Do Minority Discount and DLOM Apply in ‘Fair Value’ Analysis?
East Park Ltd. Partnership v. Larkin, et al., 2006 Md. App. LEXIS 32 (March 6, 2006)

There’s rarely any question that discounts apply to a fair market value analysis of a business interest, as the “willingness” of most arms-length buyers is likely to depend on such factors as minority control and/or lack of marketability. But are discounts for lack of control and marketability appropriate in a “fair value” analysis; i.e., in the context of withdrawing limited partners (and, by analogy, dissenting shareholders)?

On a case of first impression in Maryland, the Court of Special Appeals said that—absent unusual circumstances, they are not. “Because no open market transaction takes place when a partner withdraws from a limited partnership, we hold that, ordinarily, discounts should not be applied.”

‘Fair Value’ Open to Interpretation

Unlike fair market value, for which “countless cases” and statutory provisions establish a clear definition, the term “fair value” in the Maryland uniform partnership and limited partnership laws appears without clarification or guidance. Ditto for the dissenting shareholder provisions of the state’s Corporations and Associations Act, which use “fair value” without explanation. There was no local case on point, although the Court noted that the majority of states to consider the issue in the dissenting shareholder context have concluded that discounts do not apply to a fair value analysis. These opinions plus the legislative purpose behind the relevant statutes helped sway the Court—along with the “competent and material” evidence from expert valuators.

The first expert for the withdrawing limited partners, testified that the fair market value of the LLP’s only asset, a shopping center, was $19.5 million. A second expert accounted for the property’s liabilities to reach a going concern value of approximately $14.64 million.

To prove its version of value, the partnership provided a state tax assessment of the property at $13.9 million. More importantly, it also proffered expert opinion that the “fair value” of the limited partners’ interests necessitated applying a 25% discount for lack of control and a 31.27% discount for lack of marketability.

At trial, the court agreed with the limited partners’ experts, finding that the fair market value of the shopping center was $19.5 million, and its “net” or going concern value was $14.64 million. As for what constituted “fair value,” the lower court also determined:

• It is not the same as fair market value, for if that had been the intent, the state legislature would have used the FMV term in the uniform partnership laws. Also, in the context of “cashing out” a limited partnership interest, it would be incorrect to apply a fair market analysis where third parties are not involved, but only withdrawing partners surrendering their interests.
• In the shareholder dissent statutes, “fair value” requires reimbursement for a withdrawing shareholder’s proportionate interest in a going concern, or “the intrinsic value of the shareholder’s economic interest in the corporate enterprise.”
• By analogy to shareholder cases, the objective is to ascertain the actual worth of what the withdrawing limited partner loses because he/she is not willing to “go along with” a controlling partner’s decision; this includes the appraisal of all material factors that affect going concern value, such as nature of the partnership operations, its assets and liabilities, future prospects, etc.
• Although fair value does not necessarily equal liquidation value, in this case the two are indistinguishable, as the sole asset at stake (real property) had no goodwill or other intangibles.

In conclusion, as the withdrawing limited partners would not be selling their interests in the open market, discounts would not apply; or as the trial court put it, “the remaining partners would end up acquiring the…interests for less than they were worth if those interests had remained in the hands of the withdrawing partners.”

The appeal court confirmed the ruling and its reasoning, noting in particular that testimony by the limited partners’ expert was supported by case law and statutes, whereas the partnership’s expert had admitted that he was unfamiliar with the partnership laws, and had simply equated fair value with fair market value. The court also confirmed that “the application of discounts is appropriate only under a fair market value analysis; that is, in determining what price a willing buyer would offer, and a willing seller would accept, on the open market.”