ChapterPDF Available

Fair Value in Shareholder Dissent and Oppression

Authors:
  • Sutter Securities Financial Services, San Francisco

Abstract

State courts employ fair value as the predominant standard to determine the value of minority shares in both appraisal (also known as dissent) and oppression cases. When the courts determine the minority's share price in an appraisal or order the buy-out of an oppressed minority shareholder, the price of the award or buyout is critical for both parties and sets the "fair value" of the minority's shares. Although appraisal and oppression statutes in most states expressly or effectively stipulate that the minority's shares are to be valued at "fair value," there remains considerable confusion about what "fair value" means. To understand fair value as a standard of measurement, it must be considered in contrast to the standards of value called fair market value and third-party sale value, as will be discussed in this Chapter. Both appraisal and oppression cases are governed by state law. That state law includes corporate law statutes, the judicial interpretations of those statutes, and the courts’ holdings under their equitable authority even when the state lacks corresponding statutes. Although fair value is now the state-mandated or accepted standard for judicial appraisal and oppression valuations in almost all states, there are differing interpretations of its meaning and measurement that have evolved through legislative changes and judicial interpretation. . . . . . Note: Updated in 2017 articles - “Statutory Fair Value in Dissenting Shareholder Cases: Part I” and “... Part II”
'3
tain Ualue in Shaneholden
Dissent and Oppression
Êil[Gnt E. Matthews and Michelle Pattenson
Wiley Finance
Standards
Value
Theory ønd Applications
Second Edition
Iay E. Fishman, Shannon P. Pratt'
and Witliam I. Morrison
WILEY
CHIPTM S
FaF Ualue ln Shanelmlden lllssent anl llppnessl0n
Gilbert E. Matthews ønd Michelle Patterson
Fair Value as the Standard of Value in Dissent,
Oppression, and Entire Fairness Cases
The Ãþpraisal Remedy for Dissenting Shareholders
. Histãry and Overview of the Appraisal Remedy
Appraisal Rights TodaY
Appraisal Rights in Publicly Traded Corporations:
The Market Exception
Fair Value Can Be Less Than Arms'-Length Price
The Oppression Remedy
Deveiopment of the Oppression Remedy
Context of Oppression RemedY
Dissolution as a Remedy for Oppression
Shareholder Buyouts as an Alternative Remedy
Examples of Oppression
Fair Value Is the Standard of Value in Appraisal and
Oppression in Almost All States
Fair Value as Defined by Various Authorities and Statutes
The Valuation Date-Before the Effectuation of the
Corporate Action to'SØhich the Shareholder Objects
Valuation Date in Appraisal Cases
Valuation Date in Oppression Cases
Customäry and Current Valuation Techniques
Fair Value in Delaware
Delaware Fair Value Standards
Entire Fairness in Del¿ware
Components of Fair Value in Delaware
Ohio's Unique and Unfavorable Standard of
Value in Appraisals
Fair Value Normally Excludes Discounts
' and Premiums
Most States Now Reject Minoriry and
Marketability Discounts
Levels of Value
Discounts- at the Shareholder Level
The "Implicit Minority Discounr"
No Premiums Are Applicable to DCF Values
Discounts at the Corporate Level
Control Premiums at the Corporate Level
Some States Permit Considering Extraordinary
Circumstances in Determining Vhether to
8S
89
94
94
97
99
702
106
706
ß7
110
110
1.76
12L
1,21.
125
725
1,26
130
1,39
739
740
144
155
757
L57
159
160
163
167
L68
169
Apply Discounfs 17L
Court Decisions Have Moved toward Rejecting Discounts L7Z
Equitable Adjustments to Fair Value 188
Consideration of rüTrongdoing in Calculating Fair Value 188
Damage Claims 793
Summary 194
Fain Ualue in Shaneho
Dissent and 0ppnes
I
lden
sion
Silbent E. Mattnews and Michelle Patt8r.son
tAtR uAtuE As rHE sT[tlDARIt 0t uAtuE llll lllssEN[
(|PPRES$IÍ|N, AND EUTIRE TAIRNE$S CASE$
State courts employ fair uølue as the predominant standard to determine
the value of minority shares in both appraisal (also known as dissent)r and
oppression cases.'When the courts determine the minority's share price in
an appraisal or order the buy out of an oppressed minority shareholder,
the price of the award or buyout is critical for both parties and sets the
"fair value" of the minority's shares.2 Although appraisal and oppression
statutes in most states expressly or effectively stipulate that the minority's
shares are to be valued at "fair value," there remains considerable confu-
sion about what "fair value" means. To understand fair value as a standard
of measurement, it must be considered in contrast to the standards of value
called fair marþet ualue and third-party sale ualue, as will be discussed in
this Chapter.
The authors thank Michael A. Graham, Ph.D., for his assistance in editing this
chapter.
rSince shareholders who dissent from a transaction are entitled ro appraisal oftheir
shares, the terms dissenters'rights and appraisal rights arc interchangeable.
2 Douglas K. Moll, "Shareholder Oppression and 'Fair Value': Of Discounts,
Dates, and Dastardly Deeds in the Close Corporation," 54 Duþe L. l.293,31,0
(2004).In this chapter, we extensively cite Professor Moll's expert writings in
the a¡ea of oppression and fai¡ value. For a fuller discussion of these standards,
see the section below entitled "Fair Value as Defined by Various Authorities and
Statutes."
89
90 STANDARDS OF VALUE
Both appraisal and oppression cases are governed by state law That state
law includes corporate law statutes, the judicial interpretations ofthose statutes'
and the courts'holdings under their equitable authoriry even when the state
lacks corresponding statutes.3 Although fair value is now the state-mandated or
accepted standard for judicial appraisal and oppression valuations in almost all
states, there are differing interpretations of its meaning and measurement that
have evolved through legislative changes and judicial interpretation.
The model statutes proposed by the American Bar Association (ABA)
and the American Law Institute (ALI), together with Delaware appraisal law,
have greatly influenced a majority of state stâtutes. The ABA and the ALI
have developed definitions of fair value that are set forth in the ABAs Re-
uised Model Business Corþorøtion Act (RMBCA)a and the ALI's Principles of
Corþorøte Gouernance.s Although statutes and legal organizations have con-
tributed to the development of the fair value standard, the Delaware courts'
decisions are central to its definition.
Delaware's appraisal statute explicitly mandates fair value as the meâs-
ure of value, and the l)elaware Supreme Court clarified its meaning in ?l-
Continental u. Battyeí in 1950. Fair uølue was defined as the value that had
been taken from the dissenting shareholder:
The basic concept of value under the appraisal statute is that the
stockholder is entitled to be paid for that which has been taken
from him, uiz., his proportionate interest in a going concern. By
value of the stockholder's proportionate interest in the corporate
enterprise is meant the true or intrinsic value of his stock which
has been taken by the merger. In determining what figure represents
this true or intrinsic value, the appraiser and the coufts must take
into consideration all factors and elements which reasonably might
cnter into fixing the value.T
This concept of value has since been cited in numerous appraisal and
oppression cases as the basic standard, In recent years, most (but not all)
3 Id.
aThe ABA's Model Business Corporation Act is a model code designed for use by
state legislatures in revising and updating their corporation statutes. It was initially
published by the ABA in 1950, and revised in 1971,1984, and 1999. There were
amendments with respect to appraisals in 1969 and 1978.
5 "The Ame¡ican Law Institute . drafts, discusses, revises, and publishes Re-
statements of the Law, model statutes, and principles of law." wwwali.org/index.
cfm ?fuseaction=about.overview.
6TrïContinental u. Battye,74 A.2d 71 (Del. 1950).
7 Tri - Continental, 7 4 A.2ð, 7 1., 7 2.
Fair Value in Shareholder Dissent and 0ppression
jurisdictions have accepted the position that øhat has been taken from the
shareholder is a þro ratø share of the value of the company as â whole.
It is helpful to understand the different legal actions of appraisal,
opprcssion, and brcach fiduciary duty in which fair value is uscd as thc
standard of valuation. The appraisal action is a "limited legislative remedy
which is intended to provide minority shareholders who dissent from a
merger asserting the inadequacy of the [consideration], with an independ-
ent judicial determination of the fair value of their shares."8 Dissentìng
minority shareholders may petition for appraisal under a stâte statute'
commonly known as øppraisal or dissenters'rights' Shareholders custom-
arily have appraisal rights when they are involuntarily cashed out in a
merger or consolidation, but some states also permit dissenters to seek
appraisal in other circumstances, such as a sale of assets, recapitalization,
stock-for-stock mergers, amendments to articles of incorporation, or other
major changes to the nature of their investment. In an appraisal action, the
exclusive remedy is cash.
Although appraisal or dissenters' rights commonly apply to close cor-
porations, public companies may be sublect to appraisal actions under some
of the above circumstances. A common misperception exists that publicly
held shares are not entitled to appraisal rights because of the existence in
many states' appraisal statutes of a provision called the "market exception-"
This is discussed below in the section entitled "Appraisal Rights in Publicly
Tiaded Corporations: The Market Exception."
Oppression actions arise from shareholders of close corporations who
assert that they have been treated unfairly or prejudicially by those in
control and seek dissolution of the company or a buyout of their shares'
Oppression remedies are available to these shareholders when they es-
tablish that the majority has excluded them from their proper share of
the benefits accruing from the enterprise.e Oppression often involves egre-
gious majority action targeting individual minority shareholders. It can
include termination of compensation, employment' or dividends, andlot a
siphoning of corporate assets for the benefit of the majority at the expense
of the minority.
Oppression actions, like appraisal actions, are primarily based on state
statutes. All but nine states have enacted oppression-triggered dissolution
8 Alabama By-Products Corp. u. Neal, 588 A.2d 255,256 (Del. 1'991').
e"The terms'majority'and'minority' . . . distinguish those shareholders who pos-
sess the actual power to control the operations of the 6rm from those who do not'"
J.A.C. Hetherington ðc Michael P. Doole¡ llliquidity and Exploitation: A Proposed
Statutory Solution to tbe Remaining Close Corporation Problem,63 Va. L. Reu' I,
5,n.7 (1977).
g1
92 STANDARDS OF VALUE
statutes under which shareholders may petition for involuntary dissolution.
Over time, alternative remedies to involuntary dissolution have arisen, and
involuntary dissolution has come to be much less frequent. In fact, "(oppres-
sion' has evolved from a statutory ground for involuntary dissolution to a
statutory ground for a wide variety of relief."l0
In many states lacking oppression-triggered dissolution statutes' the
courts hâve created another way for oppressed minority shareholders to
seek redress. These courts have emphasized that a fiduciary duty of good
faith and loyalty exists between the majority and the minority shareholders;
other courrs have even extended fiduciary duty obligations to exist between
one shareholder and another. By so doing, these courts have permitted the
"oppressed" shareholder to sue, asserting breach of fiduciary dury. The fail-
ure of the control shareholders to fulfill their fiduciary duties to the minority
can be deemed to be oppression.
In breach of fiduciary dury cases, the courts grânt many of the same
remedies, such as dissolution and compulsory buyouts, which are provided
for in the state oppresion statutes. The court employs the same fair value
standard used in oppression and appraisal actions to make its judicial deter-
mination of minority share value. Professor Douglas Moll writes:
The development of the statutory and fiduciary duty actions
reflect[s] "the same underlying concerns for the position of minor-
ity shareholders, particulârly in close corporations after harmony
no longer reigns." Because of the similarities between the two re-
medial schemes, it has been suggested that "it makes sense to think
of them as two manifestations of a minority shareholder's cause of
action for oppression." In the close corporation context' therefore,
it is sensible to view the parallel development of the statutory action
and the fiduciary duty action as two sides of the same coin-i.e., the
shareholder's cause of action for oppression'l1
Delaware provides an example of courts acting under their own eq-
uitable âuthority in states where there is no specific oppression statute.l2
In Delaware, when the court believes there is a conflict of interest or
10Moll, "Minority Oppression and the Limited Liability Company: Learning (or
Not) from Close Corporation Histor¡" 54 Waþe Forest L. Reu' 883,894 (2005).
11 Id., at 895, quoting Robert B. Thompson, "The Shareholder's Cause of Action for
Oppression," 48 Bus. Lau.,.699,739 (19931,
12 Delaware is preeminent in establishing standards for corporate law because a ma-
jority oflarge publicly traded companies are incorporated in Delaware and because
of Delaware's well-developed body of law regarding corporations.
