A decision handed down by Louisiana’s Third Circuit Court of Appeal on February 21, 2019, is the first reported case to examine the remedy granted to oppressed shareholders by the Louisiana Business Corporation Act (LBCA), which became effective in 2015.
The LBCA introduced in Louisiana a version of what is known as the “oppression remedy,” which entitles a shareholder to withdraw from the corporation and force it to buy all of their shares at “fair value” if the shareholder can demonstrate that the corporation’s distribution, compensation, governance, and other practices are “plainly incompatible with a genuine effort on the part of the corporation to deal fairly and in good faith with the shareholder.”
In Kolwe v. Civil and Structural Engineers, Inc., the Third Circuit reviewed the judgment from a trial held for the limited purpose of valuing the ownership interest of a shareholder who had exercised his right to withdraw on grounds of oppression from a closely held professional engineering firm organized as a Louisiana corporation.
Specifically, the court considered whether it was appropriate to allow for “tax-affecting” when computing the value of the plaintiff’s shares in the corporation, which was taxed as an S corporation. “Tax affecting” in this context means to reduce the value of corporate earnings to account for tax liability, and there is an ongoing debate among legal and valuation professionals about how best to recognize the tax benefits of pass through entities, such an S corporation, in an appraisal. In Kolwe, the corporation’s valuation expert believed the value of the corporation’s receivables should be reduced or “tax affected” to reflect the tax liability that would accrue upon their collection, while the plaintiff’s expert excluded tax affecting in his valuation. The differing opinions on this issue alone resulted in a discrepancy of more than $250,000 in the experts’ respective valuations of the plaintiff’s shares.
The appellate court ultimately followed the trial court in denying the application of tax affecting when valuing the shares. In so ruling, the court reasoned that tax affecting equates to applying a discount to the value of the corporation’s shares in violation of the LBCA’s definition of “fair value,” which prohibits discounting for lack of marketability or minority status when determining fair value. In particular, the court went to great lengths to make clear that a “fair value” determination under the LBCA requires the corporation to be valued as a whole and then allocating to each share its pro rata portion of the total enterprise value, without applying any shareholder-specific discounts.
Whether the Kolwe decision will be followed by other courts remains to be seen, but the case nevertheless serves as a cautionary tale of the thorny issues related to valuing and acquiring ownership interests in closely held companies. Even when the owners of a company have in place an agreement dealing with the departure process of a principal, significant questions may still arise as to the value of their ownership interest if the agreement is not carefully drafted.
 La. R.S. 12:1-1435.
 264 So. 3d 1262 (La. App. 3d Cir. 2019).