At a bench trial, experts presented estimates of the “fair market value” of the company as ranging from $3 million to over $5 million. Mortgages on the company assets existed in the amount of approximately $2.3 million, and Tabor testified that he was liable for a potion of that debt. The trial court determined a company FMV of $4 million and then applied a 10% marketability discount and a 10% minority discount. The $4 million FMV determination did not, however, incorporate the $2.3 million of debt. Ultimately, the court concluded that Tabor’s 10% in the company was worth $324,000. Eddy Creek appealed from the trial court’s failure to subtract the $2.3 million in debt from the $4 million FMV in determining the value of Tabor’s interest.
As for the Court of Appeals' statement that “the dissociated member … shall be entitled to receive the fair value of the Member’s Company interest as of the date of dissociation based upon the Member’s right to share in the distributions of the Company.”, it is a verbatim recitation of part of KRS 275.215 as adopted in 1994, which language was repealed in 1998.
Practice Pointer – Terms like “fair value” do not have objectively defined meanings. An operating agreement that calls for redemption at “fair value,” without further defining what is meant by “fair value” and defining the mechanism by which that amount will be determined, simply invites further (and typically expensive) litigation.