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The New Louisiana Business Corporation Act Remedies and Valuation Standard

By Steven G. “Buzz” Durio, A. Anderson Hartiens, and Travis J. Broussard

The transformational new Louisiana Business Corporation Act (LBCA) creates previously unknown remedies for minority shareholders and a new business valuation standard for Louisiana. The full impact of its new remedies cannot be realized without understanding its change of the controlling business valuation standard.  By mandating the use of “fair value”, the LBCA legislatively completes the jurisprudentially initiated elimination of minority and marketability discounts announced by the Louisiana Supreme Court five years before in Cannon v. Bertrand.[1]

The New Act

The new Business Corporation Act was the result of Acts 2014, No. 328, eff. Jan. 1, 2015 and became La. R. S. 12: 1-101, et. seq.[2] Drafted by a Committee of the Louisiana Law Institute, as reported by LSU Law Professor Glenn Morris, it was based on the Model Business Corporation Act 1999 and subsequent revisions.[3] Significant changes to prior law include a new section governing shareholder derivative actions,[4] an extensive elaboration of appraisal rights, formerly referred to as dissenting shareholder rights,[5] and a completely new remedy – the shareholder’s right to withdraw.[6]

The New Remedies

Appraisal Rights

Appraisal rights are triggered by substantially the same transactions under the LBCA which previously triggered dissenting shareholder’s rights under the LBCL, but without the exception which previously disallowed them in cases where there was eighty percent approval of the triggering transaction.[7] A new obligation of notice, with specified disclosures and information is imposed upon the Corporation.[8] Appraisal rights now specifically include the right “to obtain payment of the fair value of that shareholder’s shares”.[9]

Withdrawal

The shareholder’s new remedy of withdrawal is contained in La.R.S.12:1-1435(A) which simply states:

If a corporation engages in oppression of a shareholder, the shareholder may withdraw from the corporation and require the corporation to buy all of the shareholder’s shares at their fair value.

The predicate for this new remedy is “oppression”, which is defined by La. R.S. 1435B:

A corporation engages in oppression of a shareholder if the corporation’s distribution, compensation, governance, and other practices, considered as a whole over an appropriate period of time, are plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder. Conduct that is consistent with the good faith performance of an agreement among all shareholders is presumed not to be oppressive.[10]

This new remedy incorporates a standard for business valuation which is also essentially unknown to Louisiana statutory law: “fair value”.[11]

The New Standard

This new standard of “fair value” enters the law of Louisiana traditionally populated by cognate but variant terms such as “fair cash value”,[12] “value” to “pay in money”,[13] and “fair market value”,[14] which have applied statutorily to the evaluation of dissenting shareholder rights,[15] the interest of a withdrawing partner,[16] and a membership interest in an LLC,[17] respectively.  The Business Corporation Act repealed the reference to “cash value” in connection with dissenting shareholder rights under the old Business Corporation Law and replaced it in the new chapter on appraisal rights under the Business Corporation Act.

Under the new LBCA, fair value is defined in connection with appraisal rights  by La. R. S. 12:1-1301 (4):

 (4) “Fair value” means the value of the corporation’s shares determined immediately before the effectuation of the corporate action to which the shareholder objects, using customary and current valuation concepts and techniques generally employed for similar businesses in the context of the transaction requiring appraisal, and without discounting for lack of marketability or minority status except, if appropriate, for amendments to the articles pursuant to R.S. 12:1-1302(A)(5).[18]

This same definition is incorporated in the new withdrawal remedy by La. R.S. 12:1-1435C:

The term “fair value” has the same meaning in this Section and in R.S. 12:1-1436 as it does in R.S. 12:1-1301(4) concerning appraisal rights, except that the value of a withdrawing shareholder’s shares under this Section and R.S. 12:1-1436 is to be determined as of the effective date of the notice of withdrawal under Subsection D of this Section.[19]

