'Fair Value' and Discounting in N.J. Shareholder Oppression Cases

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.

New Jersey is not alone in its struggle to define FV. Nationally, interpretation is split between the FMV (hypothetical transaction) approach and that of enterprise value. The N.J. Legislature has apparently opted for something different than FMV with its marked redefinition in the New Jersey Corporation Act. The enterprise value approach sees the oppressed shareholder as an investor with no choice but to cash out his ownership interest. It assumes that, were it not for the adverse conduct by the oppressor, the oppressed would have retained ownership and continued to enjoy benefits commensurate with his or her share of the company. Rather than conjuring up a fairy-tale romance between a fictional buyer and seller of a minority interest in a closely-held corporation, the enterprise valuation claims to run parallel to reality. In this light, the enterprise approach values the company as a whole and then apportions its pro rata value to each shareholder. Excess earnings, discounted cash flow, the formula method, or some combination thereof may be utilized in calculating FV.