Fair Value in Massachusetts Shareholder Actions
By Marissa Pepe Turrell, Director, Advisory Services
Shareholder disputes in Massachusetts involving dissension and oppression both have significant case history to draw from. However, the courts’ interpretation of the remedies available to minority shareholders in each of these actions have been very different. Shareholder dissension actions have relied on the fair value standard in determining the value to be awarded to the dissenting shareholder. Whereas, under oppression actions, minority shareholders have fewer recourses and unlike in many other states, have little ability to demand a buyout, for fair value or otherwise, unless explicitly stated in the entity’s governing documents.
The standard of value in Massachusetts for shareholder dissension is fair value, as defined in Massachusetts General Laws 156D, § 13.01:
“Fair value,” with respect to shares being appraised, the value of the shares immediately before the effective date of the corporate action to which the shareholder demanding appraisal objects, excluding any element of value arising from the expectation or accomplishment of the proposed corporate action unless exclusion would be inequitable.
It is also well settled in case law that fair value in shareholder dissension actions is applied without discounts for lack of control or lack of marketability.
The case, Spenlinhauer vs. Spencer Press, Inc. 81 Mass. App. Ct. 56 (2011), where a minority shareholder objected to the price received in a cash-out merger of the corporation with another corporation, clearly articulated the fair value standard under Massachusetts case law. In upholding the trial judge’s decision to appraise the minority shares value as the pro rata percentage of the net selling price, the appellate judge stated:
The Massachusetts approach to the determination of “fair value” is consistent with the position taken by the American Law Institute and the national trend of interpreting “fair value” as the proportionate share of a going concern “without any discount for minority status or, absent extraordinary circumstances, lack of marketability.” American Law Institute, Principles of Corporate Governance: Analysis and Recommendation, § 7.22(a) (1994) (ALI Principles of Corporate Governance).
The court in Spenlinhauer cited a number of cases in support of his decision not to value the minority interest above the pro rata value, including Shawnee Telecom Resources, Inc. v. Brown 354 S.W.3d 542 (Kentucky 2011), where fair value was stated “not as a hypothetical price at which the dissenting shareholder might sell his or her particular shares, but rather as the dissenter’s proportionate interest in the company as a going concern.”
The court also cited Sarrouf vs. New England Patriots Football Club, Inc. 397 Mass. 542 (1986), where stockholders of the New England Patriots Football Club franchise rejected the corporation’s per share offered price. The court in Sarrouf concluded that, as a going concern, the value of an enterprise “is the price a knowledgeable buyer would pay for the entire corporation.” Interestingly, the court in Sarrouf also concluded that earnings played little part in that particular valuation as “there exists a class of extremely wealthy individuals willing to purchase National Football League franchises at prices not directly related to the earnings or prospective earnings of the football team [in order to become] a member of an exclusive club — NFL Franchise-owners.”
While the court in Spenlinhauer acknowledged that the American Law Institute allows for discounts in extraordinary circumstances, this case did not present such an occasion. Further, the reasoning behind valuing a minority interest on a pro rata basis was cited from McLoon Oil Co. 565 A.2d 997 (Maine 1989) “Any rule of law that gave the shareholders less than their proportionate share of the whole firm’s fair value would produce a transfer of wealth from the minority shareholders to the shareholders in control. Such a rule would inevitably encourage corporate squeeze-outs.”
Massachusetts has a long history of attempting to balance shareholder rights in oppression cases. The court established protection for minority shareholders beginning with the seminal case Donahue v. Rodd Electrotype Co. of New England, Inc. 328 N.E.2d 505 (Massachusetts 1975), where the Massachusetts Supreme Judicial Court ruled that the defendant must buy a minority shareholder’s stock on the same terms as it had purchased other shareholder’s stock. The ruling held that, for close corporations, “the relationship among the stockholders must be one of trust, confidence, and absolute loyalty” and that shareholders owe one another a strict fiduciary duty. However, this broad ruling of stringent duties to minority shareholders has been chipped away at slowly over the years in an attempt by the courts to allow legitimate business decisions that would be less harmful to majority shareholders.
In 2006, in Brodie v. Jordan 447 Mass. 866, the Massachusetts Supreme Judicial Court ruled that in the absence of an agreement requiring the buyout of shares, the court did not have the power to impose a buyout of the interest of the minority shareholders whose rights had been breached. In its ruling the court stated: “The proper remedy for a freeze-out is to restore [the minority shareholder] as nearly as possible to the position [s]he would have been in had there been no wrongdoing.”
Subsequently, in O’Brien v. Pearson 449 Mass. 377 (2007), the court upheld the idea that the minority shareholder’s benefits should be restored to what they would have been had a breach not occurred. However, the court also held that the theory of lost profits was too speculative to assign a value, thus no damages were awarded.
Currently, only shareholders who have the power to vote on the question of dissolution and who own more than 40 percent or more of an entity have the ability to request judicial dissolution under Massachusetts’ corporate dissolution statute (156D, § 14.30). Such a vote is only allowed in the event that the directors are deadlocked and real harm to the corporation would occur if the deadlock were to continue.
These cases and many others illustrate the Massachusetts courts’ growing unwillingness to interfere in actions involving a breach of duty to minority shareholders. In the absence of court involvement, Massachusetts shareholders must rely on an entity’s governing documents as the basis for minority shareholders’ rights and determining remedies to violations.