Fair Value in Connecticut Shareholder Actions
Connecticut law applies the fair value standard of value in both dissenting and oppressed shareholder actions. However, the fair value standard is explicitly defined by state statute for purposes of dissension, and is determined by case law for oppressed shareholder actions. Whether defined by statute or by case law, both circumstances typically do not allow minority discounts or discounts for lack of marketability, and both clearly distinguish fair value from fair market value.
CT General Statute § 33-855 (Right to an appraisal and payment for shares) defines1 fair value in dissenting shareholder actions as follows:
"Fair value" means the value of the corporation's shares determined: (A) Immediately before the effectuation of the corporate action to which the shareholder objects, (B) using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and (C) without discounting for lack of marketability or minority status except, if appropriate, for amendments to the certificate of incorporation pursuant to subdivision (5) of subsection (a) of § 33-856.
While fair value is not explicitly defined in § 33-900 (Election to purchase in lieu of dissolution), discounts for lack of control and lack of marketability have historically been rejected, except in extraordinary circumstances.
DeVivo v. DeVivo2 is oft cited as rejecting the fair market value standard of value and, therefore, discounts for lack of marketability and lack of control. Interestingly, the court did apply a discount for lack of marketability due to extraordinary circumstances in this case. DeVivo involved the judicial dissolution of two 50% shareholders where the defendants elected to purchase the shares of the plaintiff claiming oppression, and the court was asked to determine the fair value of the plaintiff's stock.
The Court in DeVivo held:
Under the dissenters' rights statute, § 33-855 and its counterpart under the Model Business Corporation Act, § 14-34(a), a shareholder, dissenting from a corporate merger, share exchange, sale of all corporate property, or an amendment to a certificate of incorporation that materially and adversely affects the rights in respect of the dissenters' shares, is entitled to the fair value of his shares. The courts and authorities have recognized that "there is no reason to believe that 'fair value' means something different when addressing dissenting shareholders that it does in the context of oppressed shareholders."
The Court further concluded "that the proper method to determine 'fair value' of the shares of a petitioning shareholder under § 33-900 is to ascertain the value of the corporation as a whole and allocate value to the shares of the petitioning shareholder in proportion to the percentage interest they represent in the corporation."
As to the application of minority and lack of marketability discounts, the court rejected both as a matter of course within the meaning of § 33-900, for three distinct reasons:
- Such discounts deny petitioning shareholders the full proportionate value of their shares that they would receive on dissolution.
- The discounts unfairly enriches the corporation or buying shareholders who may reap a windfall from the appraisal process by cashing out the petitioning shareholders at less than the proportionate value of the latter's shares.
- The discounts penalize the petitioning shareholders for taking advantage of the protection afforded by the appraisal statute.
Finally, the court considered whether extraordinary circumstances warranted a discount for lack of marketability in this instance. Citing the Minnesota case of Advanced Communication Design v. Follett, 615 N.W.2d 285 (Minn. 2000), the court found that similar extraordinary circumstances existed in this case. Specifically, in DeVivo the corporation's net worth and cash flow were insufficient to support the payment of the value of the plaintiff's equity interest. The court declared that payment of this value would strip the corporation of the cash flow and earnings necessary for future growth, and therefore applied a 35% discount for lack of marketability to the valuation.
The case Conway v Carpenter3 involved two minority shareholders of two related companies claiming the controlling shareholders failed to declare dividends, paid themselves excess compensation and mismanaged the companies. The defendant elected to purchase the plaintiffs' shares under § 33-900 and the court was asked to determine the fair value of the plaintiffs' interest. The court ruled that, in accordance with DeVivo, no discounts for lack of marketability or lack of control were applicable. In addition, the defendant had asked that the court discount the value of the companies for capital gains tax which would be incurred if the corporate assets were sold. The court rejected the application of a discount for capital gains tax, as no evidence existed that the assets would be sold or for how much (and no evidence was presented that the assets must be sold to purchase the plaintiffs' shares), making any discount speculative.
In summary, discounts for lack of control and lack of marketability are generally not allowed in both dissenting and oppressed shareholder cases. Exceptions may exist in the extraordinary circumstance that a corporation has insufficient cash flow to make payments. In addition, there may be circumstances where a capital gains tax could be applied to discount that value if a sale is deemed necessary and imminent.
1. As used in sections 33-855 to 33-872 inclusive.
2. 30 Conn. L. Rptr. 52, 2001 WL 577072, 2001
3. Conway v. Carpenter, No. CV 04-4005121S (May 16, 2007)