ValueLinks Newsletter

July 8, 2007

Shareholder Actions

Fair Value Not Always the Standard in Shareholder Actions

In New Jersey we often look to fair value as the Standard of Value in Corporate Shareholder Actions.  In simplest terms, fair value is fair market value without the application of minority or marketability discounts. The intent is that minority shareholders are not penalized for taking advantage of the Appraisal Statute and to protect oppressed, minority shareholders from being treated unfairly through application of discounts against their pro-rata stock value.  The oft quoted cases, Balsamides v. Protameen Chemical and Wheaton v. Smith reminds us that, “the guiding principal, …, is that the marketability discount cannot be used unfairly by the controlling or oppressing shareholders to benefit themselves to the detriment of the minority or oppressed shareholders.”  We note that discounts were provided for in the Balsamides matter in order to be fair to the oppressed shareholder.

A recent case in Colorado, Kim v. The Grover C. Coors Trust again reminds us that it is a common misconception to presume that statutory fair value is the appropriate standard of value in every shareholder dispute.  A minority shareholder alleged a breach of fiduciary duty by directors for approving a sale of preferred stock to raise badly-needed capital. Rather than viewing the matter as a dissenters’ rights action the Court focused on the questions of whether the transaction was fair.  As a result, the fair value standard under the state’s Model Business Corporation Act was not invoked and the fair market value standard was applied, including consideration of appropriate discounts.

This case serves as an excellent reminder that standard of value is the first and most important topic of discussion between analyst and attorney at the onset of an engagement. 

Summary of the case, Kim v. The Grover C. Coors Trust

• In 1999 a Colorado packaging company entered into an agreement to fund payback of $525 million of an acquired company’s outstanding debt.  The initial source of funds to repay this debt did not materialize and the Board of Directors had to act quickly to raise cash;

• The Board of Directors decided to sell 1 million shares of convertible preferred stock for $100 million to a trust for which two of the packaging company’s Board of Directors were trustees;

• The Company formed a special committee of independent directors to evaluate the transaction;

• The committee obtained a fairness opinion from an investment bank, indicating that the stock sale was financially fair and approved the sale, including discounts for lack of marketability;

• Shareholder sued, alleging that the directors beached their fiduciary duties in approving the transactions;
• Colorado’s code is modeled after the Model Business Corporation Act (MBCA).  The Colorado code provides that a conflicting interest transaction is measured based on whether the “transaction is fair as to the corporation.”  In looking to MBCA the Court finds that “Fair accords with traditional language in the cases” and “the term as a special, flexible meaning and wide embrace.”

• In response to the shareholder position that discounts were not warranted, the Court responded that “this case is not a dissenters’ rights action.  If involves the question of whether a transaction was fair, not the “fair value” of dissenters’ shares.”

• Finding that the Board of Trustees acted in good faith, the Court concluded that the transaction was fair and discounts between 15% and 20% were allowed.