Chicago Business Litigation Lawyer Blog
The offer to buy your shares arrives as a single page. You built a quarter of the company over fifteen years, and the letter values your stake at a number that would not cover two good years of the distributions you used to take. The controlling owner calls it generous. His accountant has trimmed it once for your lack of control, trimmed it again because the shares are hard to sell, and used a valuation date that happens to fall right after the worst quarter in the company’s history. The message is that this is the market speaking, and that you should take the number before it falls.
It is not the market speaking. It is a negotiating position dressed up as an appraisal. Illinois does not measure a departing owner’s shares by what a stranger would pay for a powerless slice of a private company. It measures them by fair value, and for a court-ordered buyout the General Assembly has defined that term in a way that removes the two discounts on the offer letter. If you are a minority owner staring at a lowball buyout, the law is more on your side than the letter wants you to believe.
What does “fair value” mean for a minority owner in Illinois?
Fair value is not fair market value, and the difference decides most of these cases. When a court orders a buyout under section 12.56 of the Business Corporation Act, 805 ILCS 5/12.56, it determines the fair value of the petitioner’s shares as of the day before the petition was filed, or another date the court finds fair. Fair value asks what your proportionate piece of the whole company is worth as a going concern, not what a buyer would pay for a minority position with no control over anything. That single distinction often moves the number by a wide margin.
Can the company discount my shares just because they are a minority stake?
No, not in a buyout ordered under section 12.56. The statute says so in words the offer letter will not quote you. Fair value there “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). The minority discount is gone outright. The marketability discount survives only in extraordinary circumstances, and it is the company that has to show them.
The same legislation put the same rule in the dissenters’ rights section, so a shareholder squeezed out through a merger is protected the same way. There, fair value means the proportionate interest of the shareholder “without discount for minority status or, absent extraordinary circumstance, lack of marketability.” 805 ILCS 5/11.70(j)(1).
If you have read older Illinois cases describing these discounts as discretionary, check their dates. The Illinois Supreme Court allowed a ten percent combined minority and illiquidity discount in Stanton v. Republic Bank of South Chicago, and said a trial court “was not even required to apply any discounts.” 144 Ill. 2d 472, 480 (1991). That was a bank merger appraisal. The appellate court affirmed a refusal to apply a marketability discount in Jahn v. Kinderman, 351 Ill. App. 3d 15, 27-28 (1st Dist. 2004), and treated the question as one for the trial court’s discretion. Both decisions came before the definition existed. The legislature wrote the definition to end the disagreement those cases left behind.
Why the legislature took the discounts away
The sponsors said it on the floor, and it is worth reading if you are the one holding the offer letter. The bill was House Bill 5376. Its Senate sponsor explained the purpose in three sentences: “This is to address a problem concerning how to pay for minority shareholders in closed corporations. There is a split among the appellate courts in Illinois as to whether fair value should include a discount for minority share or lack of marketability. This would define fair value as the … value without any such discount.” The House sponsor was blunter. The bill reaches people “being forced out … being thrown out of a corporation,” and without it “they get pennies on a dollar if they’re forced out.” It passed the House 112 to 1 and the Senate 57 to 0. No one appeared against it. It became Public Act 94-889 and took effect on January 1, 2007.
So the discounts stacked on your offer letter are not a neutral convention of the appraisal trade. They are the thing the General Assembly decided to take off the table for owners in your position.
What if I own an LLC interest instead of stock?
You get to the same place, but it takes one more step. The Limited Liability Company Act lets a court order a buyout of a member’s interest where those in control have acted oppressively toward that member. 805 ILCS 180/35-1(b). What the Act does not do is say how to value the interest, and the sections that once supplied a method were repealed in 2017. The measure therefore has to come from the corporate analogue, and the argument is a short one: a member forced out of an Illinois LLC should not be paid less than a shareholder forced out of an Illinois corporation on the same facts. Expect the controlling member to argue the opposite. Have your own appraiser value the company whole, and have your lawyer ready on the valuation standard, from the first conference.
How the valuation date and the appraiser decide the case
Two technical choices often matter more than the appraisal method. The first is the valuation date. A controlling owner who picks the date right after a bad quarter, or right after he has diverted business to himself, is choosing the number rather than finding it, and the statute lets the court pick a fairer date. The statute also tells the court to take into account any impact on value “resulting from the actions giving rise to a petition under this Section.” 805 ILCS 5/12.56(e)(i). A controlling owner does not get to depress the company and then buy you out at the price his own conduct produced. The second choice is the appraiser. These cases turn on a contest between qualified valuation experts, and an owner who accepts the company’s figure without retaining his own appraiser has conceded the fight before it began. The right expert, working from the company’s real books rather than the summary in the offer letter, often produces a value that bears no resemblance to the first page you received.
