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Lawson Mardon Wheaton, Inc. v. Smith

160 N.J. 383, 734 A.2d 738 (1999)

CORPORATIONS; SHAREHOLDERS; DISSENTERS—Absent extraordinary circumstances, a marketability discount should not be applied to the value of the shares being tendered by a dissenting shareholder in the context of a statutory appraisal action.

The principal question in this case was whether a court should apply a “marketability discount” in determining the “fair value” of shares of stock held by dissenting shareholders in a family-held corporation in the context of a statutory appraisal action. Until 1991, the corporation was a privately-held business. At that time, one of the shareholders was forced out of the company and sold some shares to a foreign corporation. That corporation secured option agreements to purchase an additional portion of the company and made a conditional offer to buy all of the company stock. The corporation’s directors rejected the offer. In an attempt to further restrict future public sales of the company stock, controlling family members approved a plan to restructure the corporation. Consistent with the appraisal statute in effect at that time, it gave dissenting shareholders the right to demand payment for the “fair value” of their shares. A demand was made by shareholders holding approximately 15% of the stock and the company offered to buy the stock using a non-marketability discount of 25% on the theory that there was a limited supply of potential buyers. The lower court did not apply a general rule, but concluded that the “extraordinary circumstances” of the case mandated application of a discount. It believed that the dissenters had exploited a change they themselves had championed and possibly prevented an initial public offering to the detriment of the other shareholders. The Appellate Division accorded deference to the lower court’s findings of fact and concluded that when the dissenters seized upon a non-material restructuring to trigger an appraisal remedy, such action constituted “extraordinary circumstances” to warrant application of the marketability discount.

There was no disagreement about the basic technique to be used for determining fair value of the shares, but the New Jersey Supreme Court felt it necessary to explain the distinction between a marketability discount and a minority discount. In its view, some courts confuse those terms. A minority discount adjusts for lack of control over the business entity on the theory that non-controlling shares of stock are not worth their proportionate share of the firm’s value because they lack voting power to control corporate actions. A marketability discount adjusts for a lack of liquidity in one’s interest in an entity on the theory that there is a limited supply of potential buyers for stock in a closely held corporation. The very nature of the term “fair value” suggests that courts must take fairness and equity into account in deciding whether to apply a discount to the value of the dissenting shareholders’ stock in an appraisal action. After reviewing cases from around the country, the Court found most persuasive those cases holding that marketability discounts should not be applied. In its view, a rule that imposes a discount on the exiting dissenting shareholder “fail[s] to accord to a minority shareholder the full proportionate value of his shares ... [and] enriches the majority shareholder who may reap a windfall from the appraisal process by cashing out a dissenting shareholder… .” Such a rule would penalize the minority for taking advantage of the protection afforded by the appraisal statute. The Court noted that there may be situations where equity demands another result. In its view, those situations are best resolved by resort to the “extraordinary circumstances” exceptions. Consequently, under this very limited exception, a court may determine that a discount reflecting the lack of marketability of shares is appropriate. A court should apply this exception only when it finds that the dissenting shareholder has held out in order to exploit the transaction giving rise to appraisal so as to divert to itself value that could not be made available proportionately to other shareholders. Here, the dissenters wanted liquidity for their stock and wanted to sell their stock in a corporation now controlled by new management in whom they lacked confidence. The New Jersey Supreme Court did not find an “extraordinary circumstance.” Instead, it noted that most appraisal cases involving family-held corporations concern family feuds. “To find such circumstances extraordinary would be inconsistent with the purposes of the Appraisal Statute.” In reviewing the record, the Court did not agree that the dissenters “sought to exploit the transaction.” All of the corporate actions taken were adopted by the majority shareholders, who ran the company without any participation by the dissenters. In short, the company instigated the share restrictions and restructuring; the dissenters merely pursued their lawful options. Accordingly, the Court refused to diminish the value of their fair share.


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