Shareholder Buyout Valuations
Shareholders and management of private companies sometimes disagree on key corporate decisions, such as investment plans or the level of distributions to shareholders. Often company executives are also significant shareholders. When these disagreements can't be resolved internally, most US states have shareholder rights laws that attempt to seek an equitable resolution. Most state statutes allow a minority shareholder to force the dissolution of the company if specific behavior on the part of the majority shareholders or the board can be established. Often the dissolution is stayed by the court to allow the purchase of the petitioning shareholder's shares, with the value determined by three court-approved valuation experts. The standard of value language under these proceedings is usually not well-described for valuation experts, so a detailed and thorough knowledge of precedent cases is required.
There are also situations where private entity shareholders sell their equity interest to the company or other shareholders without resorting to a legal process. Often, there is no written agreement detailing the process, the price, or the terms of a sale. This can lead to tension between the selling shareholder and the buyers regarding the terms of the transaction. We provide clients with an unbiased and sophisticated perspective on the value of the interest. An important part of the process is ensuring the parties understand how we arrived at our conclusions. Once a value for the interest is settled, we help the parties structure a realistic payment schedule. In smaller companies with limited cash or borrowing capacity, contingent or deferred payments are very common.
Our previous shareholder buyout engagements are available upon request. Please find articles related to shareholder buyout valuations below. Call our number below to discuss any shareholder buyout questions you may have.
"Greg has been a tremendous help to our firm and funds by valuing very 'difficult-to-value' private, early-stage biotech companies. His work is thorough and comprehensive, and is reasonably priced for the great quality provided. He was able to tailor his services to our budget. His reports were on time and very informative. His experience in valuing private companies, and especially biotech companies, is what led us to his firm.
Greg's published articles were also very enlightening and gave us insight into his knowledge. We highly recommend Greg to clients looking for high quality, professional and personable service!"
Viet Ly, General Partner of Inception Capital Management and Inception Capital Group
Articles & Newsletters
Marketability Discounts in New York Statutory Fair Value Determinations, New York State Bar Association Journal, October 2016, Vol. 88, No. 8
"Appraisers appear to try earnestly to get the courts and attorneys to understand the valuation concepts, and when and how marketability discounts are applied, but it seems the parties are locked in either a state of perpetual disagreement or misunderstanding."
Reprinted with permission from: New York State Bar Association Journal, October 2016, Vol. 88, No.8, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.
Are Valuation Discounts Appropriate in LLC Member Statutory Buyouts?, The State Bar of California, Business Law News, Issue 1, 2016
"Prior to 2010, most of the dissolution and buyout cases that were decided by the California courts of appeal involved corporations, with plaintiffs seeking buyouts under California Corporations Code § 2000. Given the rise in popularity of limited liability companies (LLCs), there have been an almost equal number of LLC buyout cases since 2010. The LLC buyout option language in California Corporations Code § 17707.03 is similar to § 2000. However, the language is not precise from an appraiser’s perspective and could lead to a lower value being attributed to an LLC member’s interest than would be determined under the § 2000 language."
Six Questions for Your Section 2000 Appraiser, The State Bar
of California, Business Law News, Issue 4, 2009
"The statute describing the valuation assumptions is rather vague, and although supplemented by reasonable precedent guidance, valuation experts still seem to have wide latitude to interpret the statute’s wording, often with a dramatic impact on the value conclusion. It would not be unusual for one company valuation to yield a value of $1 million, and another a value of $5 million."