As I’ve stated in many of previous blog posts valuation is one of the most important issues in minority oppression litigation. The majority wants the valuation to come in lower, so they are required to pay less for the minority’s shares. On the other hand, the minority wants the valuation to come in high, because they want to receive more for their interest in the closely held company. 

Experts generally like to review five (5) years worth of financial records when providing their opinion as to the minority’s "fair value" interest in the subject company. The problem is not all companies which are the subject of a shareholder divorce are at least five (5) years old. Sometimes, the company which is the subject of the shareholder divorce or minority oppression action is a start-up. 
In Krzastek v. Global Resource Industrial & Power, Inc., 2008 N.J. Super. Unpub. LEXIS 1360 (App. Div.), Certification Denied, 197 N.J. 259 (2008), the Appellate Division was asked to question the valuation of a start-up entity which only had one project credited to the subject company.  In that case, the Plaintiff was a business entrepreneur with extensive experience in engineering, procurement and construction of power plants. Through the course of his work on hundreds of nuclear power plant projects, the Plaintiff developed a business relationship with Darryl Jenkins of DiFazio Electric, Inc. Mr. Jenkins introduced the Plaintiff to Vincent Barletta, who was the President of Barletta Engineering & Construction, Inc. The Plaintiff learned that Mr. Barletta was interested in starting a power and industrial group of his own.  They discussed forming a new business which they eventually named Global Resource Industrial and Power, Inc. ("GRIP"). Mr. Barletta, or one of his companies, would own 90% of GRIP. The remainder would be owned by the Plaintiff or anyone he wished to share his interest with.  Shortly thereafter, GRIP entered into a joint venture agreement with DiFazio Electric, where the two entities formed a third, Pinelawn Contractors, LLC, which was created to construct a power plant in Babylon, New York. The joint agreement between GRIP and DiFazio Electric provided that each entity would equally split the profits in Pinelawn Contractors, Inc.  
At trial, Plaintiff retained a certified public accountant with expertise in business valuations. That expert testified that he was unable to evaluate GRIP because it was a start-up entity. So as to provide an opinion as to value that expert performed a valuation of GRIP’s single achievement — the Pinelawn joint venture.  In that regard, the expert prepared two sets of calculations to determine Plaintiff’s 7% interest in GRIP.  One was based on the actual performance of the Pinelawn joint venture; the other based on the projected profits of Pinelawn as of January 31, 2005 (the time when the majority oppressed Plaintiff by terminating his employment). 
The expert also engaged in the process of "normalizing" the financials of the project. With regard to the same, he determined that the bonuses paid to the majority shareholder from the joint venture were really profits which would have been payable to the company. Moreover, he normalized automobile expenses (as well as other costs). 
In its appeal, the Defendants asked the Appellate Division to overrule the trial court’s determination that GRIP could be valued by simply looking at the profits of the Pinelawn project. The Appellate Court did not overrule the trial court. Rather, it looked at the evidence presented at trial and determined that there was enough evidence for the trial court to find that, although the plan was for GRIP to find other projects or business, it was a single purpose entity (because it never found any other business). The Krzastek decision reaffirms what other courts have said about valuation — "it’s an art not a science."  The decision provides attorneys and experts the ability to "think outside the box" in terms of valuing a start-up or single purpose entity. 
Scott Unger is a Shareholder in Stark & Stark’s Lawrenceville, New Jersey office concentrating in Shareholder & Partner Dispute Litigation. For questions, or additional information, please contact Mr. Unger.