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How Are Shares Valued by a Court?

Shareholders engaged in a dispute or disagreement with their business partners may attempt to negotiate their own buy-out in resolution of the grievance. However, all too often shareholders in New Jersey improperly assess the value of their shares, usually leading them to accept less than their shares are really worth, and sometimes far less than he or she would have recovered in a lawsuit. There are several steps to avoid, and several that should be taken, when trying to assess a proposed buy-out.

Majority shareholders often will tell a minority shareholder that, if they do not want to be a shareholder anymore, they should follow the procedures set forth in the Buy-Sell Agreement.  Of course, those agreements usually contain a formula that yields substantially less than the shares are really worth.  However, if the acts of the majority shareholders fit within the language of the New Jersey statute, the Buy-Sell agreement, which usually does not contemplate an “involuntary” sale resulting from “oppression,” may not govern.

Instead, the minority shareholder may be entitled to “fair value” for his or her shares, which may be even more than “fair market value.”  No buyer – other than the majority shareholder – may wish to purchase a ten or twenty percent minority interest in a given company.  However, in New Jersey, this is factored into the valuation, and, under certain circumstances, may result in a higher value.

Another common mistake minority shareholders make is to rely on the company’s accountant for valuation information.  That accountant is usually beholden to the majority shareholder, who has the power to fire him or her.  Even if you feel you can assume that the company accountant would not lie or give false information, he or she may not go out of the way to determine whether any “equitable adjustments” to value should be made due to the majority’s conduct which resulted in a deflated share value.

Instead of attempting on your own to determine share value, it is critical to obtain the assistance of a valuation expert.  An attorney with experience in such matters will know whom to avoid, and will know the difference between an expert with impressive credentials and one with impressive credentials who is also impressive in the courtroom.  This distinction could literally mean the difference between success and failure in a contentious litigation.