Prior to the new Business Corporation Act, the terms “cash” value and “value” had been subsumed by the term “fair market value”.[20]  It was generally acknowledged that “fair market value … is not the pro rata share … of the fair market value … of the entire business …. [and] can be impacted by such factors as …. minority discounts”. Pratt, Shannon P., The Lawyer’s Business Valuation Handbook, p. 4.[21] Thus the reference to “fair market value” was generally understood to require such discounts for minority status or lack of control and lack of a market or marketability.[22]

However, the Louisiana Supreme Court in Cannon v. Bertrand, 2 So.3d 393 (La. 2009) largely signaled the death knell for the application of minority or marketability discounts. See 57 La. Bar. J. 24, Discounts in Business Valuations After Cannon v. Bertrand.[23] Since then, Louisiana’s Business Corporation Law has been completely repealed.[24] The new Louisiana Business Corporation Act which replaced it, La. R.S. 12:1-101, et seq., effective January 1, 2015, eliminates the use of minority discounts by referencing “fair value” instead of “fair market value”.  See La. R.S. 12:1-1301(4), 1302, 1435, passim. Thus, in terms of valuation standards, the new Business corporation act is both the logical extension and the inevitable conclusion of the analysis the Supreme Court accepted in Cannon v. Bertrand.[25]

Conclusion

The cumulative effect of these new remedies and the new valuation standard in the Business Corporation Act cannot be underestimated. The direct remedy of withdrawal from a corporation was unavailable,[26] dissolution was practically impossible,[27] and even a successful minority shareholder’s claim for the indirect remedies of receivership,[28] or dissenting shareholder’s rights,[29] or a derivative action for the devaluation of interest,[30] or an action for damages,[31] were all destined to be pyrrhic victories, because minority or marketability discounts of up to 70% were not uncommon.[32]  For experienced business practitioners who have long represented minority shareholders and have so often experienced justice frustrated, the new Business Corporation Act remedies and valuation standard generate a feeling comparable to Moses’ bittersweet view of the promised land.[33]


Footnotes:

[1] 2 So.3d 393 (La. 2009). See, Discounts in Business Valuations after Cannon v. Bertrand,  57 La. Bar. J. 24. Mr. Durio served as counsel and Mr. Hartiens was the testifying valuation expert for Mr. Cannon in Cannon v. Bertrand.
[2]  Act 328 also repealed former Chapter 1, the “Business Corporation Law”, consisting of R.S. 12:1 to 12:178. See 2014 revision comment to La.R.S. 12:1-101.
[3] Id.
[4] See Section 1-740, et seq. The Act also included a provision which exempts shareholder derivative proceedings as defined in the LBCA from the application of Chapter 5 regarding “Class and Derivative Actions “ of  the Code of Civil Procedure. See La. Code Civ. Pro. Article 611B.
[5] See Section 1-1301, et seq.
[6] See Section 1-1401, et seq.
[7] La. R.S. 12:131(A).
[8] See La. R.S 12:1-1321.
[9] La. R.S. 12:1-3012(A).
[10] Section 1435 goes on to state:

The following factors are relevant in assessing the fairness and good faith of the corporation’s practices:

(1) The conduct of the shareholder alleging oppression.
(2) The treatment that a reasonable shareholder would consider fair under the circumstances, considering the reasonable expectations of all shareholders in the corporation.

