The Impact of COVID-19 on Business Valuation in Divorce
Any valuation professional who specializes in the matrimonial sector would likely agree with the statement that closely held business interests tend to comprise a material segment of the value of the marital estate. Valuing a closely held business interest in connection with a matrimonial dissolution proceeding is a complex process with many variable factors; however, the selection of a valuation date is one of the few inputs that is not variable and is dictated by statute or the court. So, what does the selection of a valuation date have to do with COVID-19?
Consider, first, the following examples of the determination and selection of the valuation date. In Connecticut, the date of valuation is set as, “…the date of the dissolution judgement…”1 which, for practical purposes, can entail a continually “rolling” valuation date as the date of the dissolution judgement is, in turn, influenced by the natural variability of court proceedings. Conversely, in New York, the date of valuation is dependent upon whether an asset is deemed active or passive, with active2 assets traditionally valued as of the date of commencement of the marital dissolution proceedings, and passive3 assets generally valued at some point between date of commencement and date of dissolution.4
Why is the valuation date such a critical factor when considering the impact of COVID-19? In the business valuation arena, valuation professionals may only consider that information and those facts which were “known or knowable” as of the date of valuation.5 At what point did COVID-19 become “known or knowable”?
While there does not appear to be a pinpointed date for the very first COVID-19 case in Wuhan, China, it was on December 31, 2019 when Chinese health officials first informed the World Health Organization (“WHO”) of the existence of a cluster of 41 patients with a mysterious pneumonia.6 The first confirmed case in the United States was reported on January 20, 2020, in Washington State, when a resident experienced symptoms after returning from a trip to Wuhan.7 On January 30, 2020, WHO officially determined the COVID-19 outbreak to constitute a Public Health Emergency of International Concern (“PHEIVC”); on February 11, 2020, WHO christened the virus COVID-19.8 A month later, on March 11, 2020, WHO declared COVID-19 to be a pandemic.9 The measures taken thereafter, in the United States and elsewhere, have continued escalating, with little known about the future impacts.
The value of a business interest, for purposes of a marital dissolution proceeding in Connecticut that was dissolved on December 30, 2019, will likely be very different than the value of that same business interest in the same marital dissolution proceeding with a dissolution date of April 1, 2020. Although in both of these scenarios it is clear that the valuations included only facts that were known or knowable as of their respective valuation dates and as of the date of dissolution, the impact of COVID-19, and the potential inequities as a result, are also clear.
In a state such as New York, for example, where a marital dissolution proceeding may have commenced on December 30, 2019, the impact of COVID-19 and the resulting inequities could be far greater. An active asset that has depreciated greatly in value, as a result of the impacts of COVID-19, could produce a significant inequitable result to one spouse through utilization of a December 30, 2019, valuation date, when COVID-19 was not known or knowable. How does the fact that a passive market force–the effect of COVID-19–on what would traditionally be characterized as an active asset impact the selection of the valuation date, if at all? Still other states have yet other factors that go into the determination of the valuation date. It is these questions, together with a myriad of others, which have yet to be answered. While courts across the country continue to shut down to all but emergency hearings, and while businesses languish as a result of close orders, these questions and their potential resulting inequities remain a high priority topic and one which deserves careful consideration. Litigants, attorneys, judges and other litigation-related occupations must consider the impact of the valuation date selection in marital dissolution proceedings and the potential impacts thereon.
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1. Sunbury v. Sunbury, 216 Conn. 673, 676, 583 A.2d 636 (1990), cited in O’Brien v. O’Brien, 161 Conn. App. 575, 587, 128 A.3d 595 (2015).
2. Assets which value is dependent upon the labor of a spouse.
3. Assets which value is dependent only upon market conditions.
4. Smerling v Smerling, 177 A.D.2d 429 Page 288; Heine v Heine, 176 A.D.2d 77; Zelnik v Zelnik, 169 A.D.2d 317; Kallins v Kallins, 170 A.D.2d 436; Greenwald v Greenwald, 164 A.D.2d 706).
5. Subsequent Events, subset 43, to the Statement on Standards for Valuation Services issued by the American Institute of Certified Public Accountants; Fishman, Jay E., Pratt, Shannon P., Morrison, William J., Standards of Value: Theory and Applications: Second Edition, John Wiley & Sons 2013, page 65; Hitchner, James R., Financial Valuation: Applications and Models: Third Edition, John R Wiley and Sons, 2011 at page 41.
Coronavirus Pandemic Timeline, Business Insider, April 7, 2020.
7. Taylor, Derrick Bryson, A Timeline of the Coronavirus Pandemic, The New York Times, April 7, 2020.
8. CNN Editorial Research, Coronavirus Outbreak Timeline Fast Facts, CNN, April 7, 2020.