Valuing Minority Interests in Closely-Held Farming Operations – The “Reasonable Expectations” Theory

Minority shareholders in a small, close-held farming corporation are in a precarious position.  They have no control over management of the corporation and, for example, can’t force dividends to be paid or force a corporate liquidation.  The majority shareholders owe the minority certain fiduciary duties such as acting in good faith, but the majority also has the right to operate the corporation as they see fit under the “business judgment rule.” 

Under the facts of a recent case decided by the Iowa Supreme Court,  a minority shareholder who wanted the corporation to buy-out his interest, never invoked a 1984 buy-out provision that was adopted at his request, but demanded that his interest be bought out at a price he deemed acceptable.  The majority shareholders attempted to negotiate with the minority shareholder in good faith, but the parties couldn’t agree on the “process” for valuing the shares that the minority shareholder could agree to before he sued for “oppression.” While the minority shareholder never established that the majority breached any fiduciary duties with respect to the shareholder, and the corporation was operated in an efficient manner that dramatically increased its value (and, hence, the value of the minority shareholder’s stock interest), the minority shareholder claimed that the majority undervalued his interest by taking into account a minority interest discount and never paying him a dividend.  That, the minority shareholder claimed, constituted oppression, and he sued seeking an order that either the corporation be dissolved or that his shares be bought-out at fair market value.