Title: American Ethanol, Inc. v. Cordillera Fund, LP

State: nevada

Issuer: Nevada Supreme Court

Document:

427 Nev,, Advance Opinion 13
IN THE SUPREME COURT OF THE STATE OF NEVADA

AMERICAN ETHANOL, INC., A No, 54779
NEVADA CORPORATION; AND AE
BIOFUELS, INC., A NEVADA |

Someta FILED

vs
CORDILLERA FUND, L. NY 052011

|
, A TEXAS
LIMITED PARTNERSHT

Respondent.

Appeal from a district court judgment in a corporations action.

   

 

Second Judicial District Court, Washoe County; Brent T. Adams, Judge.
Affirmed.

Holland & Hart LLP and Jeremy J. Nork and Ethan J. Birnberg, Reno,

for Appellants,

McDonald Carano Wilson LLP and Craig A. Newby and William A.S
‘Magrath II, Las Vegas,
for Respondent.

BEFORE CHERRY, GIBBONS and PICKERING, JJ.

opinion
By the Court, CHERRY, J.:

In this appeal, we examine the definition of “fair value” as
prescribed by the stockholder right-to-dissent statutes. We adopt a
flexible approach in determining fair value, whereby the district court

should evaluate a number of relevant factors in determining fair value.

 

 

 
   
    
     
     
   
  
   
  
 
 
    
    
     

Furthermore, we determine who bears the burden of proving
the fair value of a stockholder’s corporate shares in a stockholder's right-
dissent appraisal action. We conclude that in such an appraisal
yroceeding, both the dissenting stockholder and the corporation have the
yurden of proving their respective valuation conclusions by a
reponderance of the evidence. In evaluating the fair value, even if
Incither party satisfies its burden, the district court ultimately must use its
independent judgment to determine the fair value.
FACTS

In 2006, respondent Cordillera Fund, L.P., purchased a total
lof 583,334 shares of series B convertible preferred stock in appellant
|American Ethanol, Inc., for $1,750,002, or $3 per share.’ In July 2007,
|American Ethanol and appellant AE Biofuels, Inc., formalized a merger
jegreement, and American Ethanol notified its stockholders of their NRS
[Chapter 92A right to dissent. In response, Cordillera gave American
[Ethanol notice of its intent to dissent and demand payment for its total
lshares. The other American Ethanol stockholders approved the merger,
land on December 7, 2007, the articles of merger were filed with the
[Nevada Secretary of State.

‘The following month, Cordillera sent appellants a demand for
payment pursuant to NRS 92A.440. After appellants refused to tender

‘Cordillera Fund originally purchased 250,000 shares of American
[Ethanol convertible preferred stock for $1,750,002 in September 2006. In
[February 2007, American Ethanol reduced the offering price to $3 per
lshare and correspondingly issued to Cordillera an additional 333,334
shares. Thus, in total, Cordillera owned 583,834 shares of American
[Ethanol series B preferred stock at $3 per share.

 
Jpayment, citing untimeliness, among other things, Cordillera filed a
Jcomplaint for declaratory and injunctive relief in the district court. See
INRS 92.460. Specifically, Cordillera req

 

sted a declaration of its right
to payment for its shares in American Ethanol, an injunction compelling

jappellants to comply with Nevada's dissenters’ rights statutes, and

 

reasonable attorney fees and costs, Appellants contested the timeliness of

[Cordillera’s demand, and apparently, a secondary issue was also raised—

   

the proper valuation of the shares. ‘The timeliness issue was heard first,
land after @ one-day trial, the jury found that Cordillera exercised its
Jdissenter's right in a timely matter. Thus, the only remaining issue for
ithe district court to determine was the fair value of Cordillera’s shares of
stock as of December 7, 2007, the date of the merger. See generally NRS
92.4.490.

Neither Cordillera nor appellants provided an appraisal of the
shares’ fair value, and the district court directed appellants to either
deliver payment or an offer for the “fair market value” of the shares plus
laccrued interest. See NRS 92A.460; NRS 92A.470. The district court

2As the issue was not raised, we express no comment on the
Jpropriety of conducting an NRS 92A.440 proceeding in conjunction with an
INRS 92A.490 proceeding.

