On January 28, 2021, the Indiana Supreme Court decided Hartman v. BigInch Fabricators & Construction Holding Co., rejecting the short-lived distinction between divorce case business valuation discounts from discounts in other settings and establishing a new precedent for business law practitioners.

Revisiting the Case

BigInch was a closely held corporation in the business of fabricating and installing natural gas and pipeline stations and related apparatus. Blake B. Hartman was one of the founders and a former president of BigInch.

In 2006, the shareholders to the corporate predecessor of BigInch, each owning a minority position, entered into a shareholder agreement. The shareholder agreement required the company to purchase the shares of any shareholder who was involuntarily terminated as an officer or director of the company based on an appraised market value by a third-party valuation company. In 2018, Hartman was involuntarily terminated from his position as a director and officer of BigInch. BigInch retained a third-party valuation company to value Hartman’s 17.77% interest in BigInch. The resulting business valuation discounted Hartman’s interest by a combined 32% lack of control discount and marketability discount. Upon challenge by Hartman, the trial court entered summary judgment, affirming application of the discounts.

On May 5, 2020, the Indiana Court of Appeals reversed, determining that lack of control and marketability discounts do not apply to compelled return of ownership interests to a controlling party where there is a ready-made market. The majority opinion distinguished divorce cases where lack of control and marketability discounts may be applied. See Alexander v. Alexander, 927 N.E.2d 926 (Ind. Ct. App. 2010). The majority’s distinction arose from trial court’s broad discretion when determining the value of marital property in divorce proceedings and the fact that there was no sale of an ownership interest in Alexander. The Indiana Court of Appeals viewed the trial court in BigInch as attempting to prevent a windfall to the majority as opposed to the Alexander trial court simply trying to value an interest that was not being sold. The appellate court also interpreted the prior rejection of discounts in Wenzel v. Hopper & Galliher, P.C., 779 N.E.2d 30 (Ind. Ct. App. 2002), as applicable to all sales occurring in a closed market, regardless of whether a “fair value” statutory standard or other valuation standard applied. The Indiana Court of Appeals concluded that the value of Hartman’s shares under the buyback provision in the shareholder agreement, which required the application of the “appraised market valuation,” could not be discounted for lack of control and marketability.

The Indiana Supreme Court vacated and reversed the Indiana Court of Appeals opinion and affirmed the trial court’s grant of summary judgment for BigInch. The unanimous opinion, while recognizing the public policy rationale underlying Hartman’s position, held that parties’ freedom to contract permits the application of minority interest and marketability discounts in closed-market transactions. The Supreme Court distinguished Wenzel since it concerned the interpretation of a statute rather than a contract and noted that no court applying Indiana law had concluded that these discounts were always inapplicable to closed-market sales — only that the discounts were inapplicable in certain situations. The unanimous opinion looked to divorce case precedent Eyler v. Eyler, 492 N.E.2d 1071 (Ind. 1986), as authority for that assessment. The Indiana Supreme Court determined that the shareholder agreement was unambiguous in equating “appraised market value” to “fair market value” and providing for valuation of the shares as if they were being sold on the open market. The Supreme Court added that, even if ambiguous, the fair market value standard would apply. As a result, minority interest and marketability discounts could be applied.

What This Decision Means for Business Law Practitioners

BigInch eliminates the distinction between divorce and other business litigation valuation principles in the context of shareholder agreements and other contracts and allows for the application of discounts in compulsory contractual transactions, all grounded in Indiana’s strong freedom of contract principles.