SW Legal studies in Business

Minority Shareholders Get Control Premium When Forced to Sell Out
Description Iowa high court held that minority shareholders forced to sell their stock to the majority shareholders get a control premium added to the value of their stock based on the fair market value of control premiums generally paid when a party gets complete control of a company.
Topic Business Organization
Key Words Minority Shareholder; Valuation; Control Premium
C A S E   S U M M A R Y
Facts Several shareholders owned 8.6% of the stock in River Cities Investment Co. The rest was owned by Northwest Investment Corp. As it had the right to do, the majority shareholder voted that the minority shareholders must sell their shares. The River Cities board determined the fair market value to be $33.23 per share, based on an appraisal. The minority shareholders demanded $64 per share for their stock based on another appraisal. That appraisal determined that the higher price was justified as a control premium. River Cities then offered $48 per share, but that was refused and litigation resulted. The district court found the minority shareholder valuation to be more credible and ordered a price of $64 a share be paid. The majority shareholder appealed.
Decision Affirmed. The main issue in contention is the inclusion of a control premium, which is the basis for pushing the price up to $64. A control premium is the additional consideration an investor could pay over the value for a minority interest to own a controlling interest in the common stock in a company. The appraiser properly based his opinion on fair value of the stock, in part, on sales data involving mergers and acquisitions. He determined that control premiums ranged from 36% to 52%; he adopted 40% for a conservative approach. That was a fair valuation, so the price of $64 holds.
Citation Northwest Investment Corp. v. Wallace, ---N.W.2d--- (2007 WL 2012419, Sup. Ct., Iowa, 2007)

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