When a closely held company’s owners fall out, the dispute almost always resolves into a single financial question: what does the departing or excluded shareholder get paid?
That question is governed by a different standard of value than most valuation work, and the standard is where the money is. A 30% interest can be worth well over a million dollars more under one standard than the other, with identical financials and an identical appraiser.
General information. Corporate law and the availability of remedies vary significantly by state; work with litigation counsel.
Fair value is not fair market value
Fair market value contemplates a hypothetical willing buyer and seller, neither compelled, both informed. Because a hypothetical buyer of a minority private interest would demand compensation for illiquidity and lack of control, fair market value normally permits discounts for lack of control and lack of marketability.
Fair value is a statutory standard. Its logic is different. In a dissenters’ rights case, the shareholder is not choosing to sell into a market; a corporate action is forcing them out. In an oppression case, the majority’s conduct is what caused the exit. Many courts have concluded that applying marketability and minority discounts in those circumstances would let the majority profit from the very conduct or transaction that triggered the remedy.
The result, in a large number of jurisdictions, is that fair value equals the shareholder’s proportionate share of the enterprise as a going concern, without discounts. Some jurisdictions permit discounts in narrow circumstances, some distinguish between dissent and oppression cases, and some allow equitable adjustment depending on conduct.
This is one of the areas where the appraiser must be instructed by counsel and must not assume. The same expert may produce two very different reports on the same company depending on the governing law and the claim.
The two main contexts
Dissenters’ rights / statutory appraisal
Triggered by a corporate action such as a merger, a sale of substantially all assets, or certain charter amendments. A shareholder who objects and follows the statutory procedure can demand payment of fair value for their shares as of a date typically just before the corporate action, excluding any appreciation or depreciation arising from the action itself.
That exclusion matters. If a merger creates synergy value, the dissenter generally is not entitled to a share of the synergy, only to the value of the company as it stood. Separating deal-specific value from standalone value is often the central analytical task.
Minority oppression / shareholder deadlock
Where the majority has engaged in conduct that frustrates the minority’s reasonable expectations: exclusion from management, termination of employment in a company where employment was part of the ownership bargain, cessation of distributions while the majority takes compensation, dilution, or denial of information rights.
Remedies vary and can include a court-ordered buyout at fair value, dissolution, or an injunction. In many states the corporation or the majority may elect to purchase the minority’s shares to avoid dissolution.
Valuation in oppression cases frequently requires unwinding the effects of the oppressive conduct itself. If the majority paid itself excessive compensation for six years, normalizing that compensation restores the earnings the company would have shown, and therefore the value the minority’s shares should reflect.
What drives the number in these cases
Normalized compensation. Almost always contested. The controlling owner will argue their compensation reflects their contribution; the minority will argue it is a disguised distribution available only to the majority. Market compensation data for the role, hours, and industry is the evidence.
Related-party transactions. Rent to an affiliate, management fees, loans, purchases from an entity the majority owns. Each is examined for arm’s-length character.
Distribution policy. A profitable company that never distributes while the majority draws salary is a classic oppression fact pattern and a classic valuation adjustment.
The valuation date. Statutes often fix it. Where they do not, it is contested, and the choice can be worth a great deal where performance has changed.
Going concern versus liquidation premise. A dissolution remedy implies liquidation; a buyout remedy implies going concern. They produce different numbers.
Marketability at the entity level. Even where a shareholder-level marketability discount is disallowed, some experts argue for an adjustment reflecting the illiquidity of the enterprise itself. Treatment varies by jurisdiction and is often litigated.
Evidence that tends to matter
Shareholder disputes are document-intensive and frequently involve forensic work:
- Minutes and written consents showing what was disclosed and approved
- Compensation history for all owners, compared against market data
- Distribution and dividend history
- Related-party agreements and whether they were approved at arm’s length
- Prior offers for the company or for blocks of stock
- The operating or shareholder agreement, including any buy-sell provision and whether it governs
- Communications showing expectations at formation, which bear on the reasonable-expectations analysis in oppression claims
Where a buy-sell agreement exists and covers the triggering event, it may control and displace the statutory remedy. Whether it does is a legal question that should be resolved before valuation work begins, since the agreement may specify a different standard of value entirely.
Expert positioning
These cases usually involve competing experts, and the gap between them is generally traceable to a handful of drivers. Identifying them early narrows the dispute and is often the path to settlement:
- Standard of value and whether discounts apply
- Normalized owner compensation
- Company-specific risk premium
- Forecast assumptions
- Weighting across approaches
An expert who is transparent about each of these and who applies them consistently is far more useful than one who reaches an aggressive number by stacking favorable assumptions. Credibility is the asset; the trier of fact is comparing two people as much as two documents.
FAQ
Will discounts apply to my buyout?
It depends on the governing state law, the type of claim, and in some jurisdictions the conduct of the parties. This is the first question to settle with counsel because it drives everything else.
Can our shareholder agreement override the statute?
Often yes, where it validly covers the triggering event. Whether it does is a legal determination, and poorly drafted agreements frequently leave gaps.
What if the majority refuses to provide records?
Books and records rights exist in most jurisdictions and are usually the first procedural step. The appraiser should disclose any limitation on the analysis caused by incomplete production.
Should we use one joint expert?
It can work where the parties want to narrow cost and the facts are clean. Where conduct is contested and forensic work is needed, separate experts are more common.
