Divorce Court May Utilize a Written Stock Agreement’s “Minority Interest” Discount for Business Valuation

By the time of his divorce, Husband had been a sales manager with Hudson Jewelers for the around 16 years. As part of his compensation, Husband had received stock in the company subject to a written agreement. While Husband and Wife stipulated in their divorce to the value of most of their assets in the family law matter, the value of the Hudson Jewelers stock was a highly contested issue.

Ownership of the Hudson Jewelers stock was subject to a written agreement, which limited Husband’s right to dispose of the stock to anyone but the company without prior written consent. If Husband wanted to sell the stock, Hudson Jewelers had a right to purchase the stock for its “computed value” or the price offered to Husband by any third party, whichever was lower. If Husband voluntarily quit his job or was terminated for just cause, Hudson had the right to purchase the stock for 70% of its “computed value.” Pursuant to the written agreement, the “computed value” of the stock was primarily based on the asset book value of the corporation with certain adjustments, but excluding goodwill.

Pursuant to the stock agreement, the divorce court valued the stock at 70% of its “computed value” in the divorce, Wife’s divorce lawyer appealed, arguing that this grossly undervalued the stock.

The Court of Appeal disagreed with Wife’s divorce attorney and affirmed the divorce court. First, the Court rejected Wife’s divorce lawyer’s argument that goodwill should be considered due to the fact that Hudson might be acquired by another big corporation soon. The Court explained that “there was no evidence of any planned merger or acquisition . . . and, in the absence thereof, the corporation [] had the right to purchase the stock at not more than ‘computed value’ should it be offered for sale.”

Second, the Court of Appeal rejected Wife’s divorce lawyer argument that a 30% discount should not have been applied to the “computed value” of the stock. The Court explained that “in view of the restrictive conditions on the disposition of the stock and its resulting illiquidity, factors substantially affecting its value, the divorce trial court was justified in assessing the value of the stock at 70 percent of its ‘computed value.’ Although that was its lowest value except in the event of a sale to a third person for less, it was the only value that was relatively certain.” Additionally, the Court of Appeal agreed with Husband’s divorce lawyer and explained that “while technically it does not go to the valuation of the stock[,]” the Hudson stock’s lack of liquidity supported a lower valuation in the family law matter, in part, because Wife was awarded more liquid assets in the divorce than Husband.

In re Marriage of Rosan (1972) 24 Cal.App.3d 885