SAlthough an appraisal would have been advantageous, neither
jparty had an obligation to provide an appraisal pursuant to NRS
J92A.490(1). In addition, while it might have been effective for the district,
(court to appoint an appraiser pursuant to NRS 92A.490(4), it was under
Ino obligation to do so. During oral argument, appellants’ counsel stated
[that appraising Cordillera’s shares of stock would be an extraordinarily
Klifficult endeavor because: (1) Cordillera owned preferred stock, not
Jcommon stock; (2) American Ethanol stock was not trading on a stock
lexchange; and (3) Cordillera owned vory few shares of stock in relation to
continued on next page.

 

 
Jordered that if the payment or the offer was not accepted by Cordillera,
then Cordillera must notify appellants of its estimate of the shares’ fair
Jvalue no later than 30 days after compliance by appellants. See NRS
J92A.480. The district court provided that if there remained a dispute

 

between the parties concerning the fair value of shares, then the court
would determine that value.

Thereafter, appellants offered Cordillera $0.15 per share.
Cordillera rejected the offer, Subsequently, Cordillera gave notice to
lappellants of its estimate of the fair value of the stock at $3 per share.
IThe parties proceeded to trial because no agreement as to fair value could
[be reached.

At trial, Cordillera produced three Securities and Exchange
[Commission (SEC) documents to support its contention that the fair value
lof the stock on the merger date was $3 per share, including one that
indicated that $3 per share was the offering price of the series B preferred
stock as of the date of merger. Appellants provided testimony that the

continued

ithe total amount of the outstanding stock. Appellant's counsel maintains
jthat an appraiser was obtained by appellants, but that the appraiser could
Jnot provide an appraisal.

Also, NRS Chapter 92A's dissenters’ payment is for the fair value of
jthe shares; the district court misapplied the term “fair market value.”
“Fair market value” and “fair value” are two separate concepts. See 184

Jur. 2d Corporations § 706 (2004) (fair value does not necessarily
Jequate to market value); 18 C.J.8 Corporations § 395 (2007) (market value
jis only one factor in determining value of shares).

 

 
book value per share was representative of the fair value and thus, $0.15
per share wi

   

the appropriate payment owe

At the conclusion of the trial, the district court found that the
preponderance of the evidence demonstrated that the offering price of
American Ethanol stock was the most reliable showing of value, even
though the offering price is not always or necessarily equivalent to the
value of the stock. Moreover, the district court dismissed appellants’
theory that the book value was representative of fair value in this case.
Subsequently, the district court entered a judgment in favor of Cordillera
and against appellants, jointly and severally, determining that a
preponderance of the evidence established that the fair value of
Cordillera’s shares of stock at the time of the corporate merger was
$1,750,002, or $3 per share. The total judgment was for $1,918,901.17,
which represented the principal sum of $1,750,002, plus prejudgment
interest of $168,899.17. Appellants appealed.

On appeal, appellants contend that the district court abused
its discretion in determining the fair value of the shares because
Cordillera failed to meet its burden of proof.

“Generally speaking book value of stock represents the difference
between the assets and liabilities of a corporation—that is the value of the
net assets.” Chadwick v. Cross, Abbott Company, 205 A.2d 416, 419 (Vt.
1964); see J.H. Crabb, Annotation, Meaning of “Book Value” of Corporate
Stock, 51 A.L.R.2d 606 (1957).

 
en

 

DISCUSSION
NRS 92A.800-.500 governs the rights of stockholders who
dissent from certain corporate actions, such as mergers. Cohen v. Mirage
Resorts, Inc., 119 Nev. 1, 10, 62 P.8d 720, 726 (2003). These statutes were
“patterned after, or are identical to, the provisions of the 1984 Model
Business Corporation Act.” Id. “The Model Act and Nevada's statutes are
designed to facilitate busi

 

