Discount for Lack of Marketability (“DLOM”)

In the Matter of Brooklyn Home Dialysis Training Centre, Inc., 2002 N.Y. Slip Op. 03360 N.Y.A.D. 2 Dept. [Selected from “Business Valuation Cases in Brief” by John J. Stockdale, Jr.; BVR September 2002].

Key issues – general economic factors discount.

The New York Supreme Court, Appellate Division, Second Department affirmed the lower court’s use of the investment value approach, the application of a lack of marketability discount and the application of a large (42.29 %) general economic factors discount in this judicial valuation of a one-third interest in a corporation for a buy-out to avoid its dissolution.

Dissenting shareholders’ rights

Pueblo Bancorporation v. Lindoe, Inc., 2003 Colo. LEXIS 53 (Colo. Jan. 21, 2003). Judge Rice. [Source: ASA BV E-Letter; issue 7-6, February 4, 2003].


Key issues – Dissenting shareholders, Fair value, Fair Market Value, Marketability discount, Shareholder-level discounts, Proportionate interest, Going concern, Case-by-case approach, Extraordinary circumstance exception. 


Leslie A. Patten, CPA, CVA (for Pueblo)

Patten MacPhee & Associates, Inc.

Z. Christopher Mercer, ASA, CFA (for Lindoe)

Mercer Capital

Gerald A. Feil (for Lindoe)

Alex Sheshunoff & Co.

Charles W. Murdock (for Lindoe)

Loyola School of Law

In this case, Pueblo Bancorporation appealed the court of appeals’ reversal of the trial court’s determination of the shares owned by Lindoe, Inc., a minority shareholder of Pueblo. The parties did not disagree over the value of pueblo. The sole issue before the supreme court was whether Lindoe’s shares should be discounted for lack of marketability. The trial court applied a marketability discount, but the court of appeals reversed, holding that such a discount could not be applied as a matter of law. The supreme court granted certiorari to resolve the conflict in the court of appeals over the meaning of “fair value”.

The court first determined that the term “fair value” was ambiguous and did not have “a commonly accepted meaning in ordinary usage, much less in the business community”. Thus, the court was required to look to other sources to interpret the statutory term.


The court first discussed previous Colorado cases interpreting the term, three cases in particular: WCM Indus., v. Trustees of the Harold G. Wilson 1985 Revocable Trust, 948 P .2d 36 (Colo. Ct. App. 1997); M life Ins. Co. v. Sapers & Wallack Ins. Agency, Inc., 40 P .3d 6 (Colo. Ct. App. 2001); and the proceedings below in the case at hand, Pueblo Bancorporation v. Lindoe, Inc., 37 P .3d 492 (Colo. Ct. App. 2001).

The court stated that the court of appeals had not provided a consistent interpretation of “fair value”, particularly on the issue of discounts. Because the court was unable to resolve the meaning of “fair value” by reference to the plain language of the statute, and because of the conflicting interpretations of the term in prior Colorado case law, the supreme court said that the role of this court was to determine the meaning of this phrase.


The court then listed three possible interpretations of the term. First, fair value could be the dissenting shareholders’ proportionate interest in the value of the entity. Under this interpretation, shareholder-level discounts are inappropriate. Another interpretation would be to value the dissenter’s specific allotment of shares just as one would value a commodity. This interpretation effectively equates fair value with fair market value and minority and marketability discounts would normally apply. A third possible interpretation would be a case-by-case approach, in which the trial court has discretion to apply whichever fair value definition the court thinks appropriate.


The court first held that the meaning of “fair value” was a question of law, “not an issue of fact to be opined on by appraisers and decided by the trial court on a case-by-case basis”. The court rejected an approach that would leave the decision of whether to apply a marketability discount in the discretion of the trial court.

A case-by-case interpretation of “fair value” results in a definition that is too imprecise to be useful to the business community. Under a case-by-case approach, the parties proceed to trial without knowing what interest the trial court is valuing. Although the difference between the two measures [of a pro rata interest and a specific allotment of shares] is the single largest variable in the appraisal process, the court’s choice of which interpretation to adopt is largely determined by whichever expert the court finds more persuasive. Both the corporation and the dissenting shareholder are disadvantaged because of the subjective and unpredictable nature of a case-by-case approach. A case-by-case interpretation encourages unnecessary litigation. A definition of “fair value” that varies from one courtroom to another is no definition at all.

The court then held that, to the extent that the M Life and WCM cases adopted a case-by-case approach, they are overruled.


Next, it held that fair value must have a ‘definitive meaning”. Either it is the proportionate interest in the company or it is the specific allotment of shares. The court concluded that the legislature chose “fair value” for a reason and that it must therefore mean something different than “fair market value”. If the legislature had wanted to provide for dissenting shareholders to receive “fair market value” for their shares, “it knew how to provide it; the phrase has been used many times in a wide variety of statutes”.


Finally, the court held that the proper interpretation of fair value is the shareholder’s proportionate ownership interest in the value of the corporation, without discounting for lack of marketability. It stated that this view was consistent with the underlying purpose of the dissenters’ rights statute and the strong national trend against applying discounts.

The purpose of the dissenters’ rights statute would be best fulfilled through an interpretation of “fair value” which ensures minority shareholders are compensated for what they have lost, that is, their proportionate ownership interest in a going concern. A marketability discount is inconsistent with this interpretation; it injects unnecessary speculation into the appraisal process and substantially increases the possibility that a dissenting shareholder will be under-compensated for his ownership interest. An interpretation of “fair value” that gives minority shareholders “less than their proportionate share of the whole firm’s fair value would produce a transfer of wealth from the minority shareholders to the shareholders in control. Such a rule would inevitably encourage corporate squeeze-outs.”

The court noted that this interpretation of fair value is the clear majority view, adopted by most courts that have considered the issue, the Model Business Corporation Act (MBCA) – on which the Colorado dissenters’ rights statute is based – and the American Law Institute’s Principles of Corporate Governance.

The clear majority trend is to interpret fair value as the shareholder’s proportionate ownership of a going concern and not to apply discounts at the shareholder level. The interpretation urged by [Pueblo’s expert] would position Colorado among a shrinking minority of jurisdictions in the country. We decline to do so.

The supreme court also found persuasive the recent amendments to the MBCA, amending the definition of fair value to reflect the national trend against discounts in fair value appraisals. The court affirmed the court of appeals.


