South Florida Arbitration & Litigation Lawyer Blog
South Florida (Boca Raton, Florida) Corporate and Shareholder Business Dispute Litigation and Arbitration Attorney:
Florida Minority Shareholder Election Statute:
607.1436 Election to purchase instead of dissolution.
Fla Stat. § 607.1436 gives the court charged with valuing shares in a corporation discretion to determine the most appropriate valuation method by which to arrive at “fair value.” A trial court’s selection of one valuation method over another does not require reversal. The valuation process is fact specific with an emphasis on the particular circumstances of the case. The factors to be considered in determining ‘fair value’ are market value, investment value, and net asset value, and the weight to be accorded each factor depends upon the circumstances of the particular case.
A. Consideration of Fair Market Value:
Florida courts have explained that determination of “fair value” for the purposes of the election statute rests on determining what a willing purchaser in an arm’s length transaction would offer for an interest in the subject business. This is not to say that “fair value” is synonymous with “fair market value.” Most courts have rejected the notion of such synonymity. However, the terms are not mutually exclusive. On one hand, as Florida courts have explained, where “fair market value” would take into account appreciation or depreciation in anticipation of corporate action such as a merger or acquisition, the valuation process under § 607.1436 must exclude both positive and negative effects of any such impending transaction. On the other hand, a court may use fair market value as an estimate of “fair value” when such potentially distorting corporate actions are not at issue.
Accordingly, Florida courts have recognized that valuation proceedings necessarily confront them with a variety of evidence and methods aimed at determining the price of minority interests. In valuing a corporation, a court should consider proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court such as net asset values, market price, earnings, and the like.
B. Definition of “Going Concern” and Normalization of EBITDA:
The “fair value” of a business should be determined based on the value of that business as a going concern. The term “going concern” is generally understood to refer to a commercial enterprise actively engaging in business with the expectation of indefinite continuance. In the valuation context, it is generally used in contradistinction to a business that will be liquidated. Essentially, it requires an appraisal to assume the continued operation of the same type and size of business and to exclude consideration of any merger or liquidation.
C. Compensation for Past Misconduct:
Entry of an order directing the purchase of minority shareholdings pursuant to Fla. Stat. § 607.1436 requires the dismissal of the underlying petition for dissolution pursuant to § 607.1430. § 607.1436(6). However, courts have clarified that “fair value” still ought to take into account any effect thereupon of corporate asset waste or other harm caused by mismanagement.
In a comparable sales analysis, corporate waste would affect the estimation of fair value in that it would result in higher expenses, which would, in turn, yield a lower operating margin. Normalizing the operating margin according to that of comparable businesses for any distortion caused by greater than normal expenses.
D. Prejudgment Interest:
Section 607.1436(5) provides that the valuing court “may” award interest “at the rate and from the date determined by that court to be equitable. The statute further provides that “no interest shall be allowed” when the petitioning shareholder has acted arbitrarily or in bad faith by turning down a purchase price or otherwise lengthening the proceedings. In other words, giving the statutory language its plain and ordinary meaning, the only limit on the court’s discretion to award prejudgment interest on the value of shares to be purchased arises when the minority shareholder at issue has acted in bad faith.
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