Recent Ruling of the Minnesota Court of Appeals on Valuation Issues in Shareholder Oppression Case
By: JAMES E. DORSEY
April 2009
Both majority shareholders and minority shareholders can find things to like in a recent decision by the Minnesota Court of Appeals in a shareholder oppression case. In Helfman v. Johnson, Court File No. A08-0396 (Minn. Ct. App. Feb. 24, 2009), a title-examination company and a real-estate closing company had merged in 1998. By 2003, business was declining, and the majority shareholders issued themselves shares so as to dilute the minority shareholder’s stock by five percentage points. The minority shareholder then brought suit for a buy-out under Minn. Stat. §302A.751 for shareholder oppression. The trial court granted the buy-out and then decided that the value of the whole company should be discounted to reflect certain conditions that would have a negative impact on the price a willing buyer would pay for the company. The minority shareholder appealed claiming that the discount was improper.
On appeal, the Minnesota Court of Appeals affirmed. Minority shareholders can take comfort from the facts that: (1) the trial court granted the buy-out; (2) the court of appeals confirmed that minority discounts in the context of court-ordered buyouts are improper because the legislature enacted Minn. Stat. § 302A.751 to protect minority shareholders who have been unfairly prejudiced; and (3) the appellate court also reiterated that, “absent extraordinary circumstances,” courts should not apply a discount for lack of marketability in the context of the court-ordered buyout.
For the majority, the court upheld the trial court’s decision to discount the value of the company. The court explained that the discount in this case was neither a minority discount nor a marketability discount. Instead, the court held that the application of a discount in this case was justified on the grounds that the discount reflected both the deteriorating market conditions within the subject company’s industry and the lack of non-competes for key employees who were thus able to leave and freely compete against the company.
The case also stands for the proposition that, in the context of doing a valuation for a court-ordered buyout, the court is given broad latitude in determining what valuation technique to use, the weight and credibility of expert testimony, and the right to weigh facts and opinions and draw its own conclusions.