“Fair Value” ambiguity in Illinois

Effective 2007 Illinois amended the definition of “fair value” in the Business Corporation Act (Sections 805 ILCS 5/6.15, 11.70(j)(1), and 12.56(e)) to exclude the use of minority discounts and, absent extraordinary circumstance, lack of marketability in valuing shares.  This provided legislative guidance to the courts on how to determine fair value by remedying the absence of a definition in the original statute.  Previous Illinois court decisions using minority discounts to value shares have now been superseded.  But ambiguity remains.

Many commentators have noted the failure to define what “extraordinary circumstances” permit the use of marketability discounts.  This is an issue that will be litigated in the courts.  Even more glaring is the failure to coordinate the changes with the statutes for other business entities.  Even with the franchise tax oddities noted in the previous post, LLCs have grown in popularity.  But the legislature failed to make similar changes to the fair value definitions in the LLC Act.  See 805 ILCS 180/35‑65.

As a result, while the Business Corporation Act reflects the legislature’s intent to protect minority shareholders of Illinois corporations the LLC Act does not provide similar protection to minority members.  Of course there is no guarantee that the courts will rely on the plain language of the statute.  It is possible that the courts will ignore the plain language of the statute to read in an unexpressed legislative intent.  This is what has started happening to charging order protections in single member LLCs.  Even with unambiguous statutes that makes no distinction on the number of members in the LLC, courts in various states have started using the underlying rationale of the rule (to prevent a forced partnership) to invalidate the protection.

With corporations no longer the automatic default entity chosen by business owners the legislature should coordinate future changes to the various business entity statutes.  Alternatively, it should provide some clear direction of legislative intent as to why only one statute was amended.  It will prevent situations like this from recurring.

The commentary, information, and analyses conveyed on this site by the authors do not constitute legal advice and shall not be construed as such. Entires may or may not be updated following the time of original posting. By using this site, you understand that the information contained is not provided for the purpose of rendering legal advice. Your use of this site does not create an attorney-client relationship.

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