Fair market value or fair value

Fair market value or fair value

Many states have adopted the Revised Model Business Corporation Act as their own state law. Notably, the 1984 amendments to the RMBCA defines “fair value” as “the value of the shares immediately before the effectuation of the corporate action to which the shareholder objects, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable.” Revised Model Bus. Corp. Act §13.01(4) (1984).

This definition notably omits discounts for lack of control and lack of marketability and is markedly different than the concept of “fair market value.” The Illinois Business Corporation Act also defines shareholder valuation in the context of fair value as opposed to fair market value. That is, the Illinois BCA does not apply discounts for lack of control and lack of marketability which could otherwise be unfavorable for minority shareholders in small or closely held corporations.

A company’s governing documents may set forth a procedure for the involvement of and guidelines for hiring experts to provide opinions to determine the value of an exiting minority shareholder’s interest, the use of a particular valuation formula, or even an agreed-upon value.

If an organizational document provides for a third-party appraisal or agreed-upon value, the terms of the agreement can be upheld by the court if the dispute enters litigation. However, if parties lack such terms in their agreements, appraisal standards will be used.

 

To speak to one of our lawyers, get in touch with us at (312) 223-1699 or email Thomas E. Patterson at tpatterson@pattersonlawfirm.com for more advice and information.

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