Discounting Minority Interest's Lack of Control is Appropriate in Valuation of LLC for Dissolution

Cheng v. Coastal L.B. Associates, LLC (2021) 69 Cal.App.5th 112

In Cheng, an LLC was owned by four sisters with equal shares. One of the sisters, Bernice (the Plaintiff) filed for the involuntary dissolution of the LLC. The other three sisters, decided to purchase the Plaintiff's LLC interest Corporations Code § 17707.03. Three appraisers provided independent appraisals of the twenty-five percent interest, and reached different numbers for its fair market value (FMV). After being told by the court to come to a consensus, the appraisers initially agreed upon a valuation of $831,973. After the initial valuation, the appraisers' report stated the FMV standard required a discount for a minority interest and therefore applied a twenty-seven percent discount, and a valuation of $623,979. The Plaintiff sister appealed and argued that the trial court made a mistake by having the appraisers reach a consensus as opposed to selecting one of the values, or making a de novo determination under Corporations Code section 17707.03. Secondly, the Plaintiff also appealed the application of a discount for minority control.

The Court of Appeal did not find anything in the statutory language of section 17707.03 that restricts the trial court’s authority to order the appraisers to confer further to determine whether a consensus on value could be achieved. The Court also noted that section 17707.03 only requires the Court to make a de novo determination of value, “when the trial court finds the appraisers’ award to be erroneous or incorrect,” which did not occur here. Finally, the use of the minority interest discount was not improper, because Corporations Code section 2000, which bars such discounts, only applies to closely held corporations, not LLCs. As such, the Court confirmed the consensus appraisal award and a final buyout price of $621,954.

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