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Minority Shareholder Rights
– The Challenge to Selling Shares and Solutions to Receiving Fair Value
While close corporations begin as friendly ventures, the balance of power often
lends itself to oppression of those shareholders who do not control the
corporation and usually own only a small percentage of shares, i.e. the minority
shareholders.When minority shareholders in a large publicly traded
corporation become dissatisfied with corporate operations, they can sell their
shares and thus discontinue their involvement with the corporation. Minority
shareholders in the closely held corporation, on the other hand, often cannot
easily sell their shares.
Although Minority shareholders in any corporation are in a difficult position
due to their lack of control; the Revised Model Business Corporation Act,
adopted by every state allows shareholders who dissent from certain fundamental
corporate transactions (such as mergers, consolidations and asset transfers) to
compel the corporation to purchase their shares.The dissenters remedy,
“shareholders appraisal right”, is a method a minority shareholder may use to
mitigate an injustice caused by a fundamental corporate change. This statutory
remedy provides shareholders with the right to dissent from certain corporate
activity and to obtain payment for their shares directly from the corporation.
When the corporation receives a demand from the
dissenting shareholder, the corporation must pay the dissenter shareholder the
amount the corporation considers to be the fair value of the shares as soon as
the shareholder surrenders their shares. The
corporation is required to provide the shareholder the financial statements and
an explanation of how the corporation ascertained the fair value.
If the dissenting shareholder is dissatisfied
with the corporations’ computation of fair value, a judicial proceeding
commences (“judicial appraisal”) to determine the fair value of the
shares. The courts generally appoint a qualified appraiser to ascertain the
fair value.
The dissenting shareholder has the best of both
worlds; they get their money immediately and if they insist
on a judicial appraisal, the cost is borne by the corporation.
Case law works in the favor of the shareholder
Most states define fair value available in appraisal to exclude any appreciation
or depreciation in stock value that is attributable to the transaction. This
definition makes sense when you consider that the majority wants to change the
direction of the business, the minority objects and corporate law provides the
dissenter with a chance to exit. If the minority chooses not to go with the new
enterprise in the new direction, the minority has no claim to value brought by
the transaction.Most states have looked to Delaware
Courts for guidance is defining “fair value”. The Delaware Supreme court defined
fair value as “the amount the stockholder is entitled to be paid for that which
has been taken from him, that is, his
proportionate interest in a going concern.”
In the appraisal context, a clear majority of
courts have ruled that it would be inappropriate to apply a minority discount. Modern
courts recognize that only by excluding a minority interest discount can
minority shareholders be assured of receiving their proportionate fair value. |
