“Mr. Woods and Mr. Mickelson are here to see you,” the law firm receptionist’s voice came over Jane Wu’s speakerphone. Something in her voice warned Jane that this would not be an easy meeting. As Eddie Woods and Paul Mickelson were making their way to her office, Jane thought back five years to the time a retiring partner had passed their file on to her. “These are two golfing buddies who are living their dream,” he’d told her as he packed up his bookshelf. “They’ve built Augusta Greens into one of the best courses close to the city. Paul put up most of the money and Eddie loved operating the course. They’ve always worked well together.”
But now with the two sitting in her office, Jane thought that the two looked like an elderly married couple in the first stages of a divorce. “Eddie wants to sell out to an interested developer and I don’t – at least not yet,” said Paul. “He says we can sell it for $10 million.”
“Paul doesn’t want to sell now, probably because he decides how our bonuses are paid out. And don’t get me started on all of the ‘business’ expenses he puts through the corporate credit cards,” said Eddie.
“There you go with the baseless accusations again! I just think that the course is fine the way it is. The way it’s always been! It’s an institution,” responded Paul.
“It’s a business! Not your personal piggy-bank!” Eddie shot back. Jane could see that for the two to reach an agreement, she would have to find some way to reconcile their values.
“What does the shareholders’ agreement say?” Jane asked, already knowing the answer from the file.
“There’s no written agreement,” said Eddie. “I’ve got 40 percent of the shares and Paul has the other 60.”
“Well, in retrospect it would have been a good idea to have a shareholders’ agreement in place right from the start,” said Jane. “It would have set out the corporate structure, the ownership structure, the finances and who controls the business and its affairs. It also could have laid-out the process to deal with this exact issue that you’re having now. I’m surprised my predecessor didn’t suggest it.”
“He tried. We actually had one drafted, but it was never signed. We built this based on handshakes, and we’ve always worked that way since,” said Eddie.
“Look, I don’t think that either of you wants to take this to court,” said Jane. “But Paul, you should know that Eddie can use the principle of ‘oppression’ to defend himself against certain actions you take as the majority shareholder. The courts have found that oppression can occur when a majority shareholder is appropriating the assets of the company or is conducting the business for personal gain, rather than for the best interests of the company and its shareholders.”
Jane continued, “It seems like the two of you are at a deadlock. I think the key to this might be to involve a valuations expert to guide the process. Let me conference one in right now.”
Valuing the business or property? The valuator’s view
“Thanks for looping me in, Jane”, said Sam Price, CBV. “I think that the first question we need to answer is what is the actual value of the asset,” he said. “This isn’t a simple matter, because it has not been decided if we’re looking at the value of the golf course as a business, or whether we’re looking at it as a golf course property or a real estate development. Then, this becomes a question of whom to sell it to, and when. The highest and best use of the asset is material here”, Sam stated.
“It gets more complicated if Eddie makes an ‘oppression’ claim. In that case, the court would then have to set a value for his portion of the business. Under this remedy, the value conclusion would be what is called ‘fair value,’ and this would apply his 40% share to the value of the company and its underlying assets. So, if we take that $10 million estimate, Eddie gets $4 million, because fair value doesn’t consider a discount for his minority interest. Sam continued, “The court may suggest that you retain a qualified and independent business valuator, like me, to offer an expert opinion on value. This professional will analyze the company’s cash flows, the selling prices of similar golf courses, and another expert’s opinion on the value of the land as a real estate asset.”
Jane leaned back in her chair with a smile. “So, gentlemen, how about we set-up a time next week when we can hammer-out a plan that you can both live with?”
Jane ultimately convinced Eddie and Paul that involving valuations specialists was the right way to resolve their differences. At the very least, they would have an objective determination of value to help guide their decisions. They retained Mr. Price to calculate the value of Augusta Greens as a going concern, and they also hired a real estate appraisal expert to assess what it was worth to an interested developer. In this case, the value of the real estate far exceeded the value of operating the golf course. Paul reluctantly admitted that selling the course and retiring was too tempting to pass up. Ultimately, Augusta Greens became a popular and highly profitable residential community.