Judge Kourlis filed a dissenting opinion, joined by two other justices. He based his opinion on several factors. First, he argued that Colorado case law requires a consideration of “all relevant factors”, one of which is market value. Second, he inferred, from the Colorado legislature’s failure to adopt the MBCA amendments eliminating discounts, that it intended to leave the existing statute in place. Finally, he argued that without “a marketability discount, the amount the dissenting shareholder will receive for his shares will exceed that which he would have received had he sold his stock for some unrelated reason prior to the corporate action”. Because any investor would not buy minority shares in a close corporation without accounting for the relative illiquidity of the stock, not discounting for that illiquidity allows the shareholder to collect a windfall.

Intellectual Assets / Intellectual Property

V. Secret Catalogue, Inc. v. Moseley, 259 F. 3rd 464, 475-476 (6th Cir. 2001). [Licensing Economics Review – April 2003]. 


The relevant legal statute is the Federal Trademark Dilution Act of 1995 (“FTDA”) that was effective January 16, 1996.

It provides that:

“The owner of a famous mark shall be entitled, subject to the principles of equity and upon such terms as the court deems reasonable, to an injunction against another person’s commercial use in commerce of a mark or trade name, if such use begins after the mark becomes famous and causes dilution of the distinctive quality of the famous mark, and to obtain such other relief as is provided in this subsection”.

In determining whether a mark is distinctive and famous, a court may consider factors such as, but not limited to –

Ø      The degree of inherent or acquired distinctiveness of the mark.

Ø      The duration and extent of use of the mark in connection with the goods or services with which the mark is used.

Ø      The duration and extent of advertising and publicity of the mark.

Ø      The geographical extent of the trading area in which the mark is used.

Ø      The channels of trade for the goods or services with which the mark is used.

Ø      The degree of recognition of the mark in the trading areas and channels of trade of the mark’s owner(s) and the person(s) against whom the injunction is sought.

Ø      The nature and extent of the use of the same or similar marks by third parties.

Ø      The existence of a registration under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register.

There has been active litigation over trademark dilution since this enactment, but courts and litigants have had difficulty in defining dilution and understanding what proofs are necessary for plaintiff and defendant.

The U.S. Supreme Court recently considered these questions and the interpretations of the FTDA as it related to the form of proof that a plaintiff must present in order to receive remedy in a trademark dilution case.

The case in point stems from V. Secret Catalogue, Inc. v. Moseley. V. Secret Catalogue, Inc. (“VSC”) sold women’s lingerie and apparel under the trademark ‘Victoria’s Secret’™ and brought suit against Victor and Cathy Moseley, who operated a store offering lingerie and adult novelties under the name, “Victor’s Little Secret” (formerly, “Victor’s Secret”).

The federal district court for the Western District of Kentucky rendered judgment in favour of VSC on the issue of dilution. It found that there had been a “blurring” of the distinctiveness of the VSC mark and that “tarnishment” had occurred as well, due to the risqué nature of the Moseley business. The U.S. Court of Appeals for the Sixth Circuit affirmed this decision. The Moseleys petitioned the Supreme Court on the question of whether the owner of a famous mark must prove actual, current injury, or whether proof of the likelihood of injury is sufficient.

In early March 2003, the Supreme Court ruled that “Victor’s Little Secret” was not diluting the trademark of Victoria’s Secret. The unanimous decision found that the Kentucky store that markets itself with the gender-bending twist on the lingerie giant’s name was not confusing consumers or hurting the ability of Victoria’s Secret to distinguish its goods and services. A “complete absence of evidence” to show that Victoria’s Secret name had lost any of its power to identify its own lingerie in stores or catalogues was found. The mere fact that Victor’s name might evoke a mental association with the bigger company was not enough to violate the FTDA. The decision sends the case back to a lower court.  


Kerce v. Kerce, 2003 Tenn. App. LEXIS 608 (Tenn. Ct. App. August 29, 2003). Judge Cain. [ASA BV E-Letter; issue 7-43, November 12, 2003].


Key issues – marital dissolution, expert testimony, lay testimony, income approach, asset approach, industry risk premium, Delaware block method, Revenue Ruling 59-60, personal goodwill, German text book importer.


Don Carpenter, CPA (for wife)

Gregory Luna, CPA (for husband)

The primary issues in this marital dissolution were whether the trial court used a proper methodology in valuing the parties’ business, International Book Import Service, Inc. (IBIS), and whether personal goodwill of wife was properly excluded from the value.


The parties formed IBIS early in marriage, with wife as the chief officer and business manager. Wife was the driving force behind the success of the company. One of wife’s lay witnesses testified that the company was closely identified with wife in the eyes of the target market. Husband provided computer consulting services to the company, though he was also employed elsewhere as a full-time computer software program manager.

The company was operated out of a 10,500-square-foot commercial building owned by the parties and leased to the business. The sole business of the company was the import and sale of German textbooks.


Both parties presented the testimony of a business appraisal expert. Wife’s expert, Don Carpenter, testified that the fair market value of IBIS was US $90,000. Carpenter used the income approach to value the company, and testified that the asset approach was not appropriate for this type of business. He considered numerous factors, including both parties’ contributions to the company, the nature of the business, obsolete inventory, and “the particular risks attendant to the German textbook business”. He also viewed the facilities the business was operated from.

Husband’s expert, Gregory Luna, testified that the fair market value of IBIS’ stock was US $1,013,028. Luna used the Delaware block method, which he said “looks at market value of the company, the value of the assets, and the value of the earnings stream of the business based on history”. Because there were no sales of IBIS stock, Luna gave the market value component zero weight. He based the asset value component on the balance sheet numbers, with GAAP adjustments. For his earnings stream component, he “extended the earnings of the business over a period of five years, extended loss of obsolete inventory over eight years, and … estimated 15% pre-tax return on the business”. Luna did not view the business facilities, did not consider the specific aspects of the German textbook business, and relied on information from husband about obsolete inventory and wife’s importance to the business.


Based upon the evidence and testimony, the trial court valued IBIS at US $220,000. The trial court did not completely accept the valuation of Carpenter because it discounted husband’s contribution to the business. It rejected Luna’s valuation, on the other hand, because it included a significant amount that could only be classified as wife’s personal goodwill. The court of appeals includes a portion of the transcript in which the trial court questioned Luna about wife’s importance to the business, during which Luna conceded that the business was only worth US $1,013,028 in wife’s hands, and that it could not be sold for that amount.


On appeal, husband argued that the trial court should have disqualified the testimony of Carpenter because he did not use the Delaware block method or the method outlined in Revenue Ruling 59-60, based on prior Tennessee case law. The court of appeals rejected this argument, stating that:

“… although Mr. Luna’s methodology has been adopted by our Supreme Court for the purpose of assessing the fair market value of a dissenter’s shares in a closely held corporation, it is by no means the only acceptable method, and for the purposes of evaluating the entire business as a marital asset is not a snug fit under the circumstances”.