Fair Value in Shareholder Dissent and 0ppression
oppressive behavior, it will allow a breach of fiduciary duty case for the
minority shareholder. If the case is designated as one of "entire fairness,"
the Delaware courts will use the same standard of fairness, fair value,
which its uses in Delaware appraisal cases to set the price for the minor-
ity's shares.
Importantl¡ defining fair value as a proportionate share of a company's
value, as Delaware did in Trì-Continental, differentiates it from the other
two standards of value-fair market ualue and third-party sale ualue.l3 lt
has been argued that the courts have made the best choice by selecting fair
vaiue as the appropriate standard and by reiecting fair market value and
third-party sale value.la \(/hen fair market value is used in tax cases, for
example, substantial discounts for the minority's lack of control and lack of
marketability are often applied to the value of the minority shares. Courts
have noted that a fair market value valuation based on such discounts would
be less than the value of the minority shareholders' proportionate interest
in the company.'llith a fair market valuation, the controller (or majority)
would reap a windfall at the expense of the minority. Consequentl¡ judicial
interpretations and statutes in many states now reject minority or market-
ability discounts in the determination of fair value. However, a few states
still allow the discounts either by precedent, at a court's discretion, or in
special circumstances.l5
On the other hand, if the courts used the standard of third-party sale
value, those shares would receive a value, a premium, that would be higher
than fair value. An augmented value would result because the third-party
sale price could include additional elements of value resulting from the
transâction, such as financial control and synergistic values. Minority share-
holders would not be entitled to those additional values. Most appraisal
statutes expressly instruct the judiciary to exclude from their determination
of fair value the increases in value that resuited from the synergies accom-
plished by the transaction.
In order to further understand the issues and complexity surrounding
fair value in appraisal and oppression cases, we will examine what elements
of value are addressed by the courts in their determination of fair value.'We
look, as well, at how various courts address current valuation concepts and
techniques.
13 See "Most States Now Reject Minority and Marketability Discounts" below.
1a Lawrence A. Hamermesh and Michael L. Wachter, "Rationalizing Appraisal Stan-
dards in Compulsory Buyouts,"50 B.C. L. Reu.1'021' (2009). In this chapter, we ex-
tensively cite the expert writings of Professors Hamermesh and !üachter in the area
of appraisal and fair value.
15 See "Discounts at the Shareholder Level" below.
93
94 STANDARDS OF VALUE
THE APPRAISAT REMEIIY FflR IIISSENTING SHABEHOTOERS
H¡$tony and 0verv¡ew 0f üe Anpna¡sal Remedy
In the early nineteenth century, common law held that extraordinary cor-
porate decisions wefe to be made unanimousl¡ meaning 100% shareholder
ãpproval was required. The prevailing perspective on business was that the
investment made by the minority shareholder contractually connected the
corporation to the shareholder, and that shareholders should not be required
to ðomply with fundamental changes they did not support. Therefore, any
single shareholder could utilize his or her common law veto in order to pre-
vent corpofate action.16
This perspective could have a panlyzing effect on the decision-making
pfocess in a corporarion. A minority shareholder could impulsively or arbi-
trarily threaten to reiect a corporate action solely to collect a premium on an
initial investment.rT The advancing industrial revolution brought about an
increasingly complex economy based on the nation's growing institutions
and infrastructure, including the development of the transcontinental rail-
roads. With these changes in commerce and 6nance, the corporations and
the courts came to realize that a unanimify requirement was not efÊcient for
forward movement and growth.l8
ln 1,892, the Illinois Supreme Court turned away from the unanimity
view of corporate management and affirmed maiority rule and the role of
the minority shareholder in Wheeler u. Pullman Iron 6 Steel Co-'e The
court decided that the fundamental law of cofporations should be that
the majority should control policy. It revised the concept of the minor-
ity shareholder's investment to mean that the minority shareholder, by
investing in the corporation, agrees to abide by the decisions sanctioned
16 Michael Aiken, "A Minority Shareholder's Rights in Dissension: How Does
Delaware Do It and !ühat Can Louisiana Learn?" 50 Loyola L- Reu. 231', 235
(Spring 2004).
liJohn D. Emor¡ "The Role of Discounts in Determining Fair Value under'Wisconsin's
Dissenter's Rights Statutes: The Case for Discounts," 1995 Vlisc' L. Reu. 1'1'55,'1163
(19es).
ls Mary Siegel, "Back to the Futu¡e: Appraisal Rights in the Twenty-First Century,"
32 Haruar d J. of Legislation 7 9, 87 (Ylinter 1'99 5).
ls Wheeler u. Pullman lron ds Steel Co.,32 N.E. 420,423 (Ill. 1892): "Every one
purchasing or subscribing for stock in a corporation impliedly âglees that he will be
Lo,rnd by rhe a.1s and pioceedings done or sâncrioned by a majority of thé share-
holders, or by the agenrs of rhe corporation [directorsl duly chosen by such majorit¡
within the scope of the powers conferred by the charter."
Fair Value in Shareholder Dissent and 0ppression
by the majority or the board of directors elected by the maiority of the
shareholders.2o
Following the Wheeler decision, other state courts, recognizing the
paralyzing effect of unanimit¡ generally became more sympathetic toward
majority rule. Initiall¡ majority rule was in place only in cases of insolvenc¡
but later it was considered controlling in mergers, asset sales, and similar
transactions, as long as the majority's decision was in the best interests of
the corporation.2l As a result, minority shareholders who disagreed with
the actions of the majority were left without the power to challenge such
corporate decisions or, if the shares were not publiciy traded, the ability to
exit the corporation. This in turn led to the development of appraisai rights
for such minority shareholders.
An 1875 Ohio case was earlier evidence of the emergence of appraisal
rights. In its decision, the Ohio Supreme Court stated:
[O]ur legislature has seen proper to provide that stockholders in a
railroad corporation shall not be carried into a new or consolidated
company against their consent. From this provision it is plain that
a stockholder not only can not be compelled to become a member
of the consolidated corporation, but the consolidation can not pro-
ceed until he is paid the fair value of his stock. It is impossible to
force upon him the liabilities and responsibilities attaching to the
new corporation; it is impossible to change the character of the en-
terprise in which he agreed to embark his mone¡ until he has been
paid the fair value of his investment.22
Before the appearance of appraisal statutes, minority shareholders had
to petition the courts to stop the corporation from pursuing a course of
action until their desire to exit was satisfied. They had to sue for injunctive
relief and for the cash value of their shares. The courts would award the
fair value in cash to enable shareholders to escape forced membership in
a new corporation.23 Legislatures began to enact appraisal rights statutes
that allowed the minority to dissent from a corporate transaction and re-
ceive a judicial determination of the fair value of their shares in the original
20 Charles !Ø. Murdock, "The Evolution of Effective Remedies for Minority Share-
holders and Its Impact upon Valuation of Minoriry Shares," 65 Notre Dame L, Reu.
425,429 (1.990).
21 Siegel, "Back to the Future," at 88.
22 Mansfield, Coldwater and Lake Michigan Railroad Co. u. Stout,26 Ohlo 5t.241',
1875 Ohio LEXIS 397 (Ohio 1875).
23 Siegel, "Back to the Future," at 89.
95
96 STANDARDS OF VALUE
corporation in cash.2a The statutes prevented expensive and drawn-out in-
junction procedures and allowed corporations, during the dispute, to con-
tinue conducting business as usual.
Thc U.S. Supreme Court clarified thc purpose of disscntcrs' rights
statutes in its 1941 Voeller decision.2s Justice Black cited a Securities and
Exchange Commission (SEC) report describing the history and necessity of
establishing malority rule and a remedy for minority shareholders:
At common law, unanimous shareholder consent was a prerequisite
to fundamental changes in the corporation. This made it possible
for an arbitrary minority to establish a nuisance value for its shares
by refusing to cooperate. To address this situation, legislatures au-
thorized corporations to make changes by a majority vote. This,
however, opened the door to victimization of the minority. To solve
the dilemma, statutes permitting a dissenting minority to recover
the appraised value of its shares were widely adopted.26
ln 1.927, the Uniform Business Corporation Act was introduced by the
Commissioners for Uniform State Laws.27 It was adopted only by Louisiana,
Iùflashington, and Kentuck¡ likely because most stâtes were not comfortable
with the implied inflexibility of uniform laws and wanted to reserve their
own legislative rights.28 Over the course of the first half of the twentieth
century, nearly all states adopted an appraisal statute.2e
2a Barry M. \lertheimer, "The Shareholders'Appraisal Remedy and How Courts De-
termine Fair Value," 47 Duþ.e L. J. 61.3,61,9 (1998).
2s Voelleru.Neilston Waráhouse Co.,311. U.S. 531 (194i).
26 ld., at 536,n. 6, citing SEC Report on the 'Work of Protectiue and Reorganization
Committees, Part VII ('Washington, D.C.: U.S. Government Printing Office, 1938),
pp. 557,590.
27The National Confe¡ence of Commissioners on Uniform State Laws was formed
in 1.892 for the purpose of providing states with nonpartisan, well-conceived, and
well-drafted legislation that brings clariry and stability to critical areas of the law.
28 Aiken, at 237.
2e Robert B. Thompson, "Exit, Liquidity, and Majority Rule: Appraisal's Role in
Corporate Law," 84 Georgetown L. Reu. L (1995), Appendix Table 2: New York
1890; Maine 1891; Kentucky 1,893; New Jersey 1896; Delaware 1899; Connecticut
and Pennsylvania 1.901,;Alabama, Massachusetts, Nevada, and Virginia 1903; Mon-
tana and New Mexico 1905; Ohio 1906; Tênnessee 1907; Maryland 1908; Vermont
1915; illinois and New Hampshire 1919; Rhode Island 1920; Arkansas, Florida,
North Carolina, and South Carolina 1925; Minnesota and Oregon 1,927; Louisi-
ana L928; Idaho and Indiana L929; California, District of Columbia, and Michigan
1931; .Sfashington 1933; Hawaii 1937; Georgia 1938; Arizona and Kansas 1939;
Fair Vatue in Shareholder Dissent and 0ppression
colorado and Nebraska 1941; Missouri 1,943; Iowa, oklahoma, 'wisconsin, and
\üyoming 1947; Mississippi 1954;South Dakota and Texas 1955; Alaska and North
Dakota 19 57 ; IJtah 1 9 6 1 ;'Síest Vir ginia 1'97 4.
30Thompson, at 3. See discussion in Thompson at 3-5'
31 Id., at 3-4.
97
lppnaisal Rights ÏodaY
Currentl¡ the ABA and the ALI recognize various events that can trigger
dissenteiJ rights. States have adopted triggering events in their statutes, and
these may hãve developed differently from those of the RMBCA and the
Principles of Corporate Gouernance because of each state's corporate law
history. Some common triggers contained in the RMBCA and the state stât-
utes include:
Merger
,, Share exchange
,' Disposition of assets
Amendment to the articles of incorporâtion that creates fractional
shares
. Any other amendment to the articles from which shareholders may dissent
, Change of state of incorporation
, Convèrsion to a flow-through, unincorporated or non-profit entiry
In practice, a substantial maiority of appraisal cases today arise when
controfshareholders squeeze out minority shareholders for cash'
In fact, it has been convincingly argued by Professor RobertThompson
that the "conventional explanation [which] describes appraisal rights as
part of a tradeoff implemented at the turn of the century to facilitate the
growth of American business" provides an inadequate and incorrect un-
ãerstanding of the role of appraisal rights today.3o This traditional view,
set forth by Justice Black in voeller and discussed by us above, explains
that when alpraisal rights were first granted, they were the tradeoff for
the removal of the unanimity decision-making requirement. Thompson
notes:
Lègislatures . . . passed statutes authorizing fundamental changes by
a supermaiority,vote, and often included appraisal rights permitting
the minority to exit from these changed enterprises. The focus was
on facilitating desirable corporate changes while providing liquidity
to those who chose not to continue in a business fundamentally dif-
ferent from the one in which they had originally invested'31
98 STANDARDS OF VALUE
Thompson's argument, however, is that the original iiquidity purpose of
the appraisai remedy has almost completely disappeared. Instead, the rem-
edy now "serves an entirely different putpose" of acting as a check against
opportunism. He points out that "the overwhelming majority of appraisal
cases ...reflect this cash-out context" and "less than one in ten of ...litigated
cases illustrate the liquidity/fundamental change concern of the classic ap-
praisal remedy."32 Thompson states:
Now the remedy serves as a check against opportunism by a ma-
jority shareholder in mergers and other transactions in which the
majority forces minority shareholders out of the business and re-
quires them to accept cash for their shares. In earlier times, policing
transactions in which those who controlled the corporation had a
conflict of interest was left to the courts through the use of Êduciary
duty or stâtues that limited corporate por¡/ers. Toda¡ that function
is left for appraisal in many cases.33
Thompson makes the case that several statutory appraisal provisions
which were deemed appropriate for liquidity purposes work counter to pro-
viding fairness in the modern opportunism context:
excluding from the fair value calculation any appreciation or deprecia-
tion attributable to the merger transaction;
, requiring minority shareholders seeking appraisal to take four or more
sepârate legal steps to perfect the remedy (and withdrawing relief if the
actions are not perfect);
. excluding appraisal when shares are traded on a public market;3a and
, making appraisal an exclusive remedy even when the valuation remedy
does not include loss from breaches of fiduciary dury.3s
Dissenters are required to follow precisely the complex timing and oth-
er requirements of state law in a process referred to as perfecting dissenters'
rights. The process and timetable of these events vary from state to state'
32 Id.
33 Id.
3aAs discussed in "Appraisal Rights in Publicly Traded Corporations: The Market
Exception" ahead, eight states deny appraisal rights to shareholders of companies
that are publicly traded, and 27 states deny appraisal rights in most situations to
shareholders of such companies who receive publicly traded shares in a stock-for
stock transaction.
