Following the Louisiana Supreme Court’s decision in Cannon v. Bertrand, 08-1073 (La. 1/21/09), 2 So.3d 393, the argument that discounts were not applicable in business valuations resounded across the state. Cannon was often quoted, “Minority discounts and other discounts, such as for lack of marketability, may have a place in our law; however, such discounts must be used sparingly and only when the facts support their use.” Alas, this is not a definitive statement.
Cannon v. Bertrand
This matter dealt with the value paid by two remaining general partners in a limited liability partnership to the third general partner withdrawing under LA. Civ. Code art. 2823-5.
Art. 2823. Rights of a partner after withdrawal.
The former partner, his successors, or the seizing creditor is entitled to an amount equal to the value that the share of the former partner had at the time membership ceased.
Art. 2824. Payment of interest of partner.
If a partnership continues to exist after the membership of a partner
ceases, unless otherwise agreed, the partnership must pay in money the amount referred to in Article 2823 as soon as that amount is determined together with interest at the legal rate from the time membership ceases.
Art. 2825. Judicial determination of amount.
If there is no agreement on the amount to be paid under Articles 2823 and 2824, any interested party may seek a judicial determination of the amount and a judgment ordering its payment.
The partnership owned real estate and had no real operations. Under LA. Civ. Code art. 2826, limited liability partnerships terminate upon the withdrawal of any general partner unless the remaining general partners consent to its continuation. In Cannon, the remaining two partners opted to continue the partnership. By opting to continue, the partnership was obligated to buy the interest of the withdrawing partner. Both experts used the asset approach to value the partnership.
The facts of the case lent themselves to the determination that no discounts should be applied to the determination of value: it was a partnership, the interest had to be purchased by the partnership, and the value was determined under the asset approach. Partners receive their proportionate share of the assets in a dissolution.
Partnerships are different from other business entities in that each of the partners is liable for his/her proportionate share of the partnership’s liabilities.
“Value” is not defined under the laws governing partnerships.
There is no call for fair market value or discounts. There is no consideration of hypothetical buyers, sellers, or transactions. The interest was being sold by Cannon to his partners.
Under the asset approach, the assets and liabilities are marked at their market values. The difference (or residual) is the determined value. There is no value for goodwill under this approach. The resulting value is reflective of the market value of the assets and liabilities. Liquidation or the cessation of operations is implied under the asset approach. Accordingly, the lack of control discount (a.k.a. minority discount) is typically small, if existent.
Changes in the Law
Since Cannon, the Louisiana Business Corporation Act became effective on January 1, 2015. La. Rev. Stat. §12:1-1301(4) states that shareholders dissenting to major corporate actions (e.g. merger, conversion to nonprofit, etc.) are entitled to fair value without discounts for lack of marketability or lack of control. Rev. Stat. §12:1-1435(C) states as much applies to oppressed shareholders as well. It is worth noting that these statutes are specific to the type of entity and action.
The following decisions, discussed in chronological order, have been published since Cannon.
Trahan v. Trahan, 10-109 (La. App. 1 Cir. 6/11/10), 43 So.3d 218, writ denied, 10-2014 (La. 11/12/10), 49 So.3d 889
This matter dealt with the community property partition of a 2/3rds interest in a limited liability company. The LLC was an operating company, and the company was valued using an income approach.
Community property partitions specify “fair market value” , and both experts applied a marketability discount to the interest. Neither applied a lack of control discount, because the interest had the power to control the company.
Despite Cannon, the court stated, “Louisiana courts have not clearly determined a standard for valuing a community business.” The court held that a marketability discount of 20% was applicable because the LLC was a small, closely-held LLC with only two members. The court additionally stated, “The Cannon court did not state that marketability discounts should never be used, but rather stated that the discounts should be used ‘sparingly and only when the facts support their use.’”
Fancher v. Prudhome, 47,575 (La. App. 2 Cir. 2/27/13), 112 So. 3d 909
Fancher withdrew from an operating, limited liability company.
La. Rev. Stat. §12:1325(C) states “a withdrawing or resigning member is entitled to receive… the fair market value of the member’s interest as of the date of the member’s withdrawal or resignation.”
The plaintiff provided nearly all of the business for the LLC. The court determined that the value of the business on a going concern basis was indistinguishable from the plaintiff individually, and it adopted the valuation of the business by the testifying expert who used the asset approach, i.e. no goodwill. Under this unique set of facts, where the value of an operating company was based on the asset approach, which generally indicates a lower value than the income approach, the court did not apply any discounts.
Similar to Cannon, the court valued the business under the asset approach, which uses the market value of assets less liabilities, as discussed above.
In re P.K. Smith Motors, Inc., 50,357 (La. App. 2 Cir. 3/9/16) 188 So.3d 324, writ denied, 2016-0852 (La. 6/17/16), 192 So.3d 771.
In determining the value of a 50% equity interest in a corporation, both experts used the asset approach, determining that it produced the greatest and most relevant value for the company. The shares carried restrictions on sales outside of the family, with the company and shareholders each having rights of first refusal on all shares. Both experts applied lack of marketability discounts to the interest. One of the experts also applied a lack of control discount. The court adopted a value for the interest that contained both a lack of control discount and lack of marketability discount in determining a “fair market value or fair price” , which was determined to be the intent of the parties to the shareholder agreement.
Thus, despite Cannon and the passage of Louisiana Business Corporation Act, the court held that the value of a 50% equity interest was subject to both lack of control and lack of marketability discounts. It is arguable, that the shareholder agreement provided the requisite facts to support their use.
Vedros v. Vedros, (La. App. 5 Cir. 10/25/17), 229 So.3d 677
This matter involved the community property partition of a 47.2% interest in an LLC. The interest carried a transferability restriction: “A Member may not Transfer its Membership Interest in the Company or any portion thereof without the unanimous written consent of the Members.”
Both experts used an income approach; however, they disagreed on the application of discounts.
In applying discounts for lack of control and lack of marketability, the court distinguished Cannon, stating that the two other members of the LLC were not trying to buy the community property interest, and therefore, any third-party purchaser, per a fair market value standard, would be subject to a lack of control [and marketability].
Wall v. Bryan (La. App. 2 Cir. 6/27/18), 251 So.3d 650
The plaintiff faced imminent disqualification as a member of the LLC per its Operating Agreement, which forced the sale of his 24.75% ownership interest. The parties reached a settlement agreement, which failed to state the price to be paid for the buyback of the interest.
The court found that La. Rev. Stat. §12:1325(C) applied and used the standard of fair market value. Both experts used a lack of control discount in their determinations of value. Only one of the experts applied a discount for lack of marketability.
In using the fair market value standard, the court adopted both discounts. In doing so, the court found that the definition of fair market value trumped the factual circumstances of the case: there was an agreement to buy/sell the interest, implying marketability.
In adopting discounts for lack of control and lack of marketability, the court stated, “[W]hile the mandate of the supreme court in Cannon is that discounts should be used sparingly, it is actually the industry standard for both minority and lack of marketability discounts to be applied to noncontrolling interests in ambulatory surgery centers… The trial court simply exercised the discretion Cannon afforded it and applied the discounts it thought best to achieve an equitable outcome within the constraints of the statutorily required fair market value basis.”
“[I]n Cannon, the appropriate valuation methodology and application of any discounts were left to the sound discretion of the court. This flexibility in the basis for valuation increases a court’s ability to avoid discounts while still achieving equitable results.”
It is clear that the law in Louisiana is not settled. When decided, Cannon seemed to change the landscape by abolishing the recognition of discounts to noncontrolling business interests; however, discounts are still being applied depending on the type of entity and the legal action.