Coronavirus is Likely to Affect Business Valuations in Business Divorce Litigation

By on April 20th, 2020

Posted in New Jersey

As I’ve stated in previous blog postings, business divorce or oppression cases usually end with one side buying the other out. Hence, valuation of the subject company is often one of the central issues in the case. Clearly, the coronavirus has negatively impacted a lot of closely held companies. Coronavirus has and will likely affect the valuation of the small businesses that are often ripe for disputes between the shareholders, partners, or members.

It is presumed, under New Jersey law, that the date of the commencement of the action is the presumptive valuation date. Musto v. Vidas, 333 N.J. Super. 52, 59 (App. Div. 2000). Nevertheless, the Court may set the valuation date at any time the Court deems equitable. Torres v. Schripps, Inc., 342 N.J. 419, 437 (App. Div. 2001).

There have been several instances where courts have adjusted the date of valuation in the interests of fairness. For example, in Torres v. Schripps, the Appellate Divisions approved the trial judge’s shifting the valuation date because the “business had changed following the plaintiff’s departure” and the defendant testified he “did not know how to run the day-to-day operations of business.” supra, 342 N.J. Super. 437. The court determined that the plaintiff was blameless for losses suffered following his departure and it was unfair to ascribe losses to the plaintiff as a result of the defendant’s lack of experience in management of the company. Conversely in Hughes v. Sego International, Ltd., 192 N.J. Super 60, 66 (App. Div. 1983) the Appellate Division upheld the trial court adopting an earlier date of valuation because a “subsequent increase in value of [the stock] could not be attributed to Plaintiff’s efforts.

The case law interpreting the applicable shareholder/member divorce statutes grants courts the latitude to select a date of valuation which would grant the most equitable result, and to determine “fair value.” It is clear that none of the shareholders, partners, or members caused coronavirus. This is why I believe in pending business divorce cases, courts could (and probably should) consider Coronavirus’ long-term negative affect on the value of the company. This is, because to simply use the date of filing of the complaint may be not equitable (unfair).

I also believe that Coronavirus may also affect future business divorce litigation. While I look forward to re-reading this blog post after this crisis ends and we all resume our normal lives, it is clear that another pandemic may occur. As a result of the same, business valuation experts may consider the foreseeable risk of future pandemics as a factor when they value closely held companies. That is, because business valuation experts consider business risks when they value the subject company.

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