2012
THE NEXT BIG THING: FLEXIBLE PURPOSE CORPORATIONS
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is $100 per share. Perhaps LocalCorp would achieve these greater returns by more cheaply sourcing components outside its community or by transferring human or physical resources to a less costly location. Sarah does not want the company to move in this direction, but she has been outvoted. She fears there will not be a market for the converted entity ’s shares, and so she pursues her dissenters ’ rights. Under the FPC statute, Sarah is entitled to the fair market value of her shares, valuing LocalCorp prior to the conversion ’s announcement. The question is: How will fair market value be defined? If appraisal provides Sarah $100, it will go a long way toward protecting her financial interests. She might reinvest the $100 in another locally-focused social enterprise. Alternatively, she might invest $80 in a pure for-profit and invest in or donate $20 to a community-focused entity. Assuming substitutes exist, she might engage in any number transactions to achieve her desired mix of profit and social good. On the other hand, if appraisal provides Sarah only $80, valuing only the entity ’s purely economic returns pre-transaction, dissenting shareholders like Sarah are underprotected. They will have insufficient funds to avail themselves of substitutes for their FPC investment that has ceased to exist. A court using the fair market value concept will need to be very nimble to avoid this outcome. It must not only determine the FPC ’s economic value, but also some price for the utility of the social good it generates, or at least the economic value foregone in generating that social good. Attempting to include appreciation in fair market value will add further complications. Valuations of appraisal rights in pure for-profits are already notoriously tricky.54 Applying the concept in a transaction converting an FPC into a for-profit will be even more difficult. Moreover, and perhaps most importantly, the appraisal tool can only offer cash as its remedy for lost social good production. But, there are some things money simply cannot buy. For FPC shareholders, the significant risks of a conversion transaction are non-financial; they fear the abandonment of the entity ’s special purpose. It seems far more likely that Sarah opposes LocalCorp ’s
54. See COX & HAZEN, supra note 51, at 641 ( “The most difficult task in obtaining relief under appraisal statutes is establishing the fair value of the dissenting shares . . . . Legislatures and the courts have not been able to establish any definite measure or standard of value. ”).