Valuation Issues and Reverse Stock Splits

It is important to read the footnotes when considering how a minority interest in your bank or bank holding company might be valued. Iowa Code §524.1406(3) permits the use of minority and marketability discounts in determining fair value in connection with appraisal rights for banks and bank holding companies. We have successfully represented a client in a district court case in which this provision was recognized and upheld against a constitutional challenge. At first glance it might appear that the Iowa Supreme Court’s July 13 2007 decision in Northwest Investment Corp. v. Wallace reaches a different result. In that new reverse stock split case an appraised value was approved that not only did not apply such discounts but added a control premium. The critical distinction is found in footnote 3 which indicates that the corporation involved was not a "bank holding company" within the meaning of Iowa Code §524.1801. Therefore, the generally applicable corporate standards for determining fair value set forth in Iowa Code §490.1301 applied, rather than the special rule for banks and bank holding companies found in Iowa Code §524.1406(3).

For more information contact Arthur F. Owens, who practices primarily in business and corporate law.