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65 Notre Dame L. Rev. 425 (1989-1990)
Evolution of Effective Remedies for Minority Shareholders and Its Impact upon Valuation of Minority Shares

handle is hein.journals/tndl65 and id is 433 raw text is: The Evolution of Effective Remedies for Minority Shareholders and Its Impact Upon Valuation of Minority Shares Charles W. Murdock* I. Introduction There are 51 shares, said he, that are worth $250,000. There are 49 shares that are not worth a - -.I Such was the plight, we are told, of the minority shareholder. Since the majority, through the board of directors, ruled the company, no one would buy the minority's shares. The dilemma for the minority share- holder in the closely-held corporation was that those in control could reap the benefits of ownership through compensation and other with- drawals not available to the minority; the minority would receive no re- turn on his or her investment, nor could the shares be sold because no prudent person would step into the shoes of the minority. Just over thirty-five years ago, Carlos Israels, in his seminal article, The Sacred Cow of Corporate Existence: Problems of Dead-lock and Dissolution,2 suggested that close corporations should receive judicial treatment analogous to that afforded partners in a partnership. The thrust of Pro- fessor Israels' article was that, as a result of the liberalizing of legislative and judicial attitudes with respect to close corporations, such as the ac- ceptance of unanimous vote requirements,3 draftsmen now had a greater opportunity to protect the interests of minority shareholders through charter provisions or contractual agreements. While freeze-outs4 remained a possibility, Professor Israels also saw a trend in which, as a result of veto provisions inserted in corporate doc- uments to protect minority interests, there would be more deadlocks or stalemates. Stalemate, which he defined as the consistent non-coopera- * Professor of Law at Loyola University; former Dean of Loyola University Law School; former Deputy Attorney General for the State of Illinois; J.D., Loyola University Law School, 1963. 1 Humphrys v. Winous Co., 165 Ohio St. 45, 50, 133 N.E.2d 780, 783 (1956). 2 Israels, The Sacred Cow of Corporate Existence: Problems of Deadlock and Dissolution, 19 U. Cm. L. Rev. 778 (1952). 3 Id. at 780-81. For example, although New York struck down a shareholder agreement requir- ing unanimity for director action, in Benintendi v. Kenton Hotel, Inc., 294 N.Y. 112, 60 N.E.2d 829 (1945), the decision was overruled by the legislature three years later when § 9 was added to the New York Stock Corporation Law. See In re Burkin, I N.Y.2d 570, 136 N.E.2d 862, 165 N.Y.S.2d 898 (1956). 4 As used in this Article, a freeze-out is used to denote the situation in which a minority shareholder retains his or her interest but is deprived either of employment or of dividends such that he or she is unable to realize any return on the investment in the close corporation. On the other hand, squeeze-out is used to denote the situation in which the interest of the minority shareholder is involuntarily acquired by the corporation, for example, in a cash-out merger. Also, as used in this Article, the phrase minority shareholder includes not only a less than 50% shareholder but also a 50% shareholder who is excluded from participation in management.

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