Parties That Behaved Wrongfully Could Not Demand Marketability Discount in Shareholder Buyout Case

Sipko v. Koger, Inc., ___ N.J. ___ (2022). This is the second time that this intra-family business divorce case came before the Supreme Court. The first iteration, which dates back to 2013, was discussed here. Today’s decision, written by Justice Pierre-Louis for a 5-0 Supreme Court (Justice Patterson recused in this case), addressed whether a marketability discount should have been applied in valuing plaintiff’s interest in the businesses. A marketability discount, Justice Pierre-Louis explained, “reflect[s] the decreased worth of shares of stock in a closely held corporation, for which there is no readily available market” (quoting Balsamides v. Protameen Chemicals, Inc., 160 N.J. 352, 377 (1999)). The trial court denied a marketability discount, but the Appellate Division reversed and required one. The Supreme Court reversed that ruling and restored the trial court’s result.

Again quoting Balsamides, Justice Pierre-Louis said that “[d]epending on the facts, we have held that fairness and equity can compel the decision to apply such a discount, or not. Stated differently, ‘[a]pplication of the equities . . . [can] dictate[] opposite results.’” In short, there can be no bright line rule, but “[t]he guiding principle in such cases is that a marketability discount cannot be used unfairly by the parties whose misconduct and bad faith caused the corporate split to benefit themselves to the detriment of the injured parties.”

Here, the Court concluded, “the many instances in which defendants took deliberate steps to prevent Robert [plaintiff] from recovering any value he might achieve throughout the course of litigation” called for the denial of defendants’ demand for a marketability discount. Justice Pierre-Louis reviewed in detail a number of wrongful actions by defendants. She then concluded:

“Defendants’ bad-faith behavior throughout this 15-year litigation occurred for the specific and obvious purpose of preventing Robert from being fairly compensated for his interests. Defendants now ask the Court, after acting unfairly at almost every turn, to apply a doctrine rooted in fairness to relieve them of their responsibility to buyout Robert for the amount determined by the trial court. We decline to do so. If ever there was an instance in which equity did not fall in a party’s favor, it is this case” (emphasis by Justice Pierre-Louis).

The Appellate Division erred in not according deference to the decision of the trial court, “particularly because the trial judge handled this matter for over a decade, presided over the bench trial, heard testimony, asked questions, and had, by far, the best feel for the case.” Accordingly, the Court reinstated the trial court’s decision.