3s Id., at 4-5.
Fair Value in Shareholder Dissent and )ppression
but in most cases are strictly enforced. A company's board of directors is
required to give notice (commonly in a proxy or information statement) of
a contemplated corporate action from which shareholders may dissent. Dis-
senters must then decline the consideration and demand payment of their
shares in a notice to the board prior to the action. This dissent triggers an
appraisal. Upon notice of dissent, dissenters relinquish all rights except the
right to receive payment of the fair value of their shares, and will receive
no payment until the conclusion or settlement of litigation. In some states,
however, the company must put into escrow the amount that it contends
to be fair value. Furthermore, dissenters become unsecured creditors of the
company or its successor, which often is a highly leveraged entity.
Some modifications were suggested in t978 when the Model Business
Corporation Act (MBCA) provided that dissenting shareholders should be
given notice of events from which they could dissent, and instituted guide-
lines as to how to dissent. Even with the MBClt's new procedural aids, there
remain strict and onerous rules and procedures that dissenters must follow
to perfect their rights.
Àppra¡$al Rights in Publicly Tnaded Corponations:
The Manket Excention
There is a common misperception that publicly held shares are not entitled
to appraisal rights because of a provision in many states' âppraisal statutes
called the mørþ.et exceþtion.The market exception denies appraisal rights in
many circumstances for shareholders of companies whose shares are listed
on a national market, or, in most states, have more than 2,000 shareholders.
Although it is true that shareholders of public companies, in contrast to
shareholders of privately held companies, are often restricted in their abil-
ity to avail themselves of the appraisal remed¡ there are conditions under
which they may do so. Fifteen states permit appraisal rights to shareholders
whether publicly traded or not while 35 states deny or materially limit the
appraisal rights of publicly traded companies' shareholders under their mar-
ket exceptions.36 For example, the Arizona statute states:
Unless the articles of incorporation of the corporation provide
otherwise, this [appraisal] section does not apply to the holders of
36Jeff Goetz, "A Dissent Dampened by Timing: How the Stock Market Exception
Systematically Deprives Public Sha¡eholders of Fair Value," '1,5 Fordham J. of Fin.
and Corp. L.771.,773 (2009).Two states (Colorado and Kansas) provide a ma¡ket
exception if the shares received are marketable even if the shares held by the investor
befo¡e the transaction were not marketable.
g9
100 STANDARDS OF VALUE
shares of a class or series if the shares of the class or series were
registered on a national securities exchange, were listed on the
national market systems of the national association of securities
dealers automated quotation system or were held of record by at
least two thousand shareholders on the date 6xed to determine the
shareholders entitled to vote on the proposed corporate action.37
Although the 1969 MBCA included the market exception, the 1984
RMBCA deleted it because opponents argued that even when a liquid market
exisred, the market price might not reflect all relevant information. In addi-
tion, the market price is capped by the transaction price and "market value
and fair value are not necessarily synonymous under all circumstances'"38
The 1,999 RMBCA committee weighed these arguments and decided that
it would again recommend a market exception provided that appraisals be
available in conflict-of-interest transactions.3e
Restrictions on appraisal rights break down as follows:
l. Arizona and seven other states do not permit appraisals of shares of
public companies.
2. Twenty-seven states permit appraisals for shareholders of public com-
panics under specified circumstances:
a. Some permit appraisals unless the shareholder receives solely shares
of a public compâny.
b. Others permit appraisals if the shareholder receives anything but
cash and/or shares of a public company' such as non-marketable
shares, debt instruments, warrânts' or contingent rights.
c. Others permit appraisals in special circumstances.
3. Fifteen states and the District of Columbia have no market excePtion
and extend appraisal rights without distinction as to whether the com-
pany is public or privâte.
Eight states (including Delaware) provide that shareholders of public
companies have appraisal rights when the shareholder receives in considera-
tion anything other marketable shares.a0 Delaware's statute states:
rTAriz. Rev. Stat. $ 10-1302(D).
rs Mary Siegel, "An Appraisal of the Model Business Corporation Act's Appraisal
Rights Provisions," T4 J. of Law and Contemporary Problems 231',247 (2011).
3e Id., at 248.
a0ln addition, Louisiana and Maryland provide for appraisal rights if shareholders
receive anything but shares of the surviving cofporation, but they do not specify that
those shares must be listed.
Fair Value in Shareholder Dissent and 1ppression 101
Notwithstanding paragraph (bX1) of this section [the market ex-
ception], appraisal rights under this section shall be available for
the shares of any class or serìes of stock of a constituent corpora-
tion if the holders thereof are required ' . . to accept for such stock
anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect
thereof;
b. Shares of stock of any other corporation' or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or held of record by more than 2,000 holders.al
Fourteen states provide that the market exception is inapplicable and
appraisal is permitted when the consideration includes anything other than
cash and/or listed shares.a2 For example, the Florida statute provides:
Paragraph (a) [the market exception] shall not be applicable and
appraisal rights shall be available pursuant to subsection (1) for
the holders of any class or series of shares who are required by the
terms of the corporate action requiring appraisal rights to accept
for such shares anything other than cash or shares of any class or
any series of shares of ary corporation, of any other proprietary
interest of any other entit¡ that satisfies the standards [of being
publicly traded] set forth in paragraph (a) at the time the corporate
action becomes effective.a3
Two major states permit appraisals only in special circumstances.
California allows dissent by holders of shares either when those shares are
subject to transfer restrictions or when 5t/t the outstanding shares of a
class request appraisal.aa Pennsylvania permits shareholders in a class other
than common stock to dissent if the transaction does not require a maiority
vote of the class.as
a1 8 Del. Code Ann. tit. B, $ 262(b)(2).
a2In addition, the New Jersey statute reads similarly but specifies listed securities
rather than shares. Securiti¿s is a broader term that includes debt and warrânts.
a3 Fla. Stat. Ann. $ 607.1302(2)(c).
aa Cal. Corp. Code S 1300(bX1).
a5 15 Pa. Cons. Stat. S 1571(bx2xii).
tg?. STANDARDS OF VALUE
Exhibit 3.1 (on page 103) shows which jurisdictions apply the market
exception, and gives an overview of those situations in which the sharehold-
ers of public companies will have appraisal rights and the exception does
not apply.a6
tain Ualue Can Be less lhan [¡'m$"[ength PF¡ce
Dissenting shareholders seek appraisal when they believe that the fair value
of their shares is greâter than the consideration that they were offered in
the transaction. Dissenters have sometimes been awarded far more than the
price they were originally offered, but this rarely happens when the buy-
er was a third party. \flhen considering fair value, courts give substantial
weight to a price negotiated in an arm's-length transaction:
This fact that maior shareholders . . . who had the greatest insight
into the value of the compan¡ sold their stock to [the third-party
buyer] at the same price paid to the remaining shareholders also
powerfully implies that the price received was fair.aT
The Delaware Supreme Court reiterated this view in 1999,whenit wrote
that "a merger price resulting from arms-length negotiations where there are
no claims of collusion is a very strong indication of fair value."a8 However'
if the court determines that a third-party transâction was not arm'slength
due to confìict of interest andlor improper âctions by the buyer, the merger
price is not credible evidence of fair value.ae Because of synergies, as well as
a buyer's ability to make changes in the operations and financial structure of
a company, fair value is often less than third-party value.50
a6 In Exhibit 3.1, "listed" means listed on a national securities exchange (which now
includes NASDAQ), and "NYSE" means the New York Stock Exchange and the
NYSE MKT LLC (formerly the American Stock Exchange).
a7 Cinerama, Inc. u. Technicolor, Inc., 663 A'.zd 1134 (Del.Ch. 1'9941, aff'd in part,
Cede, Inc. u. Tecbnicolor, Inc., 663 A.zd 1L56 (Del. 1995). Similarly, a New Jersey
court called market price a valuable tool for corroborating fairness (Dermody u.
Sticco, 465 A.zd 948,951 (N.J. Super. 1983)).
4s M.P.M. Enterprises, Inc. u. Gilbert,731' A.2d 790,797 (Del' 1.999).
ae Gearreald u. Just Care, Inc., 2012 Del. Ch. LEXIS 91' at " 15, n.26.
so"Since the [appraisall remedy provides going concern value and the sharehold-
ers [in an arms'-length transaction] are in fact receiving the higher amount, third-
party sale value, the likely award in appraisal will be a lower amount than the
dissenting sha¡eholder will receive by voting in favo¡ of the merger and taking the
merger price." Hamermesh and'Wachter, "The Fair Value of Cornfields in Delaware
Appraisal Law," 3 l J. Corp. Løw 11.9, 1.42 (200 5) (hereinafter, " Cornfields" ).
Elilll[l| 3.1 The Market Exception and $(ihen Appraisal Is Permitted Despite the Market Exception
Market exception aPPlies to: When appraisal is permitted:
(also see footnotes)
Alabama, Arkansas, D.C.,
Hawaii, Illinois, Kentuck¡
Massachusetts, Missouri,
Montana, Nebraska,
New Hampshire, New
Mexico, Ohio, Vermont,
Washington, Wyoming
New York"
Delaware, Colorado,
Kansas,b Oklahoma'
Georgia,d Texas
No market exception
Shares of listed company
Shares of listed company or company with
2,000 shareholders
Shares of listed company or company with
2,000 shareholders
Sha¡eholder receives anything but shares of listed
company, or short form mergerc
Shareholder receives anything but shares of listed
company or company with 2,000 shareholders, or
short form mergerr
Shareholde¡ receives anything but shares of listed
company or company with 2,000 shareholders' or
short form merger, or shareholder receives shares
different in type or exchange ratio from shâres
offered to others of same classe
Shareholder receives anything but sha¡es of listed
company or company with 2,000 shareholderss
Shareholder ¡eceives anything bttt cash or shâres of
listed company
Shareholder receives anything but cash or shares of
NYSE or NASDAQ company (continued)
Utah
Michigan
Minnesota, North Dakota
Shares of listed company or company with
2,000 shareholders
If no shareholder vote required, shares of
listed company
Shares of NYSË or NASDAQ company
C|t
FEXH|EIIS.l (Continued)
Market exception applies to: When appraisal is permitted:
(also see footnotes)
Nevada
Florida
Idaho, Iowa,' Mississippi,r
South Dakota, !Øest
Virginia
Connecticut,' Maine,
North Carolina,rVirginiar
New Jersey
Shares of listed company or company with
2,000 shareholders
Shares of NYSE or NASDAQ or company
with 2,000 shareholders and ma¡ket value of
$10 million excluding shares held by senior
executives, directors, and 70"/' beneficial
shareholders
Shares of NYSE or NASDAQ company
or compâny with 2,000 shareholde¡s and
market value of $20 million excluding shares
held by senior executives, directors, ar'd tIo/'
beneficial shareholders
Shares of company traded in an "organized
market" lnot defined in statutef or compâny
with 2,000 sha¡eholders and ma¡ket value of
$20 million excluding shares held by senior
executives, directors, and 70u/. beneficial
sharehoiders
Shares of listed company or company with
L,000 shareholders
Shareholder ¡eceives anything btt cash or shares
of listed compâny or compâny with 2,000
shareholde¡s
Shareholder receives ânything b:ut casb or shares
of NYSE or NASDAQ company or company
with 2,000 shareholders and market value of $10
million excluding shares held by senior executives,
dircctors, and 10o/" bencficial shareholdcrs
Shareholder receives anything but casb or shares
of NYSE or NASDAQ company or company with
2,000 shareholders and market value of
$20 million excluding shares held by senior
executives, directors, and 1,0L beneficial
shareholders, or transaction with interested party
Shareholder receives anything b:ut casb or shares
of company traded in an organized market or
company with 2,000 shareholders and market
value of $20 million excluding shares held by
senior executives, directors, and 10n/" beneficial
shareholders, or transaction with interested parry
Shareholder receives anything b:ut cash or securities
of listed company or company with 2,000
shareholders
When appraisal is permitted:
Market exception applies to: (also see footnotes)
California Shares of listed company Shares with transfer restrictions, or if more than
57o request appraisal
Louisiana Shares of listed compâny If not convened solely into shares of surviving
Maryrand shares or risted company ï:i:i:îi:i;i.iri"Ï:ïï:i"îï:"'ïï"
corporation (but no public market requirement);
or if directors and executive office¡s were the
beneÂcial owners, in the aggregate, of 5%; or if
dircctors and executive officcrs receive stock on
terms not available to all holders
Pennsylvania Sharcs of listed company or company with Sha¡es of any class unless transaction requires
2,000 shareholders' majority vote of the class
Alaska, Indiana, Oregon, Shares of listed company None
South Carolina, Tennessee,
Wisconsin
Arizona, Rhode Island Shares of listed company or company with None
2,000 shareholders
. Àppraisal permitted in short-form merger; appraisal permitted if shares are not entitled to vote on transaction.
