Despite intense criticism, the Appellate Division, Second Department, has stood apart from the Court of Appeals and other courts in its application of the lack-of-marketability discount when determining the value of closely held corporations. This discount takes into account the illiquidity of the shares due to the absence of a public market in which the shares can easily be converted into cash.1 Given the illiquidity, a reasonable investor in an arms-length transaction would generally pay less for the shares of a privately held corporation than those of a comparable public corporation.
Until recently, the Second Department has refused to apply the discount to any of a corporation’s tangible assets. In Cinque v. Largo Enterprises of Suffolk County Inc., 212 AD2d 608 (2d Dept. 1995), Whalen v. Whalen’s Moving & Storage Co. Inc., 234 AD2d 552 (2d Dept. 1996), and Cohen v. Cohen, 279 AD2d 599 (2d Dept. 2001), the Second Department held that the lack-of-marketability discount should only be applied to the value of the corporation that is attributable to goodwill. This limitation is significant because in the case of a real estate holding company or LLC whose sole assets are cash and real estate, the Second Department would not apply the discount, choosing instead to equate the value of the shares with the value of the corporation’s assets.
