## Facts

- Minority shareholders owned stock in Stockgrowers State Bank of Ashland, Kansas.
- Majority shareholders formed a holding company (Stockgrowers Banc Corp.) and attempted to acquire the minority shareholders’ bank shares; the minority shareholders refused to sell.
- The Bank implemented a 1-for-400 reverse stock split, reducing outstanding shares from 4,000 to 10, intending to leave the minority shareholders with fractional shares and eliminate them as shareholders via K.S.A. 17-6405.
- K.S.A. 17-6405 permits a corporation to refuse to issue fractional shares and instead pay cash equal to the “fair value” of the fractional share.
- To set the cash-out price, the defendants obtained appraisals that valued the company and then applied a minority discount (lack of control) and a marketability discount (lack of liquidity), producing a reduced per-share amount.
- The defendants paid the minority shareholders based on the discounted appraisal figures; the minority shareholders challenged the valuation as improperly depressed in a transaction designed to force them out.
- The federal district court certified to the Kansas Supreme Court the state-law question regarding whether such discounts may be used to calculate “fair value” under K.S.A. 17-6405 in this context.

## Issues

1. Under K.S.A. 17-6405, may a corporation determine the “fair value” of a fractional share created by a reverse stock split intended to eliminate minority shareholders by applying minority and marketability discounts?

## Decision

- The Kansas Supreme Court answered the certified question “no.”
- It held that, in this freeze-out reverse-split context, applying minority and marketability discounts is not proper when determining “fair value” under K.S.A. 17-6405.
- The court returned the matter to the federal district court for further proceedings consistent with its answer.

## Legal Principles

- For cash-out of fractional shares under K.S.A. 17-6405 arising from a reverse stock split intended to eliminate minority shareholders, “fair value” is the shareholder’s pro rata share of the corporation’s value as a going concern.
- “Fair value” in this statutory setting is distinct from “fair market value” and is not based on a hypothetical sale of a small, illiquid minority block.
- Minority discounts are improper in a compelled cash-out because they reduce compensation based on lack of control that the majority itself exploits through the freeze-out.
- Marketability discounts are improper in a corporate cash-out because the transaction itself provides liquidity; illiquidity assumptions tied to open-market sales do not fit the statutory buyout.
- Valuation should reflect enterprise value allocated proportionately among shares, without discounting the cashed-out minority interest for lack of control or marketability in this setting.

## Conclusion

Kansas law requires that minority shareholders cashed out through a freeze-out reverse stock split receive “fair value” measured by their proportionate interest in the corporation as a going concern, without minority or marketability discounts.


Arnaud v. Stockgrowers State Bank of Ashland, 268 Kan. 163, 992 P.2d 216 (Kan. 1999)