The New Jersey Oppressed Shareholder Statute, N.J.S.A. 14A:12-7(1)(c), allows an oppressed minority shareholder in a closely held corporation having 25 or fewer shareholders to bring suit in the N.J. Superior Court. Once oppression has been established, the act allows a judge to, inter alia, order dissolution of the corporation or sale of its stock. If sale of the stock is the remedy, the act allows judicial discretion to structure the sale in a manner “fair and equitable” to all parties, given the circumstances. Typically the court will order the oppressor-majority shareholder to buy out the shares of the oppressed-minority. Where there is to be a sale, the act requires the judge to price the oppressed-minority’s ownership interest at a “fair value” (“FV”). This is where it gets interesting. What is FV? Does FV encompass a minority or marketability discount? Faced with these questions, in 1999 the N.J. Supreme Court in Balsamides v. Protameen Chemicals, Inc. , 160 N.J. 352 (1999), and Lawson Mardon Wheaton, Inc. v. Smith , 160 N.J. 383 (1999), responded that it was not possible to pronounce a consistent rule. Rather, each decision depends on the specific facts of the case, and also should reflect the purpose served by the law in that context. Hence, despite a progeny of cases brought under the act, we are left with a case-by-case resolution, which is an amorphous standard that has proven to be fertile ground for dispute between valuation experts.
The Supreme Court, in Balsamides, addressed the meaning of FV with limited success. Courts in states with similar oppression statutes often look to that state’s dissenting shareholder appraisal statute in defining FV. New Jersey is no exception. As the Balsamides Court stated, “there is no reason to believe that ‘fair value’ means something different when addressed to dissenting shareholders than it does in the context of oppressed shareholders.” Notice that the act uses the term “fair value,” not “fair market value.” While these terms may have similar meanings in other contexts, the difference is quite noteworthy here. FV seeks to adequately compensate shareholders for their interest, while fair market value (“FMV”) is the market’s judgment of valuation: the price that would be paid “between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell.” The two values are rarely equivalent. Until the adoption of the New Jersey Corporation Act in 1968, FMV was the metric utilized in dissenting shareholder valuation. The act jettisoned FMV in favor of FV to permit judges to have more flexibility in valuation. Be careful what you wish for: this flexibility has opened the floodgates for debate and litigation in oppressed shareholder cases.
