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Important Valuation Issues In Dissenting Shareholder Cases

Posted in Business Valuation, on Feb 2019, By: Mark S. Gottlieb


We are presently working of several assignments concerning dissenting shareholder disputes.  Attorneys that represent clients in such matters can attest that there are many challenges unique to these cases.  One of them, and perhaps the most prominent, relates to the value of the business subject to the dispute.  Within this broad context, attorneys need to be familiar with a number of valuation issues affecting their case.  These often include a familiarity of the standard of value, the valuation date, and valuation method to be employed. This week’s blog briefly discusses these issues. Hopefully, it will set you in the right direction.

Standard Of Value

The standard of value for dissenting shareholder cases in most states is fair value, although the term is subject to different statutory and judicial interpretations. Generally, fair value is defined as the value of the plaintiff’s shares immediately before the corporate action that the shareholder objected to. Fair value typically excludes any appreciation or depreciation related to the corporate action unless exclusion would be inequitable. This definition may not necessarily be synonymous with the “fair market value” standard of value. For instance, the dissenting shareholder is not usually a willing participant in the transaction; nor is the transaction consummated on an objective, unbiased basis. Also, fair value usually doesn’t always include discounts for lack of control and marketability. Some jurisdictions may recognize one of these discounts — or leave the application of these discounts to the court’s discretion based on the case’s facts and circumstances. Where such discounts are prohibited, the rationale is that the discounts give controlling shareholders a windfall by cashing out a dissenting shareholder at less than the pro rata value of his or her shares.

Effective Date

Statutes in most states say that fair value should be determined as of the day before the contested corporate action. As previously stated, these statutes are based on the notion that the dissenting shareholder shouldn’t suffer or benefit from the effects of the contested action. Note that different effective dates might be used in shareholder oppression cases where the plaintiff isn’t challenging a specific action but claiming unfair treatment in general by the controlling shareholders. In those cases, the business may be valued as of the day the lawsuit is filed (or the day before filing), the date of oppression, or a postfiling date (such as the trial date, the judgment date or the date of the buyback order).

Valuation Methods

Appropriate valuation methods vary depending, in part, on the company’s industry, assets and operating history. Courts accept several different approaches when valuing a dissenting shareholder’s interest:

Income Approach. The discounted cash flow method is a common valuation method in these cases, especially in Delaware, where many companies are incorporated. The capitalization of earnings method, which likewise falls under the income approach, is also used to compute fair value, particularly when long-term financial projections aren’t available and the company’s earnings have stabilized.

Market Approach. When comparable transaction data is available, a valuation expert also might apply the market approach or consider prior transactions and offers involving the subject company’s stock. (See “Court turns to failed IPO to value dissenter’s interest” below.) Courts tend to give significant weight to transactions negotiated by unrelated third parties. But fair value may be less than the price in an arm’s length transaction because that price might take into account the corporate synergies that would result from the transaction or the buyer’s ability to improve the company’s performance.

Cost (Asset Based) Approach. Experts occasionally apply the cost approach in dissenting shareholder cases. But courts are split on adjusting the value of a dissenter’s interest for the tax consequences of built-in gains under the cost approach. Courts in some states ignore the tax consequences unless the company was actually undergoing a sale or liquidation on the valuation date, but others allow it regardless of the likelihood of incurring capital gains tax.

A Complicated Matter

Business valuations for dissenting shareholder cases involve complicated issues that may require special treatment based on the venue. Attorneys should work closely with experts to ensure that valuations are based on the applicable requirements for the standard of value, effective date, valuation methods and other factors that will affect the expert’s conclusions. Hopefully, this short summary has been helpful.  If you have questions about this or any other valuation issues feel free to contact me at the above phone numbers.  I can also be reached via email at


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