The court of appeals also found that “Of overriding significance in the evaluation of IBIS is the degree to which the success of the business depends on [wife]”. The court of appeals characterized this as wife’s personal goodwill. Quoting from Smith v. Smith, 709 S. W. 2d 588 (Tenn. Ct. App. 1985), the court said: “ There is a disturbing inequity in compelling a professional practitioner to pay a spouse a share of intangible assets at judicially determined value that could not be realized by a sale or another method of liquidating value”. In Tennessee, this personal goodwill is not a marital asset.

Because the trial court’s valuation was within the range of evidence and was supported by the evidence in the record, including both expert and lay testimony, the court of appeals affirmed.

D.K.H. v. L.R.G., 2003 Mo. App. LEXIS 526 (Apr. 15, 2003). Judge Breckenridge.

[ASA BV E-Letter; issue 7-25, 2003].


Key issues – marital dissolution, net asset value, fair market value, shareholders’ agreement, formula, lack of marketability, minority interest, medical practice.


Richard A. Couch (for wife)

John P. Corbin (for husband)

One of the issues in this marital dissolution was the value of husband’s 25% interest in Neurology Consultants, Chartered. Husband had purchased the interest during the marriage for US $110,000. The trial court valued his interest at US $67,688 based on testimony of the wife’s expert. The court of appeals upheld the trial court’s judgment.


Both parties presented the testimony of an expert witness at trial. Wife’s expert, Richard A. Couch, used the net asset method and determined that the fair market value of husband’s interest in the medical practice was US $67,688. Couch testified that this is the method that would be used to determine the value if husband were selling his interest to a third party.

Husband’s expert, John P. Corbin, used the formula set forth in the shareholders’ agreement. The agreement specifically stated that this formula applied to value the stock if a shareholder died, became disabled, or otherwise terminated his employment. Corbin “added together husband’s accounts receivable, severance pay, and the purchase price of husband’s common stock”. Corbin factored in an unspecified discount for lack of marketability based upon restrictions in the shareholders’ agreement. All of Corbin’s calculations resulted in negative values, and so he opined that husband’s 25% interest was worth negative US $74,457 to zero.


The trial court accepted Couch’s testimony and valued husband’s 25% interest in the medical practice at US $67,688. On appeal, husband argued that this valuation was against the weight of the evidence. He argued that Couch’s valuation should not have been accepted because it was based on the premise of the sale of his medical practice when it would be impractical for him to sell given the restrictions of the shareholders’ agreement.

The court of appeals rejected the husband’s argument. The court held that the trial court was not bound by the formula in the shareholders’ agreement because its terms did not apply to the marital dissolution scenario. The court further held that Couch’s fair market value premise was reasonable, and stated that “because of the presumption of a willing buyer and willing seller, Mr. Couch did not believe it was necessary to discount the value due to the restrictions contained in the shareholders’ agreement”. The court of appeals upheld the trial court’s valuation because Couch’s testimony constituted sufficient evidence to support it.


This is a case in which the named standard of value – fair market value – is not consistent with what the trial court actually did. The trial court did not factor in the lack of marketability of husband’s minority interest, subject to contractual restrictions, even though a willing buyer would certainly do so.

In re the Marriage of Peterson, No. 01-0145 Iowa App. February 6, 2002. [Selected from “Business Valuation Cases in Brief” by John J. Stockdale, Jr.; BVR September 2002].

Key issues – liquidation; tax consequences.

The Iowa Court of Appeals affirmed the lower court’s decision not to consider tax consequences of a future liquidation of a corporation because the tax liability would not arise as a result of the property division nor was it otherwise reasonably certain to occur within the foreseeable future.

Mary Nagle v. Gary Nagle, 2002 PA Super.155. [Selected from “Business Valuation Cases in Brief” by John J. Stockdale, Jr.; BVR September 2002].

Key issues – appropriate valuation date.

The Pennsylvania Superior Court affirmed the use of the date of dissolution as the appropriate valuation date for a closely held business in a divorce action when there is substantial time between date of separation and the date of dissolution.

Renee T. Bourgeois v. Andre Gerard Bourgeois, No. 2000 CA 2149 (LA App.1Cir.May 10, 2002). [Selected from “Business Valuation Cases in Brief” by John J. Stockdale, Jr.; BVR September 2002].

Key issues – value of a professional degree.

The Louisiana Court of Appeals, First Circuit, reversed a lower court’s award to wife for her financial contribution to the husband’s law degree. It found that while the wife contributed to the law degree, the lower court did not offset that amount by the amount by which she benefited from the post-degree earnings of the husband, which it found exceeded the amount of her contribution. In reaching this decision, the court noted that there was no evidence from which to compare the husband’s pre-degree earnings with his post-degree earnings.

James A. Mace v. Angela T. Mace, No. 2000 CA 01283 – SCT (Miss. May 30, 2002). [Selected from “Business Valuation Cases in Brief” by John J. Stockdale, Jr.; BVR September 2002].

Key issues – professional practice / professional degree – marital assets?

A divided Supreme Court of Mississippi determined that a professional practice is a marital asset that is divisible in divorce. The dissent argued that the professional practice should not be a divisible asset because it is a direct result of the professional’s degree or license, which is not a marital asset under Mississippi law.

Mann v. Mann, 2002 Iowa App. LEXIS 1071 (Iowa Ct. App. October 16, 2002). [ASA BV E-Letter; issue 6-44].

Key issues – marital dissolution, ‘de novo’ review, credibility of witnesses, hypothetical investor, normalized compensation, tax rate, marketability discount, expert witness fees.


Shannon Shaw, CPA / ABV, CBA (for wife)

RSM McGladrey, Inc.

Dennis Redmond (for husband)

One of the primary issues in this marital dissolution was the valuation of husband’s insurance sales and financial planning business, Professional Financial Solutions (“PFS”). The court of appeals reviewed the case ‘de novo’, but gave great weight to the trial court’s findings of fact and assessment of the witnesses.


The parties had been married for thirty years at the time the husband filed for dissolution. Husband had purchased PFS in 1995 for approximately $ 30,000, of which $20,000 was allocated as payment for the prior owner to stay in the business during the transitional period. Husband had operated PFS as a sole proprietorship since that time. [All amounts are in U.S. dollars].


Both parties retained valuation experts to testify at trial. [In addition to valuing the husband’s business, both experts also valued wife’s Iowa Public Employees Retirement System (“IPERS”) plan].

Wife’s expert, Shannon Shaw, testified that PFS was worth $272, 543. Shaw used a hypothetical investor standard, normalized husband’s compensation in his calculations, and used a tax rate that “presumed the hypothetical owner would have income only from PFS”.

