What is the Buy-Out Remedy?

The buy-out remedy is the most common judicially created exit from a closely held corporation for an oppressed minority shareholder in the absence of express statutory authority. It is based on the court’s inherent equitable power and is implicitly consistent with other legislatively created remedies. It is referred to as a lesser remedy because it is less drastic in that it preserves the management and operation of the business as opposed to dissolving and liquidating the corporation.

“An ordered ‘buy-out’ of stock at its fair value is an especially appropriate remedy in a closely-held corporation, where the oppressive acts of the majority are an attempt to ‘squeeze out’ the minority, who do not have a ready market for the corporation’s shares, but are at the mercy of the majority.” Alaska Plastics, Inc. v. Coppack, 621 P.2d 270, 273-74 (Alaska 1980); McCauley v. Tom McCauley & Son, Inc., 724 P.2d 232, 236 (N.M. 1986); See also O'Neal, F. Hodge, Oppression of Minority Shareholders ยง 9.05 (2003). However, a judicial buy-out is an effective remedy only if the price is fair. Most courts are concerned with the concept of fairness and construe “fair value” (as opposed to “fair market value” with minority discounts applied) to mean that an oppressed minority shareholder should receive a pro rata share of the control value of the enterprise as a going concern. For example, in Balsamides v. Protameen Chemicals, Inc., 734 A.2d 721, 733-34, 738 (N.J. 1999), the New Jersey high court noted that fair value is not synonymous with fair market value; and that “[a]lthough other jurisdictions are divided, the majority reject the use of discounts for lack of marketability or liquidity, and minority discounts” in oppressed shareholder actions because “fairness dictates that the oppressing shareholder should not benefit at the expense of the oppressed.”