Our Investment Banking firm receives an unusually large sum of inquiries from minority interest shareholders searching for help. Often times they’ve already just been terminated and concurrently be handed a Letter of Intent to acquire their minority shareholder stock.
When they search at these offers, they may be hit making use of their second punch within the gut. The offers tend to be woefully in short supply of what the terminated shareholder expected. However, whenever they start to investigate, the cruel reality with the situation makes its presence felt. IRS Revenue Ruling 59-60 allows steep discounts when valuing minority interests in private companies. The absence of marketability discount will be as high as 40%. A second discount for deficiency of control for about 40% can be applied in addition to that.
Theoretically, when you owned 49.9999% of the company that has a $10 million value which maximum discounts were applied, your $5 million value evaporates into $800,000.
Wait, it gets worse. The oppressive shareholder knows that through either the shareholder agreement or Corporate By Laws, they’ve got every to buy your minority stock with an even bigger discount from fair value. I cannot let you know how many times I have seen almost the identical language as below in By Laws or Shareholder Agreements:
Right of First Refusal: “The Corporation Shall develop the power, at its option to acquire any and all of the company’s shares owned and held by any shareholder who should want to sell……the shareholders shall not assign, transfer, encumber, or even in any manner get rid of any of all in the shares with the corporation that will now or hereafter be held or of them, with out such shares will be transferable unless and until such shares have first been agreed to the corporation.”
Wait, the pain sensation is just beginning… “In the wedding the Corporation exercises its right of first refusal beneath the above clauses, the purchase price will likely be payable in cash or bank check, and will be the book value from the shares, exclusive of goodwill, as from the first notice, as determined based on generally accepted accounting principles and should be binding upon the parties.”
In most examples the “book value” of any company net of a good will is often a small fraction on the true value with the company. I checked out a company recently which in fact had a market price of approximately $10 million. Its book value by using this definition was approximately $800,000. A 40% shareholder needed to sell his shares. According to your shareholder agreement, if, after he was terminated and given his bid in the oppressive shareholder of $500,000, he sought to trade his shares to a outside party, however have triggered the Right of First Refusal clause. The result might be a mandatory sale on the Corporation at a importance of 40% of $800,000 or $320,000. This is not even close to your fair value in the company multiplied by his shareholder percentage.
Unfortunately, traditional legal methods are inadequate to help you these minority shareholders. Their attorneys are still with pursuing a wrongful termination lawsuit. Those turn out to be a frustrating and ineffective make an effort to extract a bit of of respite from this pain these are experiencing. The poor client will discover it hard to win, he can spend the full amount of your potential settlement on estate agent fees and most importantly, he or she is focusing on the best potential reward. His prize is his stock. MidMarket Capital did with several clients in this field and has identified numerous successful strategies that will achieve meaningful exits without legal conflict.