When ownership disputes leads to business valuations

Demystifying Valuation, Economic Damages + Forensic Accounting

Ownership disputes occur among owners of any type of company – corporations, limited liability companies, partnerships, or any other legal business entity. They appear in one of two forms:

  • Dissenting Shareholder Actions – This type of dispute arises when minority owners believe that they are receiving less than fair consideration to which they believe they are entitled from a transaction. They dissent from the less than fair consideration by filing a lawsuit to receive adequate consideration for their share of the company.
  • Oppression Actions – This type of dispute most closely resembles a corporate divorce. The oppressed shareholder (who is typically noncontrolling) seeks dissolution of the company as relief from oppressive acts of the controlling shareholder. Oppressive acts include fraud, mismanagement, freezing out of the noncontrolling shareholder, termination of the noncontrolling shareholder’s employment, or otherwise undertaking any actions with the sole purpose of causing financial detriment to the noncontrolling shareholder.

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In most state jurisdictions, the standard of value for business valuations arising from ownership disputes is fair value (variants in some jurisdictions are “fair cash value” or “value”). However, the definition of fair value is not uniform across states. The Revised Model Business Corporation Act contains a statutory definition of 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 corporate action unless exclusion would be inequitable.

Most states have adopted the definition in the Revised Model Business Corporation Act as it is. Some states have adopted the same definition, but without the phrase “unless exclusion would be inequitable.”

The valuation date depends on the type of dispute. For dissenting shareholder disputes, the valuation date is not as of the day of the shareholder meeting where the shareholder dissented to a transaction. Rather, it is as of the day before this shareholder meeting. For oppression actions, the valuation date is typically as of the date that the complaint was filed with the court.

Fair value as used for business valuations arising from ownership disputes differs from the standard fair market value as used in most applications of business valuations in the following ways:

  • The buyer is not always willing, and might be compelled
  • The seller is not willing and is under compulsion
  • The impact of the proposed transaction is not considered (differs by jurisdiction)
  • Barring extraordinary circumstances, a discount for lack of marketability is typically not applied (differs by jurisdiction)
  • Some jurisdictions have allowed subsequent events to be considered

Many jurisdictions look to Delaware case law for guidance on valuation methodologies under fair value. This is because the state of Delaware is where most ownership disputes are filed. In general, jurisdictions accept the income, market, and asset-based approaches if they are applied following relevant case law (state courts may interpret these valuation methodologies differently).

The appraiser performing a business valuation for ownership dispute action should familiarize him or herself with applicable case law. The appraiser must also consult legal counsel on the engagement for guidance on applicable jurisdictional precedent and legal interpretations.

For more information on how Henry+Horne can help with your Business Valuation, check out our Services page. Feel free to contact us with any questions.