b Appraisal permined in merget of subsidiary into parent.
" Appraisal permittçd in sho¡t-form mçrger.
ú Appraisal permined if shareholder receives shares different in type or exchange ratio from shares offered to others of same clâss.
. Aipraisrl permitted in acquisition by beneficial owner of 207o of the voting rights or party wi.th the tight to elecc 25o/, of directors.
rAppraisal permirted in interested party trânsactions'
Ë sCash fo¡ fractional shares does not ttigget appraisal rights.
r06 STANDARDS OF VALUE
Importantly dissenting shareholders have been awarded amounts lower
than an arm'slength transaction price when the court determined that the
transaction price inciuded synergies and/or a control premium that should
not have been included in fair value under Delaware law A 2005 case con-
cluded that the fair value of a company was $2.74 per share, even though
the minority shares had been acquired for $3.31 in stock.sl A 2003 decision
awarded the petitioner "the value of the Merger Price net of synergies,"s2
which gave the dissenters only 86o/o of the merger price. In 2012,a company
acquired by a competitor was also appraised at 86o/o of the purchase price,
thus resulting in a minority shareholder value less than what the dissenters
would have received in the transaction price.s3
THE flPPRES$IflIll REMEIIY
Deuel0pment 0f tüe 0ppncssion Bemedy
A remedy for oppressed shareholders emerged for reasons similar to the ori-
gin of dissenters' rights. As the courts moved to majority rule, which based
decisions on the best interests of the corporation rather than the sharehold-
ers, minority shareholders could be frozen out or otherwise harmed without
the intervention ofthe courts. Shareholders would have to bring suit for an
injunction or to dissolve the corporation in order to recover their interest.
Illinois was the first state to codify oppression as a trigger for dissolution
in the 1933 Illinois Business Corporation Act. The ABA later modeied the
MBCA's dissolution statute after Illinois' example.sa The 1.953 MBCA stated
that a shareholder could call for dissolution if "the acts of the directors or
those in control of management are illegal, oppressive, or fraudulent."ss
As oppression became more widely recognized over the course of the
rwentieth century, the courts needed to find ways to identify whether op-
pression had actually occurred. Some viewed oppression as akin to fraudu-
ient or illegal acts. The Illinois court's 1957 decision ín Central Standard
Life lnsurances6 applied the term oppression more broadly than fraudulent
s1 Finkelstein u Liberty Media, [nc.,2005 Del. Ch. LEXIS 53 (Apr. 25, 2005), at o 84.
s2 Union lll. 1995 Inuestment Ltd. P'ship u. Union Financial Group, Ltd. 847 A.2d
340,364 (Del. Ch. 2003).
s3 Gearreald u. Just Care,201.2 DeL. Ch. LEXIS 91, at "'1..
saMurdock, at440.
55 Comment, "Oppression as a Statutory Ground for Corporate Dissolution," 1965
Duke L. J,1.28, n. 2 (19651.
s6 Central Standard Life Insurance u. Dauis, 141 N.E.2d 45, 51 (Il. 1957).
Fair Value in Shareholder Dissent and 0ppression
or illegaL actiuity despite finding in favor of the corporation. The term has
come to include conduct by the majority that breaches fiduciary dury de-
nies the minority shareholder his or her reasonable expectations in acquir-
ing shares and entering into a shareholder agreement, or is burdensome,
harsh, and wrongful to minority shareholder interests. Oppressive acts by
the majority can be very damaging to a minority shareholder; for example,
a majority decision may eliminate a minority shareholder's ability to receive
dividends or other types of benefits from a corporation.
Shareholder oppression now is seen to occur when the maiority share-
holders or the board of directors act in â manner that is detrimental to
minority shareholders. New York's highest court described oppression in a
1984 decision:
A shareholder who reasonably expected that ownership in the cor-
poration would entitle him or her to a job, a share of corporate
earnings, a place in corporate management, or some other form of
securit¡ would be oppressed in a very real sense when others in the
corporation seek to defeat those expectations and there exists no
effective means of salvaging the investment.sT
Gontext of 0ppr.cs$¡on ßemedy
Although dissent and oppression cases are sometimes grouped together,
their nature is very different. Oppression is generally more personal. It often
involves the loss of employment, exclusion from a close corporation that
the stockholder may have helped build, or fallout between family members
or business associates that results in the breaking up of a corporation' In
contrast, dissent is generally less personai because it arises primarily from a
financial decision in a corporation. Also dissente¡s'rights proceedings usu-
ally involve shareholders with small interests in a corporation.
There are some similarities between dissent and oppression cases. The
primary similarity is that in most stâtes they both use the fair value stand-
ard. Many courts understand the fair value definitions in the dissenters'
rights statutes to cârry over to the oppression stâtutes. Although the ALI
asserts that Íair value can be viewed differently for oppression and dis-
sent, many courts disagree. For example, New Jersey's Supreme Court in
Balsamidesss agreed with \J7ashington's Supreme Court in Robbleese that
fair value in the oppressed shareholder context has the same meaning as
s7 In re Kemp ú Beatley,Inc.,473 N.E.2d 1.1.73,11.79 (N.Y. 1984).
s8 Balsamides u. Protaineen Chemicals, lnc.,734 A.2d 72t,736 (N..J. 1999).
se Robblee u. Robblee,847 P.2d 1.289, L294 (rJ7ash. Ct. App.1992).
Iw
1m STANDARDS OF VALUE
in the dissenting shareholder context. In addition, many oppression and
dissent cases cite each other for guidelines on how to deal with various
eiements of valuation.
Both oppression and dissent stâtutes and case law were developed
to protect minority shareholders from being exciuded or abused by the
majority. In states where the oppression remedy is unavailable, oppressed
shareholders may be entitled to exercise dissenters' rights. For example,
reverse stock splits are often used to cash out minority shareholders by
reducing the number of shares in a corporation so that certain mem-
bers end up holding less than one share and are forced to sell it back
to the corporation. The U.S. District Court for the Northern District of
Illinois decided in Connector Seruice Corp. u. Briggs that the Delaware
language governing reverse split cash-outs was similar to the language
governing cash-out mergers and ordered the fair value of the oppressed
shareholder's stock to be determined using the same criteria as in a cash-
out merger.ó0 This conclusion is consistent with the Delaware decision in
Metropolitan Life u. Aramarå, which granted a quasi-appraisal remedy in
a reverse split.6r
Closely held corporations present an unusual situation requiring depar-
tures from the corporate norm. Shareholders in large publicly held corpora-
tions necessarily relinquish their control over daily activities to the board
of directors, and only function to elect the board and vote on fundamental
transactions. Shareholders who disagree with corporate management may
elect a new board or they may sell their shares in the open market. In con-
trast, in a closely held corporation, shareholders often serve as directors
and officers of the corporation and minority shareholders do not have the
alternative of selling their shares on the open market. Thus, shareholder
agreements that set out the transfer of shares, voting rights, and election
of directors are necessary safeguards for investors in close corporations, In
addition, as a result of their small size, many close corporations operate
without all of the strict formalities normally required in the operation of
public corporations. In fact, the close corporation in many ways resembles
a partnership.
One characteristic of a closely held corporation is that its sharehold-
ers often are also employees. Minority shareholders frequently invest with
the expectation of receiving a salary from employment and of participating
in thc profits of the corporation. When an employee is frozen out of a
60 Connector Seruice Corp. u. Briggs,1998 U.S. Dist. Lexis 18864 (N.D. Ill., Oct. 30,
1998),at o18. Because appraisal and oppression cases âre under state laws, federal
courts follow state statutes and case law.
61 Metropolitan Life lns. Co.u.Aramark Corp.,1,998 Del. Ch. LEXIS 70 (Feb.5, 1998).
Fair Value in Shareholder Dissent and 0ppression
corporâtion, it means that although he or she remains a shareholder, man-
agement eliminates that shareholder's job. Additionally, the majority may
elect to eliminate the payment of dividends when applicable' Although the
minority shareholder's ownership interest remains intact, that shareholder
no longer receives the benefits he or she has received historicaliy and expects
âs part of his or her investment.
Furthermore, there is no necessity for the company to buy out the mi-
nority shareholder, as it costs the company little to keep the shareholder
locked in.62 Alternativel¡ the minority shareholder may be compelled to
accept an unfavorable price to gain liquidity'63 If, however, the control share-
holders do use their majority votes to force a squeeze-out merger' the minor-
ity shareholders will then have the option to exercise their dissenters' rights
and seek appraisal.
Fneeze-0uts anü Squeers'0ut$64 For public companies, freeze-outs âre transac-
tions in which minority shareholders are compelled to take cash for their
shares, either in a cash merger or through a tender offer followed by a short-
form merger. For private companies, the term freeze-outs coveÍs compulsory
buyouts as well as a broader range of actions by the controller' As Professor
Moll wrote:
Through this control of the board, the majority shareholder has
the ability to take actions that are harmful to the minority share-
holder's interests. Such actions are often referred to as "freeze-out"
or "squeeze-out" techniques that "oppress" the close corporation
minority shareholder. Standard freeze-out techniques include the
refusal to declare dividends, the termination of a minority share-
holder's employment, the removal of a minority shareholder from a
position of management, and the siphoning off of corporate earn-
ings through high compensation to the maiority shareholder' Quite
often, these tactics are used in combination. ' ' . Once the minority
shareholder is faced with this "indefinite future with no return on
the capital he or she contributed to the enterprise," the majority
often proposes to purchase the shares of the minority shareholder
at an unfairly low price.65
62 Murdock, at 441.
63 If the action to which the oppressed shareholder obiects is a fo¡ced sale of his or
her shares, the appraisal remedy may be available'
6a The terms freeze-out and squeeze'out are commonly conside¡ed to be synonyms.
65 Moll, "Minoriry Oppression and the Limited Liability Compan¡" ar 889-891.
110 STANDARDS OF VALUE
Bis$olut¡0n a$ a Remedy fon 0ppnession
Presentl¡ certain events trigger the right to call for iudicial dissolution of
a corporâtion.66 Generally they fall under the categories of mismanage-
ment, waste, fraud, or illegal acts by management and the board of direc-
tors. However, majority behavior does not necessarily have to be illegal or
fraudulent to be unfair to a minority shareholder.
