Robinson v. Langenbach – Applying Valuation Discounts in Statutory Buyouts

Applying Valuation Discounts in Statutory Buyouts

In most states, the appropriate standard of value in statutory buyouts is fair value. Unlike fair market value, fair value generally excludes discounts for lack of control or marketability. As a result, minority shareholders usually receive their pro-rata interest in the company’s entire value on a controlling basis. However, courts may have broad discretion in determining fair value based on case facts.

In a recent shareholder oppression case — Robinson v. Langenbach — the Missouri Supreme Court upheld the application of valuation discounts to avoid a double recovery. The court noted that it’s up to the trial court to determine fair value “by taking into account the context and idiosyncrasies of the particular situation.”

Sibling Rivalry

The case involved a dispute among three siblings who held equal interests in a closely held corporation. Together, the siblings made up the corporation’s board of directors, and the plaintiff sibling served as president and treasurer. When the other siblings became dissatisfied with the plaintiff’s performance in June 2012, they voted to remove her as president and treasurer, though she technically remained on the board. They also excluded her from the company’s offices and provided no salary, benefits, severance pay or dividends.

The plaintiff sued for breach of fiduciary duty and shareholder oppression under Missouri statutory law. She sought equitable relief in the form of dissolution of the corporation, appointment of a receiver or custodian, or a court-ordered buyout of her shares by the majority shareholders.

At trial, the jury awarded the plaintiff $390,000 in damages for breach of fiduciary duty. That amount was based on the increase in the stock’s value during the five-year period between the plaintiff’s removal (June 2012) and the trial date (June 2017). In addition, the court found that the defendants had committed shareholder oppression and ordered them to buy the plaintiff’s shares for $59,000, based on testimony from the defendants’ valuation expert. That value included a 10% discount for lack of marketability and a 15% discount for lack of control.

No Double-Dipping

On appeal, the plaintiff challenged the application of valuation discounts and the June 2012 valuation date. She argued that the shares should have been valued as of June 2017, the trial date.

The Missouri Supreme Court recognized that discounts have limited application in statutory buyout cases, because they “penalize minority shareholders and encourage misdeeds by the majority.” The court explained that all relevant evidence should be considered when determining fair value. There’s no fixed set of factors to review and — unlike fair market value, which is based on hypothetical willing participants — “context is crucial” when determining fair value.

In this case, the defendants’ expert testified that discounts should be applied to avoid double recovery. The supreme court noted that the jury — by awarding the plaintiff $390,000 in damages for breach of fiduciary duty — had already given her the benefit of the stock’s increase in value from 2012 to 2017. The trial court hadn’t abused its discretion, the supreme court found, in accepting this argument.

The supreme court also found that the valuation date was appropriate. The relevant Missouri statute specifically defines the valuation date as “the date of the action objected to by the dissenting shareholder.” As the trial court explained, using this date ensures that the plaintiff “is neither punished by poor results nor benefitted by extraordinary results occurring in her absence.”

When is it Fair to Exclude Valuation Discounts?

A recent decision by the Court of Appeals of Indiana highlights a stock buyback in which valuation discounts for lack of control and marketability were rejected. In Hartman v. BigInch Fabricators & Construction Holding Company, the plaintiff served as the company’s president and was a minority shareholder. After being involuntarily terminated, the plaintiff requested a buyout of his interest pursuant to a shareholders’ agreement.

The agreement called for the buyback price to be based on the interest’s “appraised market value.” A business valuation professional estimated that the value of the plaintiff’s interest was roughly $2.4 million, including discounts for lack of control and marketability. The undiscounted value of the interest was approximately $3.5 million.

The court of appeals reversed the trial court’s application of valuation discounts. The appellate court applied fair value concepts, observing that the “fair value” standard isn’t limited to statutory buyout cases. It opined that marketability and control discounts “have no application in compelled transactions to a controlling party.”

Quoting a federal case applying Indiana law, the court emphasized that “it would be incongruous to discount the shares of the minority shareholder for lack of liquidity when valuation is being done in connection with a proceeding that creates liquidity.” The court ruled that applying discounts would create a windfall for the buyers. In theory, the company and its majority shareholders could purchase the plaintiff’s shares at a significant discount and then turn around and sell the company for its undiscounted value.

Facts Matter

Expert testimony is critical in shareholder oppression cases. Fair value depends on the facts and circumstances — and a business valuation specialist can help the court determine value within the context of a specific case.