Value May Be An Obstacle, Even With Agreement About the Need For a Buyout
You’ve had enough of your business partner. Your partner has had enough of you. You want out, and he wants you out. This should be easy, right?
Not so fast.
Even when one owner agrees to separate, and the other owners (or owner if it’s 50/50) agree to buy out the disaffected owner, there still can be business divorce litigation over the value.
You might think the litigation will be faster and easier if “all” you are fighting about is value. You have a valuation that says X; they have a valuation that says Y. How hard can it be? Very hard, because that often is not the end of the analysis.
Valuation discounts, for anything from holding a non-controlling (or minority) interest to lack of marketability, can be steep. Combined, these discounts can be 25-40%, or even more. But they normally do not apply if the shareholder being bought out has been “oppressed” in the eyes of the law. That means that in such cases, there are two disputes – one about value before discounts and one about whether these significant discounts even apply.
This aspect of the law does not necessarily make it easier to resolve difficult cases. The testimony and evidence regarding whether discounts apply is often the same testimony and evidence regarding whether the minority shareholder was oppressed in the first place. As a result, even though all shareholders agree that you need to be bought out, the litigation can be just as protracted and expensive as if no one agreed on anything.
Sometimes though, a party (or his attorney) fails to grasp this nuance of these cases. In one such instance, the parties decided to arbitrate the issue of value. The arbitration agreement contained a clause that said the arbitrator would also arbitrate the issue of whether discounts apply. The only way to accomplish that was to have a full-blown hearing about the conduct of the oppressive shareholder, to see if that conduct gave rise to a finding of oppression. If it did, then no discounts would apply under the law. Amazingly, counsel for the adverse party in that case did not understand this law and took no steps to prepare for the onslaught of negative testimony about the way his client had conducted himself and treated my client.
When both sides agree that you should be bought out, but the fight over value becomes a full-blown, alarmingly expensive proposition, significant frustration can result.
“Why is this so difficult and expensive if all we are fighting about is value?”
Make sure you know exactly what you are getting into when attempting to be bought out, or when attempting to buy out a minority member who wants to exit. Sometimes knowing how difficult and expensive the fight may become will induce both parties to take a proactive approach -- fight less and cooperate more -- before those legal fees mount. Please do not hesitate to reach out to me at dcroberts@norris-law.com.
About the Author – Business Divorce in NJ
David C. Roberts, Chair of the firm, specializes in complex commercial litigation, including fraud, trade secrets, and restrictive covenants, with a focus on business partnership and shareholder disputes in New Jersey. Known as business divorce litigation, these disputes often involve shareholder and LLC member oppression, embezzlement, owner freeze-outs, dissenter’s rights, and efforts to dissociate or expel an owner. Dave strives to resolve matters through mediation but is a seasoned trial attorney when needed. He frequently writes and lectures on minority shareholder disputes. With extensive experience representing both minority shareholders seeking buyouts and majority owners defending against such claims, Dave offers unique insight into the strategies and challenges of business disputes, particularly in family-owned companies.