Opinion ID: 2375637
Heading Depth: 1
Heading Rank: 2

Heading: The Judicial Determination of Fair Value

Text: Nowhere does the Maine Business Corporation Act define the fair value which it in section 909(1) directs that dissenting shareholders should be paid. [4] Although the phrase fair value is also used in the comparable dissenting shareholder provision of the Model Business Corporations Act (section 81), the official comment to the Model Act sheds little light on the intended meaning of those words. That comment simply states: The cases indicate that there is no definite rule for determining `fair value' but that the proper result in each case will depend upon the particular circumstances of the corporation involved. Among other jurisdictions with valuation statutes similar to our own, [5] we do find, however, a consensus that the component elements to be relied upon in determining fair value are stock market price, investment value, and net asset value. [6] While it is generally agreed that the process of stock appraisal involves consideration of all three of those elements of value, the weight to be given to these factors depend[s] upon the circumstances of each individual case. The courts have consistently declined to lay down hard and fast rules . . .. Tabulating Card Co. v. Leidesdorf, 32 Misc.2d 720, 723, 223 N.Y. S.2d 652, 656 (Sup.Ct.1961). In a given case, one element may be particularly unreliable, thus necessitating greater reliance on one or both of the other elements. The weighting of these interdependent elements of fair value is more akin to an artistic composition than to a scientific process. A judicial determination of fair value cannot be computed according to any precise mathematical formula. Flarsheim v. Twenty Five Thirty Two Broadway Corp., supra 432 S.W.2d at 255. [7] If the public stock market functioned as a perfect market, where all actors relied upon complete and accurate information, then courts would need to look only to the stock market price, and the valuation of dissenters' shares would be greatly simplified. Unfortunately, a perfect market is only a theoretical and abstract ideal, and in the real world the stock market is to varying degrees less than a perfect indicator of the value of a corporate concern. Thus, consideration of the net asset value and of the investment value of a corporation provides a check against myopic reliance on the sole criterion of stock market price. All three components of fair value may not influence the result in every valuation proceeding, yet all three should be considered. Compelling the consideration of all of them, including those which may turn out to be unreliable in a particular case, has the salutary effect of assuring more complete justification . . . of the conclusion. . . reach[ed]. Endicott Johnson Corp. v. Bade, 37 N.Y.2d 585, 588, 376 N.Y.S.2d 103, 338 N.E.2d 614, 616 (1975). In the case at bar all three elements of fair value suffered from particular weaknesses that cautioned against excessive reliance on any one factor. Although the appropriate valuation date was February 17, 1976, the last available stock market price unaffected by the announcement of the intended Nestle/Libby merger was the market price of nearly nine months earlier; i. e., that of May 23, 1975. The investment value factor also had weaknesses as a measure of fair value, given the highly subjective nature of the determination of a capitalization ratio and the erratic history of Libby earnings. The use of book value as the surrogate for net asset value made reliance on the net asset value element especially suspect. The appraiser, faced with these shortcomings of all three elements, was required to make the best of what he had to do with. Relying on the expert testimony available to him, it was the appraiser's job to assess the relative deficiencies of the three elements and to arrive at a weighting scheme which, in his judgment, would best reflect the fair value of the dissenters' shares. He determined that stock market price and investment value as indicators of fair value were roughly equal in reliability and significance, and that roughly half as much emphasis ought to be placed upon net asset value. Accordingly, the appraiser assigned weights of 40%, 40%, and 20% to stock market price, investment value, and net asset value, respectively. As we shall explain, we believe that in arriving at his recommendation the appraiser exercised sound judgment, well supported by the factual record and by relevant principles of law. Both the appraiser and the Superior Court considered all three elements of fair value and engaged in the process of giving relative weights to them. However, the Superior Court departed from the weighting recommendations of the appraiser, [8] because of the court's belief that the fact the minority shareholders were unwilling sellers, forced to part with their shares in the course of the statutory merger, should be given special consideration. In weighting the three components the Superior Court justice view[ed] the transaction in terms of the respective losses and benefits to the parties to the actual transaction. Fixing fair value at a price which would satisfy a willing buyer and a willing seller would not, according to the Superior Court justice, adequately compensate the shareholder for his loss of freedom to deal with his property as he sees fit. Thus the justice below rejected the appraiser's recommendation of a 40% weighting for stock market price and instead assigned only a weight of 10% to that element. In addition, the Superior Court justice asserted that the unsophisticated shareholder carried a mental image of his shareholder rights that focused on his right to part ownership of the assets of the corporation. To compensate the dissenting shareholders for the deprivation of this cherished right of part ownership of corporate assets, the Superior Court ruled that the appraiser erred in assigning net asset value a weight of only 20%. The justice substituted a weighting of 45% for net asset value. In thus attributing significance to impairment of the dissenting shareholder's economic freedom to dispose of his property when and as he wished and to the shareholder's mental image of his undivided ownership rights in corporate assets, the Superior Court justice committed an error of law that requires the judgment below to be set aside as far as the weighting of the elements of fair value is concerned. The statutory right of a dissenting shareholder to be paid the fair value of his shares is not designed to