"38 mergers, while protecting minority
shareholders from being unfairly impacted by the majority shareholders’
decision to approve a merger.’ Id, at 10, 62 P.3d at 726-27. Thus,
minority stockholders who dissent from a corporate action such as a
merger are entitled to receive payment for the fair value of their shares.
NRS 92A.380(1)(a).
Eair value

“Fair value” is not explicitly defined in the statutes, The
relevant version of NRS 92A.320 states merely that fair value is “the value
of the shares immediately before the effectuation of the corporate action to
which [the stockholder] objects, excluding any appreciation or depreciation
in anticipation of the corporate action unless exclusion would be
inequitable.” NRS 92A.320 (2008);5 see 3 Model Bus. Corp. Act Ann. §

8We rely on the 2008 version of NRS 92A.320, as it was in effect
during the pendency of the litigation.

In 2009, the Legislature amended NRS 924.320. 2009 Nev. Stat.,
ch, 361, § 64, at 1720-21. However, the amended statute does not provide
much additional guidance in determining fair value. NRS 92A.320 now
provides:

“Fair value,” with respect to @ dissenter’s shares,
means the value of the shares determined:

continued on next page .

 
13.01 (Ath ed, 2008). ‘Thus, as noted in the official comment to the 1984
‘Model Business Corporation Act, the statute leaves it to the courts to work
out “the details by which ‘fair value’ is to be determined within the broad
outlines of the definition.” 3 Model Bus. Corp. Act Ann. § 13.01 emt. 3 (8d
ed. 1984),

Determining fair value, “in actual practice ... is not easy.”
Steiner Corp, v. Benninghoff, 5 F. Supp. 2d 1117, 1128 (D. Nev. 1998)
(applying Nevada law). “One of the first questions that must be addressed
in any valuation study is what ‘standard of value’ the valuation study is
” Id, In Nevada, “that
rights statutes direct that dissenting shareholders
should receive the ‘fair value’ of their shares.” [d,; see NRS 92,320; NRS
92A.380. “Unfortunately, the statutes do not elaborate on what ‘fair value’

meant to determine

 

jandard is set by statute—the

 

 

Nevada dissenter:

 

means, or on what should be considered in order to arrive at fair value.”
Steiner, 5 F. Supp. 2d at 1123. Lacking oxplicit statutory directive, courts
typically consider “all relevant factors” when valuing dissenting

continued

1. Immediately before the effectuation of
the corporate action to which the dissenter objects,
excluding any appreciation or depreciation in
anticipation of the corporate action unless
exclusion would be inequitable;

2. Using customary and current valuation
concepts and techniques generally employed for
similar businesses in the context of the
transaction requiring appraisal; and

3. Without discounting for lack of
marketability or minority status,

 
stockholders’ shares. Ferdinand S. Tinio, Annotation, Valuation of Stock

Dissenting in_Case_of nor Mer
Corporation, Sale of Its Assets. or the Like, 48 A.L.R.d 430 § 3(a) (1973).

In the related context of determining “fair cash value” under
former NRS 78.510, this court has adopted a flexible approach that looks

to a number of different factors. See Southdown, Ine, v, McGinnis, 89 Nev.
184, 188-90, 510 P.2d 636, 639-40 (1973) (noting that “[t}he words ‘fair

 

cash value’... have been construed by courts elsewhere to mean the
intrinsic value of the dissenting shareholder's interests determined from
the
factor bearing on value"), superseded by statute on other grounds as
stated in United Ins. Co, v. Chapman Indus., 120 Nev. 745, 747-48, 100
P.3d 664, 666 (2004); seo also Steiner, 5 F. Supp. 2d at 1126
any . . factor bearing on value” would be considered in determining fair

 

ssets and liabilities of the corporation considered in the light of every

value).

