"Fair Value" or "Fair Market Value": What Concept Should Be Applied in a Shareholder Dispute?

It is a common principle in corporate law that the share value of different shareholders may vary according to their shareholding and/or control position within a company (or corporation).

For example, in some cases, a discount may be applied to the share value of a minority shareholder when a majority shareholder or a third party is about to acquire them. This is known as the "minority discount".

However, such a discount does not apply automatically, especially not in the context of a dispute between shareholders.

In this paper, we will clarify the application of these minority discounts in the context of a dispute between shareholders of a corporation.

We will also clarify the concepts of "fair value" and "fair market value", which are often confused by their users as to their application in determining the share value of a minority shareholder involved in a shareholder dispute.

Minority Discount: A Way to Attract Investors

A minority interest in a corporation means that a shareholder holds 50% or less of the voting shares of said corporation, such that he or she cannot, without a shareholders’ agreement granting him or her additional rights, appoint a majority of directors to the board of directors and thus cannot control the corporation.

Minority shareholders therefore have a limited interest in the company and exercise only limited control over various elements, such as, but not limited to:

• the election of directors;
• the appointment of officers;
• the determination of their remuneration;
• the issuance of shares;
• the payment of dividends;
• the management of the company's assets, etc.

This lack of control by the minority shareholder in the company's decisions can make it difficult for him to sell his shares in the company.

Similarly, in family-owned companies, the sale of minority interests is further complicated by the proximity of the majority shareholders, a situation that may make it less attractive for an outside party to acquire a minority interest in such a company.

For these reasons, a minority discount may be applied to the shares’ fair market value of the minority shareholder who wishes to dispose of his shares.

The shares’ fair market value is the value that can be obtained in an open market between parties dealing at arm's length, whereas the shares’ fair value is the value that is fair and equitable in the circumstances.

In practical terms, a shareholder's lack of control in the company has a downward impact on the shares value of the shares he or she holds, hence the minority discount. This minority discount will therefore encourage an investor to acquire minority interests in a company over which he has little or no control.

However, there are certain situations in which, despite the acquisition of a minority interest, the discount on the sale price of the said interest will not be applicable, particularly when a minority shareholder is the victim of oppressive acts on the company’s and/or a fellow shareholder’s part.

The Application of a Minority Discount in an Oppression Action

The courts have broad discretionary powers under corporate legislation, namely the Business Corporations Act (Quebec) and the Canada Business Corporations Act, particularly in the context of an oppression action brought by a minority shareholder victim of wrongdoing by the directors, the corporation and/or the other shareholders.

For example, if the wrongful behavior so justified, a court could order the company or the other shareholders to buy back the oppressed minority shareholder's shares.

But, in such a case, what will be the value of the shares at which the oppressed minority shareholder shall sell them?

Although the share value in the context of a redemption or a share purchase following an oppression action is left to the court’s discretion, the minority shareholder plaintiff must, in his conclusions, ask the court to apply the "fair value" test. The latter consists of a fair and equitable value in the circumstances and not, as we, unfortunately, see all too often, the "fair market value" test, which takes into account a minority discount.

In fact, a minority shareholder who requests that the court grant the redemption or the purchase of his shares at their fair value will obtain more for them than if he requested that the purchase or redemption of his shares be made at their fair market value.

However, it is important to note that the court’s discretion does not prevent a judge from deciding that, given a particular situation, the fairest value of a minority interest is the fair market value, which would then include a premium or a discount that the judge would deem appropriate to apply in the circumstances.

For example, case law shows that a minority discount will be applied to the value of the minority shareholder's shares when the latter has engaged in conduct justifying his exclusion from the corporation, when he has committed oppressive acts against the other shareholders or when no abusive and/or oppressive acts have been committed against him by the other parties.

In short, there is no automatism in assessing the value of a minority shareholder's shares in the context of a shareholder dispute: everything depends on the case’s context and facts.

If you have any questions about shareholder dispute issues, please contact our Shareholder Disputes team, who will be pleased to assist you.