Title: Wheaton v. Smith
Citation: N/A
Docket Number: a-63-98
State: new-jersey
Issuer: new-jersey Supreme Court
Date: July 14, 1999

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized). GARIBALDI, J., writing for a unanimous Court. This appeal considers whether, in a statutory appraisal action, the court should apply a non-marketability discount in determining the fair value of the shares of stock held by dissenting shareholders in a family-held corporation. The appeal arises out of a dispute over the management of a family business that began as a one-man glass works in 1888 and evolved into a multi-national corporation, Lawson Mardon Wheaton, Inc., formerly Wheaton, Inc. (Wheaton or the Company). Until 1991, the Company was a privately-held, family controlled business. In 1991, Frank H. Wheaton, Jr., was forced out of the Company and sold 100,000 shares of his stock to a British Company, Bowater PLC, for $64 per share. In August 1991, Bowater secured option agreements to purchase an additional 17.7 percent of Wheaton stock at $64 per share, and also made a conditional offer to buy all of Wheaton's stock at $64 per share. The Wheaton directors rejected Bowater's offer and adopted a resolution stating that Wheaton was not for sale. Also, a majority of Wheaton shareholders approved a plan to restrict further sales of Wheaton stock outside the family unless approved by seventy-five percent of shareholders and a shareholder committee. In November 1991, in an attempt to further restrict future public sales of Wheaton stock, controlling family members approved a plan to restructure the corporation. Under the plan, Wheaton would transfer substantially all of the company assets to newly-created subsidiaries in exchange for the subsidiaries' stock. The new stock consisted of two classes: class A stock, which could not be sold to anyone outside the family; and class B stock, which could be sold freely, but only carried one vote to the ten votes of each class A stock. Wheaton formally approved the plan on December 6, 1991. It advised shareholders who did not approve of their right to dissent and demand payment of the fair value of their shares under N.J.S.A. 14A:11-1 to -11 (the Appraisal Statute). Twenty-six shareholders, owning approximately fifteen percent of the stock, dissented and demanded fair value payment for their shares. Wheaton offered the dissenting shareholders $41.50 per share as fair value. The offer price was calculated by Wheaton's investment banking firm, and included a non-marketability discount of twenty-five percent on the theory that there was a limited supply of potential buyers for the stock. The dissenters rejected the offer in April 1992, and Wheaton initiated the present appraisal action in the Chancery Division. In June 1995, prior to the trial, Wheaton voted to rescind the 1991 corporate restructuring. Citing the rescission, it moved to dismiss the appraisal action. The trial court denied that motion. While the trial was proceeding, the Legislature amended the Business Corporation Act so that the type of corporate restructuring that Wheaton undertook, the intracorporate transfer of assets, would no longer trigger dissent and appraisal rights. Wheaton renewed its motion to dismiss the appraisal action, arguing that the amendments applied retroactively. The trial court also denied that motion. After the trial was completed, the Supreme Court granted Wheaton's motions for leave to appeal the denial of the rescission motion and for direct review of the retroactivity motion. The case was argued on April 29, 1996. One day later, Wheaton announced its agreement to a sale-merger with Alusuisse-Lonza Holding Ltd., (Allusuisse), a Swiss holding company. Under the agreement, Wheaton shareholders would receive $63 per share. Alusuisse also asked Wheaton's counsel to withdraw its appeal in the appraisal matter. The Supreme Court affirmed the trial courts' rulings on the rescission and retroactivity issues. Strasenburgh v. Straubmuller, 146 N.J. 527 (1996). The Court also remanded the matter to the Chancery Division to determine the fair value of the dissenters' stock, and, in its discretion, to reopen the record for consideration of events since the hearing closed, including the sale to Alusuisse. The dissenters appealed. The Appellate Division affirmed, finding that the propriety of applying a discount is a question of law for the reviewing court to decide de novo. The Appellate Division