The shareholder oppression statutes are part of corporate dissolution
statutes, which are the laws in place to provide guidelines for dissolving cor-
porations. Dissolution statutes exist to provide procedures by which busi-
nesses may wrap up their business affairs and end their existence. Although,
as noted above, most states use a combination of similar triggering events'
the statutes are generally unique to each state.
Many states allow shareholder oppression as a triggering event for dis-
solution or a buyout of a claimant's shares.67 Most states allow the op-
pressed minority shareholder to file for ludicial dissolution; in those that
do not, the oppressed shareholder must seek relief in other ways' such as a
suit for breach of fiduciary duty.68 Delaware does not include shareholder
oppression in its dissolution statute.
$haneholden Buyout$ as an Altepnat¡ue RemGdy
As long as dissolution was the primary remedy for oppressed minority
shareholders, the courts were hesitant to find in favor of the minority share-
66 The case law and concepts we address in this chapter deal exclusively with oppres-
sion in corporations and focus mainly on close corporations. Partnerships âre not
subject to the same remedies because of the withdrawal rights available by statute in
most states. For LLCs, case law is in its infancy because of the relative newness of the
corporate form. For more information on the remedies for minority mistreatment in
all three corporate forms, see Moll, "Minority Oppression and the Limited Liability
Compan¡" at 892-895.
67An exception is Michigan, whe¡e an action citing oppression can be brought by
the shareholder outside the dissolution statute, although dissolution (among others)
may still be the remedy.
68 Delaware and Indiana allow shareholder dissolution only in the case of deadlock.
Kansas and Louisiana allow shareholder dissolution in the case of deadlock, but
only if irreparable damage is being done to the corporation or shareholders. Mas-
sachusetts requires thatno less than 40o% outstanding shareholders can file for dis-
solution, but only in cases of shareholder or management deadlock. Michigan allows
shareholders to file if they cannot agree on management and the corporation is not
able to function properly. Nevada and Ohio allow shareholder dissolution only if
petitioned by a majority. Oklahoma, Texas, and the District of Columbia do not al-
low sha¡eholders to petition for dissolution.
Fair Value in Shareholder Dissent and 0ppression
holder. Oppressive conduct had to be egregious-a waste of assets or gross
fraud or illegality. Dissolution is drastic because it results in the liquidation
of the company and adversely affects employees, suppliers, and clients. An
Alaska Supreme Court decision notes the problem:
Liquidation is an extreme remedy. In a sense, forced dissolution
allows minority shareholders to exercise retaliatory oppression
against the majority. Absent compelling circumstances, courts often
are reluctant to order involuntary dissolution. . . . As a result, courts
have recognized alternative remedies based upon their inherent eq-
uitable powers,6e
Dissolution remained the statutory remedy until the states began to in-
stitute buyout provisions for the shares of oppressed shareholders.t0 ln 1,941,,
California was the first state to institute a buyout provision; its statutetl pro-
vided an option for a corporation to offer petitioning minority shareholders
the fair cash value for their shares in lieu of dissolution.T2
ln 1,973, the Oregon Supreme Court ruled that "for'oppressive' conduct
consisting of a'squeeze out'or'freeze out'in a'close' corporation the courts
are not limited to the remedy of dissolution, but ma¡ as an alternative, con-
sider other appropriate equitabie relief."73 The expressly permitted alternative
is "[t]he ordering of affirmative relief by the entry of an order requiring the
corporation or a majority of its stockholders to purchase the stock of the
minority stockholders at a price to be determined according to a spccified for-
mula or at a price determined by the court to be a fair and reasonable price."7a
The decision proved highly influential, as many other states accepted the rea-
soning of the Oregon court and permitted buyouts as an alternative to dis-
solution.Ts A 1991 revision to the RMBCA introduced the compulsory buyout
for shareholders fiiing for dissolution. By that time, the fair value buyout as
an alternative remedy was already in use in some states, such as New York.
Several judicial remedies for the oppressed shareholder have emerged. If
the court finds oppression, it can order a wide variety of remedies, including
6e Alasþa Plastics, Inc. u. Coppocþ,621, P.zd 270,274 (Alaska 1980).
70 Murdock, at 453.
71 1941 Cal. Stat.20.58-.59 (codified as amended at Cal. Corp. Code $ 2000 (West
1977 k Supp. 1989)).
72 Murdock, at 46L.
1i Baþer u. Cotnmercial Body Builders, Inc., 507 P.Zd 387,395 (Orc. 1973).
7a Id., at 396.
TrJohn H. Matheson and R. Kevin Maler, "A Simple Statutory Solution to Minority
Oppression in the Closely Held Business," 91 Minn. L. R.,657,680-681 (2006).
ilt
112 STANDARDS OF VALUE
an equitable distribution of the proceeds of a court-ordered liquidation or
a compulsory buyout of the oppressed shareholder(s) shares at a court-
determined Íair vahrc.76 'tù(/hen the court orders a buyout, the price to be paid
for the minority shares is judicially determined under the fair value standard.
If there is a chance the corporation will be found to have committed
acts of oppression, fraud, mismanagement, abuse, or if the corporation an-
ticipates dissolution being the outcome of the court proceeding, or if the
corporation wants to avoid the court proceeding altogether, it may elect to
purchase the petitioner's shares at their fair value within the statutory time
76The Oregon Supreme Court listed several "alternative remedies":
(a) The entry of an order requiring dissolution of the corporation at a specified
future date, to become effective only in the event that the stockholders fail
to resolve their diffe¡ences prior to that date;
(b) The appointment of a receiver, not for the purposes of dissolution, but to
continuc thc operation of the corporation for the benefit of all the stock-
holders, both maiority and minorit¡ until differences are resolved or "op-
pressive" conduct ceases;
(c) The appointment of a "special fiscal agent" to report to the court relating to
the continued operation of the corporation, as a protection to its minority
stockholders, and the retention of jurisdiction of the case by the court for
that purpose;
(d) The retention of iurisdiction of the case by the court for the protection of the
minority stockholders without appointment of a receiver or "special fiscal
agent";
(e) The ordering of an accounting by the maiority in control of the corporatìon
for funds alleged to have been misappropriated;
(f) The issuance of an injunction to prohibit continuing acts of "oppressive"
conduct and which may include the reduction of sala¡ies or bonus payments
found to be unjustified or excessive;
(g) The ordering of affirmative relief by the required declaration of a dividend
or a reduction and dist¡ibution of capital;
(h) The ordering of affirmative relief by the entry of an o¡der requiring the cor-
porâtion or a majority of its stockholders to purchase the stock of the mino¡-
iry stockholders at a price to be determined according to a specified formula
or at a price determined by the court to be a fair and reasonable price;
(i) The ordering of affirmative relief by thc entry of an ordcr permitting minor-
ity stockholders to purchase additional stock uncler conditions specified by
the court;
(j) An award of damages to minority stockholders as compensation for any
injury suffered by them as the result of "oppressive" conduct by the majority
in control of the corporation.
Baþer u. Commercial Body Builders,507 P.2d 387,395-396.
Fair Value in Shareholder Dissent and 0ppression
frame.71 In this case, the dissolution proceeding will be put on hold (but not
terminated) until an equitable settlement has been negotiated. One New
York court pointed out that "once the corporation has elected to buy the
petitioning stockholders' shares at fair value, the issue of maiority wrong-
doing is superfluous."78 In addition, if the corporation elects the buyout,
it may avoid the "equitable adjustments" the court might make in a case
where wrongdoing is found, as well as other costs associated with a court
proceeding.
In the buyout remed¡ the company may elect to buy out the share-
holder at fair value before a proceeding occurs, or the court can go forward
with the proceeding. This leaves four scenarios when oppression is alleged:
1,. If the company elects the buyout procedure after the oppressed mi-
nority shareholder has petitioned for dissolution, the company will
pay faír value for the minority shares.
2. If the company does not elect the buyout option and the court finds
that oppression has occurred, the company will ultimately pay fair
value, plus any equitable adjustments the court requires.
3. If the court 6nds no oppression, the shareholder will likely not re-
cover the fair value as a percentage of enterprise value, and the
court may look to what the shareholder's share would brìng on the
open market, considering his or her minority status. This would
imply the application of shareholderlevel discounts.
4. If the court finds no oppression, there may be no buyout and thc
shareholder may be compelled to remain with the corporation.
As we have noted, in states with an election, if the election process does
not succeed in reaching a value for the minority shares that is acceptable to
both sides, the court may order a compuisory buyout of the minority shares.
As Professor Moll describes it:
Electìon provisions are designed to serve as a counterbalance to
the dissolution-for-oppression statutes. Although an aggrieved in-
vestor is entitled to petition for dissolution of a company on the
ground of oppressive conduct, shareholders who wish to continue
the business may elect to buy out the petitioner's ownership stake
to avoid any risk of dissolution. Thus, the purpose of the election
provisions is to provide the remaining shareholders with a mecha-
nism for continuing the business and, relatedl¡ to safeguard against
77 Moll, "Shareholder Oppression and'Fair Value,"' at 360.
78 In re Friedman,661N.E. 2d 972,976 (N.Y. 1985).
1r3
114 STANDARDS OF VALUE
the risk of dissolution. In operation, an election usually circumvents
any liability inquiry and converts an oppression lawsuit into a mere
valuation proceeding. Indeed, because an election often occurs be-
forc a court has made a finding of oppression, the election statutes,
in most instances, effectively cÍeate a no-fault "divorce" procedure.
The company at issue continues as a going concern under the con-
trol of the majority shareholder, the allegedly aggrieved investor is
cashed out of the business, and no finding of wrongdoing is made
by the court.Te
In cases of appraisal pursuant to a dissent action, an individual should
receive the undiscounted proportionate value of the company as a going
concern. In an oppression action, the¡e are many other considerations
caused by the degree of oppression and misconduct by the majority.
Exhibit 3.2 lists the states that have a buyout option in oppression cases
and those that do not.
The generic terms closely held corporation or close corporation refer to
privately held corporations formed under a state's regular business corpora-
tion statutes. A company is not a statutory close corporation unless it elects
that status. As shown in Exhibit 3.2,the buyout option is offered only to
stâtutory close corporations in some states, whereas in other states such an
option is additionally available to all close corporations.
Statutory close corporations share the attributes of almost all close cor-
porations: they are privately held, cannot make public offerings of stock, and
shares are most often held by the owners/managers of the business and their
families.s0 In addition, when shareholders die or wish to liquidate their interests,
remaining shareholders or the company itself usuaily will purchase the shares.
ie Moll, "Shareholder Oppression and'Fair Yalue,"' at 69.
80 Recognizing the unique issues presented by close corporations, 21 jurisdic-
tions permit companies to elect statutory close corporation status, Four states-
California, Maine, Ohio, and Rhode Island-permit corporations to elect statutory
close corporation status pursuant to their regular corporâtion statutes.. In addi-
tion,1,7 jurisdictions have enacted close corporation statutes permitting the elec-
tion: Alabama, Arizona, Delaware, District of Columbia, Georgia, Illinois, Kansas,
Maryland, Missouri, Montana, Nevada, Pennsylvania, South Carolina, Texas,
Vermont, Wisconsin, and SØyoming. These entities can be run pursuant to their
shareholder âgreements, which is permitted to set forth and limit the duties and
obligations of its shareholders.
Despite the ability to bypass some of the procedures required for close corpora-
tions, the great majority of corporations that otherwise would qualify to make a
statutory close corporation election have not chosen to do so. Empirical studies
have shown that only a very small percentâge of corporations have ever registered
Fair Value in Shareholder Dissent and 0ppression 115
E¡filBlI 3.2 Availability
Cgrngrlions by State
States
Buyout Remedy in Judicial Dissolution of Close
Buyout Available as
Remedy
Alabama, Alaska, Arizona, California, Connecticut, District
of Columbia, Florida," Hawaii, Idaho, Illinois, Iowa,
Maine, Michigan,b Minnesota, Mississippi, Montana,
Nebraska, New Hampshire, New Jerse¡ New York, North
Carolina,'North Dakota,d Rhode Island, South Carolina,d
South Dakota, Utah, Virginia,'S7est Virginia,'!Øyoming
Georgia, Maryland, Missouri, Oregon, Vermont, Iíisconsin
Arkansas, Colorado, Kentucky, New Mexico, Pennsylvania,
Tennessee,'!Tashington
Delaware, Indiana, Kansas, Louisiana, Massachusetts,
Nevada, Ohio, Oklahoma, Texas
Yes
Yes, but in statutory
close corporation
provision only
No
No statute providing
for oppression
as grounds for
dissolution
a. The Florida dissolution statute applies only to companies with 35 or fewer shareholde¡s.
b. In Michigan, once.,illegal, fraudulent, or willfully unfair and oppressive" conduct has been
established, the court may order dissolution, purchase at fair value, or other remedy provided
fo¡ in the statute.
c. North Carolina allows the company to avoid dissolution by a buyout after the cou¡t decides
that the situation merits dissolution'
d. In North Dakota and South Carolina, the court has equitable discretion to provide a buy-
out remedy.
