Source: http://www.lenghea.com/index.php/shareholder-disputes/
Timestamp: 2019-04-26 09:48:01+00:00

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A shareholder who owns a minority interest in a closely held corporation can be in a difficult position when faced with management decisions with which they disagree. Whereas a shareholder in a corporation whose shares are publicly traded can simply sell his or her shares on the open market at the current market price, no comparable market or well-established market price exists for shares of closely held corporations.1 Instead, shareholders who own a minority interest in a closely held corporation must rely on statutory or contractual provisions providing for the valuation and liquidation of their shares in such situations. However, when considering whether to obtain a valuation pursuant to Florida’s statutory provisions, a minority shareholder must be aware that Florida law is unsettled with respect to how minority shares should be valued, and there are two conflicting views that can produce vastly different results.
However, there is significant disagreement as to what “fair value” means and two conflicting views have developed. One view equates fair value with “fair market value” and factors in certain reductions in determining the value of a minority ownership interest (referred to as “discounts”) that are common in a fair market value analysis, most notably, a discount for lack of control and a discount for lack of marketability.6 The opposing view rejects the use of those two discounts in determining the fair value of a minority ownership interest. This is a critical distinction because the use of the two discounts can significantly reduce the buyout price of minority ownership interest, often reducing the buyout price by more than 50 percent.
For instance, suppose a shareholder who owns 49 percent of the shares in a closely held corporation with a value of $2 million is faced with a “squeeze out” by the majority owner and petitions to dissolve the corporation pursuant to Florida’s dissolution statute. In response, the majority owner elects to purchase the minority owner’s shares at their “fair value,” as provided in the dissolution statute. If the value of the minority owner’s interest is determined as the value of a proportionate interest in the corporation, the minority owner would receive $980,000. However, if a discount for lack of control were factored in, the value of the minority owner’s shares could conceivably be reduced by 33 percent, to $653,333. If a discount for lack of marketability were also factored in, the value of the minority owner’s shares could be reduced by an additional 50 percent, to $326,666. The result is that the minority owner, whose proportionate interest in the corporation is $980,000, is forced to sell his or her interest at a vastly reduced price. The majority shareholder, whose improper actions necessitated the minority’s petition, would get complete control of the corporation at an enormous discount. Although such a scenario appears inequitable, it is a distinct possibility under existing Florida law.
A recent amendment to Florida’s appraisal rights statute that defines fair value and addresses the use of the two discounts both clarifies and confuses the determination of fair value, creating a two-tier scheme in which the two discounts are not used if a closely held corporation has 10 shareholders or less, but are used if it has more than 10 shareholders.7 Moreover, this recent amendment does not reference the definition of fair value under Florida’s dissolution statutes, nor is there a corresponding amendment to the dissolution statutes that similarly defines fair value. As a result, there is the possibility that the definition and determination of fair value under Florida’s appraisal statutes could be treated differently than the definition and determination of fair value under Florida’s dissolution statutes.
Because the use of the two discounts can have a significant impact on the buy-out price of a minority shareholder’s interest in a closely held corporation, it is important for an attorney dealing with an appraisal or dissolution case (or deciding whether to bring either action) to have an understanding of this issue, the relevant Florida statutes and decisions, as well as significant cases from around the country that address this issue.
Two conflicting positions have developed regarding whether the determination of the fair value of a minority ownership interest in a closely held corporation should include the use of discounts for lack of control and lack of marketability.
Florida’s approach to fair value to date is confused and conflicting. Until recently, Florida’s appraisal and dissolution statutes, while providing for the payment of fair value to a minority shareholder, did not address whether the determination of fair value included the use of discounts for lack of control or lack of marketability.
A recent amendment to Florida’s appraisal statute that provides that the determination of fair value should not include discounts for lack of control or lack of marketability both clarifies and further confuses the issue. On the surface, the amendment appears to bring Florida law in line with the majority of courts that do not allow the use of such discounts in determining fair value. However, the amendment is arguably applicable only to the determination of fair value pursuant to Florida’s appraisal statutes and not to the determination of fair value pursuant to Florida’s dissolution statutes, raising the possibility that fair value under the appraisal statutes might be different than fair value under the dissolution statutes. Moreover, the amendment’s limitation to corporations with less than 10 shareholders seemingly creates a two-tiered scheme in which the two discounts are used in some instances and not in others. This state of affairs creates the likelihood of unique litigation issues, not to mention corporate gamesmanship in shareholder struggles.
(a) Immediately before the effectuation of the corporate action to which a shareholder objects.
(b) Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable to the corporation and its remaining shareholders.