Like other Model Business Corporation Act states, we
conclude that, in determining “fair value, the trial court may rely on proof
of value by any technique that is generally accepted in the relevant
financial community and should consider all relevant factors, but the
value must be fair and equitable to all parties.” Advanced Communication
Design v, Follett, 615 N.W.2d 285, 290 (Minn. 2000); see also Torres ¥,
Schripps, Inc,, 776 A.2d 915, 923-24 (N.J. Super. Ct. App. Div. 2001); 18
C.3.S, Corporations § 394 (2011), This flexible approach “allows the trial
court to adapt the meaning of fair value to the specific facts of the case.”
Pueblo Bancorporation v. Lindoe, Inc,, 63 P.3d 353, 360 (Colo. 2003),
Burden

Despite Nevada's flexible approach, appellants contend that

_ Cordillera did not satisfy its burden of proof in establishing the fair value

 

8
or

sre ro es SET WEEE TST
   

Jof its stock. Appellants’ argument, however, presumes that in an

 

lsppraisal matter, the burden is Cordillera’s alone, a presumption not
|supported by the statutory language or existing Nevada caselaw.

The question of which party bears the burden of establishing
the fair value of a corporation's stock at the time of merger is not expressly
lanswered by Nevada's dissenters’ rights statutes. NRS 92A.300-.500.
[And the question is one of first impression for this court, Other
jurisdictions have, without much discussion, variously placed the burden
lon the corporation, the dissenting stockholder, or neither. Matter of
(Cohen, 636 N.Y.S.2d 994, 996 (Sup. Ct. 1995) (citing cases from the
[Eleventh Circuit Court of Appeals, Georgia, Delaware, Oregon, and Ohio).

Delaware corporate laws, like Nevada's, require the court to
make the determination of fair value. Montgomery Cellular Holding Co. v.
Dobler, $80 A.2d 206, 221 (Del. 2005). Instead of assigning the burden

-xclusively to one side or adopting the “no burden” approach taken in New
‘ork, Matter of Cohen, 636 N.Y.S.2d at 996, the Delaware Supreme Court
Jhas concluded that “[iJn a statutory appraisal proceeding, both sides have
Ithe burden of proving their respective valuation positions by a
lpreponderance of evidence.” M.G. Bancorporation, Inc. v. Le Beau, 737
JA.2d 513, 520 (Del. 1999); see In_re Appraisal of Metromedia Intern,
|Group, 971 A.2d 893, 899 (Del. Ch. 2009); Highfields Capital, Ltd. v. AXA
|Financial, 939 A.2d 34, 42 (Del. Ch. 2007); Montgomery Cellular Holding,
[S80 A.2d at 221. However, “[elven if one side fails to satisfy its burden,

 

the Court is not free to accept the competing valuation by default, but
Imust use its own independent judgment to determine fair value.”
[Montgomery Cellular Holding, 880 A.2d at 221; see Highfields Capital,
1039 A.2d at 42-43 (if neither party adduces evidence sufficient to satisfy

 
this burden, “the court must then use its own independent judgment to
determine fair value” (internal quotations omitted); Metromedia, 971
A.2d at 900 (“[Alfter having considered the parties’ legal arguments and
the respective experts’ reports and testimony supporting their valuation

conclusions, the Court has broad discretion either to select one of the

 

parties’ valuation models or to fashion its own.”); see also Gonsalves v,
Straight Arrow Publishers, 701 A.2d 857, 361 (Del. 1997) (noting that it is
the district court's responsibility to “independently determine the value of
the shares that are the subject of the appraisal action’); see generally
Chrome Data Systems. Inc. v, Stringer, 820 P.2d 831, 833 n.2 (Or. Ct. App.

1991) (noting that, in Oregon, which has a relevant statute similar to

Nevada's, the dissenting stockholders do not necessarily bear the burden

 

of proof and suggesting that, even if no evidence is offered, dissenting
stockholders are entitled to fair value).

