| For those that have been a victim of a | | | | as reported by the Coolidge Study of actual |
| minority shareholder squeeze out, the | | | | minority shareholder buy-outs: |
| experience can be a nightmare. It usually | | | | |
| involves the majority shareholder first | | | | Average sale price was 36% below accounting |
| terminating the employment of a shareholder | | | | book value |
| of less than 50% of the privately held | | | | |
| company's stock. The benefit to the minority | | | | Only 20% were at discounts of less than 20% |
| shareholders in owning the stock is primarily | | | | |
| their employment and the anticipation of a | | | | 53% sold at discounts ranging from 22% - 48% |
| fair purchase price when the entire company | | | | |
| is sold. | | | | 23% sold at discounts ranging from 54% - 78% |
| | | | |
| Dividends are seldom paid to shareholders, | | | | Note: The metric used was accounting book |
| and if they are, they are minimal. After the | | | | value not fair market value. For most going |
| minority shareholder is terminated, he | | | | concerns, net book value is not even close to |
| receives an offer to purchase his shares from | | | | true market value. Net book value might apply |
| the majority holder or the corporation for | | | | if the company was losing money or making so |
| what he feels is way below market price. When | | | | little money, that the break up value of |
| he objects, he is referred to the shareholder | | | | selling the assets exceeded a valuation based |
| agreement that he signed years ago that gives | | | | on the earnings capacity of the business. In |
| the Corporation or other shareholders the | | | | a company we recently looked at, for example, |
| right of first refusal to purchase his shares | | | | the net book value was about $3 million. The |
| at valuations that are not even close to the | | | | fair value, however, based on comparables and |
| fair value of his shares. | | | | a discounted cash flow valuation was closer |
| | | | to $10 million. So the best way I can |
| The first reaction is to sue. Let me tell you | | | | describe these buyout offers is punishing. |
| it is usually a waste of time and almost | | | | |
| always a waste of money. After all, you | | | | Remember the first reaction is the lawsuit. |
| signed the shareholder agreement that states | | | | Unless the majority owner does something |
| very clearly: | | | | stupidly oppressive, there are no grounds |
| | | | that can force him to buy your shares at |
| Right of First Refusal: The Corporation Shall | | | | anything other than what is stated in the |
| have the power, at its option to purchase any | | | | shareholder agreement. He really does not |
| and all of its shares owned and held by any | | | | have to buy your shares at all. He can simply |
| shareholder who should desire to sell - the | | | | wait you out and pay no dividends, and pass |
| shareholders shall not assign, transfer, | | | | the business down to the next generation. |
| encumber, or in any manner dispose of any or | | | | Your family could conceivably get no value |
| all of the shares of the corporation that may | | | | for the ownership for a hundred years. |
| now or hereafter be held or owned by them, | | | | Remember, most likely your benefit from being |
| and no such shares shall be transferable | | | | a minority shareholder was that you were |
| unless and until such shares have first been | | | | employed by the company. |
| offered to the corporation. | | | | |
| | | | Many squeezed out shareholders try the route |
| It gets worse folks: | | | | of wrongful termination lawsuits. Again, |
| | | | great for the lawyers, not such a sound risk |
| In the event the Corporation exercises its | | | | reward decision. Typically they will spend |
| right of first refusal under the above | | | | $100,000 in legal fees to recover one year's |
| clauses, the purchase price shall be payable | | | | wages of $150,000. Other than the |
| in cash or bank check, and shall be the book | | | | satisfaction of sticking it to the majority |
| value of the shares, exclusive of goodwill, | | | | holder, it is pretty much useless. If you |
| as of the first notice, as determined | | | | think this wrongful termination lawsuit can |
| according to generally accepted accounting | | | | somehow be used to leverage the majority |
| principles and shall be binding upon the | | | | shareholder into paying fair value for your |
| parties. | | | | stock, you are deluding yourself. |
| | | | Unfortunately, the legal counsel you have |
| According to the Coolidge Study Fixing Value | | | | hired will support your delusion. |
| of Minority Interest in a Business Actual | | | | |
| Sales Suggest Discounts as high as 70 percent | | | | A client was attempting this ill-fated |
| from what would be considered the fair value | | | | approach and had been at it for over a year |
| of the entire company multiplied by the | | | | and spent over $100K on a wrongful |
| minority shareholder's percentage ownership. | | | | termination lawsuit. Our advice went |
| | | | something like this, Dan, you are focusing on |
| A number of years of experience has | | | | the wrong thing. You are spending all your |
| demonstrated that it is extremely difficult | | | | time and money thinking your wrongful |
| to find any market for minority interests | | | | termination lawsuit can somehow benefit your |
| | | | cause to improving the buyout offer. If you |
| -despite efforts to do so - On the relatively | | | | win, your one year in salary recovery will |
| rare occasions when an offer is made to buy a | | | | just about break you even with your legal |
| minority interest, it is almost always for an | | | | expenses. You have been offered $500 K to |
| amount far less than the fiduciary and | | | | purchase your 47% interest in a business with |
| beneficiary expect to get. | | | | an enterprise value of $9 million. Let us |
| | | | help you focus your efforts on chasing the |
| Why does this happen? The majority | | | | correct pot of gold. |
| shareholders whose attorneys drew up the | | | | |
| shareholder's agreement certainly balance the | | | | I know what you are thinking. I already know |
| scales way in favor of their clients. | | | | this. I have lived this. Why have I wasted my |
| Secondly, IRS Revenue Ruling 59-60 allows | | | | time reading this article to have you tell me |
| steep discounts when valuing minority | | | | what I already am painfully aware of? OK, |
| interests in privately held companies. The | | | | maybe I can shine a ray of sunshine. We |
| lack of marketability discount can be as high | | | | recommend an investment banking approach to |
| as 40%. A second discount for lack of control | | | | encourage the majority shareholders to allow |
| for up to 40% can be applied on top of that. | | | | the minority shareholders to unlock more |
| | | | value for their shares. It involves a great |
| Armed with this knowledge and backed by a | | | | measure of deal making fineness to help the |
| favorable shareholder agreement, the majority | | | | majority shareholder recognize what's in it |
| shareholder is under no compunction to offer | | | | for him. If that fails, the majority |
| anything close to a fair price for the | | | | shareholder has to make an error and then you |
| squeezed out minority holder. Below is the | | | | can attempt a minority oppression lawsuit. |
| sad news that results from this environment | | | | |