Inside: Shareholder divorces and determining fair value

Valuation can be an enormously complicated subject, even without the added drama that a shareholder dispute brings to the table

If a dispute between shareholders cannot be resolved, the only thing to be done — other than dissolution or appointing a receiver — is to have a shareholder buy out, so the corporation survives unencumbered by a troublesome shareholder. Troublesome is a misnomer, for usually the one bought out was oppressed in some way by the other shareholder(s), brings a complaint to redress his or her grievances, at which point the other shareholder or shareholders elect to pay him or her off to exit the corporation.  

If criminal law involves bad people on their best behavior and divorce law involves good people on their worst behavior, shareholder disputes are somewhere in between. Disputes have erupted between brothers in a family corporation, high school pals, and partners of more than 20 years. Often each knows the others’ dirty laundry. A buyout proceeding functions like a divorce except that the only custody issue involves the corporation. The shares of one shareholder are bought by the other so they can go their separate ways.

Another key issue is setting the valuation date. In many cases, the corporate acts that led to the dispute had a significant effect on the value of a business, and therefore on the value of the shares held by the shareholder who seeks a buy-out. While various state statutes and case law can create a few wrinkles in determining the valuation date, most jurisdictions agree that the proper date is the day before the shareholder meeting where the offending corporate act took place. In cases of shareholder oppression, where the dispute is caused more by chronic disagreement or misconduct rather than any one act, the date the complaint is filed or the date a buyout is elected in a pleading is usually chosen as the valuation date. To the extent that wrongful acts affected the fair value, the court can adjust the buyout price.

Valuation opinions must be tied to the valuation date, meaning that retrospective appraisals are necessary. As counter-intuitive as it may seem, events that have occurred after the buyout date that were unforeseeable at the buyout date often — under valuation standards — cannot be considered. The knowledge that each party had as of the time of the valuation date will be taken into account when setting the valuation, however.  

Contributing Author

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Thomas Patterson

Thomas E. Patterson started the Patterson Law Firm in 2000. He has 32 years of experience preparing and trying lawsuits for businesses, professionals and entrepreneurs—often...

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