Fairness and Fair Value: Why Discounts Are Now Inappropriate Under Georgia's Dissenters' Rights Statute

• Publication year: 2001
• Pages: 0001

Georgia Bar Journal Volume 6.

GSB Vol. 6, No. 6, Pg. 1. Fairness and Fair Value: Why Discounts are Now Inappropriate Under Georgia's Dissenters' Rights Statute

GSB Bar Journal
Vol. 6, No. 6, June 2001

"Fairness and Fair Value: Why Discounts are Now Inappropriate Under Georgia's Dissenters' Rights Statute"

By James D. Blitch IV

Under Georgia's Dissenters' Rights Statute,1 shareholders who dissent from certain corporate actions are entitled to receive the "fair value" of their shares in the corporation as determined by a court.2 The right to dissent and obtain fair value through a judicial appraisal is an exclusive remedy,3 making the determination of fair value critically important to shareholders that assert their dissenters' rights. A fundamental issue in determining fair value has been whether or not to discount the dissenter's shares because of their minority status and the lack of marketability of shares in a closely held corporation. In Blitch v. Peoples Bank,4 the Georgia Court of Appeals recently held that minority interest and lack of marketability discounts do not apply to the determination of fair value. This marks the first time an appellate court in Georgia has considered the issue of discounts since the 1984 Court of Appeals decision in Atlantic States Construction Inc. v. Beavers.5 Blitch now brings Georgia in line with the more modern view that dissenting shareholders are entitled to their pro rata share of the value of the corporation as a whole. In addition to discussing the Blitch decision, this article also provides an overview of the major procedural requirements under the statute. Practitioners representing corporations or dissenting shareholders should be familiar with these requirements and the potential pitfalls infailing to comply with them

The Case Against Discounts

In Blitch, the corporation, a closely held bank executed a merger that forced J. Dan Blitch III to exchange his shares for cash. Until the merger, Blitch was the bank's only minority shareholder. He wanted to remain a shareholder, but the bank gave him no other choice but to leave when it merged with an interim corporation wholly owned by its holding company. This corporate action provided Blitch the right to dissent, which he exercised in order to receive the fair value of his shares.6 In litigation, the bank took the position that minority interest and lack of marketability discounts applied to the transaction. Blitch maintained that these discounts should not be used in determining the fair value of his shares. The trial court agreed with the bank and applied both discounts. Blitch appealed on the basis that the application of these discounts constituted legal error.7

Interpreting "Fair Value"

In Blitch, the Court of Appeals first examined the historical origins of the statute. When first created corporations governed themselves by unanimous consent among the shareholders. From a practical perspective, this proved an unmanageable form of governance. To solve the problem legislatures granted corporations the right to majority rule and, in turn, gave minority shareholders the right to dissent from certain corporate actions.8 The remedy of fair value represented a quid pro quo measure designed to protect minority shareholders from being victimized by majority rule But, as the court in Blitch recognized, the statutory definition of fair value did not indicate whether discounts were appropriate.9 Under the Code, fair value means "the value of the shares immediately before the effectuation of the corporate action to which the dissenter objects, excluding any appreciation or depreciation in anticipation of the corporate action."10 Whether the value of the shares immediately before the corporate action should be discounted requires statutory interpretation.11 Blitch explained that no Georgia appellate court has interpreted the meaning of fair value since the legislature adopted a new dissenters' rights statute based on the Model Act in 1988.12 Georgia's legislature did not change the basic definition of fair value when it adopted the Model Act, which left the courts with the question of whether or not discounts apply. Numerous other jurisdictions have interpreted fair value and determined that discounts should not be applied.13 Moreover, in 1999, the drafters of the Model Act changed the definition of fair value so that it specifically provided that discounts are generally inappropriate in dissenters' rights proceedings.14 Decided in 1984, Beavers noted that Georgia's statute was based on the dissenters' rights statute in New York, and that discounts may be applied in a given case but only with caution.15 Beavers explained that the purpose behind dissenters' rights was to provide "an orderly and fair method" for valuing the shares, and the "apparent intent" in the fair value standard was simply one of valuation flexibility.16 This conclusion, however, ignored the...