Husband’s expert, Dennis Redmond, testified that PFS was worth $100,000. Redmond also used a hypothetical investor standard. He, however, used husband’s actual compensation rather than a normalized compensation figure, because of husband’s extensive experience, contacts, local knowledge, and contribution to the company. Redmond used a higher tax rate than Shaw, presuming other income for the hypothetical investor. Finally, Redmond applied a marketability discount to his resulting value because “PFS was a small, sole proprietorship dependent upon its relationship with a single, large corporate entity”. The court does not indicate the size of this discount.


The trial court accepted the valuation testimony of Redmond, and valued PFS at $100,000. It then awarded the business, and the indebtedness thereon, to the husband.

The trial court ruled that each party was responsible for their own expert witness fees as costs.


The court of appeals upheld the trial court’s valuation of PFS because it was within the range of evidence presented at trial. The court of appeals agreed with the trial court’s observations that Redmond’s valuation, including the higher tax rate and marketability discount, was more reasonable under the facts of this case. The court of appeals also noted that the 1995 purchase price also supported the lower valuation.

The court of appeals also upheld the trial court’s ruling that each party was to pay their own expert fees because the case “involved complicated valuations of the assets of both parties”.

Built-in Capital Gains Tax Liability

Dunn v. Commissioner, 2002 U.S. App. LEXIS 15453 (5th Cir. Aug. 1, 2002). Judge Weiner. [ASA BV E-Letter; issue 6-37].


Key issues – asset approach, income approach, built-in capital gains tax liability, estate tax.


William Frazier, ASA (for petitioner)

Howard Frazier Barker Elliot

Shannon Pratt, CFA, FASA, MCBA (for petitioner)

Willamette Management Associates

Carmen Eggleston, CPA (for IRS)

PricewaterhouseCoopers LLP

This case comes on appeal to the Fifth Circuit Court of Appeals from Estate of Dunn v. Commissioner, T.C. Memo 2000-12, 79 T.C.M. (CCH) 1337, Jan.12, 2000.

The only issue in this case is the appropriate built-in capital gains tax discount to be applied in calculating the fair market value of a 62.96% block of common stock in Dunn Equipment, Inc. owned by the decedent on the date of her death. All amounts are expressed in U.S. dollars.


Dunn Equipment had been family-owned and operated. Dunn Equipment owned and rented out heavy equipment primarily in the petroleum refinery industry and petrochemical industries.

This litigation started as a result of Commissioner’s notice of deficiency, which assessed additional taxes of $238,515.05, approximately 3 ½ years after the decedent’s death and  2 ½ years after her estate tax return was filed. The Commissioner filed an amended answer in which estate tax deficiency was increased to approximately $1,100,000 because the Commissioner’s position was that Dunn Equipment’s 492,610 common shares were undervalued in the estate tax return. The Commissioner also advocated that the common shares should be valued “solely on the basis of the fair market value of its assets, discounted only for the lack of a market and lack of a super-majority, and with no reduction for built-in tax liability of those assets and no consideration whatsoever of an earnings or cash flow-based approach to valuation”.

At trial, the Tax Court determined the fair market value of Decedent’s block of stock in Dunn Equipment to be $2,738,558 on the valuation date. The Tax Court calculated Dunn’s Equipment’s “earnings-based” value at $1,321,740, and its “asset-based” value at $7,922,892. The latter value was calculated using a 5% factor for built-in capital gains tax liability. The Tax Court then assigned a weight of 35% to the lower earnings-based value and a weight of 65% to the higher asset-based value.

The final valuation figure also included a 15% lack of marketability discount and a 7.5% discount for lack of super-majority control. Both parties conceded that these discounts were appropriate and they were not challenged on appeal.

The estate appealed the tax Court valuation holding.


The Court of Appeals held that the Tax Court’s valuation methodology was in error with respect to the built-in capital gains tax discount that was applied and the relative weights given to the asset-based and earnings-based values.

In deciding to apply only a 55 capital gains tax discount, the Tax Court had reasoned that there was little likelihood of liquidation or sale of the assets. The Court of Appeals rejected this reasoning, because the underlying assumption of an asset-based valuation (of an operating entity) is the concept of liquidation. The Court of Appeals stated:

“We hold as a matter of law that the built-in (capital) gains tax liability of this particular business’ assets must be considered as a dollar-for-dollar reduction when calculating the asset-based value of the Corporation, just as, conversely, built-in gains liability would have no place in the calculation of the Corporation’s earnings-based value”.

The Court of Appeals further found, however, that the “likelihood of liquidation” was a relevant consideration in determining the relative weights to assign to the asset-based and earnings-based valuation conclusions. The Tax Court’s 65% asset / 35% earnings weighting was not supported by its finding of fact that there was little likelihood of liquidation of Dunn Equipment. The Court of Appeals held that correct weighting was a 85:15 ratio, giving greater weight to the earnings-based valuation. If the company was not likely to be liquidated, then the valuation approach premised on liquidation should not be given the greater weight.

The Court of Appeals remanded the case back to the Tax Court for it to:

“(1)  re-determine the asset-based value using a 345 reduction for built-in tax liability; (2)  re-calculate the fair market value of the Corporation based on that 85:15 weighting ratio; (3)  calculate the value of the Estate’s ratable portion of the total value of the Corporation thus re-determined; (4)  discount the value of that ratable portion by 22.5% for lack of marketability and lack of super-majority; (5) based on that result, re-determine the estate tax liability of the Estate as well as any resulting overpayment of such taxes by the Estate; and (6)  render a final judgment consistent with this opinion and our judgment”.


Corporate / Securities Law

Weiss v. Schad, [1999] O.J. No. 4356, File No. 92-CQ-15488, Ontario Court of Justice, November 17, 1999. [The Valuation Law Review: volume 6 / issue 1, July 2000].


Key issues – fiduciary relationship between a controlling shareholder / director and a minority shareholder, director’s fiduciary duty / duty of good faith and fair dealing in negotiations, sophisticated parties negotiating at arm’s length, valuation vs. pricing analysis, illiquidity discounts, minority discounts, shareholders’ agreement. 

In this matter, the principal plaintiff, Heinrich Weiss, claimed that he was misled during negotiations with the defendant, Robert Schad, with respect to the fair market value and sale to Schad of his 15% interest in the common shares (the “Husky shares”) of Husky Injection Molding Systems Ltd. (“Husky”). The principal defendant, Schad, was president and a director of Husky. Schad, through his personally-controlled numbered company, 864062 Ontario Limited (“864062”), was also the majority shareholder of Husky, owning approximately 61% of the common shares of Husky.

