Opinion ID: 2630611
Heading Depth: 3
Heading Rank: 4

Heading: Marketability Discount and Control Premium

Text: ¶ 44 Given the strong probability that the per share fair value derived by the method outlined above will be greater than 4.528 cents, we next address the issue of discounts. Norman's report states: All other things being equal, an interest in a business is worth more if it is readily marketable or, conversely, worth less if it is not.... There is not a ready market for [Zinetics'] stock. In our opinion, the fair value of Zinetics' stock would include a marketability discount. In the values that reflect the non-marketable nature of Zinetics' stock, we have applied a 31.93% discount. Norman further stated that [t]he market value of a security is impacted by the elements of control o[r] lack of control inherent in the block of stock being valued. Noting that [i]n this valuation, the 18.56% block of stock is clearly a minority position, Norman confirmed that [w]e have applied a 36.81% control premium when the value is identified to reflect a control position value. ¶ 45 Minority shares and shares considered non-marketable are subject in some contexts to discounts that place their value below a simple percentage of the total value of the corporation. Likewise, majority shares sometimes benefit from a control premium. However, a majority of courts that have addressed the issue of minority discounts has held that discounts at the shareholder level are inherently unfair to the minority shareholder who did not pick the timing of the transaction and is not in the position of a willing seller. Hansen, 957 P.2d at 41. Moreover, some courts have reasoned that valuing the shares at less than their proportionate share of the corporation's fair value produces a transfer of wealth from the minority shareholder to the shareholders in control. Id. As the Woodward court observed, contrasting dissenters' valuation with tax valuation, the statute is designed to protect the minority from the very considerations which resulted in a discounted value in the tax cases. By statute the minority is guaranteed the `real' value of its stock. 133 N.W.2d at 44. The Eighth Circuit Court of Appeals observed in Swope that [t]he American Law Institute explicitly confirms the interpretation of fair value as the proportionate share of the value of 100% of the equity, by entitling a dissenting shareholder to a `proportionate interest in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.' 243 F.3d at 492 (quoting American Law Institute, Standards for Determining Fair Value, Principles of Corporate Governance: Analysis and Recommendations (ALI) § 7.22(a) (1994)); see also Utah Code Ann. § 16-10a-301(4). The Swope court explained that `fair value' in minority stock appraisal cases is not equivalent to `fair market value.' Dissenting shareholders, by nature, do not replicate the willing and ready buyers of the open market. Rather, they are unwilling sellers with no bargaining power. 243 F.3d at 492. ¶ 46 We agree and note that this is especially true of dissenting shareholders in a squeeze out merger. See Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1145 (Del.1989); Security State Bank v. Ziegeldorf, 554 N.W.2d 884, 890 (Iowa 1996); In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997, 1002-05 (Me.1989); Rigel Corp. v. Cutchall, 245 Neb. 118, 511 N.W.2d 519, 525-26 (1994). Therefore, the court should not employ discounts in its valuation of the Minority's shares of Zinetics.