Under the Illinois Business Corporations Act, the shareholder of a closely held corporation with certain grievances may seek involuntary dissolution of the corporation. (See my prior post on the grounds for dissolution.) However, instead of dissolution, the court may order an alternative remedy: that the corporation buy out the shares of the unhappy shareholder and conduct an evidentiary hearing, called a valuation proceeding, to determine the value of the shares. 805 ILCS 5/12.56(e).
The statute providing for this remedy uses the term “fair value” — rather than “fair market value” — as the standard used to determine the buyout price. The statute provides that “fair value” means “the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances lack of marketability.” 805 ILCS 5/12.56(e) (emphasis added). This language is critical.
“Fair market value” is widely recognized in the business world as the standard for valuing property including equity in a business, and is defined as the price at which the interest will change hands between a willing and able buyer and willing and able seller acting at arms’ length in an unrestricted market, when neither is compelled to buy or sell and when both parties have knowledge of all relevant facts.
Fair market value will typically discount the value of a minority interest in a closely held corporation for lack of control (called a “minority discount”) and because there is no market to sell the interest (“lack-of-marketability”). In contrast, the statute makes clear that courts should not apply these discounts, which offers a significant benefit to the petitioning shareholder who may be awarded a buyout. The parties to an Illinois business divorce must be mindful of this distinction, which has a significant impact in valuation proceedings and court ordered buy outs.
Although the Illinois LLC Act also uses the term “fair value” with respect to valuation proceedings for interests in limited liability companies, this statute makes no mention of minority or lack-of-marketability discounts. 805 ILCS 180/35-65.
(This is for informational purposes and not legal advice.)