compensate the shareholder for psychological injuries, or to take into account the particular mental image of ownership rights possessed by the shareholder. In the same way, compensation for real estate taken under the power of eminent domain disregards whatever emotional or psychological attachments the owner may have to his property, as well as any nontransferable values arising from [the owner's] unique need for [the] property.. . . United States v. 564.54 Acres of Land, 441 U.S. 506, 516, 99 S.Ct. 1854, 1860, 60 L.Ed.2d 435 (1979), quoting Kimball Laundry Co. v. United States, 338 U.S. 1, 5, 69 S.Ct. 1434, 93 L.Ed. 1765 (1949). Furthermore, fair value is not measured by any unique benefits that will accrue to the acquiring corporation, any more than the compensable value of property taken by eminent domain is measured by its special value to the condemnor. Cf., e. g., Gilmore v. Central Maine Power Co., 127 Me. 522, 145 A. 137 (1929). The fair value of shares is to be determined on the basis of what a reasonable and objective observer would consider to be a price that reflects the intrinsic value of the right of stock ownership, without regard to any subjective mental processes of the dissenting shareholders or any special benefits to be derived by the acquiring corporation. The Superior Court's view[ing] the [merger] in terms of the respective losses and benefits to the parties to the actual transaction does violence to the statutory mandate, 13-A M.R.S.A. § 909(1), that the value of the dissenters' shares shall be valued without relation to the proposed merger. We cannot read any other way the statutory provision that the fair value of the shares shall be determined as of the day before the merger vote was taken and furthermore shall exclud[e] any appreciation or depreciation of shares in anticipation of such corporate action. Id. The dissenting shareholders are entitled to receive the full fair value of their shares, but that value must be determined independently of the merger transaction that gave the dissenting shareholders the statutory right to be bought out and their corporation the statutory duty to pay them off. The appraisal proceeding is not at all concerned with the losses to the particular dissenting shareholders or with the benefits derived by the particular acquiring corporation in the merger, except as those losses and benefits would be reflected in the price that would be bargained out in a completely free market between any willing buyer and any willing seller in absence of the merger. Although we must set aside the Superior Court's judgment based as it was upon an erroneous view of the meaning of fair value, we do not find it necessary to remand this case for further proceedings in the Superior Court. Where, as here, the trial court's decision is rendered entirely upon the basis of written evidence, an appellate court can read and evaluate the record as well as can the trial justice. Under the circumstances of this appeal, final resolution of the dispute by the Law Court, without a remand, serves the interests of all parties by providing a speedy determination of the issues in controversy and makes the most efficient use of our total judicial resources. See Beaulieu v. Francis Bernard, Inc., Me., 393 A.2d 163, 166 (1978); Northeast Investment Co. v. Leisure Living Communities, Inc., Me., 351 A.2d 845, 854 (1976); Cunningham v. Cunningham, Me., 314 A.2d 834, 839 (1974); Thacher Hotel, Inc. v. Economos, 160 Me. 22, 23, 197 A.2d 59, 60 (1964). To remand to the Superior Court with directions that the appraiser's recommendation be reexamined in light of the principles here declared would later invite another appeal to the Law Court by one or both of the parties, and thus remand would not be the most efficient way for this court to carry out its function of correcting error in this case between these parties. Furthermore, under the circumstances of this case, the Law Court can best perform its lawgiving responsibility for the guidance of counsel, appraisers, and Superior Court justices in future dissenting shareholder cases, by actually applying to this written record the proper rules as we see them. We proceed, then, to place ourselves in the position of the Superior Court, and to make for it a determination of the fair value of the dissenting shareholders' stock. In setting the fair value of the Libby stock, the recommendation of the appraiser, elaborated by his reasoned report, serves the court both as a starting point and as a useful guide. The appraiser lived with this case for several months and at the four-day hearing held to receive financial data and expert opinion he served as the eyes and ears of the court. Of course, the court is not bound by either the findings of fact or the conclusions of law made by the appraiser. [9] The statute provides that [t]he court shall . . . fix the fair value of the shares. (Emphasis added) On the other hand, the statute authorizes the appointment of an appraiser to receive evidence and [to] recommend a decision on the question of fair value. (Emphasis added) Had the legislature intended to limit the role of the appraiser to that of merely receiving evidence, it would not have also empowered the appraiser to recommend a decision on the ultimate question of value. [10] While the final determination of fair value remains always the responsibility of the Superior Court, the question the court addresses is, Should the appraiser's recommend[ation of] a decision on the question of fair value be accepted? In seeking an answer to that question, the court carefully examines the appraiser's analysis of the record and the applicable law by which he arrived at his recommended decision. In the case at bar, the question before the Superior Courtand now before this court in lieu of remandis, Should the court accept the appraiser's recommendation that it decide that the fair value of Libby stock on the pertinent valuation date was $6.00 per share? Specifically, the question for the court is whether the appraiser, on this record, was correct (i) in fixing the dollar amount of the three individual components of fair value, namely, stock market price, investment value, and net asset value, and (ii) in ascribing weight to those components of 40%, 40%, and 20%, respectively. We now turn to a consideration whether the appraiser correctly weighed the constituent elements of fair value. We will return later, in connection with consideration of the dissenting shareholders' cross-appeal, to the appraiser's determination of the individual elements.