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Lawson Mardon Wheaton, Inc. v. Smith

315 N.J. Super. 32, 716 A.2d 550 (App. Div. 1998)

CORPORATIONS; SHAREHOLDERS; DISSENTERS’ RIGHTS—A lack of marketability discount may be applied to the value of shares tendered by shareholders that seize upon a non-material corporate restructuring to trigger an appraisal remedy.

Twenty-six shareholders dissenting from a corporate restructuring of a closely held corporation invoked their right to an appraisal and purchase of their shares pursuant to New Jersey statute. The issue raised was whether a discount for lack of marketability of the shares should be applied.

As part of a plan for an initial public stock offering (for the purpose of providing current liquidity to the company’s shareholders) an investment banker advised the company to restructure and become a Delaware corporation. The restructuring plan was approved by the board and then by the shareholders. On the day prior to the restructuring, twenty-six shareholders holding approximately 15% of the company’s outstanding shares, formally dissented from the plan pursuant to the appraisal statute and demanded payment of fair value for their shares. The dissenting shareholders’ initial action was dismissed on the ground that their claims, if valid, were derivative not direct. The investment banker then valued the company’s shares at between $36.87 and $42.53 per share. With this in mind, the company offered the dissenters $41.50 per share. The offer was rejected by the dissenters. The company filed a complaint pursuant to a New Jersey statute seeking determination of fair value. The dissenting shareholders filed a counterclaim. The initial public offering was then terminated when the company was ultimately sold in a merger for $63 per share.

Following trial, the judge applied a 25% “lack of marketability discount” to the value of the company’s stock. The dissenting shareholders appealed, arguing that: (a) most jurisdictions that have considered the issue have rejected such a discount; (b) such a discount creates a disincentive for shareholders to dissent from corporate action; (c) the lower court’s decision placed the dissenters in a subordinate position to the other company shareholders who received $63 per share when the company was sold; and (d) there is no need for a marketability discount since the company itself was purchasing the shares.

On appeal, the Appellate Division held that “lack of marketability discounts” should not be applied generally, citing persuasive decisions from other jurisdictions as well as a section from Principles of Corporate Governance by the American Law Institute. In this particular case, the Appellate Division upheld the discounted price because the dissenters seized upon a non-material corporate restructuring to trigger an appraisal remedy. Their actions and motives constituted sufficiently extraordinary circumstances to permit application of a marketability discount.


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