10/28/2009

Statutory Fair Value of Real Estate Holding Co. Includes Transaction Costs, Taxes

Brynwood Co. v. Schweisberger, 2009 WL 2218728 (Ill. App. 2 Dist.)(July 23, 2009)(unpublished) Several professional tenants in a commercial office formed a C corporation to purchase the property in 1979. The owner of an accounting firm took a lead interest (26%), served on the board of directors, and provided the company’s accounting services until he retired in 1996. The remaining shareholders’ interests ranged from 11% to 14%. The company owned and operated the building as its sole asset for nearly twenty-five years when the directors considered converting to an S corporation, primarily to avoid double taxation (at the corporate and shareholder level). The board also discussed selling the building and dissolving the company. The building was appraised five times, with values ranging from $850,000 to $1.43 million. In 2000, the company repurchased the shares of two non-tenant owners at $42.50 per share. During the next year, it offered to repurchase the interests of all non-tenant owners, including the retired accountant, for $48.50 to $50.00 per share. Click here to read the rest of this abstact.

The doctrine of shareholder oppression protects a close corporation minority investor from the improper exercise of majority control. When a minority shareholder establishes “oppressive”majority conduct, a court typically orders the majority to purchase the minority’s stock at its “fair value.” But what does fair value mean? Further, when is fair value to be measured? The questions are critical ones that affect the lives of countless close corporation investors and that generate an enormous amount of present-day litigation. This Article builds a case for defining fair value as enterprise value in the shareholder oppression context. The Article argues, in other words, that the buyout remedy should provide an oppressed minority investor with his pro rata share of the company’s overall value, with no reductions (or “discounts”) for the lack of control or liquidity associated with the minority’s shares. Moreover, the Article suggests that, in many situations, courts should allow an oppressed shareholder to choose between the “date of filing”and the “date of oppression”as the appropriate valuation date.