Previously, we’ve written about some of the remedies available to shareholder oppression claimants. Among those we mentioned is the judge’s ability to dissolve the company, or at least the minority’s interest in the company. While these actions can effectively end the oppressive conduct, the question then becomes how will each party’s shares be valued? When shareholder oppression is involved, these valuations can become extremely tricky.
As you can probably imagine, if the judge orders a dissolution of the minority’s interest, the majority will argue for the lowest possible valuation in order to pay the lowest amount. On the flip side, the minority will argue for the highest valuation, so as to receive the most money from the claim. While both sides are likely to present valid valuations, the question of which should be used largely turns on whether certain discounts should apply.
There are two main kinds of discounts that may apply to any business valuation, depending on the particular facts of the case. The first is called a “minority discount.” This discount operates to reduce the value of a minority’s shares, as that minority interest lacks the control of the majority, and is therefore worth less to a prospective buyer. The second is called a “marketability discount.” This discount operates to reduce the value of minority shares because those shares are not easily marketable. Put another way, a prospective buyer will not be able to convert that investment into cash as easily as other types of investments, and will therefore demand to pay less for the shares.
Though these discounts can significantly alter valuations during shareholder oppression proceedings, they are not automatic. Whether each will apply depends upon an analysis of all the circumstances surrounding each case. Regardless of what side you’re on, a shareholder oppression attorney can help you determine the best way to value your interest given the particular facts of your case.