âs statutory close corporations. (Harwell Wells, "The Rise of the Close Corporation
and the Making of Corporation Law," 5 Berkeley Bus. L.J.263 (2008)).
To be eligible to elect stâtutoty close corporâtion status in those states that pro-
vide that chãice, corporations must meet ce¡tain criteria, such as size. To qualif¡
corporations cannot hâve mote than a particular number of shareholders, typically
a mãximum of 30 or 50. In addition, shareholders usually must agree unanimously
to statutory close corporation status and a written shareholders' agreement gov-
erning the affairs of the colporâtion must be drafted. It usually is also required that
cerfain transfer restrictions appear on the corporation's stock cerdficates. Typi-
call¡ where the close corporation statute, or shareholder agreement' is silent on a
mattef, the provisions of the state's regular business corpolations statute will frlì
in the gaps.
Statutory close corporations are not heavily utilized, but the relevant
sratutes coniuin provisi,ons that relate to the standard of value,s' and they
may differ from åther closely held corporations both in those standards and
in ihe remedies they provide. Only certain states provide statutory close
corporation shareholders with dissolution as a remedy for oppressive or
illelal conducr; orhers provide them with a buyout election in lieu of dis-
solition. Valuators involved in oppression cases.need to work closely with
counsel in the appropriate jurisdiction to understand the legal status_of the
entiry in which ihey ãre valuing shares and ro know what standard of value
is applicable.
Examples of 0ppnes$¡on
ReasonAble E¡pe6tat¡gn3 More than 20 states use a "reâsonable expectations"
standard for oppression.s2 A breach of reasonable expectations was estab-
lished as a fntráamental determination of oppression based on the 1980
New York case Topþer u. Park Sheraton Pharmacy,s3 one of the earliest cases
in which the court ordered a buyout as an alternative remedy. In this case,
rhe court found that the plaintiff's reasonable expectations were violated by
an intentional freeze-out and ordered the buyout of his shares.
TÍ|PPER U. PARI( SHEBAIÍIN PHARMAGY
il8 STANDARDS OF VALUE
Three individuals operated two pharmacies in prominent Manhattan
hotels, the New York Sheraton and the New York Hilton. The share-
holder agreements were executed in early 1979' The agreements
provided no method for transfer or purchase of shares, nor did they
specify terms of employment. Topper associated himself with the
other two individuals in the two corporations with the expectation
of being an active participant in their operations, ln order to partici-
pate, Topper ended a 25-yea( relationship with his prior employer
and moved to New York, invested his life savings in the ventures'
and executed personal guarantees of a lease extension and promis-
sory notes for the purchase price of his stock interest.
81 For example, Missouri explicitly provides statutory close corporation shareholders
with dissente¡s'rights. S 351.870 R.S. Mo. (20121.
82 Matheson and Maler, at 664.
83 Topper u. Park Sberaton Pharmacy,433 N.Y.S.2d 359 (N.Y. Supr' 1980)'
Fair Value in Shareholder Dissent and 0ppression 117
The majority stockholders discharged Topper as an employee
in February 1980, terminated his salary (after his salary had been
raised from 150% in the first year), removed him as an officer and
as a cosignatory on the corporate bank accounts, and changed the
locks on the corporale office. Moreover, the corporations paid no
dividends. The controlling shareholders claimed that the petitioner
had suffered no harm, as his one-third interest remained intact.
The court deemed that the actions of the majority constituted a
freeze-out and were oppressive because they violated Topper's rea-
sonable expectations in joining the business. The court recognized
that in a close corporation, the bargain of ihe participants is not
necessarily reflected in the corporation's charter, bylaws, or other
written agreement. ln many small corporations, minority sharehold-
ers expect to participate in management and operations, and these
expectations constitute the bargain of the parties by which subse-
quent conduct must be appraised.
The court also stated that New York's business corporation law
determines that oppression of the "rights and interests" of minority
shareholders in a close corporation is an abuse of corporate power.
These rights are derived from the expectations of the parties under-
lying the formation of the corporation. The court awarded Topper the
right to the fair market valuesa of his shares as of the day prior to the
date of petition.
In a Connecticut case, the plaintiff sought to dissolve a corporation as ten-
sions became high among the doctors in the corporation.ss The plaintiff
claimed she was entitled to a fai-r value of $338,000 as her share, but the
shareholders' âgreement stated that she was entitled to the net book vaiue of
the assets she had contributed to the corporation, a little over $13,000. No
oppression was found by the court, and the court found it was not inequita-
ble or unfair under the circumstances to look to the stockholders' agreement
for a determination of value. This case indicates that maintenance of and
adherence to a shareholders' agreement provides a certain amount of clarity
8a It should be noted that although the courts were empowered to award fair value
by N.Y. Statute $ 1 1 18, the court used the term fair market ualue as a substitute. It
is unclear whether that substitution was intentional.
ssStone u. R.E.A.L. Health, P.C.,2000 Conn. Super. LEXJ.S 2987 (Nov. 15, 2000).
118 STANDARDS OF VALUE
âs to shareholder expectations, as long as a particularly egregious breach of
the agreement has not occurred,
Bneach ol tiduc¡ary lluty The failurc of thc control shareholders to fulfill thcir
fiduciary duties to the minoriry can be deemed to be oppression. According
to Matheson and Maier, "twelve states have adopted a fiduciary duty ap-
proach that, for the most part, is expansive and could be employed to reach
the same result as the reasonable expectations standard."86 A landmark
Massachusetts case offering relief to oppressed shareholders, Donahue u.
Rodd Electrotype,sT established that a breach of 6duciary duty (the obliga-
tion owed to minority shareholders by the majority) may determine whether
shareholder oppression has occurred,ss
IIflIUllHUE U. RflDII EIECTAOTYPE llI IIEW HIIGIAIUII
ln 1935, Harry C. Rodd began working for the Royal Electrotype
Company of New England, lnc. ("Royal"). He became a director in
1936, and succeeded to the position of general manager and treas-
urer in 1946. Joseph Donahue was h¡red in 1936 as a "finisher" of
electrotype plates. He became plant superintendent in 1946 and
corporate vice president in 1955, but never participated in the man-
agement of the business.
Rodd and Donahue acquired 200 and 50 shares, respectively,
of Royal at $20 per share. Another individual owned 25 shares and
the parent company (Royal Electrotype of Pennsylvania) retained
725 shares.
ln June 1955, Royal purchased all 725 shares from the parent
company at a total price of $135,000. The 25 shares owned by the
other individual were also purchased. The stock purchases left Har-
ry Fodd as the B0% majority shareholder. Donahue was the only
minority shareholder. The company subsequently was named Rodd
Electrotype of New England.
Harry Rodd's sons assumed control of the company between
'1959 and 1967. Harry Rodd also pursued a gift program by which
he distributed his shares among his two sons and his daughter,
86 Matheson and Maler, at 664.
87 Donahue u. Rodd Electrotype of New England,328 N.E.2d 505 (Mass. 1975).
88 Massachusetts does not have a dissolution statute.
Fair Value in Shareholder Dissent and )ppression tlg
each child receiving 39 shares, wilh 2 shares being returned to the
corporate treasury. ln 1970, Harry Rodd was77 and wished to retire,
but he insisted that some financial arrangements be made regard-
ing his remaining 81 shares. The directors decided that they would
purchase 45 shares for $800 a share ($36,000). Following this, each
child was gifted additional shares such that each held 5l shares.
Donahue's heirs still owned 50 shares: his wife, Euphemia, owned
45 and his son, Robert, owned five.
ln .1971, the Donahues learned that the corporation had pur-
chased Harry Rodd's shares. The minutes of the meeting show that
the stockholders unanimously voted to ratify the stock purchase
agreement. However, the trial judge found that the Donahues did
not vote aff irmatively.
Euphemia Donahue offered her shares to the corporation on the
same terms given to Harry Rodd. The corporation refused to pur-
chase the shares as it was not in a financial position to do so.
As plaintiff, Euphemia characterized the purchase of Harry
Rodd's shares as an unlawful distribution of corporate assets to
controlling shareholders constituting a breach of fiduciary duty. The
defendants claimed that the purchase was within the powers of the
corporation and met the requirements of good faith and inherent
fairness, and asserted that there is no right to equal opportunity in
corporate stock purchases for the corporate treasury.
The court characterized the transaction as a preferential distri-
bution of assets. The control shareholder had received an advan-
tage over his fellow shareholders and had turned corporate funds to
personal use. That action was inconsistent with the strict standard of
fiduciary duty required in close corporations. The court ordered that
either Harry Rodd remit the $36,000 with interest or that the plaintiff 's
45 shares be purchased for $36,000 without interest.
lleavy-llanded, Ar[¡trany,0r 0ver[ean¡ng Conduct Illinois uses the standard of
heavy-handed and arbitrary or overbearing conduct to determine whether
opprc.ssion has occurrcd. This definition leave s grcat discrction to thc court's
judgment on oppressive conduct. The standard was establishedby a 1.972
Illinois case, Comþton u. Paul K. Harding Reahy Co.8e
8e Compton u. Paul K. Harding Realty Co.,285 N.E.2d 574 (lll. App 19721.
120 STANDARDS OF VALUE
GllMPTflN U. PAUL K. HAROINû REA1TY Gfl.
Martha Compton was an officer and a shareholder of the Paul Hard-
ing Realty Corporation along with the defendant, Paul Harding'
When they formed the business together in 1962, Harding led the
discussions and planning on the formation of the corporation due to
his more extensive experience in real estate.
Once the corporation was formed, Compton and Harding con-
tinued discussions in regard to an agreement between the share-
holders. Compton testified that an agreement was drafted on yellow
paper and later typed up by Harding. The provision that she had re'
quired was that the corporation was not to have any additional share-
holders, other than Compton, Harding, and her brother, Forrest
Leoty. The document was undated, but typed on letterhead and
signed by Compton, Harding, and Leoty.
The record of the case states that from the beginning the corpo-
ration was loosely managed and shares were not distributed in ac-
cordance with the memorandum. Although the agreement stipulated
that Harding's salary would be $100 per week, at the onset of busi-
ness he received $175, soon raising itto $200. ln the fallof 1964, the
salary was raised to $250 per week. He also received commissions.
Compton contended that Harding was guilty of self-dealing and
corporate mismanagement in raising his own salary without notice to
the shareholders, contrary to the terms of the agreement. The court
found that between incorporation and the trial, Harding had taken an
amount in excess of his contractual salary, which was to be paid back
1o the corporation before liquidalion, but it did not find that fraud had
occurred. Harding claimed that the agreement he signed should have
no effect, but the court stated that many close corporations have similar
agreements and these have previously been recognized by the courts'
Last, and most significant with respect to the precedent set
by this case, Harding claimed that there was no statutory basis by
which the court could order liquidation because he had committed
no fraud. The court looked to the statute indicating the availability
of dissolution if the acts of the directors are illegal, oppressive, or
fraudulent. The court referred to Central Standard Life lnsurance,
which held that oppression is not necessarily synonymous with ille-
gal and fraudulent behavior and established the doctrine of heavy-
handed, arbitrary, and overbearing conduct as a test for oppres-
sion, stating:
Fair Value in Shareholder Dissent and 0ppression
We think there is ample evidence in the record showing an
arbitrary, overbearing and heavy-handed course of conduct
of the defendant Harding to justify the finding of oppression
and the order of dissolution. Specific instances of such evi-
dence include testimony regarding the failure of defendant
Harding to call meetings of the board of directors or to con-
sult with plaintiff Compton regarding management of corpo-
rate affairs, his imperious attitude when questioned about his
salary and his dilatory reaction to the plaintiffs' requests.s0
IAIR UATUE I$ TIIE STATI|IIIRII flI UITUE IN APPRAI$AI ANII
OPPBESSIÍ|N IN ATMÍ|ST Att SIATE$
Fair Ualue as DcfinGd [y Vanious Àuth0t'¡ties and Statutcs
Professors Lawrence Hamermesh and Michael'\üflachter write that in Dela-
ware "the measure of 'fair value' in share valuation proceedings is superior,
in both fairness and efficienc¡ to its two main competitors, [fair] market
value and third-party sale value."e1 They posit that the fair value standard
is fairer to opposing parties in a dispute than either fair market value or
third-party sale value because fair value attempts to balance the dangers
that lie in either direction: on one side, that of awarding a windfall to an
opportunistic controller who has forced out the minority shareholders; on
the other side, incentivizing litigation by minority shareholders attempting
to capture value from controllers whose energies and abilities have resulted
in increased company value through a synergistic transaction. These writers
suggest that fair value strikes the best balance in the attempt to value what
was taken from the minority by awarding them the pro rata share of the
existing company's going-concern value. Going-concernuølue is the present
value of the cash llows to be generated from the corporation's existing assets
plus its reinvestment opportunities.e2
Fair value is the standard of value for appraisal in 47 states and the
District of Columbia.e3 State statutes var¡ but most draw inspiration from
eo Id., at 58'1..
e1 Hamermesh and l7achter, "Rationalizing Appraisal Standards," at'1.021'.
