Relying on Non-Expert Witnesses Can Be Costly
By: Joshua Johnson
Anderson v. Anderson – Minnesota Court of Appeals, A08-1365, October 10, 2009
Hennepin County District Court, File Number 27-FA-292333, November 20, 2007
In Anderson v. Anderson, (a marriage dissolution), the key issues were the extent of the Respondent’s, (Kurt Anderson) ownership interests in two privately-held companies and the value of his interests as of the date of valuation. Mr. Anderson acknowledged a 90% ownership interest in one of the two companies, but claimed that his relationship with the second company was that of a consultant. Based on the facts, his position was extreme and difficult to defend under the best of circumstances. Mr. Anderson further complicated his situation by failing to engage an outside party to value his interests. When the Court ruled that the Respondent had concealed an ownership interest in a business formed during the marriage, it had only one opinion of value, that of the Petitioner’s expert, upon which to rely for the division of assets.
In 2004, Mr. Anderson owned 90% of an internet hosting company, Honeycomb Internet Services, LLC. In 1999, the year Petitioner, Robyn Anderson, and Mr. Anderson were married, Honeycomb had little to no value. Over the course of their marriage, the company appreciated in value due to the efforts of Mr. Anderson. Under Minnesota law, increased value due to active appreciation is subject to the marital estate. To determine the value of Honeycomb stock, the Court relied on adjusted gross revenues of $112,342. Mrs. Anderson’s hired expert, Stephen Dennis, JD, CPA, ABV, placed a 50% of revenue multiple on Honeycomb. This equated to a value of $56,171; applying the subject ownership interest of 90% brought this down slightly to $50,554. Divided amongst the marital estate, each party received an equitable ownership value of $25,277. No discounts for control and marketability were applied
During the same period of time, Mr. Anderson and two others, William Jurewicz and Mark Setterholm, launched another internet-related company called Space150.com, LLC, (now known as Space150, LLC). Space150 specialized in the design and promotion of websites. There is some confusion as to who actually owned Space150. Messrs. Anderson and Jurewicz claimed that the entire operation was one of “strategic alliances between Honeycomb, Space150 and Mr. Setterholm’s company, Setterholm Productions: that Mr. Anderson had no ownership interest. However, according to the deposition of Mr. Setterholm, that was not the original intent. He testified that each of the three contributed roughly $10,000 to the company. Further, Space150’s website identified Mr. Anderson as a “Founder/IT Director.”
The Court noted that there is no legal definition for “strategic partnership”, thus its meaning is open to a wide variety of interpretations. After reviewing the depositions and testimony of both parties and all witnesses, both the District Court and the Appellate Court determined that the inconsistencies were such that there was, in fact, an attempt to conceal ownership. The actions taken by Mr. Anderson, in his capacity as “IT Director” for Space150, were not those of a disinterested third-party consultant or “strategic partner,” as he and Mr. Jurewicz claimed, but those of an owner with a vested interest in the successful outcome of Space150’s business. Based on original capital invested, the Court determined that Mr. Anderson held a one-third interest in the company.
To determine the value of Space 150 stock, the Court heard testimony from Mr. Jurewicz and Mr. Irving Fish. Mr. Jurewicz opined a value of three times revenue. Mr. Fish, a non-expert, non-credentialed witness, called upon by Mrs. Anderson, was the CFO of Fallon Worldwide, Inc. (an advertising company), until he retired in 2002. His experience established him as knowledgeable with regard to advertising companies and their potential values. The Court did not contest the point, however, his knowledge of internet companies was contested. Mr. Fish offered an opinion of value based on an examination of the company’s financial statements and its client book of business. Based on his analysis, Mr. Fish testified that he concurred with Mr. Jurewicz in applying a multiple of three times revenue (300%). Neither Mr. Anderson (who claimed no ownership) nor Mr. Setterholm offered an opinion of value.
A 300% multiple may appear rather high, especially in light of the 50% multiple applied in valuing Honeycomb. A review of the Pratt’s Stats database revealed that this multiple, though rare, was not entirely unreasonable for a strategic sale of an advertising business during that time period. The Court noted that it would have preferred to hear an opinion of value from an independent expert. However, relying on the testimony of record, it valued Space 150 at $7,135,080 based on 2004 revenues of approximately $2,378,360. Multiplied by Mr. Anderson’s one third interest, the value of the stock going into the marital estate was $2,378,360. No discounts for control and marketability were applied in the Court’s finding.
Mr. Anderson did not hire a professional to value his assets and he took the extreme position that he did not own stock in Space 150. The importance of hiring an appraisal professional was very clear once the Court ruled that Mr. Anderson owned a one third interest in Space 150. A qualified appraiser might have offered testimony that a 300% multiple is realistic only for a strategic sale of a company or that discounts for lack of control and lack of marketability should be applied to a one-third interest under the state’s fair market value standard. Either of these had the potential to lower the value of the stock considerably. However, the Court had only one opinion of value on which to rely. The final decision proved quite costly for the Respondent.