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