Section 2000 business valuation

When shareholders differ, settling valuation disputes gets complex. But minority owners have options.

When shareholders in a company organized as a corporation in California disagree — such as on company strategy, financial representations or reporting, or simply due to clashing personalities — the California Corporations Code provides strict procedures for voluntary and involuntary dissolutions.

Moreover, barring an existing buy-sell agreement, minority shareholders have limited rights. In rare circumstances, a dissenting shareholder can force the involuntary sale of a business, in accordance with guidance set forth in the California Corporations Code (CCC) Section 1800. In less extreme scenarios, shareholders who combine to own 50% or more of a company can voluntarily dissolve the company under CCC Section 1900.

Value in the balance

Generally, companies are valued under the premise of “going concern,” which assumes the company will continue to operate regularly into the foreseeable future. However, CCC Section 2000 offers a third but more complex alternative for corporations or shareholders who collectively own 50% or more of the entity.

Contending parties must retain three independent appraisers to determine the fair value of the subject company, and these appraisals are presented to the presiding Superior Court to confirm the entity’s fair value. CCC Section 2000 specifies that a rarely used standard of value be adopted: to determine the company’s fair value on the basis of liquidation value as of the liquidation date, while also accounting for a value of the sale of the business as a growing concern.

Business valuations – How we help

The inherent premise of valuing a business under Section 2000 differs from typical valuations and appraisals. Such valuations must consider both the liquidation value and the liquidation value as a going concern. Procedures taken to consider both premises of value are meant to allow the moving party to emulate the procedures taken under Section 1800 and Section 1900, while allowing the buying party the opportunity to avoid dissolution.

Once the court accepts the proffered valuation as a fair value for the subject company, the buying party may buy out dissenting shareholders at the stated amount or dissolve the company.