August 12, 2020

Divorce Business Valuations Distinguished From Compulsory Buyback Valuations by Indiana Court of Appeals

On May 5, 2020, the Indiana Court of Appeals decided Hartman v. BigInch Fabricators & Construction Holding Co., effectively distinguishing divorce case business valuation discounts from other settings and establishing a key legal precedent for business law practitioners.

Revisiting the Case

BigInch was a closely held corporation in the business of fabricating and installing natural gas and pipeline stations and related apparatus. Blake B. Hartman was one of the founders and a former president of BigInch.

In 2006, the shareholders to the corporate predecessor of BigInch, each owning a minority position, entered into a shareholder agreement. The shareholder agreement required the company to purchase the shares of any shareholder who was involuntarily terminated as an officer or director of the company based on an appraised market value by a third-party valuation company. In 2018, Hartman was involuntarily terminated from his position as a director and officer of BigInch. BigInch retained a third-party valuation company to value Hartman’s 17.77% interest in BigInch. The resulting business valuation discounted Hartman’s interest by a combined 32% lack of control discount and marketability discount. Upon challenge by Hartman, the trial court entered summary judgment, affirming application of the discounts.

On appeal, the Indiana Court of Appeals reversed, determining that lack of control and marketability discounts do not apply to compelled return of ownership interests to a controlling party where there is a ready-made market. The majority opinion distinguished divorce cases where lack of control and marketability discounts may be applied. See Alexander v. Alexander, 927 N.E.2d 926 (Ind. Ct. App. 2010). The majority’s distinction arose from trial court’s broad discretion when determining the value of marital property in divorce proceedings and the fact that there was no sale of an ownership interest in Alexander. The Indiana Court of Appeals viewed the trial court in BigInch as attempting to prevent a windfall to the majority as opposed to the Alexander trial court simply trying to value an interest that was not being sold. The appellate court also interpreted the prior rejection of discounts in Wenzel v. Hopper & Galliher, P.C., 779 N.E.2d 30 (Ind. Ct.  App. 2002) as applicable to all sales occurring in a closed market, regardless of whether a “fair value” statutory standard or other valuation standard applied.

As a result of this analysis, the Indiana Court of Appeals concluded that the value of Hartman’s shares under the buyback provision in the shareholder agreement, which required the application of the “appraised market valuation,” could not be discounted for lack of control and marketability.

What This Decision Means for Business Law Practitioners 

BigInch reinforces the distinction between divorce and other business litigation valuation principles and expands the rejection of discounts in a range of compulsory transactions, following trends in Indiana and other jurisdictions.


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