Oppressed Shareholder, Dissenting Shareholder, and Derivative Suits
Oppressed shareholder actions generally are triggered when a minority shareholder in a closely held company seeks a remedy against the majority shareholder. The minority shareholder needs to be able to demonstrate that the majority shareholder, in the majority shareholder’s capacity as a shareholder, director, officer, or employee has abused his or her authority as an officer or director or is guilty of fraud, illegality, mismanagement, oppression, or similar misconduct. In oppressed shareholder actions, the most common remedy requires the company or the majority shareholder to purchase the oppressed shareholder’s shares at the fair value of the shares.
Dissenting shareholder actions begin with a triggering event. The minority shareholder believes that the company’s decision will trigger an adverse effect on the minority shareholder. Dissenters’ rights or appraisal rights are triggered in many situations. Some of these situations are reverse stock mergers or corporate “squeeze outs.” In most states’ statutes, triggering events are company actions such as a merger or sale of the company or a disposition (sale or exchange) of all of the company’s assets. In dissent actions, the only practical remedy is for the company to purchase the dissenter’s shares at the fair value of the shares.
In most states’ statutes, triggering events are company actions such as a merger or sale of the company or a disposition (sale or exchange) of all of the company’s assets.
Valuation Rights and Standard of Value
In these shareholder actions, the minority shareholder is usually not a willing seller of the shares. Valuation analysts should take that perspective into account when considering the applicability of discounts (e.g., for lack of control and lack of marketability).
The Model Business Corporation Act defines fair value as follows: “Fair value, with respect to a dissenter’s shares, means the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporation action unless exclusion would be inequitable.” A majority of the states have adopted the Revised Model Business Corporation Act definition of fair value. Some states have adopted the definition with the phrase ”unless exclusion would be inequitable” excluded.
The concept of fair value rather is driven by state statutes and judicial interpretation. Therefore, it is interpreted based on the facts and circumstances of each case. In these types of lawsuits, the fair market value standard is usually not applicable, although every state is different and the analyst should consult with the attorney regarding the standard of value in the particular state where the action will be tried.
While prior case precedent should be studied for guidance, legal interpretation of prior court decisions is best left to the attorneys. Facts and circumstances vary greatly from one case to another and courts will consider these variations in deciding whether a principle articulated in one case is applicable to the instant case. The court’s postures toward discounts and premiums are highly variable, too.
Valuation Date
In both dissenting shareholder actions and minority oppressed shareholder actions, the fair value should be determined immediately before the triggering event, usually without consideration of the effect of the triggering event.
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