Opinion ID: 2763968
Heading Depth: 2
Heading Rank: 1

Heading: Mr. Smith’s Appraisals

Text: ¶14 Mr. Smith‘s initial appraisal estimated the value of the Dissenters‘ shares using an asset-value approach.11 That approach required him to separately appraise the value of each of URI‘s assets. In determining the value of URI‘s assets, Mr. Smith discounted the value of URI‘s interest in HHA, based on URI‘s status as a minority shareholder and the projected transaction costs in selling that interest.12 He then deducted from the discounted asset value both booked and projected liabilities. These included deductions for (1) anticipated trapped-in capital gains taxes and transaction costs related to the sale of the St. George real estate,13 and (2) income taxes 11 We note that each of Mr. Smith‘s appraisals state that he considered both the income value approach and market value approach, in addition to an asset value approach. But Mr. Smith apparently calculated neither an income value nor market value for URI as a whole. Rather, he used an income approach only to value URI‘s oil and gas royalty interests. Moreover, he noted that ―the Market Approach was not used [by him] in estimating the value of URI as a whole,‖ but that a market approach was used by Fortis in valuing URI‘s real estate. 12 Mr. Smith used the Fortis real estate appraisal to value HHA‘s land holdings, which he used to compute the value of HHA as a company. He then calculated the asset value of URI‘s interest in HHA. URI owned, on the valuation date, 49.58 percent of HHA. Because URI held only a minority stake in HHA and because there would be transaction costs in selling that interest, Mr. Smith applied a fifteen percent discount to URI‘s interest. This reduced the value of URI‘s interest in HHA by $150,000. 13 Mr. Smith first reduced the gross value of the St. George real estate by 5.5 percent for transaction costs associated with selling the land, including anticipated broker commissions and closing costs. He then reduced the adjusted value by 37.3 percent of the difference between it and the land‘s book value (the difference being the net appreciation of the property). In sum, these calculations reduced URI‘s net asset value by $5,818,500. 6 Cite as: 2014 UT 59 Opinion of the Court on URI‘s oil and gas royalty interests.14 In the end, Mr. Smith derived an asset value for URI of $17,769,073, or $7,571 per share.15 ¶15 Both parties contested Mr. Smith‘s initial valuation. URI objected to it as being ―incomplete, insofar as it did not offer an Investment Value or Market Value for URI.‖ The district court overruled URI‘s objections. The Dissenters challenged, as a matter of law, Mr. Smith‘s use of certain asset discounts and projected liabilities deductions. Specifically, they challenged Mr. Smith‘s application of a discount to URI‘s interest in HHA on the basis that any marketability discount was contrary to Utah law. And they challenged Mr. Smith‘s use of tax and transaction costs deductions on the basis that any future land sales, and the accompanying taxes and costs, were ―speculative‖ and that Utah law prohibited the district court from considering them. The district court sustained the Dissenters‘ objections and ordered Mr. Smith to produce a new appraisal without any marketability discounts or adjustments for built-in capital gains taxes. The district court‘s disallowance of these discounts and deductions is the first issue URI has raised on appeal. ¶16 Mr. Smith stated that he believed his initial appraisal represented the fair value of URI, but he agreed to amend his report, indicating that he and his fellow appraisers were ―not attorneys and [were] not qualified to interpret Utah law.‖ His amended valuation resulted in the following differences: 14 Mr. Smith employed an income capitalization method to appraise the oil and gas royalty interests. His valuation describes this approach as ―‗a method within the income approach whereby economic benefits for a representative single period are converted to value through division by a capitalization rate.‘‖ This approach accounts for the costs necessary to generate income, including income taxes. Ultimately, accounting for income taxes reduced the capitalized value of the oil and gas royalties by $1,428,000. 15 Mr. Smith‘s asset approach valuation was nearly $2,000 per share more than Mr. Wright‘s 2004 valuation. This difference is largely attributable to the fact that Mr. Smith used the Fortis real estate appraisal rather than the Porter real estate appraisal used by Mr. Wright. As noted above, supra ¶ 7 n.7, the district court chose to rely on the Fortis appraisal and URI does not challenge that finding of fact. 7 URI v. MTC Opinion of the Court Asset Initial Valuation Amended Valuation Difference St. George Real Estate $9,835,000 $15,653,500 $5,818,500 Mineral Royalties $2,400,000 $3,828,000 $1,428,000 HHA $1,351,000 $1,501,000 $150,000 Other Net Assets $4,183,073 $4,183,073 - Total $17,769,073 $25,165,573 $7,396,500 Total per Share $7,571 $10,722 $3,151 ¶17 Mr. Smith later repudiated his own amended valuation. He stated that the amended valuation conflicted with generally accepted appraisal techniques and was ―not consistent with how [he] normally value[s] businesses.‖ He testified that he had never valued an asset without considering both the costs of selling the asset and associated taxes. He also noted that as to the oil and gas royalty interests specifically, the amended values were mathematically and factually erroneous, but were calculated to satisfy the district court‘s requirements. Moreover, Mr. Smith stated that he thought his first appraisal accurately valued URI‘s assets and that it was his view that no rational buyer would have paid more than $25,000,000 for URI on the valuation date. Despite Mr. Smith‘s protestations, the district court adopted his amended valuation in full.