Following several years of negotiations commenced in September 1987, Weiss agreed to sell to 864062, Schad’s company, 270,000 common shares of Husky, representing a 15% interest in Husky, for $29.355 per share – this transaction was completed on October 31, 1989.

Unknown to Weiss, Schad began discussions in November 1988, with a Japanese company, Komatsu Ltd. (“Komatsu”), with a view to forming a Komatsu / Husky partnership or strategic alliance. An agreement between Husky and Komatsu was eventually reached on December 5, 1989. The transaction closed on February 15, 1990, about three-and-a-half months after the sale of Weiss’ Husky shares. The Komatsu agreement involved the purchase of 26% of Husky’s common shares for approximately $73 per share with a total price of approximately U.S. $28 million.

In this action, Weiss claimed damages against Schad on the basis of a breach of fiduciary duty and a breach of a duty of good faith and fair dealing in the course of the business negotiations for the sale of his Husky shares to Schad’s personal holding company, 864062.

As background, Weiss originally acquired the Husky shares in 1975, and he remained a passive investor without board representation and without the protection of a shareholders’ agreement. In September 1987, Schad wrote to Weiss asking him whether he was interested in selling his Husky shares. Weiss testified that his response to this was that he was prepared to sell the Husky shares if he got an “excellent price” – otherwise he was prepared to continue as a Husky shareholder.

However, in contemplation of the sale of his Husky shares, Weiss retained Price Waterhouse (“PW”) in July 1988, to assist in the negotiations and the valuation of the Husky shares. PW advised Weiss that his valuation methodology used to calculate the value of Husky for purposes of negotiations, $34 per share, was “simplistic”. PW recommended that a full valuation of Husky be carried out. Weiss rejected this advice, and instead, elected to proceed with a pricing analysis based on unadjusted multiples and price-earnings ratios – he did not consider redundant assets, minority shareholder discounts and other matters which PW advised him could have a significant impact on the value of his Husky shares.

In November 1988, Schad outlined in an internal memo that Husky’s goals over the next ten years included a strategic partnership with a deep-pocket, machine manufacturing company to support financially Husky’s growth objectives. In the course of a search for a strategic partner, Schad initially contacted Komatsu in November 1988, seeking an investment from Komatsu of $30 to $35 million.

At about the same time, Weiss wrote to Schad advising him that his view was that the Husky share value exceeded $30. Schad’s position was that the Husky share value was less than $20, relying on the price paid in then recent transactions with several institutional investors, including Wood Gundy and Bank of Nova Scotia, for small blocks of Husky shares – the parties at this point remained fairly far apart.

Schad made no mention to Weiss of the negotiations with Komatsu, or even that he was having discussions with a potential strategic partner. However, once started, it was apparent that the negotiations with Komatsu moved at a fairly quick pace. Komatsu signed a confidentiality agreement on January 26, 1989.

At a meeting in May 1989, Schad indicated that he placed a value on the Husky shares somewhere in the range of $26 - $28 per share and that he was prepared to offer Weiss a price within this range. Schad arrived at this value range by applying a 30% - 35% minority discount to his estimate of Husky’s en bloc per share value of $40. Schad also benchmarked this value range to the $21 per share value used for transfers made between Husky’s employees under the Husky stock option plan. The Husky ESOP value, $21 per share, was recently arrived at by the directors of Husky taking into account current and expected earnings for Husky, applying a suitable price-earnings ratio and then deducting a 25% private company discount for illiquidity. By discounting the $26 - $28 per share value by a further 25%, as was done for Husky’s ESOP, one could approximate the $21 per share value used for Husky’s ESOP transfers. Schad felt that his offer of $26 - $28 per share was consistent with his willingness to offer Weiss something more than the current value used for Husky’s ESOP transfers.

On May 29, 1989, Schad’s financial advisers, Citibank, told Schad that on a preliminary basis, the value of Husky shares could be around $57 per share if the Komatsu deal went forward.

On July 29, 1989, Weiss agreed in principle for the sale to 864062 of Weiss’ 270,000 husky shares at $29.355 per share – as stated, this transaction closed at the end of October 1989.

In December 1989, Husky, Schad and 864062, among others, entered into an agreement for the purchase by Komatsu of 26% of the common shares of Husky at the price of approximately $71.24 per share. 459,918 or 80% of these shares were issued from Husky’s treasury; 114,979 or 20% of the shares were sold to Komatsu by 864062. The agreement closed on February 15, 1990. After the closing of the Komatsu transaction, Weiss learned for the first time about the Komatsu negotiations and agreement and commenced this action.

The Court identified, among others, the following issues to be decided:

  1. whether there was a fiduciary duty owed to Weiss by Schad, as an officer and director of Husky, to disclose that there were negotiations taking place with Komatsu as a potential investor in Husky; and
  2. whether Schad was deceitful in his negotiations with Weiss.

On the first issue, Weiss argued that Schad, as the buyer of the Husky shares, had a fiduciary duty, as an officer and director of Husky, to advise him that Schad was negotiating with Komatsu for the sale of the significant equity interest in Husky. Weiss argued that had he been aware of this fact, he would have suspended his own negotiations until the arrangement with the potential investor had been determined. If a deal was reached, it would, in Weiss’ view, probably establish a higher market value for his Husky shares than he could bargain for in his own negotiations.

The Court observed that, in general, a share transaction between a director and a minority shareholder does not automatically give rise to a fiduciary relationship. Rather, it is the “dynamics” of the shareholder relationship which are important in determining if such a fiduciary relationship exists.

In the absence of special circumstances, and the fact that Schad had not acted outside the scope of his normal duties as a director, the Court concluded that Schad did not owe a fiduciary duty to Weiss to disclose the fact that there were discussions taking place with a potential investor. The Court stated the following:

It cannot be said that the defendants, at any point in the negotiating process, relinquished their self-interest in dealing with the plaintiffs. There was no trust placed by Weiss in … Schad … and no expectation on his part that [Schad] would act in his best interest. What occurred is best described as a commercial negotiation between two sophisticated parties who had at all times dealt with each other at arm’s length … The plaintiffs did not rely on the defendants for any advice. [Weiss] retained [PW] to assist him … The hallmarks of a fiduciary relationship – trust, dependence or reliance of one party on another were totally absent in this bargaining process.

The Court also noted the following:

Weiss … did not rely on Schad’s opinion to determine the price of the shares. [He] had [his] own approach as to how to determine the value. [Weiss] even rejected the advice of … PW. [PW] had told [Weiss] that [his] approach was simplistic and that a proper valuation should be undertaken … Although recognizing that his approach was indeed simplistic, [Weiss] decided to proceed with his own method of valuation and to take the risk of continuing the negotiations without the benefit of further information. The plaintiffs made this business decision because they knew the price they wanted – a price which reflected a reasonable return on their investment.

