Fair Value Buy Out
“Fair value” as defined by statute is much more favorable to a minority shareholder than selling shares for fair market value or any other metric of value normally employed when selling an interest in a small business. The Illinois Business Corporations Act defines fair value as: “taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section.”[1]
The Illinois Business Corporations Act provides in pertinent part:
“(e) If the court orders a share purchase, it shall:
(i) Determine the fair value of the shares, with or without the assistance of appraisers, taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section…
For purposes of this subsection (e), “fair value”, with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.
The purchase ordered pursuant to this subsection (e) shall be consummated within 20 days after the date the order becomes final unless before that time the corporation files with the court a notice of its intention to dissolve and articles of dissolution are properly filed with the Secretary of State within 50 days after filing the notice with the court.”[2]
The statute providing for this remedy uses the term “fair value” — rather than “fair market value” — as the standard used to determine the buyout price.[3] The statute further provides that “fair value” means “the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances lack of marketability.”[4] This language is critical here where the majority owners frequently assert (likely based on outdated law) that they are entitled to a discount when purchasing the minority interest. Illinois law is clear that discounts at the shareholder level are disallowed because they result in undervaluing the dissenters’ shares while overvaluing the majority’s shares, thereby effectively punishing the minority shareholder for exercising his statutory right to dissent.[5] The whole purpose of the statute is to protect minority shareholders. A minority shareholder with competent counsel can be very powerful. Filing suit alleging shareholder oppression essentially turns the tables and puts the majority in the corner forcing settlement or an expensive fact intensive fight.
The section of the Illinois Business Corporations Act providing for this remedy uses the term “fair value” — rather than “fair market value” — as the standard used to determine the buyout price. 805 ILCS 180/35-65 The statute provides that “fair value” means “the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances lack of marketability.”[6] This language is critical to maximizing settlement value for a partner who has been shut out of an Illinois small business. Discounts at the shareholder level are disallowed because they result in undervaluing the dissenters’ shares while overvaluing the majority’s shares, thereby effectively punishing the minority shareholder for exercising his or her statutory right to dissent.[7] The law is clear and when the issue is forced with a lawsuit the minority can take control of their financial interest.
The Illinois Business Corporations Act, (805 ILCS 5/12.56) provides:
“If the parties are unable to reach an agreement as provided for in paragraph (5) of this subsection (f), the court, upon application of any party, shall stay the proceeding under subsection (a) and shall determine the fair value of the petitioner’s shares pursuant to subsection (e) as of the day before the date on which the petition under subsection (a) was filed or as of such other date as the court deems appropriate under the circumstances.”[8]
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[1] 805 ILCS 5/12.56(e)(i).
[2] 805 ILCS 5/12.56(e).
[3] 805 ILCS 180/35-65.
[4] 805 ILCS 5/12.56(e).
[5] Brynwood v. Schweisberger, 393 Ill. App. 3d 339, 359 (2d Dist. 2009).
[6] 805 ILCS 5/12.56(e) (emphasis added).
[7] Brynwood, 393 Ill. App. 3d at 359.
[8] 805 ILCS 5/12.56.
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