observed that the weight of authority is against application of a marketability discount, and that such a discount has been viewed as especially inapplicable to intra-family transfers in closely-held companies, as in this case. Nonetheless, the Appellate Division accorded deference to the trial court's findings of fact and found that the record supported the conclusion that the dissenters seized upon a non-material restructuring to trigger an appraisal remedy. It agreed that these actions constituted extraordinary circumstances to warrant application of a marketability discount. The Appellate Division also concluded that the trial court did not abuse its discretion by refusing to reopen the record to consider the Alusuisse merger. The Supreme Court granted the dissenters' petition for certification. HELD: Marketability discounts generally should not be applied when determining the fair value of dissenters' shares in a statutory appraisal action. Nor does the record in this case support a finding of extraordinary circumstances that warrant such a discount. 1. Because the question whether to apply a marketability discount implicates a question of law, it is subject to de novo review by this Court. The Appraisal Statute is designed to afford a simple and expeditious remedy to dissenting shareholders, and should be liberally construed in favor of dissenting shareholders. (pp. 16-23) 2. Equitable considerations have led the majority of states and commentators to conclude that marketability discounts should not be applied when determining the fair value of dissenting shareholders' stock in an appraisal action. Such discounts inject speculation into the appraisal process, fail to give the minority shareholder the full proportionate value of his shares, and encourage corporate squeeze-outs. Application of a marketability discount also penalizes the minority shareholder for taking advantage of the Appraisal Statute. (pp. 23-27) 3. The Court does not believe that the record in this case supports a finding of extraordinary circumstances warranting application of the marketability discount. The dissenters in this case wanted liquidity for their stock because the corporation was now controlled by new management in whom they lacked confidence. That is not an extraordinary circumstance. The Court also does not agree that the dissenters sought to exploit the transaction. The actions that triggered the dissenters' dissatisfaction -- restrictions on the sale of Wheaton stock -- were instigated by the majority shareholders. The dissenters merely pursued their lawful options. (pp. 27-30) 4. The record should be reopened for the limited purpose of considering how the $63 per share Alusuisse acquisition price bears on the value of the corporation at the time of the restructuring. The Company's own financial statements disclose that its fair value was greater in 1991 than 1996. The judgment of the Appellate Division is REVERSED, and the matter is REMANDED to the trial court for recalculation of the fair value of the dissenters' shares. CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN, STEIN and COLEMAN join in JUSTICE GARIBALDI's opinion. LAWSON MARDON WHEATON, INC., formerly known as WHEATON INC., formerly known as WHEATON INDUSTRIES, Plaintiff-Respondent, v. DOUGLAS FREDERICK SMITH, a/k/a DOUGLAS F. SMITH and ANTHONY D. SMITH, TRUSTEE FOR DOUGLAS FREDERICK SMITH, Defendants, and SUSAN HUFFARD BALL, P. PHILLIPPI HUFFARD, IV, TREVOR LANSING HUFFARD, WHITNEY LANCASTER HUFFARD, COURTNEY MONTAGU HUFFARD, ROBERT D. ROBERTSON, a/k/a ROBERT SHAW, FRANK H. WHEATON, III, CUSTODIAN FOR AMANDA ELIZABETH WHEATON, FRANK H. WHEATON, III, FRANK H. WHEATON, III, CUSTODIAN FOR CHRISTOPHER BAINBRIDGE WHEATON, ADA A. STRASENBURGH, JAMES A. STRASENBURGH, JOHN B. STRASENBURGH, JOHN GRIFFIN STRASENBURGH, JOHN B. STRASENBURGH, TRUSTEE FOR JOHN GRIFFIN STRASENBURGH, JR., JOHN B. STRASENBURGH, TRUSTEE FOR BLAIR BALDWIN STRASENBURGH, LOUISE HOUGHTON STRASENBURGH, JOHN B. STRASENBURGH, TRUSTEE FOR SARAH HOUGHTON STRASENBURGH, JOHN B. STRASENBURGH, TRUSTEE FOR TOBY E.A. STRASENBURGH, SALLY STRASENBURGH Defendants-Appellants. Argued May 3, 1999 -- Decided July 14, 1999 On certification to the Superior Court, Appellate Division, whose opinion is reported at 315 N.J. Super. 