'2 Id., at 1,022.
e3 Wisconsin unes fair ualue for all purposes other than business combinations, for
which it uses fair marþet ualue. Wis. Stat. Azn., $$ 180.1301, 180.i130(9Xa).
121
the MCBA (1,969) and the later RMBCAs (1984 and 1.9991.In order to ad-
dress the fair value standard, we look at the definitions in the various itera-
tions. The 1969 MBCA set out that "fair value" was to be the measure by
which the minority shareholder was to be paid for his or her shares, but it
provided no details on fair value's definition. It stated that:
[S]uch corporation shall pay to such shareholder, upon surrender, of
ihe certificate or certificates representing such shares, the fair value
thereof as of the day prior to the date on which the vote was taken
approving the proposed corporate action' excluding any apprecia-
tion or dãpreciãtion in anticipation of such corporate action'e4
In t984, the ABA issued the RMBCA, which added important addi-
tional conccpts to the definition of fair value. It cxcludcd from the value
of minority ihares the synergy value of the objected-to transaction "unless
exclusion would be inequitable"'lt reads:
The value of the shares immediately before the effectuation of the
corporate action to which the dissenter objects, excluding any ap'
preiiation or depreciation in anticipation of the corporate action
unless exclusion utould be inequitøble [added language in italics]'ej
The L984 definition provides a guideline, however nonspecific,. by
which fair value should be determined. The company should be valued on
the day before the corporate action occurs without any of the effects of the
acrion unless their exilusion would be unfair. The passage does not give
instructions on what method or valuation technique should be utilized to
determine the fair value, nor does it defrne inequitable.Twenty-one statesec
currently use this exact definition of fair value. The intentional ambiguiry in
this deÊnition allows for wide interpretation of the assumptions that under-
lie this standard of value. Comments published by the ABA explain that this
definition leaves the matter to the courts to determine "the details by which
fair value is to be determined within the broad outlines of the definition."e7
1z2. STANDARDS OF VALUE
% 1969 RMBCA.
,.5 1984 RMBCA.
e6Alabama, Arizona, Arkansas, colorado, Hawaii, Illinois, Indiana, Kentuck¡
Massachusltts, Michigan, Missouri, Montana, Nebraska, Nevada' New Hampshire,
North Carolina, Oregon, South Carolina, Vermont,'l7ashington, !üyoming'
eTAmerican Bar Association, A Report of the Committee of Corporate LaLus,
"Changes in the Revised Model Business Corporation Act: Amendments Pertaining
to Close Corporations," 54 Bus. Lawyer,209 (November 19981'
Fair Value in Shareholder Dissent and 0ppression 128
!ühile insuring that the courts have wide discretion, this ambiguity can
create confusion on the part of appraisers and appraisal users. Valuation
professionals are well advised to discuss this with counsei so as to come to
an understanding of thc specific interpretation relevant to their state or ap-
propriate jurisdiction.
Although most state statutes use the RMBClt's definition of fair value,
six states have utilized the ALI's concept of fair value in case lawes In the
"Principles of Corporate Gouernance,prrblirh.d in 1,992,the ALI defined fair
value as:
. . . the value of the eligible holder's proportionate interest in the
corporation, without any discount for minority status or, absent ex-
traordinary circumstances, lack of marketability. Fair value should
be determined using the customary valuation concepts and tech-
niques generally employed in the relevant securities and financial
markets for similar businesses in the context of the transaction giv-
ing rise to appraisal.ee
In 1.999, following the development of substantial case law on dissent
and oppression, as well as the publication of the ALI's Principles of Corporate
Gouernance,the RMBCA was revised so that the definition of fair value reads:
The value of the shares immediately before the effectuation of the
corporate action to which the shareholder objects using customa.ry
and current uøluation conceþts ønd techniques generally effiplayed
for similør businesses in tlte context of tbe trønsøction requiring
øppraisø\, and without discounting for lack of marketability or mi-
nority status exceþt, if øppropriate, for amendtnents to the certifi-
cate of incorpolation [added language in italics].100
The t999 RMBCA definition mirrors the ALI's Principles of Corpo-
rate Gouernance ín that it adds two important concepts to the frame-
work: the use of customary and current valuation techniques, and the
rejection of the use of marketability and minority discounts except, "if
appropriate, for amendments to the certificate of incorporation pursu-
ant to section 13.02(a)(5)."101 (The exception permitting discounts for
e8 Colorado, Minnesota, New Jerse¡ Arizona, Connecticut, Utah.
ee ALl, Principles of Corporate Gouernance, at $ 7.22.
100 1999 RMBCA.
r01 $ 13.02(a)(5) of the 1999 RMBCA states that "any other amendment to the ar-
ticles of incorporation, merger, share exchange or disposition of assets to the extent
124 STANDARDS OF VALUE
amendments to the certificate of incorporation is minor in impact.)
The dissenters' rights statutes of 11 jurisdictions currently follow this
definition.102
Other states, including f)claware, have dcveloped their own definitions
of fair value or have used different standards of value in their statutes. For
example, although New Jersey has used fair vaiue as its statutory standard
for appraisal since 1968,103 its oppression statute includes a clause that al-
lows for "equitable adjustments."
Only three states-Louisiana, Ohio, and California-do not explicitly
use the phrase fair ualue for dissenters' rights. Louisiana and Ohio use fair
cash ualue, but with different meanings. Ohiot appraisal standard is unfa-
vorable to dissenters, as discussed later in this chapter under "Ohio's Unique
and Unfavorable Standard of Value in Appraisals." In contrast, the Louisi-
ana statute's wording is favorable: "'[F]air cash value' means a value not less
than the highest price paid per share by the acquiring person in the control
share acquisition [emphasis added]."t0+ Thus, a Louisiana court may deter-
mine that the value is higher than the transâction price, but the dissenter
cannot receive less,
California uses the term "fair market value" in dissent (but not in op-
pression). Its dissent statute states:
The fair market value shall be determined as of the day before the
first announcement of the terms of the proposed reorganization
or short-form merger, excluding any appreciation or depreciation
in consequence of the proposed action, but adjusted for any stock
split, reverse stock split, or share dividend which becomes effective
thereafter.lo5
prouided by the articles of incorporation, bylaws or a resolution of the board of
directors [emphasis added]." The official comment to the 1999 RMBCA states that
if the corporation grants appraisal rights voluntarily for certain t¡ansactions that
do not affect the entire corporation, the court can use its disc¡etion in applying
discounts.
102 Connecticut, D.C., Florida, Idaho, Iowa, Maine, Mississippi, Nevada, South
Dakota, Virginia, IØest Virginia.
loj B ølsamides, 7 34 A.2d 721,, 7 3 6.
loa La. R.S. 12t1.40.2.C. (201.2).
'05 2010 Cal. Corp. Code, Chapter 13, Dissenters'Rights $ 1303 (a). Given this defi-
nition, dissent does not appear to be an attractive option for shareholders, and it is
not surprising that there are no reported California dissent cases.
Fair Value in Shareholder Dissent and 0ppression
The dissolution statutes in California and Alaska permit payment of farr
value in lieu of dissolution, and both state:
The fair value shall be determined on the basis of the liquidation val-
ue as of the valuation date but taking into account the possibilit¡ if
an¡ of sale of the entire business as a going concern in liquidation.106
The term fair ualue in liquidation, as used in California and Alaska, is
unusual since most states attempt to determine fair value in oppression cir-
cumstances under the assumption that the business will continue to operate
as a going concern.
The diversiry among states in their definitions of fair value combined
with the complexity of each state's statutes compels valuation experts to con-
sult with counsel for guidance before undertaking their fairness assessment.
As noted earlier, the majority of states use all or pan of the RMBCA's
definition of fair value. This definition involves several components, and in
<¡rder to understand the requiremcnts of the definition, it is important to
break it down and understand each component separately.
THE UATUATI||N OATE-BETORE THE ETTEGTUATIÍ|N flI TIIE
GORPÍ|RATE ACTION Tfl WHICH THE SHARBIÍ|TIIER Í¡BJEGTS
In both appraisal and oppression cases, the valuation date is a critical com-
ponent that can significantly affect a court's ultimate fair value assessment.
This portion of the definition suggests a time frame for the valuation: it
instructs the court to set a valuation date immediately prior to the corporâte
action from which the shareholder dissents. Most states follow the RMBCA
and say that valuation should reflect the value on the day before the corpo-
rate action occurred or was voted on to which the shareholder dissents' This
indicates that the shareholder should not suffer or benefit from the proceeds
or effects of the transaction from which he or she dissented.
Ualuat¡0n llate ¡n Appra¡sal Ca$es
In appraisal cases, state statutes instruct the court âs to the appropriate
valuation date. Most states definc the valuation date as thc day of, or the
day before, the effectuation of the corporate action from which the share-
holder dissents. However, some states define the valuation date as the day of
'06 Cal. Corp. Code, $ 2000(a); Alas. Stat. S 10.06.630(a)'
12ã
128 STANDARDS OF VALUE
or the day before the shareholder vote.107 California is an anomaly: it uses
day before the transactio Ír wãs announced as the valuation date.
Although the date of effectuation of the corporate action is the valua-
tion date in appraisal cases, what may be considered in the determination
of fair value is often at issue. The general rule is that all information that is
known or þnowable as of the valuation date is generally to be considered.
The Tri-Continentøl case, more than 60 years ago, stated that "facts which
were known or which could be ascertained as of the date of metger" must
be considered, as these are essential in determining value.108
In a few cases, events occurring after the valuation date have been used
as a "sanity test" to check the validity of the corporate transaction valuation
date fairness caiculation. For example, in Lane u. Cøncer Treatrnent Centers,
the court allowed postvaluation date discovery for ayear afler the action to
test the assumptions underlying a prc-merger discounted cash flow (DCF)
calculation.loe
ln Lawson Mardon'Wheøton, the lower courts refused to consider a
post-event acquisition price.110 The New Jersey Supreme Court, recognizing
that Delaware had allowed the use in appraisal of certain post-merger infor-
mation in order to better determine fair value at the time of merger,111 de-
cided to permit the consideration of certain post-event information.il2 The
dissente¡'s assertion was that the trial court's fair value of $41.50 per share
in 1991. was questionable because, in 1,996, an acquisition price of $63 per
share was offered. The court reasoned that the value of $41.50 per share in
1.991.,when the company was doing well, should be questioned in light of
an actual sale in 1,996 at $63 per share when the company's performance
was poofer,
Ualuat¡on Date ¡n 0npnession Gases
In oppression, similarly as in appraisal, the valuation date is crucial to the
fair value determination.
r0TAlaska, Louìsiana, Maryland, Michigan, Missouri, New Mexico, New York,
Ohio, and Rhode Island.
108 Tri-Continental, 7 4 A.zd 7 1,, 7 2.
10e Lane u. CancerTreattnent Centers of America,Inc.,1994 Del. Ch. LEXIS 67 (May
25,1.994),at "10-11.
