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VIII. "DISCOUNTING" OF RESTRICTED STOCK
  A. Stock options often involve restricted stock, which may be unregistered or have other restrictions on sale, which reduces the value of the stock.
  B. Some courts apply a discount to stock that is restricted because the hypothetical value of the restricted stock on the open market would be lower than non-restricted stock.
    1. In Hagerman v. Yukon Energy, 839 F.2d 407, 412 (8th Cir.)(affirming entry of summary judgment in favor of plaintiff in breach of contract action for failure to honor stock option agreement) cert. denied, 488 U.S. 820, 109 S.Ct. 63, 102 L.Ed.2d 40 (1988), the court rejected the defendant's argument that plaintiff's damages should be discounted because restrictions on the transferability of the stock reduced the market value on the ground that the argument was not raised until after the grant of summary judgment.
    2. In Scully v. U.S. Wats, Inc., supra, 238 F.3d at 513, the Third Circuit Court of Appeals rejected the defendant's argument that the trial court was obligated to apply a discount to restricted stock, while recognizing "some validity" to the argument. Experts for both parties testified as to the appropriate discount before the trial court, with plaintiff's expert opining that a discount of up to 45% would be appropriate and the defense expert opining that a 29% discount would be proper. Scully v. U.S. Wats, Inc., 1999 U.S. Dist. LEXIS 13007, *13 (E.D.Pa., July 27, 1999)(Fullam, S.J.).
      a. The Scully court nevertheless acknowledged that the hypothetical value of restricted stock selling on the open market would be lower than the value of unrestricted stock because of its decreased marketability. Id., citing Sowell v. Butcher & Singer, Inc., 926 F.2d 289, 300 (3d Cir. 1991); Hagerman v. Yukon Energy Corporation, supra, 839 F.2d at 412-413, Eastern Service Corporation v. C.I.R., 650 F.2d 379, 383-84 (2d Cir. 1981); Rochez Brothers, Inc. v. Rhoades, 527 F.2d 891, 894-95 (3d Cir. 1975)(remanding case with instructions to take further testimony to establish the correct discount factors that would apply to damages relating to restricted stock in securities fraud case).
  C. Discounts Are Sometimes Considered to Account for "Blockage"
    1. "Blockage" is the presumed inability to sell a large block of stock at one time without depressing the market value per share. See e.g., Scully v. U.S. Wats, Inc., supra, 1999 U.S. Dist. LEXIS 13007, *12.

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