The World Is No Longer Flat: The Appraisal Process Applied In Close Corporation Split-Ups Since Balsamides

Article by Alan S. Pralgever, Esq., Assisted by Gary L. Koenigsberg, Esq.

This article originally appeared in the November 21, 2011 edition of New Jersey Law Journal.

Since the New Jersey Supreme Court decided Balsamides v. Protameen, 160 N.J. 352 (1999) on July 14, 1999 ("Bastille Day") along with its companion case, Lawson Mardon Wheaton, Inc. v. Smith, 160 N.J. 338 (1999), (dealing with minority oppression), the case has become a statewide, if not nationally recognized, seminal decision concerning business valuation and the applicability of minority and marketability discounts in oppressed shareholder cases. In fact, over time Balsamides has been further amplified, and serves as the foundation of shareholder, partnership, and limited liability dispute law in New Jersey and several other states. It incorporates key equitable and legal principles concerning minority shareholder oppression, and the concomitant rights and responsibilities that result in such high pressure circumstances.

In Balsamides, 50% percent shareholders Emanuel Balsamides and Leonard Perle of Protameen Chemical, Inc., became embroiled in an irreconcilable dispute and deadlocked after one of the shareholders, Leonard Perle, brought his sons into the business and decided they should have the same compensation as the Balsamides' sons. This dispute for control and compensation became the fulcrum for oppression and a forced sale.

The trial court determined that Balsamides was an "oppressed shareholder" and was entitled to buy-out Perle's interest in Protameen, but at a significantly discounted price. There were several "firsts" in Balsamides: (1) It was the first time a 50% shareholder was declared an "oppressed minority" and given protection under the Oppressed Minority Shareholder Statute N.J.S.A. 14A:12-7, et seq; (2) It was the first time punitive damages were imposed under the Statute to a 50% shareholder; (3) It was the first time a "marketability discount" was applied to a 50% shareholder's interest; (4) Balsamides was also awarded attorneys fees at the Appellate level; and (5) It was determined that "fair value" was not equivalent of "fair market value," and constituted a "factual" and not a "legal" issue, not reviewable on appeal.

A central dispute concerned the appropriate use of a "marketability discount" in the forced sale of a close corporation. A "marketability discount" adjusts for a lack of liquidity in one's interest in an entity for which there is no recognized market. The Court also essentially applied the "marketability discount" to assure that equitably the wrongdoer, Perle, would not be rewarded for his oppressive conduct. Balsamides' expert proposed a 35% marketability discount which the trial court accepted, but the Appellate Division reversed on that basis alone, claiming the discount resulted in too low a purchase price. The New Jersey Supreme Court, accepting the case on Certification reversed the Appellate Court and applied a "marketability...