Shareholder Disputes ("Business Divorce")
A company’s quality of earnings (“QOE”) can be determined a number of ways, but ultimately it is obtained through analysis of actual operating cash flow. Often this analysis leads to sales and profit margins differ from internal financial statements and/or company tax returns.
To arrive at a true representation of operating sales and related expenses we begin analysis with a high-level, key management and accounting staff interview in order to get a sense of day-to-day financial entry logistics, check and balances in place, and leadership style overall.
In general, earnings that are calculated conservatively are considered more reliable than those calculated by aggressive tax mitigating accounting policies. Quality of earnings can be obscured by accounting practices that hide poor sales or increased business risk.
Per Florida Statute Chapter 607 (definition of “fair value”):
“Fair value” means the value of the corporation’s shares is determined:
- Immediately before the effectiveness 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, excluding any appreciation or depreciation in anticipation of the corporate action unless exclusion would be inequitable to the corporation and its remaining shareholders.
- In most instances, without discounting for lack of marketability or minority status.
- Florida statute mandates that shareholders are entitled to certain operations and financial information and that such rights cannot be waived through the terms of a company created operating agreement.
Per Florida Statute Chapter 605 (limitations of operating agreement allowances):
Contractual agreements (i.e., operating agreement) within entities cannot unreasonably restrict the duties and rights stated in Florida Statute 605.0410, but the operating agreement may impose reasonable restrictions on the availability and use of information obtained under that section and may define appropriate remedies, including liquidated damages, for a breach of a reasonable restriction on use.
Dissenters’ rights provide shareholders the opportunity to dissent from unusual corporate actions that will negatively impact their holding. Shareholder rights are governed by state statutes and case law can be triggered by a multitude of actions of which the non-controlling shareholder objects (i.e., merger, sale of assets other than in the ordinary course of business, sale of shareholding, amendment to articles of incorporation, etc.).
A valuation may also be required in a variety of other disputes among shareholders, including the terms of a buy-sell, operating agreement, or involving transactions between new or departing shareholders or partners. These matters are directed by contractual agreements or other governing corporate documents between the owners of a business.