In many situations, a court may have to determine the fair vale of a shareholder or partner’s stake of a company. A dispute may result in a buyout, for example. When this happens, it’s important to understand just what exactly the court is looking for, to understand the test they’re applying.
The relevant law in Illinois the Business Corporation Act (BCA). As it name suggests, the BCA covers just about everything corporation-related in the state. When it comes to valuing shares, Section 805 ILCS 5/12.56 provides in part: “(e) If the court orders a share purchase, it shall: (i) Determine the fair value of the shares, with or without the assistance of appraisers, taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section. For purposes of this subsection (e), ‘fair value’, with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.”
Hearing “fair value” you might assume “fair market value” is meant, but the two terms are distinct. Fair market value is a narrower test, meaning essentially “what price would these shares receive on the open market.” It takes into consideration not just the health of the company but also the marketability of the shares. Fair value, on the other hand, doesn’t allow for such discounts and further takes int consideration “the reasonable expectations of the corporation’s shareholders as they existed at the time the corporation was formed and developed during the course of the shareholders’ relationship with the corporation and with each other.”
Unsurprisingly, when such different tests are applied to valuing shares, the results can differ drastically.
Horowitz Law Offices represents shareholders and partners in all manner of disputes and disagreements. You are welcome to contact us at (312) 787-5533 or email@example.com