11o Laruson Mardon.Wheaton u. Smith,716 A.zd 550 (N.J. Super. 1998), reu'd,734
A.2d 738 (N.J. 19ee).
ttl Cede ú CO. u. Technicolor, 1.990 Del. Ch. LEXIS 259 (Oct. 19, 1'990), aff'd in
þart and reu'd in part on other grounds,634 A.zd 3a5(Del. 1993).
112 Lawson Mardon Wheaton,734 A.zd 738,7 51.-52.
Fair Value in Shareholder Dissent and 0ppression 1n
"The [court's] determination of fair value [in oppression cases] is
also critically influenced by the choice of the valuation date' ' ' ' The
question is of enormous consequence to the relevant parties) as a
company's value is affected by internal and external factors that can
matêrialiy change over a short period of time. The designation of
the valuation date therefore is an important inquiry in and of itself,
as the choice of date can significantly affect a court's ultimate fair
value conclusion.'113
The issues concerning the valuation date differ' but are equally impor-
tant to the relief or the remedies for the oppressed shareholder. The vaiua-
tion date Íor Íair value will be the same when (a) the state statute or couft
permits the company or its majority shareholders to attempt to avoid trial
ty electing to puichase rhe dissenter's shares, or (b) no such election is made
(or statutórilypermitted) and the courr finds oppression and o¡ders â com-
pulsory buyout as a remedy.
- The nMscn suggesrs that the court should "determine the fair value of
the petitioner's shares as of the day before the date on which the [dissolution]
petition . . . was filed or as of such other date as the court deems appropriate
under the circumstances.'1r4 Three types of valuation dates may be used, and
there are debates as to which is appropriate and under what circumstances.
The date used in a substantial majority of fair value determinations is the date
of filing (or the preceding day).115 This date not only has the virtue of clarity
and simplicity-it also embodies the notion that the minority shareholderhas
kept hisihareholder status in the company as long as he chose to do so before
feeìing compelled to exit because of oppressive maiority behavior'
The second most frequently used valuation date is the date of oppres-
sion, which may be much more difficult to determine. since oppressive con-
duct usually occurs not on a single date but over a period oftime, the court
may have io "rr.r, when the most severe acts of oppression occurred in
ori., to selecr a valuation date. Although this complicates the date of op-
pression, Moll posits that courts are competent to evaluate the evidence and
to choose a daæ when the most damaging oppressive conduct occurred'116
r13 Moll, ,,shareholder oppression and 'Fair Value,"' at 366-367 . For a comprehen-
sive and informative discussion on valuation dates in oppression cases' see the com-
mentary entitled "The Valuation Date," at 366-381.
T14RMBCA S 14.34(d).
ll5NewYork uses the day before the date the petition was 6led and Rhode Island
uses rhe date of filing. California and New Jersey suggest the date of filing, but leave
the door open for the court to designate an alternative date if more equitable.
r16 Moll, "shareholder Oppression and'Fair Yalue,"' at 371.
ln STANDARDS OF VALUE
The third alternative is a post filing valuation date (i.e., the trial date,
the judgment date, or the date a buyback order is issued)' Moll points out
the flaws in using a post-filing valuation date:
A presumptive post filing valuation date is problematic, however,
because the parties' actions will be influenced by the litigation con-
text. In addition, . . . if the valuation period extends through (and
potentiâlly beyond) the date of trial, experts may be unable to draw
final conclusions about a company's value by the time their reports
are due, by the time their deposition testimony is required, and per-
haps even by the time their trial testimony is needed.rli
The arguments among these different valuation dates differ depending
on whether election is permitted in the state in which the oppression oc-
curred.'\ùlhen the company or majority is permitted to elect to buy out dis-
senters' shares, the argument for the use of the date of filing is strong. As
Moll explains:
[S]hareholders who wish to continue the business may elect to buy
out the petitioner's ownership stake to avoid any risk of dissolution.
. . . [B]ecause an election often occurs before a court has made a
finding of oppression, the election statutes, in most instances, ef-
fectively cÍeate a no-fault "divorce" procedure. . . . [T]he allegedly
aggrieved investor is cashed out of thc business, and no finding of
wrongdoing is made by the court.r18
In nonelection cases, the arguments on balance are more persuasive for
using the date of oppression. Since the majority has frustrated the oppressed
shareholder's reasonable expectations and forced him or her into a non par-
ticipatory role, it can be argued that adverse changes in the company's value
post-freeze-out (or other oppressive act) should not be borne by the op-
pressed shareholder. Moll writes:
The logical consequence of this argument is that a court should set
the valuation date as close as possible to when the oppressive ex-
clusion from management occurred, as that date signifies when the
majority decided that the minority's participation would cease.11e
t17 Id., at 372-373.
t18 Id., at 369.
t1e Id., at 37 5.
Fair Value in Shareholder Dissent and 2ppression 129
In a variation of setting the valuation date as the date of oppression,
some courts view the date of a specific act of oppression as the appropri-
ate vâluation date..!7hen this has been done, it has depended on the spe-
cific facts and circumstances of the case. For cxamplc, a Washington court
ruled that "'fair value' means the shares' value at the moment just before
the majority committed misconduct."120A federai court concluded, "In cases
of minority stockholder oppression, the date of ouster seems appropriately
used,Ð 121
However, in nonelection cases, Moll argues that the use of the filing date
can be justified as a means of allowing an oppressed shareholder the ability
to benefit from increases in the value of the business:
[T]he date of 6ling is defensible as the presumptive valuation
date to the cxtent that it is deemcd to reflect thc "unofficial" end
of a plaintiff's shareholder status. Up until that point, the op-
pressed investor was entitled, as a shareholder, to participate in
any changes in the company's value, It is important to note that
this rationale can work both for and against a plaintiff share-
holder, as changes in the company's value from the date of op-
pression to the date of filing can encompass losses as well as
gains.122
[However,] no one will ever know with certainty what would
have happened because the majority oppressively denied the mi-
nority an opportunity to participate. Because this uncertainty
stems from the majority's conduct, it is appropriate to resolve the
uncertainty against the majority's interests. If a company experi-
enced post oppression losses, a court could legitimately presume
that the minority's managerial participation would have prevented
the decline. On this basis, a court could decide that the minority
does not have to share in the losses.r23
Although valuation dates vary not only among states but sometimes
within states where the courts may use their discretion, "the date of filing
of the oppression action is usually designated as the presumptive valuation
date."t2a
t20 Prentiss u.'Wesspur, Inc., 1997'Wash. App. LEXIS 637 at " 1.-2 (Apr. 28, 1997).
'21 Hendley u. Lee,676 F. Supp. 7317,1327 (D.S.C. 1987).
r22 Moll, "Shareholde¡ Oppression and 'Fair Yalue,"' at 373.
t23 Id., at 377.
t2a Id., at 368.
180 STANDARDS OF VALUE
OU$TÍIMARY ANII CURRENT UAI.UATIÍIN TEGHNIQUES
As a result of numerous fair value cases, a considerable body of law suggest-
ing various methodologies to arrive at fair value emerged in the twentieth
century. One such well-known methodology is the Delaware block method.
Midway through the twentieth century, the Delaware block method was of-
ten used for determining value in the context of appraisal rights,12s and was
relied on almost exclusively by the Delaware courts until 1983. This method
was also adopted in several other states that tended to rely on Delaware
cases related to corporate law
The Delaware block method weights a company's inuestment ualue
(based on earnings and dividends), market ualue (usually based on its pub-
lic trading price, guideline public company information, or guideline trans-
action information), and asset ualue (usually the net asset value based on
current value of the underlying assets). These individual values are deter-
mined and then assigned a weight selected by the valuator to compute the
fair value.l(6 Many viewed the Delaware block method as mechanistic and
not reflective of the techniques regularly employed by those in the financial
community.
In 1983,the Delaware Supreme Court's landmark .Weinberger decisionl2i
enunciated the concept that a company could be valued using alternative
methods customarily cmployed by the financial community' râther than re-
lying on the long-established Delawa¡e block method.
WEINBEREER U. U|¡B IÍ'IG.
UOP, lnc. was a diversified industrial company that engaged in
petroleum and petrochemical services, construction, fabricated
metal, transportation, chemicals, plastics, and other products and
services. lts stock was publicly held and traded on the New York
Stock Exchange. Signal Corporation, lnc. was a diversified technol-
ogy company operating through various subsidiaries, including the
Garrett Corporation and Mack Trucks, lnc.
12s In re General Realty dt Utilities Corp., 52 A.2d 6,11 (1'947).
126 Gilbert E. Matthews and M. Mark Lee, "Fairness Opinions and Common Stock
Valuations," in The Library of Inuestment BanÞing, Vol. IV, R. Kuhn, ed. (Home-
wood, IL: Dow Jones llwin,1990l, at 386.
127 Weinberger u. UOP, Inc., 457 A.2d 701 (Del. 1983) ("Weinberger" ).
Fair Value in Shareholder Dissent and 0ppression
ln 1975, negotiations took place and through tender offer and
direct purchase, Signal obtained its 50.5% interest in UOP at $21
per share, while the stock was trading at slightly under $'14. At
UOP's annual meeting, Signal elected 6 members to the .13-member
board. When the chief executive officer (CEO) of UOP retired in
1975, Signal replaced him with an executive of the Garret Corpora-
tion, who took the old CEO's position on the board as well.
UOP then wenl lhrough some difficult years financially. During
that time, Signal performed a study of the feasibility of acquiring the
49.5% balance of UOP's shares. The study indicated that acquiring
the shares at any price under $24 would be a good value' Signal's
executive committee proposed a merger by which the remaining
shares would be cashed out at $21 per share. UOP's shares were
trading at $.14.50 the day prior to the announcement of the merger.
At the annual meeting, the merger was voted on, and 56% of the
minority shares were voted. Of these, 2,953,812voted in favor of the
merger and 254,850 voted against it. ln May 1978, UOP became a
wholly owned subsidiary of Signal Companies, and UOP's former
minority shareholders were cashed out at $21 per share for their
former interests in UOP.
ln a class action, the plaintiff claimed that the $21 price was
grossly inadequate and unfair to UOP's minority shareholders. He
asked that the minority shareholders be awarded damages or the
appropriate value for their shares based on the substantial assets of
the company. There were additional charges of abuse of authority,
misleading shareholders, and a breach of fiduciary duty for failure
to argue for a higher value of the shares.
The defendants held that their purpose was in no way illegal'
They asserted that the $2'1 per share price, which was a 40% pre-
mium over market price, was more than fair to the minority.
Plaintiff's expert used a comparative analysis based on an
analysis of the premium paid over market in 10 other tender-offer
merger combinations and a discounted cash flow method. By these
methods, he concluded that the value of the shares was no less
than $26 per share. The defendant's expert used the Delaware block
method and weighted the market value, net asset value, and invest-
ment value to come to the conclusion that the $21 share price was
fair to minority shareholders. The trial court agreed with the defend-
ant's expert, consistent with the precedent of utilizing the Delaware
block method to value shares. The Court of Chancery ruled that the
181
192 STANDARDS OF VALUE
merger met the entire fairness standard. lt decided that UOP's fail-
ure to obtain appraisals of all property and assets was not a breach
of fiduciary duty because the appraisals would have no bearing on
the fairness of the merger.
Upon appeal, the Delaware Supreme Court overturned the rul-
ing, stating that there were misrepresentations made by the direc-
tors in the failure to supply sufficient information to shareholders,
including a study conducted by Signal itself concluding that $24
would be a good price to acquire the additional shares,
Until the $21 price is measured on remand by the valuation
standards mandated by Delaware law, there can be no find-
ing at the present stage of these proceedings that the price
is fair. Given the lack of any candid disclosure of the material
facts surrounding establishment of the $21 price, the majority
of the minority vote, approving the merger, is meaningless.
. . . On remand the plaintiff will be permitted to test
the fairness of the $21 price by the standards we herein
establish, in conformity with the principle applicable to an
appraisal-that fair value be determined by taking "into ac-
count all relevant factors."128
The court relied on a 1981 amendment to the state's dissent
statute referencing fair value that directs the court to "take into ac-
count all relevant factors." The court concluded that there was a
legislative intent to fully compensate shareholders for their loss.
The Supreme Court decided that the Delaware block method ex-
cluded other generally accepted techniques used in the f inancial com-
munity and the courts, and was therefore outmoded. lt stated that the
standard should no longer be the exclusive technique used in valuation.
We believe ihat a more liberal approach must include proof
of value by any techniques or methods which are generally
considered acceptable in the financial community and oth-