Once a minority shareholder or partner in a business that has been locked out establishes a right to be bought out the next question is how much is the minority interest worth? This is a complex question that as a testifying expert in a case we recently tired explained, is ultimately more art than science.

Illinois courts have stated that there is no precise formula for valuing the stock in a corporation, and a trial court is to consider “[e]very relevant evidential fact and circumstance entering into the value of the corporate property and reflecting itself in the worth” of a dissenter’s shares.[1] A relevant factor is anything that might impact on the stock’s intrinsic value.[2] Some of the factors that may be relevant to a determination of fair value include the stock’s market price, the corporation’s earning capacity, the investment value of the shares, the nature of the business and its history, the economic outlook of the business and the industry, the book value of the corporation, the corporation’s dividend paying capacity, and the market price of stock of similar businesses in the industry.[3] Although “fair value” is not synonymous with “fair market value,” fair market value is another relevant factor to be considered.[4]

Ultimately, making a fair value determination is a fact-specific endeavor requiring the trial court to make an independent appraisal of the corporation, taking into account all recognized methods of valuation, whether or not advanced by the parties.[5]

According to Financial Accounting Standards Board (“FASB”)’s Accounting Standards Codification (“ASC”) 820, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” An “orderly transaction” is a hypothetical transaction assumed to take place on the measurement date with the subject asset having been exposed to the market for the usual and customary period of time for transactions involving such assets in order to provide sufficient time for marketing activities. It is a sale where the seller is not under duress (e.g., a forced liquidation or distress sale). Fair value measurements are considered from the perspective of a market participant that already holds the asset or owes the liability. The objective of measuring fair value is to determine an exit price: the price that a known seller would receive to sell an asset or to transfer the liability to a market participant buyer.

The income approach generally relies on the expectation of future cash flows and/or earnings. In many cases we apply a Discounted Cash Flow Method (“DCF”) to estimate the Enterprise Value of the minority interest by discounting the projected future free cash flows from the business using an appropriate discount rate.

In practice, we are able to maximize settlement by engaging reputable business valuation experts early in the litigation to establish a value for the business. Settlements are achieved by establishing a clear, conservative, value for the business and not wavering from that position.

[1] Stewart v. D.J. Stewart & Co., 37 Ill. App. 3d 848, 853, 346 N.E.2d 475 (1976).

[2] Independence Tube Corp. v. Levine, 179 Ill. App. 3d 911, 917, 535 N.E.2d 927 (1988).

[3] Kalabogias v. Georgou, 254 Ill. App. 3d 740, 748, 627 N.E.2d 51 (1993).

[4] Brynwood, 393 Ill. App. 3d at, 353.

[5] M.G. Bancorporation v. Le Beau, 737 A.2d 513, 526-27 (Del. 1999) followed by Brynwood v. Schweisberger, 393 Ill. App. 3d 339, 353, 913 N.E.2d 150, 162 (2d Dist. 2009).

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