Opinion ID: 1968591
Heading Depth: 1
Heading Rank: 2

Heading: The value of the transferred assets.

Text: If the book value be taken as indicating real value, the price is about one-half of that amount. The disparity is substantial, but book value is not conclusive evidence of real value, as both sides agree. The going concern value is of much more importance in many cases of sales or of mergers. Allied Chemical & Dye Corp. v. Steel & Tube Co., 14 Del.Ch. 64, 122 A. 142; Sterling v. Mayflower Hotel Corp., 33 Del.Ch. 293, 93 A.2d 107, 38 A.L.R.2d 425; Cottrell v. Pawcatuck Co., supra. Going concern value is based upon the demonstrated capacity of the corporation to earn money and pay dividends. The Vice Chancellor gave special weight to this standard of value. He held that the transferred assets did not have a value of more than eight to seven times normal earnings. He did not specify what he regarded as normal earnings. The rapid decline of Pressed Metals' business in the years prior to the sale makes the determination of such a figure difficult. True, there was an upturn in earnings in 1955; as of July 31 it was $1.39 a share. But at the time of the sale the earning capacity of the corporation was uncertain. Pressed Metals averages the net earnings for the four years 1951-1954, uses a factor of eight times earnings, and subtracts $1,600,000 as working capital. It thus arrives at a value for the transferred assets of $2,228,000. In the light of the corporation's financial difficulties, this result does not seem unreasonable; but the figure of $1,600,000 is not really supported by evidence, and the result is therefore open to question. In this case it is unnecessary to find a valuation wholly on the record of earnings. This is a case in which market value  the sum a willing purchaser would pay  is of especial importance. Allaun v. Consolidated Oil Co., 16 Del.Ch. 318, 147 A. 257, 262. In 1954 Pressed Metals was faced with a very serious loss of business and with serious labor troubles. The directors determined to sell the machinery, equipment and plant. The best price they could hope to get was what someone would be willing to pay. The record shows that they made every effort to find a purchaser. The facts are set forth above. Three offers were made and rejected; and finally after eleven months the present offer was made. The directors negotiated a slightly better price and accepted it. From the field of possible purchasers they took the best offer. Allaun v. Consolidated Oil Co., supra. There is no suggestion that any director made any personal profit from the sale. The judgment of the directors is entitled to the presumption that it was exercised honestly and in good faith. Robinson v. Pittsburgh Oil Refining Corporation, 14 Del.Ch. 193, 126 A. 46. The legal principles applicable to the case have long been settled in Delaware. When disparity is alleged between the value of the assets sold and the consideration received, plaintiff has the burden of showing such a gross disparity as will raise an inference of improper motives or reckless indifference to or intentional disregard of stockholders' interests. Allied Chemical & Dye Corp. v. Steel & Tube Co., supra; Schiff v. RKO Pictures Corp., Del. Ch., 104 A.2d 267, 271. Under the facts in this record we are of opinion that the disparity between the book value of the transferred assets and the consideration paid raises no inference of improper motives or reckless disregard of the stockholders' interests. Plaintiff, however, insists that the real value of the transferred assets greatly exceeded their book value. He agrees that book value is not conclusive, but says that in this case it should be increased  not reduced. By a process of starting with book value and adding a succession of what he calls plus factors, he arrives at a figure of $15,147,774 plus as the value of the transferred assets. This staggering total represents a minimum value of $55 for a share of stock that had earned a yearly average of $1.40 for the four years preceding the sale. This value is 39 times earnings  a rate so out of all reason as almost to suggest wilful exaggeration. How does plaintiff attempt to sustain this figure? His plus factors are as follows: