GameStop shares have soared 1,700% as millions of small investors, egged on by social media, employ a classic Wall Street tactic to put the squeeze — on Wall Street. (Retrieved at https://www.nytimes.com/2021/01/27/business/gamestop-wall-street-bets.html)
In “Squeeze-out, Freeze-outs and Discounts,” our former law school professor asks why Illinois is in the minority of states to protect shareholders? (C. Murdock, “Squeeze-outs, etc.” 35 Loy. Univ. Chi. Law J. 737-778 (2004).) It is a good question. Many business people do not know that the Illinois Business Corporation Act requires that a Court “determine the fair value of shares” in a privately held company to protect shareholder interests. 805 ILCS 5/12.56.
But what is “fair value?” For publicly traded companies, value is determined by the stock price. The Efficient Markets Hypothesis holds an investor can not earn an abnormally high return in the market because stock prices reflect all available information; competition among investors guarantees stocks are properly priced in the market, and the market provides a set of efficient arrangements where buyers and sellers are brought together through buy-sell mechanisms. (T. Stilp, Making Money Going Into the Deal, p. 17 (2020).)
We help clients buy and sell privately held companies. There are a number of approaches successfully used in the past to determine value. As a rule, Illinois courts do not allow for a discount for minority (i.e., less than 50%) status, failure to have controlling interest, or an illiquidity premium for the lack of marketability (that is, there is no readily accessible market for the stock).
The old maxim, “there is no deal until money changes hands,” reflects the simplicity of any transaction but ignores the intricacy of the accomplishment. Valuation requires knowledge and experience in finance, accounting, banking, negotiations and, yes, law for the transactional documents to get the deal done right.
With hundreds of successful transactions, if you are thinking of selling or buying a company, or would like a “second” opinion, give us a call. Who knows – you might be the next GameStop.