In summarizing this issue, the Court referred to the decision of Lac Minerals in stating:

The hallmark of a fiduciary relationship is that one party is at the mercy of the other’s discretion. In my view, having regard to all of the circumstances, the plaintiffs have failed to establish that they were peculiarly vulnerable or at the mercy of the defendants. The bargaining positions of the parties were equal. The plaintiffs were experienced in business and had access to information in the plastic injection molding equipment industry. They had their own resources and professional advisers, including their own legal counsel as well as [PW]. They had been advised to obtain further information in order to arrive at an accurate valuation of their shares. They rejected that advice. They knew the price that they wanted for the shares and, through skillful negotiating, managed to close the deal at a price very close to their intended target … Weiss, an able and experienced businessman, would have been well aware of the fact that Schad, as [a] director of Husky, [was] privy to information which he did not have … Certainly, the plaintiffs’ advisors at [PW] knew that the directors would have all kinds of information potentially relevant to value and which the plaintiffs would not have unless they asked for it. Weiss could not have reasonably expected Schad would act in his best interest.

On the final issue, the Court assessed whether Schad was deceitful in his negotiations with Weiss. Weiss argued that various statements or omissions were intended by Schad to mislead Weiss into believing that his Husky shares would be resold to Husky employees and that there was no other market for them. Weiss submitted that had he known about the negotiations with a potential equity investor, he would have been in a better bargaining position. The existence of an interested third party would mean that the Husky shares were not as illiquid as one might otherwise expect for shares of a privately-held corporation. Weiss would have perceived that his 15% interest in Husky had enhanced strategic value in the context of the Komatsu negotiations.

The Court reviewed all of the correspondences and all of the dealings between the parties, and the context in which various statements and / or alleged omissions were made at meetings and in correspondence passing between the parties.

The Court concluded that there was no statement of fact, either express, implied or by omission, made by Schad that was false and that Schad knew was false. Furthermore, even if Schad made such a misrepresentation, Weiss failed to establish that any such statements or omissions were material – an essential element to establishing Schad’s deceit.

In examining the issue of materiality, the Court commented on the method Weiss used to value his Husky shares in the negotiations:

One of the factors which the court may consider in assessing the materiality of the Komatsu negotiations is the approach which the plaintiffs chose to follow in valuating their shares. That approach resulted in them taking no interest in whether or not the defendants were searching for or negotiating with potential investors. After learning that Komatsu paid [just over] $70.00 per share, the plaintiffs now say that such information was crucial – that if they had known about the Komatsu discussions they would have immediately stopped their own negotiations with the defendants and waited to see what happened. That is what the plaintiffs assert in hindsight. The difficulty with this assertion is that the evidence does not support it. There was no indication of any interest on their part in the existence of an outside equity investor during the course of their negotiations with the defendants.

The Court also said that in testing materiality, it may consider the degree of interest which plaintiff shows on the subject of the representation. On this point, the Court observed the following with respect to the relevance to Weiss of the Komatsu negotiations:

The plaintiffs now assert that preliminary negotiations with a potential outside investor were an extremely important factor in their own negotiations. But when one examines their conduct at the relevant time, there is nothing to indicate that this would have been of any significance to them at all. The plaintiffs submitted that they did not ask any questions about an outside investor because they had no idea that discussions were taking place with anyone. In the absence of that information, they went about the business of valuating their shares according to [Weiss’] approach. This argument is difficult to accept, given the plaintiffs’ knowledge of Husky’s financial condition or financial situation … and the fact that even on July 20, when [Weiss] was told that the defendants were looking for a strategic partner, he made no further inquiries. The plaintiffs were well aware of Husky’s need for an infusion of equity. They knew the company could not take on any more debt. They knew that Schad, the company, and the employees did not have the funds necessary to but the shares. The plaintiffs had all of this information, yet never once asked any questions relative to an outside equity investor. Nor did they instruct [PW] to follow up on how Husky planned to pay for their shares. It can only be concluded that they had no interest in whom the defendants were talking to in the course of their search for a strategic partner, what the various proposals might be, or what stage such negotiations might have reached. These matters would clearly have no interest to them … The reason for the plaintiffs’ disinterest was due, in part, to the particular approach which they chose to valuate their shares. They looked to the past performance of the company rather than ahead to its future prospects. This was not the methodology recommended by [PW]. In May 1988 [PW] advised [Weiss] by letter that to arrive at a reasonable estimate of the fair market value of the shares, a number of factors should be considered. Among these were:

These factors involved a forward-looking approach to the valuation of the shares in contrast to the approach taken by [Weiss]. The importance of looking to the future was again a subject of comment in [PW’s] July 1988 letter. [PW] criticized Weiss’ approach as being simplistic. Without an in-depth analysis of Husky and a very clear understanding of its future prospects, [PW] stated that they were unable to comment on [Weiss’] estimated value of $34.00 per share. [Weiss] agreed that the art of valuation involves looking ahead – budgets, forecasts, plans which the company has for the future in order to stay competitive are all relevant. He acknowledged that his approach was simplistic but rejected [PW’s] advice to do a complete valuation. [Weiss’] mind-set was to look to the past. He knew what the plaintiffs had originally paid for the shares. His goal was to agree with the defendants on a price which reflected a reasonable return on that investment … [Weiss] was focused on multiples, price-earnings ratios and on Husky’s past performance. References to plans to obtain outside equity and ongoing searches for equity were of no interest to him. Hence, he asked no questions about these matters … Since this information was not relevant to his particular method of valuating the shares, or perhaps because he was so focused on his own method, [Weiss] chose to ignore it. It was not significant or material to him.

Weiss also submitted that Schad’s negotiations with Komatsu were relevant and material to his assessment of the appropriate minority discount for the Husky shares.

The Court rejected this point. It noted that, objectively speaking, Komatsu was not a potential purchaser of Weiss’ Husky shares. Komatsu’s deal with Husky was driven by technology synergies. Weiss, therefore, could not have been part of that deal. The Komatsu transaction was not a simple share transaction as it involved the formation of a strategic alliance with Husky in which there was to be a co-ordination of research and development activities as well as sharing of technology.

Furthermore, at no time did Schad describe Weiss’ Husky shares as “locked in” or as having no market. In fact it was PW who, in the course of advising Weiss, explained the problem of illiquidity and the potential impact of minority shareholder discount, particularly when there was no shareholders’ agreement in place.

On the subject of minority discounts, the Court stated the following:

In summary, the Court concluded on the issues as follows:

1.      The defendant Schad did not owe a fiduciary duty to the plaintiffs to disclose that there were negotiations taking place with a potential investor.

