Opinion ID: 1929184
Heading Depth: 1
Heading Rank: 6

Heading: Calculation of Fair Value.

Text: Having addressed the parties' disagreements with respect to the proper factors to be considered in making a determination of fair value, we now turn to their criticism of the trial court's bottom line. A. Mecredy's valuation. The banks contend Mecredy's figures should have been adopted by the court as the fair value of the dissenters' shares. Mecredy's valuations, however, were fundamentally flawed because he clearly valued these shares on the basis of their minority status. Adjustments based on the minority status of the stock are not allowed under Iowa law. Woodward, 257 Iowa at 1087, 133 N.W.2d at 43. For this reason, we, like the district court, cannot accept Mecredy's opinions of the fair values of the banks' stock. B. Valuation figures used by experts. The dissenters urge us to adopt the valuations of their expert, Dennis Bixenman. Before we examine his valuations, however, it is helpful first to review the calculations underlying the experts' opinions of fair value. All three experts prepared valuation reports showing per-share values for the stock of each bank. Each expert computed a per-share figure using book value or net asset value, adjusted book value, market value (except Bixenman), adjusted earnings value, net present value of future earnings, and dividend value. Based on each expert's view of the accuracy of these valuations, he arrived at an opinion of fair value. C. Market value. The court found the market values calculated by Mecredy and Stave of little help. Prior to the reverse stock split, there had been no recent sales of Hartley stock and only one of Lake Park stock: a sale of ten shares for $933 per share. This price was considerably below the values calculated for this stock under any other method or considering any other factor. Moreover, Mecredy acknowledged in his appraisal report that the sale of ten shares was an inadequate basis upon which to arrive at a market value. For that reason, he considered the market value method immaterial to his valuation of the stock. The only other evidence arguably showing market value was Hawkeye Bancorporation's indication of its interest in purchasing the banks for 1.25 times book value. But this overture was certainly not a sale nor even a firm offer; it was merely an expression of interest that would hopefully start the negotiating process. Consequently, although Hawkeye's invitation might indicate one person's preliminary view of the value of the stock, it certainly was not the product of bargaining between a willing buyer and a willing seller. See Sieg, 512 N.W.2d at 279 (adopting appraiser's report which defined fair market value as that value which a willing buyer and willing seller, both well informed as to the facts, but neither under any compulsion to act, would establish in an arms length sale of the asset in question). We agree with the district court and Bixenman, who did not determine a market value, that there simply was insufficient information available to calculate a reliable value under a market approach. See id. (court should reject valuation techniques that are not supported by the evidence); Richardson v. Palmer Broadcasting Co., 353 N.W.2d 374, 379 (Iowa 1984) (disregarding net asset value method because the record was inadequate to determine value using this method); Woodward, 257 Iowa at 1082, 133 N.W.2d at 40 (court did not consider market value because there was no evidence of any sales of the stock on the open market). D. Net asset value and adjusted net asset value. The trial court also rejected the valuations based on net asset value and adjusted net asset value. Net asset value is the share the stock represents in the value of the net assets of the corporation. Fletcher § 5906.140, at 454. To calculate adjusted net asset value, an average price-to-equity ratio is applied to the net asset value. To be most accurate, net asset value should be based, not on book value, but on a current appraisal of all the corporation's property, tangible and intangible. Id. at 455. Where book value is used rather than a current asset appraisal, the figure obtained after applying a price-to-equity ratio is also known as the adjusted book value. As Mecredy and Bixenman pointed out, these methods of valuation in effect represent the value of the stock upon liquidation. See id. (net asset value is a value based on a hypothetical dissolution and distribution of the corporate assets). The banks, however, were going concerns and must be valued as such. Woodward, 257 Iowa at 1083, 133 N.W.2d at 41 (the real value of the stock is still to be determined as in a going concern); Fletcher § 5906.140, at 455. We considered the usefulness of a net asset valuation in Woodward. There we indicated this value was far less important than the investment value of the stock. Woodward, 257 Iowa at 1083, 133 N.W.2d at 41. Nevertheless, we recognized that it offered protection to the minority stockholder in a corporation with a poor earnings record where the value of the corporation as a going concern might be less than its liquidation value: It would not be fair to limit the minority interest to a value