32 (1998). Frederick L. Whitmer argued the cause for appellants Susan Huffard Ball, P. Phillippi Huffard, IV, Trevor Lansing Huffard, Whitney Lancaster Huffard, Courtney Montagu Huffard, Ada A. Strasenburgh, James A. Strasenburgh, John B. Strasenburgh, John Griffin Strasenburgh, John B. Strasenburgh, Trustee for John Griffin Strasenburgh, Jr., John B. Strasenburgh, Trustee for Blair Baldwin Strasenburgh, Louise Houghton Strasenburgh, John B. Strasenburgh, Trustee for Sarah Houghton Strasenburgh, John B. Strasenburgh, Trustee for Toby E.A. Strasenburgh, Sally Strasenburgh Applegate Lane, John B. Strasenburgh, Trustee for Samuel Church Applegate, John B. Strasenburgh, Trustee for Amos Eighmy Applegate, John B. Strasenburgh, Trustee for George Guthrie Applegate, John B. Strasenburgh, Trustee for Allison Webb Strasenburgh, and John B. Strasenburgh, Trustee for Oliver James Strasenburgh (Pitney, Hardin, Kipp &amp; Szuch, attorneys; Mr. Whitmer and Thomas R. Homer, on the briefs). Marc J. Sonnenfeld, a member of the Pennsylvania, Massachusetts, Florida and District of Columbia bars, argued the cause for appellants Robert D. Robertson, a/k/a Robert Shaw, Frank H. Wheaton, III, Custodian for Amanda Elizabeth Wheaton, Frank H. Wheaton, III, and Frank H. Wheaton, III, Custodian for Christopher Bainbridge Wheaton (Morgan Lewis &amp; Bockius, attorneys; Robert A. White, on the briefs). Jesse A. Finkelstein, a member of the Delaware bar, argued the cause for respondent (Kenney &amp; Kearney, attorneys; Mr. Finkelstein, Joseph H. Kenney, and Allen A. Etish, on the brief). The opinion of the Court was delivered by GARIBALDI, J. In this appeal, we consider how a court in a statutory appraisal action should determine the "fair value" of the shares of stock held by dissenting shareholders in a family-held corporation. Specifically, in calculating "fair value" should the court apply a discount reflecting the lack of marketability or non-marketability of those shares ("marketability discount"). We also determine whether the "extraordinary circumstances test" set forth in 2 ALI, Principles of Corporate Governance: Analysis and Recommendations, 7.22(a), at 302; comment e to 7.22, at 313 (1994) (2 ALI Principles) is applicable, and whether the trial court should have reopened the record to consider the affect of a subsequent merger when calculating the "fair value" of the stock. Historically, corporations could act only with the unanimous consent of all shareholders. That rule protected minority stockholders by giving them an effective veto power over the will of the majority. However, it frequently led to deadlock and corporate paralysis. To promote the flexibility needed by modern corporations, an alternative was adopted. Unanimity was traded for "majority rule" and veto power exchanged for appraisal rights. Minority owners could no longer stop their company from pursuing a course with which they disagreed. But they did not have to go along. They had the right to demand to be bought out by the company at "fair value." 1 John R. Mackay II, New Jersey Business Corporations, 9-10(a) (2d ed. 1996) (citations omitted); Barry M. Wertheimer, The Shareholders' Appraisal Remedy and How Courts Determine Fair Value, 47 Duke L.J. 613, 618-26 (1998). "Fair value," as used in the Appraisal Statute, as well as in the Oppressed Shareholder Statute, is not defined.See footnote 77 Until the adoption of the BCA in 1968, New Jersey required dissenters in appraisal actions to be paid the full market value of their shares. The New Jersey Corporation Law Revision Commission abandoned the more restrictive standard of "full market value" used in Title 14 [of the Revised Statutes, the pre-1968 corporate law], in favor of the broader and more flexible test of "fair value" found in the [ABA's] Model [Business Corporation] Act. In most cases the shares to be appraised will not be readily marketable. . . . [1968 Commissioners' Comment to N.J.S.A. 14A:11-3]. Even though fair value" is not synonymous with "fair market value,"See footnote 88 consideration of market price still can be a "valuable corroborative tool." Dermody v. Sticco, 191 N.J. Super. 192, 199 (Ch. Div. 1983). There is no inflexible test for determining fair value, as [v]aluation is an art rather than a science. Wertheimer, supra, 47 Duke L.J. at 629. Since the Delaware case of Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), rev'g, 426 A.2d 1333 (Del. Ch. 1981)), courts and commentators have come to agree that an assessment of fair value requires consideration of 'proof of value by any techniques or methods which are generally acceptable in the financial community and otherwise admissible in court.'" 