Making a low-ball offer to buy your corporate stock is probably the most common tactic used by one owner against the other in disputes between business partners. But how do you know when it’s worth the money to fight for more?
I hear it all the time. “I’ve been frozen (or squeezed) out of the company, and my business partner has offered me only X for my shares.” In a vacuum, of course, such an offer is hard to analyze. Is X a good offer? Are your shares worth 5X? 10X? Or is the offer on the table really not so far off from reality?
It is easy to see why this is such a common tactic. Often (but not always) the business partner in charge of the books and records, who is presumably the one in the best position to determine the value of the company, is the one who makes such a proposal. He is in a better position than you to know that his offer to purchase your shares is low; just how low it is may be known only to him. Since you do not have access to the same information that he does, it is very difficult for you to assess the offer, other than to suspect that it can’t possibly be fair.
But shareholders who feel they are being oppressed or squeezed out need to consider several things about pre-litigation offers for their shares. First, it is critical not to assume that the shareholder who controls the finances actually knows what he is talking about. Valuing a business is no easy task. Many things should be taken into account, and you need an experienced business valuation expert (not an attorney) to tell you what the true value is. Second, you must realize that it is highly unlikely that your business partner actually spent the money to hire a valuation expert to value your shares. In other words, there is a high likelihood that his offer bears little relationship to the actual value of your interest, and may be pulled completely from his you-know-what.
If you are in dispute with your business partner, considering litigation, and have to weigh a pre-litigation offer for your shares, don’t do it alone. You should consult with an attorney experienced in handling shareholder dispute litigation. The first thing any such attorney will tell you is that you should first see if there is any underlying basis to the offer on the table. If the majority shareholder or your 50/50 partner, as the case may be, obtained an appraisal for your shares, your attorney should ask to see it. If no appraisal was obtained, he will likely ask for the basis for the number. When no basis is forthcoming, the offer will be exposed for what it is.
An experienced shareholder dispute attorney will also be able to obtain for you the documents that you need to have an expert value your shares. In New Jersey, a corporation must give any shareholder certain financial records, as a matter of law. For the rest of the documents your expert would likely want to see, a threatening letter will often get the documents produced. After all, if you sue, you should get every financial document under the sun.
Lastly, an experienced shareholder dispute attorney should know a good business valuation expert who can do well testifying in court, hopefully at a (relatively) reasonable price. Next time, I will discuss a critical reason why a potential litigant should never hire his own expert – protecting communications as privileged.