SW Legal Educational Publishing

Forced Sale of Minority Stock May Not Be Forced to Incur Discount by Majority
Description Kansas high court held that when minority shareholders are forced to liquidate their stock in a sale to majority shareholders, or to the corporation itself, the appraiser must be independent of the interests of the majority, who have incentives to discount the stock more than would be appropriate when the price was set by a third party.
Topic Business Organization
Key Words Corporations; Minority Shareholder; Valuation
C A S E   S U M M A R Y
Facts The majority shareholders of a bank formed a new company and transferred their stock to the new company that would control the bank. The minority shareholders refused to transfer their stock to the new company so the majority ordered a reverse stock split by which 400 shares became 1 share in the new corporation. This made the minority shareholders owners of only fractions of a share, which would allow them to be eliminated under Kansas law, which allows corporations to terminate fractional shares. The minority shareholders claim they were then offered less than what their shares were worth because the value of the new shares were discounted because they were not marketable, and were also discounted because they were minority shares. In litigation that followed over the value of the shares, the federal district court certified questions to the Kansas supreme court so it could clarify Kansas law on this issue.
Decision Minority and marketability discounts are not appropriate when the buyer of the stock is either the majority shareholder or the corporation itself. Such a sale is different than a sale to third parties, so the interests must be recognized. The sale to a majority shareholder simply increases the interests of those already in control. Allowing the majority shareholder to control the setting of the price would allow a windfall to the majority. An appraiser should view the stock from the position of a third party, recognizing the facts of the limitations that accompany minority interests.
Citation Arnaud v. Stockgrowers State Bank of Ashland, Kansas, - P.2d - (1999 WL 1000415, Sup. Ct., Kan., 1999)

Back to Business Organization Listings

©1997-2000  South-Western, a division of Cengage Learning, Inc. Cengage Learning is a trademark used herein under license.