A thorough discussion of these qualifications is beyond the scope of this article and should probably await judicial interpretation
[11]   Fair value for business valuations should not be confused with the term fair value measurements in financial reporting. The definition of fair value for financial reporting is: (1) the exit price to sell an asset or transfer a liability (conceptually different from a transaction price); (2) a market-based measurement; and (3) a price that should be adjusted for transaction cost.  Fair value considers the concepts relating to assets and liabilities in Financial Accounting Standards Board Concepts Statement No. 6, Elements of Financial Statements, in the context of market participants.  A fair value measurement reflects current market participant assumptions about the future inflows associated with an asset (future economic benefits) and the future outflows associated with a liability (future sacrifices of economic benefits).
[12] La. R.S. 12:131(C).
[13] La. Civ. Code Arts. 2823-24.
[14] La. 12:1325(C).  See also the statute for community property partitions, La. R.S. 9:2801.
[15] See note 9, supra.
[16] See note 10, supra.
[17] See note 11, supra.  See also the statute regulating community property partitions, La. R.S. 9:2801.
[18] This provision stems verbatim from the Revised Model Business Corporation Act of 1999 as reflected in the 2002 edition. See, Pratt, Shannon P., The Lawyer’s Business Valuation Handbook, p.293-94.
[19] Section 1-1435 provides that the corporation may accept the notice of withdrawal or dispute the allegation of oppression in an ordinary proceeding.  Section 1-1436 applies after a notice of withdrawal and acceptance or a determination of oppression, and provides for a judicial determination of “fair value” by summary proceeding if the parties fail to determine it by negotiation within sixty days.
[20] See Shopf v. Marina del Ray Partnership, 549 So.2d 833 (La. 1989) as discussed in and distinguished by Cannon v. Bertrand, 08-1073 (La. 1/21/09), 2 So.3d 393.  See also, 57 La. Bar. J. 24, Discounts in Business Valuations after Cannon v. Bertrand.
[21] “The largest single issue in most shareholder and partner valuation disputes is whether discounts and/or premiums are applicable, and if so, what is the magnitude of such discounts and/or premiums? The most common issues involve minority discount or control premiums and discounts for lack of marketability”.  Pratt at 298.
[22] See Shopf, 549 So.2d 833 at 849, as quoted in Cannon, 2 So.3d 393 at 395-96: “The most significant adjustment must be made in recognition of the fact that [Shopf’s] share is a minority interest in a closely held business. The determination of the value of a fractional share in a business entity involves more than fixing the value of the business and multiplying by the fraction being evaluated, especially when the share is a minority interest. A minority interest may be uniquely valuable to the owner, but may have considerably less value to an independent third party, because the interest is relatively illiquid and difficult to market …. There is no testimony in this record discussing the applicability of a minority interest discount to plaintiff’s share, but some reduction is clearly warranted. Under the circumstances of this case we apply a discount of one-third …. as the fair market value.”
[23] Cannon noted: “Nationally, the trend in law is away from applying such discounts. See, e.g., 7 La. Civ. L. Treatise, Business Organizations § 4.11 (2008).  Cannon, 2 So.2d 393 at 396, note 4.
[24] Acts 2014, No. 328, Section 5, eff. Jan. 1, 2015.  See also note 2, supra.
[25] “Minority discounts and other discounts, such as for lack of marketability, may have a place in our law; however, such discounts must be used sparingly and only when the facts support their use. …. Furthermore, discounting the market value …. would be inequitable. The withdrawing partner should not be penalized for doing something the law allows him to do, and the remaining partners should not thereby realize a windfall profit at his expense.” Cannon, 2 So.3d 393 at 396.
[26] The withdrawal remedy was previously available only in connection with partnerships and LLC’s. See notes 13 and 14, supra.
[27] See, e.g., Gruenberg v. Goldmine Plantation,360 So.2d 884 (La. App 4 Cir. 3/14/78.
[28] Previously provided under La. R.S. 12:145.
[29] Previously provided under La. R.S. 12:131.
[30] Previously provided under La. Code Civ. Pro Art 611 et seq., but See La. R.S. 12:1-740 et. seq..
[31] See, e.g., Combs v. Howard, 481 So.2d 179, 183 (La. App. 3 Cir. 1985).
[32] See Combs v. Howard, 481 So.2d 179, 183 (La. App. 3 Cir. 1985) Justice Knoll’s critical observations regarding the use of minority or marketability discounts in her concurring opinion in Combs were the beginning of the process in Louisiana which culminated in Cannon and their elimination from the definition of fair value under the LBCA. Much credit must also go to Professors Wendell Holmes and Glenn Morris of the LSU law school whose writings in the Louisiana Civil Law Treatise, Business Organizations, crystalized the arguments against the application of discounts.
[33] See Deuteronomy, 34,1-4. Unlike Moses, however, a few us are still hoping we will get to live here under the LBCA a while.

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