Fair Value in Florida, a Tale of Two Standards
In the waning weeks of the 2005 legislative session amendments to the Florida Business Statutes were passed. The effect of these amendments was to create a legal minefield regarding the definition of fair value when there is either a dissenting shareholder action or the entity is being dissolved.
Appraisal Rights Actions
Under Florida law, shareholders in corporations, members of limited liability companies, and limited partners whose interest are not publicly traded (collectively the "Owners") have the statutory right to dissent from certain entity actions. These include mergers, exchanges, sales of assets of the corporation/limited liability company/limited partnership (collectively the "Business Entities") other than in the ordinary course of business, or amendments to a corporation's articles of incorporation, operating agreement, or partnership agreement. In exchange, those Owners have the statutory right to receive the fair value of their interests. These statutory rights are commonly referred to as dissenters' rights or appraisal rights.1
Prior to 2005, the Florida Business Statutes defined fair value in appraisal rights actions as the value of the corporation's shares determined:
- Immediately before the effectuation of the corporate action to which the shareholder objects.
- Using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable to the corporation and its remaining shareholders.2
The 2005 amendments specifically expanded the definition of appraisal rights for Business Entities with 10 or fewer Owners, so that fair value would be determined without discounting for lack of marketability or minority status.3
As a result of this expanded definition a significant disagreement has developed as to what fair value means in appraisal rights cases. One view equates fair value with fair market value and factors in certain discounts in determining the value of a minority ownership interest that are common in a fair market value analysis, most notably, a discount for lack of control and a discount for lack of marketability.4
The opposing view rejects the use of those two discounts in determining the fair value of a minority ownership interest on the grounds that:
- The minority interest holder is not voluntarily selling their interest;
- The proceeds from a sale to the majority interest holder should be no different than the proceeds from a true sale of the entire business; and
- Fair value is not equitable if it were to enrich the majority interest holder at the expense of the minority interest holder.5
In fact, one could argue that the statute not only allows, but actually created, two standards for fair value within appraisal rights matters. One if there are 10 or less Owners, which precludes using discounts, and a second where discounts are at the option of the court.6 As a result, in appraisal rights matters, the majority Owner could conceivably increase the number of other Owners to avoid triggering the no discounts language of the statutes. There has been no case law on the issue since the 2005 amendments went into effect.
Florida law also provides that, under certain circumstances, Owners have the statutory right to petition to dissolve the Business Entities in which they own an interest. These include instances such as when the directors are deadlocked in the management of the corporation, corporate assets of a closely held corporation are being wasted, or those in control of the corporation are acting illegally or fraudulently. In those circumstances, rather than allow the Business Entities to be dissolved, the entity itself, or another interest holder of the entity, may elect to purchase the petitioning interest holder's interests for the fair value of those interests.7
While the Florida Business Statutes define fair value in appraisal rights actions they do not define fair value in dissolution actions. As such, we look to case law for guidance for fair value in this realm which rests on the precedent established by Munshower v. Kolbenheyer, 732 So. 2d 385 (Fla. 3d DCA 1999). There, the Court, relying on New York case law, held that a discount for lack of marketability is properly factored into a fair value determination pursuant to §607.1436.
There are several issues with the Munshower decision however. First, the case predates the 2005 amendments discussed above. Also, it provides no reason for its decision beyond the statement that the court would follow New York case law. Thus, this ruling places Florida in a minority of states that permits discounts when determining fair value.8
However, the 2007 Federal case, Cox Enterprises, Inc. v. News-Journal Corporation, et. al. 469 F.Supp.2d 1094, the Court rejected a discount for lack of marketability when determining the fair value of a business that was both profitable and marketable.
The Court in Cox went on to say, "Such a result, not the use of the fair market value method, would be plainly at odds with the Florida legislature's goal of protecting the interests of minority shareholders. I conclude, therefore, that the fair market value method is the proper method of valuation in this case and weight the testimony of the parties’ experts accordingly."
As you can see the 2005 amendments created a legal minefield in Florida regarding the definition of fair value which requires clear guidance from attorneys to avoid valuation complications.
1. Fla. Stat §607.1302, §605.1006, and §620.2114
2. Fla. Stat. §607.1301(4) (2004)
3. Fla. Stat. §607.1301(4) (2006)
4. Rebecca C. Cavendish and Christopher W. Krammerer, "Determining the Fair Value of Minority Ownership Interests in Closely Held Corporations: Are Discounts for Lack of Control and Lack of Marketability Applicable?", The Florida Bar Journal, February 2008
7. Fla. Stat §607.1430, §605.0702, §620.1802