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CALIFORNIA CORPORATE & SECURITIES LAW

Court Addresses “Fair Value” Determination In Statutory Buyout Proceeding

When when a shareholder sues for involuntary dissolution, the corporation, or the holders of 50% or more of the voting power of the
corporation, may avoid the dissolution by purchasing for cash the plaintiff’s shares at their “fair value.”  Cal. Corp. Code § 2000.  The statute establishes several parameters for determining “fair value”.  Thus, “fair value” must be determined on the basis of the liquidation value as of the valuation date but taking into account the possibility, if any, of a sale of the entire business as a going concern in a liquidation.  Id.  In fixing the value, the amount of any damages resulting if the initiation of the dissolution is a breach by any moving party or parties of an agreement with the purchasing party or parties may be deducted from the amount payable to such moving party or parties, unless the ground for dissolution is that specified in Corporations Code Section 1800(b)(4) (“Those in control of the corporation have been guilty of or have knowingly countenanced persistent and pervasive fraud, mismanagement or abuse of authority or persistent unfairness toward any shareholders or its property is being misapplied or wasted by its directors or officers.”).

The Court of Appeal recently elucidated and reiterated the following elements of the determination of “fair value” in an involuntary dissolution proceeding:

  • The determination of “fair value” should include an assessment of the value, if any, of any pending derivative claims;
  • Section 2000 does not permit a lack of control discount in determining “fair value”; and
  • When a trial court appoints appraisers and then proceeds to determine “fair value”, it should not simply average defective appraisals.

Goles v. Sawhney, 2016 Cal. App. LEXIS 1010 (Cal. Ct. App. 2016).

For those procedurally minded readers, the Court of Appeal found that a statutory buyout proceeding is a special proceeding and construed the trial court’s determination of value as an appealable alternative decree.

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