Breaking Up a Small Corporation: Valuation Disputes

Minority shareholders of a closely held business may find it difficult to sell their shares or otherwise get out if they disagree with the majority. As a result, most states have a procedure to force a purchase by the majority at a fair value set by the court. A recent case from Idaho, Wagner v. Wagner, No, 42707, (Idaho, Apr. 27, 2016), <http://www.isc.idaho.gov/opinions/42707.pdf>, helps show how these proceedings work.

The case involved a dispute between shareholders in a family owned farming company. During a long series of negotiations to split the corporation into two parts, the company’s lawyer valued the company at $3,344 per share. The shareholders were unable to agree how to divide the company’s assets, and a majority of shareholders voted to liquidate a lentil processing mill that represented about half the corporate value. The minority filed a petition to dissolve the company entirely to protect their investments. The majority voted to buy out the minority, as allowed by law, and the case went to trial on the question of a fair value for the minority shares.

Both sides hired experts to value the company. The minority’s expert valued the company at $3,399 per share. The majority’s expert applied discounts to the minority share for lack of control and restricted ability to sell, resulting in values of $1,540 for voting shares and $1,490 for non-voting shares. The trial judge found that the original $3,344 calculated by the company lawyer (who stayed out of the dispute) was a fair value and did not apply discounts.

Idaho, Oregon, and Washington have similar laws allowing dissenting minorities in a corporation to demand to be bought out for a fair value of their shares. Fair value is not defined, and there have been many cases in numerous states under similar laws attempting to decide how to calculate it.

Generally speaking, the courts are allowed to consider a broad range of relevant facts in deciding what is a fair value. As a result, expert opinions are common, and usually the reasoning of the experts is discussed. For example, in the Wagner case, the majority shareholders criticized the company lawyer for overestimating the value of the company’s assets. The Idaho Supreme Court found this argument not meaningful because the minority shareholders’ expert corrected the overvaluing and still got a higher value. Similarly, the Supreme Court ruled that the trial judge had fairly declined to accept the majority’s expert’s consideration of safety issues at the lentil plant because he was not an OSHA expert and because he had made errors in his analysis that offset the safety issue. Overall, the Supreme Court agreed that there was sufficient evidence to support the trial judge’s ruling.

A second question was whether the valuation should have been on the day before the mill closed or the day before the minority filed their petition. The Idaho law presumes that the day before filing is usually the date used, but another date may be selected as appropriate. The Supreme Court ruled that the trial judge had broad discretion to select a date, and the selection of the day before closing was appropriate because the mill was viable when it was closed.

The final question, which different states do not agree upon, was a legal one. The trial judge chose not to apply discounts for either lack of control or limited marketability. Some states, including Washington, apply both in some situations. See Robblee v. Robblee, 68 Wash. App. 69, 841 P.2d 1289 (1992), <http://courts.mrsc.org/appellate/068wnapp/068wnapp0069.htm>. Other states, such as Oregon, decline to apply limited discounts for lack of control but have allowed discounts for lack of marketability. Columbia Mgmt. Co. v. Wyss, 94 Or App 195, 765 P.2d 207 (1988), <http://law.justia.com/cases/oregon/court-of-appeals/1988/765-p-2d-207.html>, rev den, 307 Or. 571 (1989). No state applies either discount in all cases, and the Idaho Supreme Court ruled that there was enough evidence to support the trial judge’s decision not to discount the value.

Overall, if you are in a dispute in a closely held company and you want out, it is usually less expensive to try to agree on a sale price. If you think the price offered by the other shareholders is too low, and you can’t get them to budge, you may have to ask the courts to decide on a fair value. This will require a careful analysis of all the relevant information, including asset values, earnings, the strength of the company as a going concern, and so forth. You can expect to spend some money for an expert and lawyers if it goes that far, and you should be ready to provide the lawyers and experts with negative information as well as positive, so that they can decide how to address it. You may also want to talk to an accountant about preparing appropriate strategies to minimize tax effects.

 

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