influenced by poor earnings, when the minority might prefer to liquidate and convert the assets into cash, and at the same time place the majority in a position where it could later liquidate and receive the entire benefit of the greater liquidation value. Id. Consequently, we concluded [i]t was necessary to consider liquidation value of the assets to protect the minority from an arbitrary action by the majority. Id. at 1086, 133 N.W.2d at 42. We place little reliance on the net asset value and adjusted net asset value in this case. See Sieg, 512 N.W.2d at 279 (court should reject valuation techniques that do not provide a reliable guide to value). The experts did not independently appraise the assets of the bank but merely used book value as the basis for net asset value, thereby lessening the accuracy of both the net asset value and the adjusted net asset value figures. In fact, Stave did not even use the term net asset value in his report, using book value and adjusted book value instead. He acknowledged it was not possible to use a net asset value method because the necessary information to value key assets was not available. Consequently, the experts' reliance on book value and adjusted book value reduces considerably the reliability of the net asset valuation approach. In addition, the banks were financially healthy entities and had significant earnings in the years preceding the reverse stock split. Consequently, they had value as ongoing concerns, a value not reflected in the net asset and adjusted net asset valuations. Finally, the likelihood of future earnings makes investment value a more accurate indicator of the fair value of the dissenters' shares. Therefore, we, like the trial court and the experts, focus our attention on the factors considered in assessing the investment value of the banks' stock. E. Investment value. Investment value is the present value of the future benefits accruing to the stockholder. The experts considered the investment value of the stock by calculating values based on adjusted earnings, net present value of future returns and dividends. The adjusted earnings value is calculated by using the banks' earnings per share and applying a multiplier based on the average price-to-earnings ratio of similar banks. The net present value approach projects future income for ten years, then discounts that figure to present value. The present value of this future income is then added to the residual value of the bank at the end of that period, discounted to present value. The sum of the discounted future income and discounted residual value equals the net present value of the stock. The dividend value is calculated by projecting the amount of dividends that will be paid in the future and applying a multiplier based on the average dividend yield on comparable publicly-traded companies. The trial court disregarded the dividend value because the figures varied widely between the experts and in comparison with other valuation estimates. For example, Mecredy placed a dividend value on Hartley stock of $13,559 compared to $4,036 by Bixenman and $3,230 by Stave. Moreover, the testimony showed the practice of declaring dividends in a closely-held corporation was dependent on factors that were difficult to predict. We agree with the trial court's decision to place little reliance on the dividend values. That leaves us with the adjusted earnings value and the net present value of future income. These values for the Lake Park stock varied from a low of $1,947 to a high of $2,365. For the Hartley shares, they ranged from a low of $2,124 to a high of $2,881. [3] As stated above, the values placed on the dissenters' shares by the trial court were $2,120 for Lake Park and $2,526 for Hartley. The trial court arrived at these values by giving equal weight to the adjusted earnings values and the net present values of future income computed by each expert, finding no reason to rely on one value more than another. On our de novo review, we agree with the trial court's appraisal. F. Bixenman's fair value opinions. We have considered the arguments of Ziegeldorf and Arnold, urging us to adopt Bixenman's opinions on fair value; we decline to do so. Bixenman believed the Lake Park stock had a fair value of $2,466 per share and the Hartley stock had a fair value of $3,081 per share. He relied primarily on the dividend value in appraising the Lake Park shares and primarily on the net present value of future income and the dividend value in arriving at the fair value of the Hartley shares. (Bixenman's dividend values for the stock were higher than the values he computed under any other valuation technique.) In contrast, we have concluded the dividend value is not as reliable as the net present value of future income and adjusted earnings value. Because Bixenman relied on a valuation we have rejected, we will not adopt his opinion of the fair value of the banks' stock. Furthermore, we note the trial court, in the face of conflicting evidence, also rejected Bixenman's valuation opinions. We accord great weight to the trial court's judgment on this matter. Davis-Eisenhart, 539 N.W.2d at 142. Therefore, we affirm the trial court's appraisal of the dissenters' shares.