Distinction Between Corporations with More Than 10 Shareholders and 10 or Less Shareholders — Although clearly providing that fair value is to be determined without discounting for lack of marketability or minority status, §607.1301(4)(c) arbitrarily limits this provision to corporations with 10 or fewer shareholders. This creates the inference that those discounts would be applied in appraisal proceedings brought by shareholders in corporations that have more than 10 shareholders. A recent commentator has argued that this distinction is illogical because there is often no market for a private corporation’s shares, regardless of whether the corporation has 10, 11, or 50 shareholders.38 Instead, as the commentator argues, the appropriate distinction should only be whether there is an established market for a corporation’s shares.39 If there is an established market, there is no need for an appraisal remedy; if there is no established market, then discounts for lack of control or lack of marketability should not apply.40 The courts have not yet addressed the issue.
Because it creates a two-tier scheme regarding the determination of fair value, §607.1301(4) also creates the potential for abuse. For instance, in a closely held corporation that has less than 10 shareholders, the corporation or controlling shareholder, to drive down the buyout price of a dissenting shareholder’s shares, could simply add a few nominal shareholders, thereby taking the corporation over the threshold 10 shareholders number, which would then allow a significant reduction in the dissenting shareholder’s buyout price.
Applicability Beyond Florida’s Appraisal Statutes — Another significant issue is that §607.1301 provides that its definition of fair value applies only to §§607.1302 through 607.1333 — the sections that address the right of a shareholder to an appraisal. Thus, arguably, §607.1301’s definition of fair value is not applicable to any other statutory provisions providing for fair value, including Florida’s dissolution statutes.
Section 607.1301(c) was only recently amended,41 and there are no decisions in Florida addressing either of these issues.
No Statutory Definition of Fair Value — Despite the requirement of a fair value determination, §607.1436 does not define fair value47 and does not address whether discounts for lack of control or lack of marketability are to be applied in determining fair value.48 As addressed above, the definition of fair value under §607.1301, which excludes discounts for lack of control or lack of marketability, arguably does not apply to §607.1436 because §607.1301 does not include §607.1436 as one of the sections to which its fair value definition applies.49 As a result, it is unclear whether fair value pursuant to §607.1436 should be determined factoring in discounts for lack of marketability or lack of control.
Because the use of discounts for lack of control and lack of marketability can have a significant effect on the fair value buy-out price of a minority ownership interest, any attorney confronted with an appraisal or dissolution case (or the choice of bringing either action) should be aware of the impact of using those discounts in determining fair value and the potential arguments for why such discounts should or should not be applied.
A majority shareholder or a corporation electing to purchase a minority interest owner’s shares will be able to purchase the shares at a lower price if minority status and marketability discounts are used in conducting the valuation. When a dissolution action is at issue, the majority shareholder can argue in favor of discounts by relying on the Third District Court of Appeal’s decision in Munshower as authority that discounts should be applied to the valuation.55 The corporation or majority shareholder can also point to the fact that §607.1301 was amended to include a definition of “fair value” that excludes discounting, and that §607.1301 specifically provides that the definition is applicable to §§607.1302 through 607.1333.56 The legislature, when amending the definition of “fair value” to exclude discounting, could have included the dissolution statute among the statutes to which the definition applied, but did not. This decision to exclude the dissolution statute suggests that the legislature intended “fair value” under the dissolution statutes to have a different meaning than it does under the appraisal statutes.
In addition, there is no logical basis for treating fair value differently under §670.1301 than under §670.1436. The same rationale for excluding discounts under §607.1301 applies to excluding discounts with respect to dissolution actions under §607.1436. In a sale under the dissolution statute, just as in a sale under the appraisal statutes, the sale to the majority consolidates or increases the interests of those already in control. The purchaser, therefore, is not buying noncontrolling shares, the value of which would be less than controlling shares and, thus, would need to be discounted. In addition, the minority is no more a willing seller under the dissolution statute than under the appraisal statute. The minority has unwillingly surrendered its shares in a forced buyout pursuant to the dissolution statute just as it does under the appraisal statutes.
Moreover, the very nature of a dissolution action argues against the use of discounts for lack of control and lack of marketability when a shareholder petitions to dissolve a company and the corporation or other shareholders elect to purchase the petitioning shareholder’s interest. When a corporation is dissolved, shares of the same class are treated equally, with no distinction between majority and minority shares.58 Thus, a minority shareholder who obtains dissolution of the corporation due to deadlock or majority wrongdoing would be entitled to the same amount per share as the majority upon distribution of the dissolution proceeds.59 Consequently, if the majority elects to purchase the minority’s shares to avoid dissolution, the minority shareholder should not be left in a worse position (by virtue of applying discounts to reduce the value of the shares) than if the corporation had been dissolved and the proceeds distributed pro rata. As a result, for the same reason discounting should not be considered in an appraisal valuation, it should not be considered in a dissolution action valuation pursuant to §670.1436.
The use of discounts for lack of control and lack of marketability can have a significant impact on the buy-out price of a minority shareholder’s interest in a closely held corporation. Thus, it is important for an attorney dealing with an appraisal or dissolution case (or the decision to bring such an action) to have an understanding of this issue and the relevant Florida statutes and decisions, as well as the significant decisions from around the country, in order to be prepared to address the potential arguments regarding the use of the two discounts.

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