Partnership and Shareholder Disputes: Valuations‚ Buyouts and Understanding What Your Shares Are Worth
So‚ if your senario is one where:
- You are a partner or shareholder of a New York or New Jersey closely held company or partnership;
- You are involved in a "partnership / shareholder dispute"; and
- It looks like one person needs to / or will be forced to sell his or her shares
Then one of the many relevant questions that you must evaluate is how do you value the shares and what is a fair price?
When it comes to partnership and shareholder disputes in New York and New Jersey‚ one positive thing is the fact that there are clear parameters that must be considered in valuation and buyout situations. However‚ they are "parameters" only and depending on the nature of your dispute there may be wide variation in the outcome of your case and/or negotiation. If you plan properly and fully understand your "litigation and negotiation strategies" ‚ there is room to influence the valuation factors in your favor. Factors to consider include:
- PRE-LITIGATION versus POST-LITIGATION – If your partnership and/or shareholder dispute has not yet reached the "litigation stage"‚ then you need to understand that you will possess much more flexability. That is‚ the valuation model that you adopt will be one negotiated between the parties. Once litigation commences certain statutory valuation measures kick in. In both New York and New Jersey‚ the courts will apply a valuation model that varies between "fair value" and "fair market value" (discussed below);
- MAJORITY versus MINORITY STATUS – Your status as a "majority‚ equal or minority" shareholder‚ member or partner‚ will impact the valuation model applied. That is‚ if you are a minority shareholder and you lack equal control over management then the value of your shares may be reduced by a "marketability discount" to refect the fact that any purchaser of your shares will lack control over the business. (NOTE: If you are a minority shareholder‚ there are ways to get around the minority shareholder discount‚ if you properly plan out your litigation and demonstrate "oppression". If you are a majority shareholder then your job is top avoid issues of shareholder oppression and to avoid this trap).
- ACTS OF MINORITY SHAREHOLDER OPPRESSION? Once buy-out and dissolution litigation arises – to avoid application of a "marketability" discount – minority shareholders will claim that they have been "oppressed" by the majority / controlling shareholders. That is‚ under both New York and New Jersey law‚ if a minority shareholder shows that the majority is abusing its control‚ then the minority shareholder (if successful) may be entitled to a full valuation buyout. If you are part of the controlling shareholders / members then you must be aware of this minority shareholder "trap" by carefully planning out with your lawyer both the structure of your litigation and the method by which you will be required to manage your business.
There are many more factors but the main message that you need to know is that there is tremendous flexability and the outcome of your dispute and‚ ultimately‚ any buy-out that you will be receiving or paying will be heavily influenced by the strategy that you adopt. Avoid the typical "traps" that many litigants fall into. So‚ understand the strengths and weaknesses of your shareholder status and carefully plan out your litigation with the recognition that‚ eventually‚ someone may be bought out.
Date: 12/20/2012 | Category: Partnership Disputes