Perlman v. Feldmann

United States District Court for the District of Connecticut · 1955 · Corporations

CorporationsControlling shareholder fiduciary dutiesControl premiumValuationcontrol premiumfiduciary dutycontrolling shareholdersale of control

Facts

As of August 31, 1950, Feldmann and related holders sold 398,927 shares of Newport Steel, constituting a control block, to Wilport for $20 per share. Wilport was formed by end users of steel whose dominant motive was to secure a continuing source of steel supply, and Feldmann knew they were paying a premium for control over Newport's steel output. After the sale, Newport's directors resigned and were replaced by Wilport's slate. On remand, the court valued Newport as a going concern at $15,825,777.53, or $14.67 per share, making the difference between that value and the $20 sale price a premium for control of the steel output.

Issue

When a controlling shareholder sells a control block at a price above the stock's value as part of the corporation as a going concern, and the excess is attributable to control over the corporation's scarce product, must that premium be shared with the minority shareholders? On remand, what was the value of the stock absent the appurtenant control over Newport's steel output?

Rule

To value a control block shorn of the power to control the corporation's output, the court determines the corporation's fair market value as a going concern, divides that enterprise value by the number of outstanding shares, and multiplies by the number of shares sold. Any excess paid above that amount is a premium for control over the corporation's output rather than for the investment value of the enterprise, and that premium is recoverable for the qualified minority shareholders.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In 2024, Nora Bishop and her family sold 38% of the outstanding shares of Lakefront Copper Works, an Ohio corporation based in Toledo, to Rivermark Components, a newly formed buyer owned by manufacturers that use copper tubing. Rivermark paid $42 per share, while evidence showed Nora knew Rivermark chiefly wanted assured access to Lakefront's scarce tubing output during an industry shortage. Expert valuation placed Lakefront's fair value as a going concern on the sale date at $30 per outstanding share.

If minority shareholders sue, which is the strongest argument for recovery under the governing rule?

Explanation. The majority rule requires the court to determine the corporation's fair market value as a going concern, derive a per-share value, and compare that figure with the actual control-block price. When the excess is attributable to control over the corporation's output, and the seller knew that was the buyer's motive, the premium belongs to qualified minority shareholders rather than solely to the controlling seller.