Fair Value in New Jersey Shareholder Actions
The standard of value in New Jersey shareholder actions is defined in case law as fair value. Fair value is very similar to the fair market value standard as defined in the Treasury Regulations for federal estate tax and gift taxes except for one major difference – how discounts, namely discounts for lack of control and lack of marketability, are applied.
Two seminal cases, both decided by the Supreme Court of New Jersey on the same day, provide guidance on the applicability of valuation discounts in dissenting shareholder and oppressed shareholder actions.
Lawson Mardon Wheaton Inc. v. Smith IV III III III defines fair value in dissenting shareholder actions. In this case, twenty-six shareholders of Lawson Mardon Wheaton, Inc., a closely held company, dissented to a corporate restructuring and invoked their rights to an appraisal action under N.J.S.A. 14A:11-1 through 14A:11-11. The trial court ruling disallowed a discount for lack of control and applied a 25 percent discount for lack of marketability. The applicability of the discount for lack of marketability was affirmed by the appellate court and ultimately reversed by the Supreme Court. The Court’s reason for disallowing any valuation discounts was to prevent controlling shareholders from gaining wealth by acquiring minority shareholder interests at a discount. As such, the fair value standard for dissenting shareholder actions in New Jersey does not allow valuation discounts except in extraordinary circumstances.
Balsamides v. Protameen Chemicals, Inc. defines fair value in oppressed shareholder actions. Emanuel Balsamides, Sr. (“Balsamides”) owned 50% of Protameen Chemicals, Inc. (“Protameen”) with Leonard M. Perle (“Perle”) owning the other 50%. In this case, Balsamides petitioned the Court for a dissolution of Protameen under the New Jersey oppressed shareholder statue N.J.S.A. 14A:12-7. The Court ordered Perle, the oppressing shareholder to sell his shares to Balsamides, the oppressed shareholder. The main issue in this case was the applicability of a discount for lack of marketability (a discount for lack of control was deemed inapplicable). The trial court applied a 35 percent discount for lack of marketability, which was reversed by the appellate court. The Supreme Court ultimately reversed the appellate division’s decision holding that a marketability discount was applicable in this instance. The Court reasoned that allowing an oppressing shareholder to receive the pro rata value of his shares from the oppressed shareholders would encourage shareholders to harm other shareholders since there would be no fear of losing any value in the company if an action for dissolution was brought under the oppressed shareholder statute. As such, the fair value standard for oppressed shareholder actions in New Jersey allows discounts for lack of marketability when the oppressed shareholder is buying-out the oppressing shareholder.
Both of these cases show that the Court’s intention was to protect minority shareholders by allowing or disallowing valuation discounts in an attempt to achieve a more “fair” price for all shareholders who may be impacted given the specific facts and circumstances surrounding the case. The discount for lack of marketability in New Jersey shareholder actions is therefore the mechanism that the courts utilize in these instances.