2.      The defendant Schad was not deceitful in his negotiations with the plaintiffs.

The action against the defendants was therefore dismissed.


At the outset, I must point out that I was one of the two PW representatives on this file and therefore I am intimately familiar with the case.

With the benefit of this knowledge, I wish to embellish two important areas referred to above. One deals with the May 1989 meeting between Husky management (i.e. Schad and Peter Hall, CFO) and PW. The other deals with the strategic importance (which is somewhat downplayed in the above case highlights) of Weiss’ Husky share block (270,000).

The May 1989 meeting took place on the strict pre-condition (imposed by Husky management) that PW were not there to conduct a business valuation, but were merely acting in an information-gathering capacity on behalf of Weiss. [Interestingly, Schad would not have known that Weiss had earlier rejected PW’s recommendation of a having a proper valuation done of Husky’s shares]. PW had to provide Husky management in advance (by means of an agenda) some of the areas on which we wanted more information. One of these was Schad’s future plans for Husky. Without hesitation, Schad responded by saying that it was his intention that Husky become an employee-controlled company. PW wanted to know how the employees could fund the proposed management buy-out given the size of the company, its continued requirement for developmental capital expenditures to maintain its competitive edge, its highly leveraged financial position, and its inability as a private company to tap the equity capital markets. PW found Schad’s response to this important question to be vague and inconclusive. Finally, almost as a throw-away line, Schad said something to the effect that an option for Husky would be to seek an equity injection “some time in the future” from a deep pocket, machine manufacturer, perhaps some one from the Far East. All this was told to PW even as Schad was in the midst of active negotiations with Komatsu. Personally, I believe that Schad was treading on rather “thin” ground in terms of acting in good faith and dealing fairly with another shareholder in his capacity as an officer of the company, once he started to go down the path of hinting at the existence of a possible Far Eastern investor, just as Komatsu was looming large as life, actively negotiating, and, as it happened, concluding a deal with Schad barely a month after Schad acquired the Husky shares from Weiss. Obviously, the court thought otherwise!

The second area I want to throw some light on is the strategic importance of Weiss’ Husky share block. Based on the above shareholdings and related percentages and my background knowledge of the case, Weiss beneficially owned 15% of Husky,  Schad and his personal holding company 864062 owned 61%, and Husky employees 24%. The important point to note is that Schad exercised voting control over the 24%-block through a voting trust agreement. This means that after Schad bought out the Wood Gundy and BNS share blocks, he held an 85% (super-majority) voting control over Husky, with Weiss having 15%. Setting aside the number-crunching, suffice it to say that at the crucial point of concluding the deal with Komatsu as contemplated, Schad desperately needed Weiss’ Husky share block to enable him to continue to hold a super-majority (typically, at least 75%) voting control in Husky after completion of the Komatsu deal. According to my calculations, Schad ended up with just over 76% voting control of Husky. In other words, Weiss’ Husky share block was a potential “deal-breaker”. Had Weiss got even the slightest “whiff” that there was a deal in process, I believe, Weiss would have simply held out and ultimately obtained a significantly higher price per share. Schad knew the critical importance of this 15% share block all along. Weiss may only have had a hint of it, until after the details of the Komatsu deal were known. Schad’s actions / verbal and written comments, at least in part, had a hand in contributing to this knowledge gap, which according to the court’s decision was acceptable.

There was some discussion about an appeal, but I am not aware of any further developments.

Intangible Assets / Intellectual Property

Re: Gifford, Federal Court of Appeal decision, August 12, 2002. [“Tax Matters” by Stewart Lewis; Investment Executive, October 2002; Financial Post, March 10, 2004].


Key issues – commissioned salespeople, interest deductibility, client list an eligible capital expenditure or current expenditure?


In the spring of 2001, Thomas Gifford (“Gifford”), a broker with Midland Walwyn Capital Inc. in North Bay, Ontario, seeking to deduct expenses incurred when buying the client list of a departing broker, won his case against the Canada Revenue Agency (“CRA”). Had the decision stood, it would have allowed him to claim the deductions, but the CRA appealed to the Federal Court of Appeal (“FCA”) and won.

The original case was heard in the Tax Court of Canada (“TCC”) under the “informal” procedure, the equivalent of a case heard in small claims court in which taxpayers can represent themselves. For practical purposes, that decision – in Gifford’s favour – had no precedent value. But, recognizing the potential havoc the news of that decision could wreak with commissioned sales people, the CRA appealed. (When the CRA appeals an informal procedure decision, it pays all of the court costs). The CRA knew that a decision by a superior court would have precedent-setting value.

The FCA’s decision was released in mid-August. There is a 60-day limit to file an appeal. Gifford himself will not be pursuing the case. The cost of a Supreme Court of Canada appeal outweighs the tax benefit he would receive if he won. In other words: the appeal needs a champion. If there was a time for advisors to press their industry associations into action and put their dues to good use, it would be now.


Gifford, an employee of Midland Walwyn (now CIBC Wood Gundy), paid $100,000 to buy a client list from a fellow financial advisor, Scott Bentley (“Bentley”), who had decided to leave the firm. Gifford wanted access to Bentley’s clients and their manager wanted to keep the business with the branch, so they signed an “Agreement to Purchase Client Base of Financial Advisor” in late 1995. Gifford agreed to pay Bentley $90,000, as well as a second payment of $10,000 or less, depending on how much the book’s mutual fund assets eroded during the transfer period. Bentley agreed not to provide securities advice to his clients for 30 months and to direct his clients to Gifford by providing them with a written endorsement of Gifford.

When Gifford filed his tax return, he deducted the interest paid on the money borrowed to finance the purchase as well as a portion of the $100,000 as amortization of eligible capital expenditure at the 7% rate permitted under the Income Tax Act (“ITA”). The CRA disallowed the deductions, stating that Gifford, as an employee, was not allowed to deduct expenses related to the purchase of a capital asset.

Gifford appealed to the TCC under the informal procedure, and presented his own case.


The case was heard by Justice Donald G. H. Bowman (“Bowman”), a tax court judge with a reputation for fair – if creative – judicial rule-making.

There were two issues in the case: the tax treatment of the $100,000 payment and the deductibility of interest on the $100,000 borrowed to make the payment.

While capital expenditures may not be deducted by an employee, Bowman reasoned that the $100,000 could be treated as a current expense. His thinking went like this: Gifford had not agreed to buy an actual client list, which might be viewed as a capital asset. Instead, Gifford was buying sole access to the clients and Bentley’s endorsement. The list, Bowman reasoned, was not Bentley’s to sell, because Bentley was also an employee of the brokerage.

