Fair Value in Illinois Shareholder Actions
In Illinois, there are two acts which dictate the rules for fair value in the state of Illinois: the Illinois Business Corporation Act (IBCA) and the Illinois Company Liability Act (ICLA).
Prior to 2007, the IBCA did not explicitly define fair value, and only stated: “Fair value, with respect to a dissenter’s shares, means the value of the shares immediately before the consummation 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.” This allowed the courts to exercise discretion regarding the inclusion or exclusion of valuation discounts in appraisal proceedings. This lead to varying court decisions on whether or not valuation discounts are applicable as evidenced by the following decisions prior to 2007:
In Independence Tube Corporation v. Levine, 179 Ill.App.3d 911, 917, 129 Ill.Dec. 162, 535 N.E.2d 927, (1988), both the trial and appellate courts held that valuation discounts should be considered when determining the fair value of Independence’s Class A shares for purposes of buying out a shareholder’s interest.
Similarly, in Weigel Broadcasting Co v Smith, 289 Ill.App.3d 602, 225 Ill.Dec. 1, 682 N.E.2d 745 (1996), the trial court held that it may be proper to consider both the discounts for minority interest and lack of marketability. The Weigel case was a dissenting shareholder action related to the dissenting shareholders being bought out of their Weigel stock through a reverse merger. In reaching its decision, the Court stated the law allows the Court to permit a solution without constraints to the valuation process. Consequently, the Court allowed valuation discounts to determine the fair value of the dissenting shareholder’s stock.
In Randall T. Jahn V. Larry Kinderman, 814 N.E.2d 116, 286 Ill.Dec. 466 (2004), regarding the buyout of a dissenting shareholder in a corporate “freeze out” situation, the trial court disallowed a 35% marketability discount in valuing the dissenting shareholder’s shares. Upon appeal, the Appellate Court affirmed the lower court’s decision. In doing so, the Appellate Court noted that the company shareholders received value in the form of substantial dividends and highly beneficial employment opportunities and consequently.
In Institutional Equipment & Interiors, Inc. v Hughes, 204 Ill App 3d 922, 562 NE2d 662 (2nd D 1990), the Estate of a founding shareholder was “merged out” of its minority interest in Institutional. The Court cited the book value of the company as a factor to consider when determining a value, especially as the majority shareholder purchased its interest in Institutional based on unadjusted book value earlier in the same year. In this case, both appraisers agreed the unadjusted book value of the company was $430 per share. Additionally, the Court weighed all of the factors and methods and disregarded the 20% discount and the 30% premium used by the two appraisers “because on this record we see no need to rely on artificial indicia of value.”
However, in 2007, the IBCA was amended to define fair value. Now Article 11 of the IBCA defines fair value with respect to dissenter shareholders as:
“the proportionate interest of the shareholder in the corporation, without discount for minority status or, absent extraordinary circumstance, lack of marketability, immediately before the consummation 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.”
It should be noted that the ICLA does not define fair value. Article 35 of the ICLA only discusses fair value only to the extent of a member to become disassociated with the company. Section 35-60 of the ICLA states:
A limited liability company shall purchase a distributional interest of a member for its fair value determined as of the date of the member’s dissociation if the member’s dissociation does not result in a dissolution and winding up of the company’s business under Section 35-1.
The amendment to the IBCA to include a definition of fair value has left little question that discounts are now generally not allowed in determining fair value. However, the court may still apply a discount for lack of marketability in extraordinary circumstances.