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<\/a>Wrongful Conduct by the Controlling Shareholder<\/strong><\/p>\nMr. Monnin-Browder explains that, \u201cThere are a number of ways that majority shareholders can usurp the interest of the minority.\u00a0 For instance, the terms \u2018freeze-out\u2019 and \u2018squeezeout\u2019 are often used, synonymously, to describe a situation where the majority uses its controlling position to exclude a minority shareholder from participation in the business.\u201d<\/p>\n
By the wrongful acts of the majority, \u201cminority shareholders can be prevented from gaining a return if they are fired, which a majority-controlled board can freely do . . . One common form of the squeeze-out occurs when a majority shareholder prevents a minority from receiving a return on her investment, and then attempts to buy the minority\u2019s shares when the value of the stock is compromised . . . The lack of a ready market for shares in a close corporation prevents a minority shareholder from selling shares as a means of escape.\u201d<\/p>\n
The Remedy<\/strong><\/p>\n\u201cOnce a court determines that majority shareholders have breached their fiduciary duty, the court is forced to find an appropriate remedy.\u00a0 Remedies for breach of fiduciary duty are equitable in nature . . . Common remedies for breach of fiduciary duty in a close corporation include dissolution, reversal of an offending decision, or buyout of the minority shareholder\u2019s shares by the corporation.\u201d<\/p>\n
However, \u201cthe most common remedy employed by courts today [ ] is buyout . . . Courts view buyout as a less harsh remedy than dissolution because it compensates the aggrieved shareholder, while allowing the corporate entity to survive.\u00a0 It is also often the most practical remedy.\u00a0 A court order to rehire or return the shares sold, for example, may not be a viable option.\u201d<\/p>\n
Marketability Discount<\/strong><\/p>\nBut to do so, the court must establish the value of the victim\u2019s interest in the entity.\u00a0 \u201cValuing a share in a close corporation usually begins with an analysis of the value of the corporation as a whole.\u00a0 To do this, courts often look to three major approaches: market value, net asset value, and earnings value.\u00a0 These factors are weighed differently, according to the specific factual circumstances.”<\/p>\n
Two general forms of discount are commonly applied in valuing interests in a closely-held corporation.\u00a0 The first is a marketability discount.\u00a0 As explained, \u201cThe marketability discount compensates for the absence of a market for shares of a close corporation.\u00a0 Investors will pay less for these shares, compared to more liquid shares, because they prefer shares that are easily sold and\/or transferred.\u00a0 Marketability discounts can be substantial, averaging from approximately 35 to 50% of the value of the stock. \u201c<\/p>\n
Minority Interest Discount<\/strong><\/p>\nThe second principal discount is the minority interest discount.\u00a0 \u201cThe minority discount compensates for the fact that the shares constitute a minority interest in the corporation that is not controlling, so long as there is no shareholder agreement to the contrary.\u00a0 Investors prefer stock that has the accompanying voting power to influence the operations of the corporation.\u00a0 Therefore, investors will pay less for those shares than shares in the majority interest.\u00a0 Like marketability discounts, minority discounts can have a substantial impact on the value of the shares, reducing the price as much as 33%.\u201d<\/p>\n
Thus, the combined discount based on minority interest and lack of marketability can exceed 50% of the value of the stock.\u00a0 Such discounts are commonly used in the estate planning context.<\/p>\n
Should a Court Apply the Discount?<\/strong><\/p>\nThe judicial trend is not to apply the discount in the context of a forced buyout of a minority interest.\u00a0 \u201cSome courts state that the context and purpose of the legislation suggest that no discount should apply.\u00a0 In Swope v. Siegel Robert, Inc.<\/em>, for example, the Eighth Circuit Court of Appeals applied Missouri law to reject the application of both a marketability and minority discount.\u201d<\/p>\nIn this way, \u201cThe typical freeze-out situation arises when a minority shareholder has no other choice but to sell their shares to the majority shareholder at less than their fair value.\u00a0 From a policy standpoint, it would be illogical to discount the value of the shares because doing so would reward an oppressive majority shareholder and injure the party who is relatively blameless.\u201d<\/p>\n
That analysis is sound, because the \u201cbuyout does not occur on an open market.\u00a0 Therefore, courts argue that they should not apply discounts that account for irrelevant market conditions.\u00a0 As Professor Moll writes, \u2018the forced-sale nature of buyout proceeding and the identity of the purchasers involved weigh heavily against the application of discounts.\u2019\u201d
\n
\nAn Extreme Result<\/strong><\/p>\nOne court went the opposite direction.\u00a0 \u201cRather than force the oppressor shareholder to purchase the oppressed shareholder\u2019s stock, the trial court chose a different remedy, holding that the oppressed shareholder was entitled to buyout the shares of the oppressor.\u00a0 The court [then] applied discounts.\u201d\u00a0 Balsamides v. Protameen Chemicals, Inc.<\/em>, 734 A.2d 721, 734 (N.J. 1999).<\/p>\nWe could certainly ask – Isn\u2019t sauce for the goose also sauce for the gander?\u00a0 The court put a real hurt to the wrongdoer by forcing a sale and also applying\u00a0 a judicially-created discount.<\/p>\n
A Point of Dispute<\/strong><\/p>\nMr. Monnin-Browder posits that \u201ca heightened fiduciary duty exists among shareholders of a close corporation,\u201d explaining that, \u201cIn the wake of the Massachusetts ruling, courts in many other states adopted the fiduciary duty rationale of Donahue<\/em>, thereby recognizing heightened fiduciary duties among shareholders in close corporations and creating a common-law cause of action.\u201d<\/p>\nThat is not a careful use of terms.\u00a0 Fiduciary duties are, by definition, \u201cheightened duties,\u201d filling gaps in the relationship between the parties.\u00a0 It does not make a great deal of sense to speak in terms of a \u201cheightened fiduciary duty.\u201d<\/p>\n
William S. Monnin-Browder, Are Discounts Appropriate?: Valuing Shares in Close Corporations for the Purpose of Remedying Breach of Fiduciary Duty under Massachusetts Law<\/strong>, in 40 Suffolk Univ. Law Review, Vol. 3<\/em> (2007) page 723.<\/p>\n","protected":false},"excerpt":{"rendered":"The issue this week concerns the appropriate remedy when controlling shareholder(s) breach the fiduciary duties they owe to the other shareholders.\u00a0 An article by attorney William S. Monnin-Browder discusses whether courts should apply a minority interest discount in a forced sale. Background As explained in many published opinions, \u201cstockholders in the close corporation owe one […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[4,7],"tags":[],"class_list":["post-242","post","type-post","status-publish","format-standard","hentry","category-corporations","category-law-reviews"],"_links":{"self":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/242"}],"collection":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=242"}],"version-history":[{"count":0,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=\/wp\/v2\/posts\/242\/revisions"}],"wp:attachment":[{"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=242"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=242"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/fresnolawyerblog.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=242"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}
![\"\"](\"http:\/\/fresnolawyerblog.com\/wp-content\/uploads\/2010\/03\/San-Francisco1.jpg\" "\\"San")
<\/a>Wrongful Conduct by the Controlling Shareholder<\/strong><\/p>\n