Furthermore, said Bowman, clients can not actually be bought as they are not innate commodities and are free to find another broker. Since, in Bowman’s opinion, there was no obligation that the clients would continue with Gifford, there was no enduring benefit to the payment and therefore found that it was fully deductible in the year of payment. As a current marketing expense, Gifford would be able to claim the deduction because the ITA permits commissioned salespeople to deduct certain non-capital expenses incurred while earning income.

The second issue facing Bowman was the deduction of the interest on the borrowed money used for the purchase. He reasoned that the nature of interest depends upon how the borrowed money is used. Money borrowed to finance the purchase of a capital asset would be treated as payment on a capital account. But money borrowed to fund a current expense – as Bowman decided to treat the $100,000 – should be classified as an expense on a current revenue account.

Bowman wrote in his decision: “I see nothing in law or in logic or as a matter of principle that would indicate that any expenditure is inherently of a capital or revenue nature”.


The CRA appealed to the FCA, which released its decision on August 12, 2002. The FCA ruled that the $100,000 payment was not deductible since it was on account of capital. In the words of the FCA judge, “… surely [Mr. Gifford] did not pay $100,000 for something he thought would be fleeting … the purpose of the … payment is to get access to a book of clients by getting [the] client list. If, after getting the clients, expenses are incurred in the ongoing struggle to satisfy the clients, those would surely be deductible expenses. But that is different from the cost incurred to get the entire book of clients in the first place.”

The judge went on to point out an inequity in the ITA in that an employee cannot deduct capital expenses other than depreciation on the purchase of an automobile or an airplane. This is indeed an inequity that cannot be addressed by the courts but instead should be addressed by Parliament.

Despite its conclusions, the FCA was sympathetic to Bowman’s reasoning. For example, the court canvassed several academic articles advocating that interest be treated as a current expense. It also agreed with the argument put forth by Gifford’s lawyer, and accepted by Bowman, that the nature of interest could be determined by the purpose of the money that was borrowed. “Interest on borrowed money is not inherently anything … It is simply the price paid for the use of borrowed money,” wrote the FCA.

The FCA recognized that its decision might be appealed. In an attempt to cover itself, it set out its view that borrowing could determine the nature of interest – contrary to the long line of Supreme Court of Canada decisions. But, the FCA said that there is a distinction between “funds borrowed to create an asset that is ultimately intended to produce income on the one hand [Bowman’s view] and funds borrowed to hold an asset during the period when it is intended to produce income, on the other hand”, [the FCA view].


On March 4, 2004, the Supreme Court of Canada handed down its decision in the case involving Mr. Gifford, an employee and advisor at Midland Walwyn, finding that the client list for which Mr. Gifford paid $100,000 to a departing advisor was a capital asset – an investment intended to produce future income – and not a deductible employment expense.

Employees are barred from claiming deductions on most capital assets, with the notable exceptions of claiming depreciation on automobiles and airplanes. This differs from self-employed advisors who are free to capitalize and depreciate any asset purchased for the purpose of earning income, including a client list. Writing for a seven-judge panel, Mr. Justice John Major said the broker could have claimed interest on the loan and depreciation (three-quarters of 7% of the payment each year, or about 5%) on the asset if he were working for himself, but as an employee he was out of luck. This “seemingly inequitable” distinction flows from the structure of the (Income Tax) act, he said.

For advisors who are considered employees, the result of the decision is that any amounts paid to purchase a client list are simply not deductible, significantly increasing the true cost of purchasing a client base.


Bogoch v. Bogoch Estate, [2002] CarswellMan 52 (Man. Master) [The Valuation Law Review: volume 9 / issue 2, April 2003].


Key issues – Manitoba family law legislation, fair market value standard, willing seller, implicit assumption to maximize value, shareholders’ agreement, minority discount, redundant assets, outdoor supply and apparel retail business.

The Master heard a reference as to the value of the respondent’s interest in a closely-held family company operating an outdoor supply and apparel store. The company had four shareholders with equal interests. They entered into a Shareholders’ Agreement which recognized that they composed two shareholder groups. The respondent had purchased the interest of one of the original shareholders. The Shareholders’ Agreement contained survivorship arrangements to continue the two shareholder groups on the death of any of the shareholders. The Agreement further provided a method of determining the purchase price by arbitration in the event of a dispute. The Shareholders’ Agreement provided that the value of the shares should be determined by dividing the fair market value of all the issued and outstanding shares in the capital of the corporation.

The petitioner’s business valuator estimated the value of the respondent’s interest by estimating the en bloc value of the business and attributing to the respondent 25% of that value for his interest. The respondent challenged the en bloc valuation advanced by the petitioner. The respondent raised a number of issues.

  1. That the petitioner’s business valuator erred in taking into account five years of earnings in determining the maintainable operating cash flow and did not properly account for slightly lower gross profit margins in two of those years. The Master rejected this assessment, finding that the calculations were weighted accurately.

  1. That the petitioner’s business valuator erred in concluding that the $175,000 of the retained earnings in the company were redundant assets and assuming that on a sale, these would be distributed. The respondent argued that these assets were necessary to finance the inventory. The Master also rejected this criticism.

  1. That the petitioner’s business valuator had selected a multiple of 3.5 to 6.5. The respondent questioned the choice of multiple but, in large part because the respondent did not call a business valuator to lead evidence on an alternative appropriate multiple, the Master rejected the critique.

  1. That the petitioner’s business valuator assumed that the vendor would sign a non-competition agreement. The respondent led evidence that the owner of the shares would not agree to sign such an agreement. The Master rejected that evidence, finding that as his task under the legislation is to determine the fair market value of the shares he must assume a willing seller and, in this case, a willing seller would sign a non-competition agreement in order to obtain the best price for the asset.

In conclusion, the Master noted that while he need not accept a business valuation report simply because the other party has not led any expert evidence to counter it, having weighed the evidence that was led, he preferred the valuation proposed by the petitioner’s expert.

The Master applied no minority discount to the shares as the Shareholders’ Agreement did not.


This case underscores the concept that in a hypothetical market in which all fair market valuations are done, the “willing vendor” is assumed to have taken all necessary steps to obtain the “highest price”, which is one of the principle tenets in the definition of fair market value. These steps would include one, all or a combination of the following: an assumed non-competition agreement (to preserve the goodwill that a purchaser may have acquired), a management contract (to ensure a smooth transition of ownership), and introduction of the hypothetical buyer to key customers and / or suppliers to facilitate, to the extent possible, the transference of non-commercial goodwill (i.e. personal goodwill of the vendor) into commercial goodwill. In the real world, however, such agreements or actions would be subject to negotiation between the vendor and the acquirer with the ultimate price reflecting the outcome of such negotiations.