1 MacKay, supra, 9-10(c)(1) (citing Dermody v. Sticco, supra, 191 N.J. Super. at 196 (quoting Weinberger, supra, 457 A.2d 701 (rejecting old block method of valuing stock and adopting approach that uses generally accepted techniques employed by financial community). That approach also is recommended by the ALI. 2 ALI Principles, comment d to 7.22, at 305-06 (stating that no single or universal standard of fair value should be applied in all contexts). See also 2 ALI Principles, 7.22(a), at 302, (stating that in corporate transactions giving rise to appraisal rights, fair value of shares should measure value of shareholder's proportionate interest in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability"); Wertheimer, supra, 47 Duke L.J. at 648 (explaining why neither marketability or minority discount should be applied in appraisal actions). Courts rejecting the discount have concluded that it injects speculation into the appraisal process, fails to give the minority shareholder the full proportionate value of his shares, and encourages corporate squeeze-outs. 1 MacKay, supra, 9 10(c)(2); Cavalier Oil Co. v. Harnett, 563 A.2d 1137, 1145 (Del. 1989); In re Valuation of Common Stock of McLoon Oil Co., 565 A.2d 997, 1004-05 (Me. 1989) (In re McLoon). Other commentators, however, believe that marketability discounts are appropriate in appraising dissenters' shares since they compensate for the high risks inherent in small family-owned businesses or for the lack of liquidity caused by the limited pool of buyers. See Harris, supra, 42 Ark. L. Rev. at 657; Columbia Management Co. v. Wyss, 765 P.2d 207, 213-14 (Or. Ct. Ap. 1988), review denied, 771 P.2d 1021 (Or. 1989) (holding marketability discount was properly applied, but it was error to apply minority discount as well). "[A] respectable minority of states, including Ohio, Indiana, and Kansas accept the view that a minority discount is appropriate in valuing shares in a dissenters' rights proceedings." 1 MacKay, supra, 9-10(c)(2) (citations omitted)). A trial court's findings will not be disturbed if they are supported by adequate, substantial and credible evidence. Rova Farms Resort Inc., supra, 65 N.J. at 483-84. We do not believe, however, that standard has been met in this case. The Company's own financial statements disclose that the fair value of the Company was greater in 1991 than in 1996. In 1991, total shareholders' equity was $193,690,000 ($162,072,000 after deducting the subsequently booked $31,618,000 liability to dissenting shareholders), and pre-tax income would have been $19,359,000 after adjustments for unusual items. In December 1991, management stated, "We feel confident that we are poised to have a strong year in 1992." By 1996, management had "substantial doubt about the Company's ability to continue as a going concern." See page 32 of Wheaton Proxy statement, section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." According to the May 1, 1996 proxy statement prepared by the Company in conjunction with the Alusuisse merger, shareholders' equity had declined to $111,633,000 by March 31, 1996, (after deducting the $31,618,000 liability to dissenting shareholders); and in 1995, the Company had a net loss of $48,000,048. The Chancery Division refused to reopen the record to consider the $63.00 per share Alusuisse acquisition price. The court determined that the Alusuisse acquisition price was neither known or knowable as of December 5, 1991. The court reasoned that if it opened the record for that transaction, it would have to open the record for all events occurring subsequent to the December fifth date, whether known or knowable, and then attempt somehow to relate it back. We disagree. CHIEF JUSTICE PORITZ and JUSTICES HANDLER, POLLOCK, O'HERN, STEIN, and COLEMAN join in JUSTICE GARIBALDI's opinion. NO. A-63/64 LAWSON MARDON WHEATON, INC., etc., Plaintiff-Respondent, v. DOUGLAS FREDERICK SMITH, etc., et al., Defendants, and SUSAN HUFFARD BALL, et al., Defendants-Appellants. DECIDED Two from the first group, Douglas and Anthony Smith, subsequently moved in the trial court to dismiss the appraisal action as to them, to restore their status as shareholders, and to receive the $63 per share payment form the acquisition merger with Alusuisse. The court granted their motion on January 29, 1997. A third member of the first group, Robert W. Shaw, joins Frank H. Wheaton III in his petition to this Court.