When one seeks to value the stock of closely held corporations the natural inclination is to “get an appraisal”. According to the Illinois Business Corporation Act an appraisal is one way to value a shareholders stock holding in small corporations yet not the only way. Section 805 ILCS 5/12.56 of the Illinois BCA (Business Corporation Act) allows a court to value a stockholders stock value by means other than appraisals. The provision provides in part: “(e) If the court orders a share purchase, it shall: (i) Determine the fair value of the shares, with or without the assistance of appraisers, taking into account any impact on the value of the shares resulting from the actions giving rise to a petition under this Section. For purposes of this subsection (e), “fair value”, with respect to a petitioning shareholder’s shares, means the proportionate interest of the shareholder in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.”
This provision provides several areas of contrast to the natural inclination. For example, the phrase “fair value” is not necessarily “fair market value”. Moreover in the absence of an appraisal, Courts have valued the stock of a family corporations or closely held corporations by using a combination of earning capacity, investment value, history and nature of the business, economic outlook, book value, dividend paying capacity, and market price of stock of similar businesses. Even if one argues these criteria are inherently built into a corporation stock appraisal and therefore clouds the difference between “fair value” and “fair market value” the Courts are allowed to take into consideration “the reasonable expectations of the corporation’s shareholders as they existed at the time the corporation was formed and developed during the course of the shareholders’ relationship with the corporation and with each other.” If every appraisal were to factor in the “reasonable expectations of the corporation’s shareholders as they existed at the time the corporation was formed” then the shares of almost every corporation would be “priceless”.