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Balsamides v. Protameen Chemicals

160 N.J. 352, 734 A.2d 721 (1999)

CORPORATIONS; SHAREHOLDERS; OPPRESSION—The fair value of a corporation for purposes of a forced buyout under the Oppressed Shareholder’s Statute may take into account a discount for lack of marketability, if applicable.

The primary issue in this appeal was whether, in a buy-out ordered under the Oppressed Shareholder’s Statute, a court should apply a marketability discount to determine a fair value for the shares of stock. Here, two former friends and close associates were each 50% shareholders of the corporation. Eventually, the relationship soured and one of the shareholders sought relief as an oppressed minority shareholder. The lower court rejected the idea of dissolving the corporation because it was worth significantly more as a growing concern, and concluded that a buy-out by one shareholder presented the greatest possibility of prompt resolution and maximum benefit to both parties. In determining the fair value of the selling shareholder’s stock, the lower court accepted the valuation of an expert who had applied a 35% marketability discount. The Appellate Division affirmed the buy-out order and the award of punitive damages, but it concluded that a marketability discount was not appropriate in this case because there was no sale of the stock to the public, and the surviving shareholder was not buying an interest that might result in the later sale of that interest to the public. On further appeal, the New Jersey Supreme Court held that the fair value of the shareholder’s stock should include a marketability discount because the company being bought by the other shareholder would remain illiquid because it was not publicly traded and information about it was not widely disseminated. According to the Court, the lower court validly relied on the testimony of one party’s expert and could ignore the testimony of the other party’s expert. The expert that was most convincing to the lower court ultimately applied the “excess earnings” method of evaluation which is a “formula method” used in such situations, after he applied a 35% marketability discount to determine “fair value.” The Court pointed out that “fair value” is not synonymous with “fair market value,” and that the oppressed shareholder statute requires a determination of “fair value.” Prior to the current law, the applicable statute required payment of “full market value,” which the New Jersey Corporation Law Revision Commission abandoned as a more restrictive standard in favor of the broader and more flexible test of “fair value.” A marketability discount reflects the decreased worth of shares of stock in a closely-held corporation, for which there is no readily available market. The selling shareholder argued that it was inappropriate to assume that there was no market for the company because, in fact, the lower court had ordered that it be sold to a particular buyer. The buying stockholder argued that by not applying a marketability discount to the value of the company, it would have to absorb the full reduction for lack of marketability when it resold the company at a future date. The Court sided with the buyer. It rejected the position of the Appellate Division, because, in its view, that position ignored the reality that the buying shareholder was buying a company that would remain illiquid because it was not publicly traded and public information about it was not widely disseminated. If the company were resold in the future, it would receive a lower purchase price because of the company’s nature. To the Court, if the two shareholders had sold the company together, the price they received would have reflected this illiquidity. They would have split the price and also would have shared that detriment. Consequently, if one shareholder paid the other shareholder a discounted price, the selling shareholder would suffer one-half of the lack of marketability markdown now. The buying shareholder would suffer the other half when it eventually sold its closely-held business. Conversely, if the marketability discount were not applied at this time to the value of the company, the buying shareholder would suffer the full effect of the company’s lack of marketability at the time that it resold the company. Therefore, to secure a “fair value” for the selling shareholder’s stock, a marketability discount was held to be appropriate. Otherwise, it would be unfair and particularly since the selling shareholder, in this case, was the oppressor and the buying shareholder was the oppressed shareholder. A 35% marketability discount was held to be appropriate in this case, if properly applied.


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