The Minnesota Court of Appeals in Advanced Communication Design, Inc. v. Follett, 601 N.W.2d 707 (Minn. Ct. App. Nov. 2, 1999) held that when a judicially ordered sale results in an oppressing shareholder becoming the sole owner of the corporation, a marketability discount should not be applied in the valuation of the oppressed minority shares. The court noted the lack of any Minnesota law on the application of a marketability discount and based its analysis upon two recent New Jersey cases: Balsamides v. Protameen Chemicals, Inc., 734 A.2d 721 (N.J. 1999), and Lawson Mardon Wheaton, Inc. v. Smith, 734 A.2d 738 (N.J. 1999). The court described the holdings in Balsamides (which applied a marketability discount in the valuation of shares in a forced sale by an oppressor shareholder to an oppressed shareholder) and Lawson (which did not apply a marketability discount in the valuation of shares in a sale by minority shareholders seeking liquidity and who dissented from a corporate decision to restructure, possibly in the form of an initial public offering) as follows:
In Balsamides, the court ordered an oppressor shareholder to sell his shares to an oppressed shareholder. The district court applied a 35% lack of marketability discount to the shares; the appellate division reversed. . . . The New Jersey supreme court reversed the appellate division.
[W]e find that courts in deciding whether to apply a marketability discount to determine the "fair value" of shares of a shareholder forced to sell his stock in a judicially ordered buy-out must take into account what is fair and equitable.
To secure a "fair value" for [the oppressor shareholder's] stock, a marketability discount should be applied. To do otherwise would be unfair ***. The fact that the buyer is known is irrelevant. *** Because the "equities" of this case quite clearly lie with [the oppressed shareholder], it would be unfair to allow [the oppressor shareholder] to receive [the corporation's] undiscounted value.
Balsamides also distinguishes the instant case: "What to do when it is the oppressing shareholder who is given the buy-out option is a harder question that we need not decide."
Lawson concerned a group of shareholders, collectively owning about 15% of the stock, who dissented from a corporate decision to restructure. The trial court concluded that a marketability discount was applicable in the appraisal of their shares because "extraordinary circumstances" were present in that the dissenters had "exploited a change they themselves championed and possibly prevented an IPO (initial public offering) to the detriment of other shareholders." The appellate division affirmed. The New Jersey supreme court reversed:
The very nature of the term "fair value" suggests that courts must take fairness and equity into account in deciding that whether to apply a discount to the value of the dissenting shareholders' stock in an appraisal action. *** There is no reason to believe that "fair value" means something different when addressed to dissenting shareholders *** than it does in the context of oppressed shareholders.
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[M]arketability discounts should not be applied in determining the "fair value" of a dissenting shareholder's share in an appraisal action.
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The dissenters in this case wanted liquidity for their stock and wanted to sell their stock in a corporation now controlled by new management in whom they lacked confidence. That is not an "extraordinary circumstance."
The supreme court reconciled its holdings in Lawson and Balsamides:
In both cases, we apply the same guiding principle - a marketability discount cannot be used unfairly by controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders.
The principles stated in Balsamides and Lawson, the court in Advanced Communication concluded, precluded the application of a marketability discount in the case before the court because an oppressing shareholder was purchasing an oppressed shareholder's shares.
In Balsamides, the court ordered an oppressor shareholder to sell his shares to an oppressed shareholder. The district court applied a 35% lack of marketability discount to the shares; the appellate division reversed. . . . The New Jersey supreme court reversed the appellate division.
[W]e find that courts in deciding whether to apply a marketability discount to determine the "fair value" of shares of a shareholder forced to sell his stock in a judicially ordered buy-out must take into account what is fair and equitable.
To secure a "fair value" for [the oppressor shareholder's] stock, a marketability discount should be applied. To do otherwise would be unfair ***. The fact that the buyer is known is irrelevant. *** Because the "equities" of this case quite clearly lie with [the oppressed shareholder], it would be unfair to allow [the oppressor shareholder] to receive [the corporation's] undiscounted value.
Balsamides also distinguishes the instant case: "What to do when it is the oppressing shareholder who is given the buy-out option is a harder question that we need not decide."
Lawson concerned a group of shareholders, collectively owning about 15% of the stock, who dissented from a corporate decision to restructure. The trial court concluded that a marketability discount was applicable in the appraisal of their shares because "extraordinary circumstances" were present in that the dissenters had "exploited a change they themselves championed and possibly prevented an IPO (initial public offering) to the detriment of other shareholders." The appellate division affirmed. The New Jersey supreme court reversed:
The very nature of the term "fair value" suggests that courts must take fairness and equity into account in deciding that whether to apply a discount to the value of the dissenting shareholders' stock in an appraisal action. *** There is no reason to believe that "fair value" means something different when addressed to dissenting shareholders *** than it does in the context of oppressed shareholders.
****
[M]arketability discounts should not be applied in determining the "fair value" of a dissenting shareholder's share in an appraisal action.
****
The dissenters in this case wanted liquidity for their stock and wanted to sell their stock in a corporation now controlled by new management in whom they lacked confidence. That is not an "extraordinary circumstance."
The supreme court reconciled its holdings in Lawson and Balsamides:
In both cases, we apply the same guiding principle - a marketability discount cannot be used unfairly by controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders.
The principles stated in Balsamides and Lawson, the court in Advanced Communication concluded, precluded the application of a marketability discount in the case before the court because an oppressing shareholder was purchasing an oppressed shareholder's shares.