “fair value,” in this case the expert believed that the standard was the same as “fair market value.” On cross-examination, he conceded that there could be circumstances—as in dissenting shareholder cases—where “fair value” could require a different valuation method.
Trial court applies discounts
The trial court found the partners’ appraisal of the FLP assets more credible. It adopted the $1.9 million value as part of its overall valuation of the FLP, but then applied the discounts asserted by the partnership’s expert—and the partners appealed.
Analogizing to federal and state law regarding “fair value” in the context of the dissenting shareholder cases, the partners argued that discounts were incompatible with their rights to recover their “complete investment” in the partnership. If discounts apply, they said, the partnership would obtain their interests at a windfall simply because the partners had chosen to exercise their withdrawal rights.
The court of appeals agreed. Moreover, the applicable state partnership law (Arkansas) characterized withdrawing partners in a similar manner—and both statutes used the “fair value” terminology to specify the applicable valuation method. But neither statute defined “fair value,” and though the partnership’s expert tried to equate this with “fair market value,” the appellate court disagreed. “Fair value is determined by ascertaining all assets and liabilities of the business and the intrinsic value of its stock rather than merely appraising its market value.” In the case of dissenting shareholders or withdrawing partners “there is no sale on the open market; their situation is more akin to a forced sale.”
Winn v. Winn Enterprises, Ltd., 2007 Ark. App. LEXIS 693 (October 10, 2007)
