By contrast, the expert for the withdrawing partner claimed that a minority discount was not appropriate because: 1) the controlling statute entitles a withdrawing partner to “an amount equal to the value that the [former partner] had at the time the membership ceased”; and 2) the partnership was not facing liquidation, and thus an “automatic market” for the shares existed, i.e., in the remaining partners’ obligation to repurchase the shares. In addition, the partnership agreement was silent as to a buyout price and the application of discounts.
The trial court’s ruling fell nearly halfway between the experts. It applied a 35% minority discount to reach what it called “a true market value” for the partner’s interest, or $228,447. The partner appealed on four grounds, “the crux of each…that the trial court should not have used a minority discount in determining the value of the partnership share.”
Appellate court looks to nature of the asset
The appellate court began by confirming the broad, discretionary basis that state precedent permitted trial courts for determining the value of a withdrawing partner’s share—which is “fair market value…in a true arms[‘] length transaction.” In these cases, the most significant adjustment to fair market value recognizes that a withdrawing partner’s share “is a minority interest in a closely held business.”
Thus, it was “certainly feasible” that an outside investor would be unwilling to pay a full one-third of the partnership’s value for the withdrawing partner’s interest, the court said. In particular, when the partnership’s main asset is land, the situation is not analogous to a professional practice, in which value is often closely allied to a partner’s personal reputation and goodwill (thereby making the application of a discount more tenuous). In fact, when the partner’s own expert was asked under cross-examination whether he would—in a hypothetical sale scenario—“recommend that your client…pay a full one-third for” the interest, the expert replied simply, “No, sir.”
The appellate court also discredited the expert’s rationale for not applying discounts in this case. “First, had the partnership agreement addressed the issue of payment to a withdrawing partner, there would likely be no need for judicial determination of the value of [those] shares.” Second, the controlling statute and case law required finding the “true market value” of the shares in an “arms[‘] length transaction,” which contradicted the expert’s position that the court should find an “automatic market” for the shares in the remaining partners.
Finally, the trial court applied a discount that fell well within the experts’ range of discounts (0% - 80%) and within the average posited by the 1994 study. Based on all of these factors, the higher court confirmed the 35% minority discount.
Cannon v. Bertrand, 2008 WL 1734158 (Louisiana) (April 16, 2008)
