Opinion ID: 1677587
Heading Depth: 1
Heading Rank: 8

Heading: Discounts

Text: We note at the outset of our review of the discount aspect of the first summarized assignment of error that while there is a wide disparity between the opinion of Rigel's expert concerning the value of Cutchall's shares and the opinion of Cutchall's expert, Cutchall has, except for the insurance issue just discussed, limited his attack on the trial court's valuation to the fact that it applied a discount because of Cutchall's minority position in Rigel/Chix. Accordingly, we too so limit our review of the trial court's determination of value. We begin by noting that the statutes of the various jurisdictions have used a variety of terms in describing the payment to be made to dissenting shareholders. As observed in Warren v. Balto. Transit Co., 220 Md. 478, 482-83, 154 A.2d 796, 798-99 (1959): In the years that have passed since appraisal statutes first came into the law (the Maryland statute passed in 1908 was one of the first), the rules governing the rights of dissenting stockholders have crystallized and are relatively uniform throughout the country. Whether the statute calls for the payment of value, fair value, or fair cash value, makes little difference since the terms are considered synonymous. Burke v. Fidelity Trust Co., 202 Md. 178, 186[, 96 A.2d 254]. The real objective is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders, that is, to indemnify him. The textwriters and cases agree generally that this is to be determined by assuming that the corporation will continue as a going concernnot that it is being liquidated and on this assumption by appraising all material factors and elements that affect value, giving to each the weight indicated by the circumstances, including the nature of the business and its operations, its assets and liabilities, its earning capacity, the investment value of its stock, the market value of the stock, the price of stocks of like character, the size of the surplus, the amount and regularity of dividends, future prospects of the industry and of the company, and good will, if any. The Delaware Supreme Court, in Weinberger v. UOP, Inc., 457 A.2d 701, 713 (Del. 1983), wrote: The basic concept of value under the appraisal statute is that the stockholder is entitled to be paid for that which has been taken from him, viz., his proportionate interest in a going concern. By value of the stockholder's proportionate interest in the corporate enterprise is meant the true or intrinsic value of his stock which has been taken by the merger. In determining what figure represents this true or intrinsic value, the appraiser and the courts must take into consideration all factors and elements which reasonably might enter into the fixing of value.... In a later case, when confronted with the question of whether to apply a minority or marketability discount, the Delaware Supreme Court said: [T]he Vice Chancellor concluded that the objective of a [dissenter's statute appraisal] is to value the corporation itself, as distinguished from a specific fraction of its shares as they may exist in the hands of a particular shareholder [emphasis in original]. We believe this to be a valid distinction. .... The application of a discount to a minority shareholder is contrary to the requirement that the company be viewed as a going concern. Cavalier's argument, that the only way Harnett would have received value for his 1.5% stock interest was to sell his stock, subject to market treatment of its minority status, misperceives the nature of the appraisal remedy. Where there is no objective market data available, the appraisal process is not intended to reconstruct a pro forma sale but to assume that the shareholder was willing to maintain his investment position, however slight, had the merger not occurred. Discounting individual share holdings injects into the appraisal process speculation on the various factors which may dictate the marketability of minority shareholdings. More important, to fail to accord to a minority shareholder the full proportionate value of his shares imposes a penalty for lack of control, and unfairly enriches the majority shareholders who may reap a windfall from the appraisal process by cashing out a dissenting shareholder, a clearly undesirable result. Cavalier Oil Corp. v. Harnett, 564 A.2d 1137, 1144-45 (Del.1989). Under a similar rationale, a number of other courts have rejected both minority and marketability discounts. Charland v. Country View Golf Club, Inc., 588 A.2d 609 (R.I. 1991); In re McLoon Oil Co., 565 A.2d 997 (Me.1989); Woodward v. Quigley, 257 Iowa 1077, 133 N.W.2d 38 (1965), on reh'g 257 Iowa 1077, 136 N.W.2d 280; Hunter v. Mitek