When a low offer is itself evidence of a freeze-out
A lowball buyout rarely happens in a vacuum. It usually follows a pattern the law calls oppression, the reduced distributions, the removal from management, the generous salary the majority pays itself while the minority gets nothing. That pattern is not only the reason the shares must be bought, it can raise what they are worth and, under section 12.56, support an award of attorney’s fees against the controlling owner. The same facts that make the offer insulting can make it expensive for the person who sent it. You can read more about what crosses the line into oppression in our discussion of what constitutes shareholder and LLC member oppression in Illinois, and about the broader toolkit in our overview of minority shareholder rights and remedies.
One document can change all of this. If you signed a shareholder agreement or operating agreement with a buy-sell clause that fixes a price or a formula, that contract may control the number no matter what fair value would otherwise be. The statutory definition governs a buyout the court orders. It does not rewrite a price you agreed to. Read the document before you respond, because its valuation method and its deadlines can decide the case before an appraiser is ever retained.
Three steps protect you in the first month. First, do not accept or counter the offer in writing until your own appraiser has reviewed the company’s financial records, because an early number becomes the ceiling on everything that follows. Second, demand the books and records you are entitled to inspect, since the offer was built on financials you have not seen. Third, preserve every communication about distributions, compensation, and your removal from the business, because that record is what turns a buyout dispute into an oppression claim with fees attached.
Being bought out is not the end of your investment. It is the start of a valuation fight, and fair value is a standard built to protect the owner on the receiving end of a one-page offer. The owners who lose money are the ones who treat the first number as the last word.
How is fair value actually calculated?
Appraisers value a company as a going concern using some blend of three approaches. The income approach capitalizes the company’s normalized earnings or discounts its projected cash flows. The market approach compares the company to sales of similar businesses. The asset approach values what the company owns net of what it owes. In a closely held company the income approach usually carries the most weight, because the business is worth what it can earn for its owners. The phrase that does the work is normalized earnings, because it is where a controlling owner’s creative accounting gets corrected.
What if the controlling owner has been paying himself an inflated salary?
That cuts in your favor. A competent appraisal adds back compensation, perks, and related-party payments that exceed what the market would pay for the work actually done, because those amounts are really disguised profit. If the controlling owner has been draining earnings through an oversized salary, payments to relatives, or personal expenses run through the company, normalizing those items can raise the company’s value, and with it the value of your shares, well above what the offer assumed. That same excess compensation is often evidence of the oppression that justifies the buyout in the first place.
A simple illustration of how the discounts distort the number
Suppose your twenty-five percent interest in a company worth four million dollars is, on a straight proportionate basis, worth one million dollars. Apply a fifteen percent discount for lack of control and another fifteen percent for lack of marketability, and the figure falls toward seven hundred thousand. Choose a valuation date right after a weak quarter, and it drops again. None of that reflects a change in the business. In a section 12.56 buyout the first of those discounts is not available at all, and the second is available only in extraordinary circumstances, so an offer built on both is an offer built on a rule that no longer exists. This is a hypothetical for illustration only, but it shows why two qualified appraisers can look at the same company and arrive at numbers that differ by hundreds of thousands of dollars.
How long does a buyout dispute take?
It varies with the company and the conduct, but these cases are measured in months to a few years, not weeks, and most resolve before trial once each side’s appraisal is on the table and the litigation risk is clear. Moving early and carefully is not about speed for its own sake. It is about setting the valuation record, and the leverage, before the other side locks in the number.
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If a controlling owner is trying to buy your shares at a number built to punish you for leaving, the fair value of your stake is often far higher than the offer, and the first thirty days shape the result. Call DiTommaso Lubin, P.C. at 630-333-0333 for a free consultation, or contact us online. This post is for general information and is not legal advice.
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Peter S. Lubin and James V. DiTommaso are Chicago business litigation lawyers who try cases throughout Illinois. Peter is a graduate of the University of Chicago Law School, where he has taught trial practice for decades, and he has been recognized as an Illinois Super Lawyer. He has served as lead counsel in more than one hundred class actions and has handled more than one hundred shareholder, LLC, derivative, breach of fiduciary duty, and fraud matters, on both the plaintiff and the defense side. Crain’s Chicago Business credited him with the largest class action settlement of the year for a $40 million recovery in Erikson v. Ameritech, and the firm has been named DuPage County Law Firm of the Year. The firm and its lawyers have represented clients such as McDonald’s, Motorola, and Experian, and have litigated against companies including AT&T and General Motors. James DiTommaso, a graduate of Chicago-Kent College of Law with a certificate in business law, has served with the Illinois Appellate Court and has argued a case before the Illinois Supreme Court. He litigates these disputes in the Illinois trial and appellate courts and in the federal courts. When you hire this firm, the lawyers whose names are on the door are the ones who handle your case.