Do Courts Apply a Private Company Discount or a Marketability Discount?

Johan Van den Cruijce – Nicolas Janssens de Bisthoven – Jurgen Tistaert*

ABSTRACT

The value of an unlisted entity remains a contentious issue. This is notably because there is no consensus on the nature, size, and drivers of the so-called discount for lack of marketability (“DLOM”). The DLOM is the estimated percentage difference in value between an unlisted and an all-else-equal listed company.

The traditional methods for estimating the DLOM are essentially based on financial and transactional data. It is notoriously difficult to obtain information about the internal organization of private companies and this explains why the knowledge of the DLOM determinants remains limited.

These limitations have led us to consider an alternative data source. Specifically, we have based our research on a unique dataset of U.S. court decisions that apply a DLOM to a private company and justify the percentage discount by reference to the specifics of the valuation subject.

This article shows that courts apply different discount percentages depending on whether they value operating or non-operating companies. The difference between the DLOM applied on operating companies and the DLOM applied on non-operating companies is 7 percent. This paper explains the difference by distinguishing between a private company discount and a marketability discount.

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^* Johan Van den Cruijce is Managing Director at Atlas Services Belgium (Orange group); Nicolas Janssens de Bisthoven is Legal Counsel at Atlas Services Belgium (Orange group); Jurgen Tistaert heads the Quantitative Modelling and Integration team for Equity & Commodity Derivatives at ING Financial Markets. The views, opinions and assumptions expressed by the authors in this paper do not necessarily state or reflect those of their respective employers or institutions. This paper was drafted under the academic supervision of Prof. Dr. Cynthia Van Hulle (KU Leuven) and Prof. Dr. Wouter De Maeseneire (Vlerick Business School). The authors thank Prof. Dr. Martina Vandebroek (KU Leuven) for guidance on methodology. The data collection was performed with the assistance of Emina Šadić Herzberger and Jackson Nock (J.D. students at the University of Georgia), Christophe Minnart (attorney at law), Vincent Van den Cruijce (J.D. graduate from the KU Leuven) and Anisa Sula (solicitor). We gratefully acknowledge the help of Sandrine Ferreira-Terreygeol (Executive Assistant at Atlas Services Belgium), Starlyn Endres and Alina Salgado (J.D. Candidates at the University of Georgia), as well as Gamble Baffert II (J.D. graduate from the University of Georgia) for their review and edits of this manuscript.