Industries, 721 F.Supp. 1102 (E.D.Mo.1989) (applying Missouri law). See, also, Richardson v. Palmer Broadcasting Co., 353 N.W.2d 374 (Iowa 1984) (which directly discusses only the minority discount). Several other courts have rejected the minority discount without extensively discussing the propriety of applying a discount characterized as one either for lack of marketability or because of lack of a controlling interest. MT Properties v. CMC Real Estate Corp., 481 N.W.2d 383, 388 (Minn.App.1992) (stating that [i]t is evident this issue involves highly conflicting policy considerations. Either resolution of the issue risks unduly enlarging the value of some shares, either those of the remaining shareholders or those of the dissenter, and holding that the dissenting shareholder statute's aim is to protect the dissenting shareholder); Walter S. Cheesman Realty Co. v. Moore, 770 P.2d 1308 (Colo.App.1988) (involving a dissent to liquidation, noting that discounting for lack of control would be even less appropriate upon liquidation); Ronald v. 4-C's Electronic Packaging, Inc., 168 Cal.App.3d 290, 214 Cal. Rptr. 225 (1985) (involving a valuation of a minority interest where the majority elected to buy out the minority to avoid involuntary dissolution versus a dissent to a merger or other action); Brown v. Allied Corrugated Box Co., 91 Cal.App.3d 477, 154 Cal.Rptr. 170 (1979). See, also, Waite v. Old Tucson Development Co., 22 Ariz.App. 517, 519, 528 P.2d 1276, 1278 (1974) (relying upon statutory language for payment of the fair value of stock `based on its pro rata share of the fair value of the net assets of the corporation'). Still other courts, without specifically addressing a minority discount or a deduction for marketability, have held that the dissenting shareholder's shares are to be valued as a proportion of the entire corporation's value without giving any consideration to diminished marketability. Sarrouf v. New England Patriots Football Club, Inc., 397 Mass. 542, 492 N.E.2d 1122 (1986); BNE Massachusetts Corp. v. Sims, 32 Mass.App. 190, 588 N.E.2d 14 (1992); Dreiseszun v. FLM Industries, Inc., 577 S.W.2d 902 (Mo.App.1979). However, there is authority for allowing either a marketability deduction, a minority discount, or both. At least three courts have allowed a deduction for marketability. Columbia Management Co. v. Wyss, 94 Or.App. 195, 765 P.2d 207 (1988), review denied 307 Or. 571, 771 P.2d 1021 (1989) (allowing a marketability discount but holding a minority discount is not appropriate); Mtr. Blake v. Blake Agency, 107 A.D.2d 139, 486 N.Y.S.2d 341 (1985), appeal denied 65 N.Y.2d 609, 494 N.Y.S.2d 1028, 484 N.E.2d 671 (allowing a discount for marketability but not a minority discount); Ford v. Courier-Journal Job Printing Co., 639 S.W.2d 553 (Ky.App. 1982). At least one decision allowed a minority discount without discussion of a marketability deduction. Hernando Bank v. Huff, 609 F.Supp. 1124 (N.D.Miss.1985), aff'd 796 F.2d 803 (5th Cir.1986) (construing a Mississippi dissenter's statute). And several jurisdictions have held that both a marketability discount and a minority discount may be made in calculating fair value. Stanton v. Republic Bank, 144 Ill.2d 472, 163 Ill.Dec. 524, 581 N.E.2d 678 (1991) (resolving a prior apparent split in its courts of appeal, not expressly noted, as evidenced by Institutional Equip. & Interiors v. Hughes, 204 Ill. App.3d 922, 150 Ill.Dec. 132, 562 N.E.2d 662 (1990); Independence Tube Corp. v. Levine, 179 Ill.App.3d 911, 129 Ill.Dec. 162, 535 N.E.2d 927 (1989), appeal denied 127 Ill.2d 617, 136 Ill.Dec. 587, 545 N.E.2d 111; and Hickory Creek Nursery, Inc. v. Johnston, 167 Ill.App.3d 449, 118 Ill.Dec. 168, 521 N.E.2d 236 (1988)); King v. F.T.J., Inc., 765 S.W.2d 301 (Mo.App.1988); Atlantic States Construction v. Beavers, 169 Ga.App. 584, 589, 314 S.E.2d 245, 251 (1984) (emphasizing that the trier of fact must apply any `minority interest' factor with caution. In many cases, other factors, such as market value, may wholly or partially account for any relevant `minority discount'); Moore v. New Ammest, Inc., 6 Kan.App.2d 461, 630 P.2d 167 (1981); Perlman v. Permonite Mfg. Co., 568 F.Supp. 222 (N.D.Ind.1983), aff'd 734 F.2d 1283 (7th Cir.1984) (applying Indiana law). We are persuaded, however, that in the event of a merger, neither a minority discount nor a deduction for lack of marketability is to be given in determining the fair value of a dissenter's shares under the provisions of § 21-2080. Only by not doing so can the statutory policy of fully compensating a dissenting minority shareholder be achieved. Accordingly, the trial court erred in setting the fair value of Cutchall's shares at $24,640 rather than at $32,000.