Valuation & Forensic StrategiesFair Value Defined for Business Valuations

Fair Value is defined as the price a buyer might reasonably expect to pay and a seller might reasonably expect to receive for the subject property, assuming:

  • That the subject property is held for sale on the open market for a reasonable period.
  • That both the buyer and the seller are in possession of all pertinent facts.
  • Neither the buyer nor seller is under any unreasonable compulsion to act, and,
  • That no adjustment shall be made for the non-control status of the subject block of shares.

This definition incorporates the following assumptions:

  • The prospective purchaser is prudent and profit seeking, and without synergistic benefit.
  • The business would continue as a going concern and not be liquidated.
  • The business would be sold for cash or cash equivalent, and
  • The business would be held on the market for a reasonable period of time.

The definition of fair value has been further clarified by the Revised Model Business Corporation Act (RMBCA or the Model Act). This act has been adopted by the American Bar Association's  (ABA) Committee on Corporate Laws and recommended by the ABA's Section of Business Law. It serves as a model for many state legislatures in their creation of statutes concerning rights of objecting shareholders to fundamental corporate changes and certain exchanges of shares.

In a fair value computation, the value of the corporation's shares will be determined:

  • Immediately before the effectuation of the corporate action to which the shareholder objects.
  • By using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring valuation, and
  • Without discounting for minority status.

Item number three above is important because imposing a minority discount on compensation payable to dissenting stockholders for their shares in proceeding under CLS Bus Corp. Section 623 or Section 1118 would necessarily deprive minority stockholders of their proportionate interest in a going concern, and would result in minority shares being valued below that of majority shares, thus violating mandate of equal treatment of all shares of same class in minority stockholder buy-outs.

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