‘The Delaware approach accords with notions of judicial
economy and fairness, because it places on the parties the affirmative duty
to prove their respective valuations but recognizes that, in the end, the
court remains the final arbiter of fair value. As in Delaware, Nevada law
makes the court the final arbiter of fair value. See NRS 92A.490(1) (the
“corporation shall .... petition the court to determine the fair value”); NRS
92A.490(6)(a) (dissenter . .. is entitled to a judgment [flor the amount, if
any, by which the court finds the fair value of the dissenter’s shares”).
Accordingly, we adopt Delaware's approach in determining fair value of a
dissenting stockholders shares of stock. As such, in a stockholder’s right-
to-dissent appraisal action, both the dissenting stockholder and the

corporation have the burden of proving their respective valuation

conclusions by a preponderance of the evidence in the district court. Final

 

 
jresponsibility for determining fair value, however, lies with the court,
Jwhich must make its own independent value determination.

a a fair value determinati
court's determination of

An appellate court reviews a distri

   

fair value under an appraisal statute such as NRS 92A.490 under an
Jabuse of discretion standard. See Gonsalves, 701 A.2d at 360; see also In
[re 75,629 Shares of Common Stock, 725 A.2d 927, 931 (Vt. 1999); Dodd v,
[Potomac Riverside Farm, Inc., 664 8.8.24 184, 190 (W. Va. 2008).
Appellants argue that the district court abused its discretion
fhere by not deciding fair value based on the four factors discussed in
Steiner Corp. v. Benninghoff, 5 F. Supp. 2d 1117, 1123 (D, Nev. 1998).

But in Steiner, the court indicated that it already decided, in a prior,

  

junreported decision, that “fair value’ would be determined by considering
(1) the pre-merger market value of the shares, discounted for illiquidity,
(2) the pre-merger enterprise value of the corporation as a whole, (3) the
Jpre-merger net asset value of the corporation, and (4) any other factor
bearing on value. Each measure of value will then be assigned a certain
weight, and then averaged appropriately.” Id, (quotations omitted).®
Here, the district court was not provided the evidence necessary to
Jcalculate and apply the Steiner factors reliably.? ‘Where, as here, a

Of note, the first Steiner factor discounts for lack of liquidity, which
lis contrary to the 2009 revisions of NRS 92A.320 providing that no
|marketability discount should be taken.

“Instead of presenting evidence supporting the factors listed in
|Steiner, appellants presented testimony as to the book value of the shares.
[The district court did not abuse its discretion in rejecting that testimony
Jalone as probative of the fair value, “Book value is entitled to little, if any,
continued on next page.

 

 
controlling stockholder has provided [limited] evidence, either pre-merger
or during the trial, to enable the Court of Chancery to perform its
mandated task, the Court may rely upon its expertise and upon whatever
evidence is presented to determine fair value independently.”
Montgomery Cellular Holding, 880 A.2d at 222. This left the district court
“free to use whatever methodology was supportable by the record to reach
a valuation result,” id,, whether by adhering to one of the parties’ properly
supported valuations or by fashioning its own. See In re Appraisal of
Metromedia Intern. Group, 971 A.2d 893, 900 (Del. Ch. 2009). (“[A}fter
having considered the parties’ legal arguments and the respective experts’
reports and testimony supporting their valuation conclusions, the Court
has broad discretion either to solect one of the parties’ valuation models or
to fashion its own,”).

In light of the flexible standard of determining fair value,
under which the district court is to consider all relevant factors presented
by each of the parties and any independent examiner, and considering the
evidence presented by Cordillera and appellants, we conclude that
appellants have not demonstrated that the district court abused its
discretion in calculating the fair value of Cordillera’s shares. The district,
court considered several factors reflecting value, including the price that
Cordillera paid for the shares of stock in 2006 and the price that
appellants indicated on an SEC document as the offering price of the series

continued
weight in determining the value of corporate stock, and many other factors

must be taken into consideration.” Bendalin v, Delgado, 406 8.W.2d 897,
900-01 (Tex. 1966); see 18A Am. Jur. 2d Corporations § 374 (2004),

12

 
  

IB preferred stock on the merger date, all of which were $3 per share.
While neither party provided extensive calculations as to the shares’ fair
value, the district court did not abuse its discretion in determining the fair
value of Cordillera’s shares based on the evidence before it, As such, we
affirm the district court's judgment,