Fair Value Remains Challenging Determination for Trial Courts

The determination of the “fair value” of a shareholder’s interest in a closely held corporation under BCL §1118 and BCL §623 has proven to be an especially complex and challenging task for the courts. The term “fair value” is not defined by either statute, and it has been left to the courts to establish guidelines to determine the fair value of shares for which there is no readily available market and to apply those guidelines to the unique factual circumstances of each case. As was observed by a federal appeals court in Okerlund v. United States, 365 F3d 1044, 1052 (Fed. Cir. 2004), “[t]he valuation of a closely held company is an inexact science (some might say an art)…”

In its recent decision in Murphy v. United States Dredging Corp., 2010 NY Slip Op 04794, 903 N.Y.S.2d 434, the Second Department addressed two particularly thorny issues that trial courts have repeatedly confronted in business valuation cases—the impact of a prospective liability for unrealized capital gains (commonly referred to as built-in capital gains or BIG) and whether a marketability discount is to be applied to the value of both tangible assets and the goodwill of a business. While the court’s decision in Murphy provided some clarity as to how these issues will be addressed in future valuation cases, it did not establish a bright line rule with respect to either issue.