MINORITY SHAREHOLDERS – EQUAL VALUATION FOR ALL
Corporations, being governed by majority rule, may decay into a tyranny by the majority. When this state of affairs occurs, the minority shareholders interests in the corporation are either ignored or exploited by the majority. In large publicly traded corporations, the minority’s dissatisfaction is relieved by the minority’s option to easily sell shares on the open market. While this option does not alter the behavior of the greater business, the shareholder is generally able to recoup any investment, possibly with a profit, while leaving. A shareholder in a closely held corporation, or other entity, does not have this easy avenue of recourse. Instead, as there is generally no market for the shares, the minority owner must either suffer in silence, convince the majority to relent, or sell out to the majority most likely at a substantial loss. The Florida legislature has taken some steps to correct these injustices with the implementation of Florida Statutes §607.1301 called Dissenters’ Rights and §607.1340 for Judicial Dissolution. The shareholder’s right of dissent in Florida Statutes §607.1301, et seq., also referred to as appraisal rights within the statute, allows a shareholder to obtain fair value for shares sold in objection to a major corporate transaction. The key differences between this form of sale and an ordinary sale of interest are the limitations on the times this sale might be made, only during major corporate transactions, and the price of fair value rather than fair market value. Moreover, under §607.1303 record shareholders may act on behalf of some or all of the beneficial shareholders represented, provided the record holder notifies the corporation of the beneficial holders’ names and addresses. However, notice must be given before a vote on an action or within 20 days after being informed the action will occur. The same section, §607.1321 also requires that the shareholder not be permitted to vote any shares owned in favor of the proposed action; essentially this prevents action on voter’s regret. A right of appraisal is only valid during the instances listed under §607.1302(1); mergers, share exchanges, dispositions of assets outside of the course of business, or amendments to articles of incorporation that affect the above or the rights to vote on future amendments. Prospective dissenters may not demand appraisal in response to more mundane activities such as marketing strategies or executive compensation packages. Those who wish to protest these decisions would be best advised to consider a derivative action against the board of directors. Additionally, corporations listed on major exchanges or those with at least two thousand shareholders owning at least ten million dollars worth of a single class of shares are exempted from the section under §607.1302(2). The rationale for the first exception is straightforward, a ready market exists for the shares and a similar rationale holds for the second as the entity is assumed to be large enough that one can find another person or entity willing to purchase the shares. Fair value is generally much more favorable to the prospective seller than fair market value. Market value would entail getting a price at whatever the market would stand after the action is made public. Fair value as stated in §607.1301(4)(a) fixes the date of valuation immediately before the action would occur. Courts have noted generally that dissenter’s rights statutes are drafted to favor minority shareholders. Boettcher v. IMC Mortg. Co., 871 So.2d 1047, 1052 (Fla. 2d DCA 2004). About the only time fair value results in a lower price than market value would be when a good faith effort to restructure the corporation will be made, but will result in a lower overall value of the shares in a given class. The greatest concern in fair value of minority shares is the refusal of several states to apply minority discounts in the valuation of the shares appraised. Recent cases Friedman v. Beway Realty Corp, 661 N.E. 2d 972 (N.Y. 1995) held that such discounts would improperly deprive the shareholders of the value other their shares compared to those owned by others in the class and would go against the intent of dissenters’ rights. See also Blicth v. Peoples Bank, 540 S.E. 2d 667 (Ga. 2000); Camino, Inc. v. Wilson, 59 F.Supp. 2d 962 (D. Neb. 1999). Shareholders are not limited to getting fair value for shares only during major transactions if the shareholder seeks court appointed judicial dissolution. This drastic sounding section, Florida Statutes §607.1430, et seq., is a petition for the court to dissolve the entity so that the shareholder gets fair value for the shares. However, Florida courts are loath to disestablish an ongoing business concern. Jones v. Harvey, 82 So.2d 371, 372 (Fla. 1955). Courts often find other equitable forms of relief rather than total dissolution of the business entity. An important change to §607.1430 during the 1994 amendments was in §607.1434(4) which expressly provides judicial authority to grant forms of relief other than the dissolution of an ongoing concern. Most commonly, the remaining shareholders have the option to purchase shares under §607.1436 rather than have the entity dissolved. Judicial dissolution narrowly defines the class of those whom may bring an action under the section. First, an action is available when the board of directors is deadlocked that shareholder are unable to break, causing paralysis in the entity. The other action arises when corporate assets are misapplied or wasted. Again, misapplication and wasting of assets refers more towards significant acts of policy and manipulation of share classes and valuation; disagreements in building a factory in Location A versus Location B are handled under other derivative action law, and the business judgment rule. Waste and misapplication by itself does not cover the various forms of majority oppression such as being “frozen out" of the corporation followed by an offer from the majority to purchase at below market prices. Over two thirds of the states have statutory provisions regarding shareholder oppression. Florida is not one of those The legislature specifically excluded such provisions in adopting portions of the Model Business Corporation Act with the stated aim of avoided unnecessary litigation. If litigation is to proceed in Florida, the claim must be addressed in language to resemble waste, or it must be predicated on a breach of fiduciary duty theory. Firing a minority shareholder employee, then watering down the value of the class of stock violated this duty. Biltmore Motor Corp. v. Roque, 291 So.2d 114 (Fla. 3d DCA 1971). Similarly, a valid claim was sustained when a corporation purchased a majority shareholder’s stock at a price inflated to bring the corporation in the shareholder’s debt. Tillis v. United Parts, Inc., 395 So.2d 618 (Fla. 5th DCA 1981). Unlike the minority protection present in dissenter’s rights action, some Florida courts have imposed minority discounts on the value of shares held in close corporations during dissolution actions. Cox Enterprises, Inc. v. News-Journal Corp., WL 2675008 (M.D. Fla. 2005); Munshower v. Kolbenheyer, 732 So.2d 385 (Fla. 3d DCA 1999). One positive aspect of dissolution actions is that while there still must be a fixed date of valuation for the shares, this date need not be set to immediately before a specific act as during a claim of dissenter’s rights. The more flexible valuation can compensate for a series of actions taken to artificially lower stock value. Finally, while there is no existing case law in Florida, if a court chooses to follow Delaware law, then it might apply forward looking valuation techniques that may inflate stock value based on predicted gains.