Opinion ID: 77883
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: Cox is a privately held Delaware corporation with its principal place of business in Atlanta, Georgia. [1] It owns seventeen daily newspapers, including The Atlanta-Journal Constitution, Austin American-Statesman, Dayton Daily News, and Palm Beach Post. NJC is a closely held Florida corporation with its principal place of business in Daytona Beach, Florida. NJC publishes the Daytona Beach News-Journal ( News-Journal ), a daily newspaper circulated primarily in Volusia and Flagler Counties. NJC has one wholly owned subsidiary, Volusia Pennysaver, Inc. (Pennysaver), which publishes six local shopping guides. NJC was organized in 1925 through the consolidation of two small Daytona Beach newspapers to form the News-Journal. NJC has one class of common stock of which 4,000 shares are outstanding. Members of the Davidson family purchased a controlling interest in NJC in 1927 and PMV, Inc., a closely held corporation controlled by the Estate of Herbert M. (Tippen) Davidson, Jr., owns those 2,100, or 52.5%, of NJC's shares. Cox acquired the remainder of the NJC stock in 1969 and has maintained its 47.5% interest since that time. When the case came before the district court, NJC's directors were Tippen Davidson, Marc Davidson, Julia Davidson Truilo, Robert Truilo, Georgia Kaney, Jonathan Kaney, Jr., and David Kendall. Tippen Davidson also served as the president and CEO of NJC until his death in January 2007. Tippen Davidson's grandfather, Julius, served as the News-Journal 's publisher from 1927 until 1962, when he relinquished control of the paper to his son Herbert M. Davidson. Herbert published the paper until his death in 1985. Under Julius and Herbert's leadership, NJC also owned and operated a radio station, WNDB-FM, from 1944 to 1972. Although Tippen Davidson enjoyed a brief career as a professional musician, he eventually returned to Daytona Beach to work as a reporter and city editor for the News-Journal. Upon his father's death, he became the paper's general manager and publisher. Tippen's wife, Josephine, has also worked as a reporter and editor at the News-Journal. Their two children, Marc Davidson and Julia Davidson Truilo, are currently members of the News-Journal staff and the NJC board of directors. Julia's husband, Robert Truilo, serves on the board of directors and as the News-Journal 's business manager. In his capacity as CEO of NJC, Tippen Davidson continued to pursue his interest in music and the performing arts. As early as 1966, he began to help create several non-profit organizations, including the Florida International Festival (FIF), Central Florida Cultural Endeavors (CFCE), Seaside Music Theater (SMT), and Lively Arts Center, Inc. (LACI) (collectively Cultural Entities). SMT, in particular, has consistently depended on funding from NJC. After NJC pledged $1.8 million to SMT in 1993, NJC management developed a spin-off strategy according to which contributions to SMT would go down by $180,000 annually until they totaled no more than $500,000 per year. The strategy was never effectively implemented, and, in fact, in 1999, NJC's total contribution to SMT came to $1.4 million. By the following year, this figure had risen to $1.8 million  triple what it had been eight years before. In 1996, NJC's directors organized LACI as a part of the SMT spin-off strategy. Tippen, Georgia Kaney, Marc Davidson, and Julia Truilo served as its original board of directors. Their goal was to build and operate an independent and upscale performing arts center for SMT, thereby enhancing the stature of SMT and increasing its revenue. The projected cost for the center was $29 million. NJC provided $13 million of this amount as part of a naming rights agreement. [2] In the beginning, NJC treated its contributions to the Cultural Entities as charitable tax deductions. Over time, however, the donations began to exceed the maximum allowed for charitable deductions. Accordingly, in 1993, NJC began to classify its contributions as business expenses for the purpose of corporate promotion. The district court found these cultural expenditures to have been waste. NJC does not challenge that finding for the purposes of this appeal. Cox first learned of the $13 million naming rights agreement on 10 March 2004. Unsatisfied with the explanations for this expenditure provided by NJC, Cox filed suit on 11 May 2004, alleging various acts of fraud, waste, and mismanagement. NJC then timely elected to purchase Cox's shares at the `fair value' of the shares pursuant to Florida law. Fla. Stat. § 607.1436(1). [3] Because the parties were unable to come to any agreement, the district court held a bench trial to determine the fair value of Cox's shares. Id. At trial, both sides presented expert testimony. Cox's expert, Owen D. Van Essen, is a partner in Dirks, Van Essen, & Murray, a firm specializing in the valuation of newspapers. Van Essen's firm has valued in excess of ten billion dollars worth of transactions in its twenty-five year history and more than fifty percent of the daily newspaper transactions in the United States over the past decade. Prior to joining the firm, Van Essen worked exclusively in the newspaper business, and was, at one point, general manager/business manager and part owner of a daily newspaper. On the basis of this background, the district court concluded that Van Essen was plainly qualified to provide testimony regarding the fair value of Cox's shares. R16-251 at 15. Van Essen's starting point in valuing Cox's shares was the fair market value of the News-Journal as a going concern. [4] To determine fair market value, Van Essen used a comparable sales analysis, which measures the market value of a newspaper primarily in relation to the purchase prices of comparable newspapers. [5] Van Essen began his analysis by comparing NJC's Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) margin to the average EBITDA or operating margin of eleven publicly traded newspaper companies. In comparison to NJC's operating margin of 9.3%, the eleven publicly traded newspaper companies had an average operating margin of 28.3%. Relying on this data, Van Essen normalized NJC's operating margin to 28.3%. R27 at 396-97, 399. From a database of over 1000 newspaper transactions, Van Essen selected seven transactions involving newspaper companies comparable to the News-Journal. Id. at 400; R7-141, Exh. 1 at 8. Van Essen selected the comparables based on 50 [6] different measures, including growth, circulation, financial metrics, and market characteristics. He then calculated the average purchase price-to-revenue and purchase price-to-EBITDA ratios of the comparable companies. After excluding two due to abnormally high ratios, Van Essen determined that the remaining comparables had an average purchase price-to-revenue ratio of 4.1:1 and an average purchase price-to-EBITDA ratio of 14.4:1. R27 at 407. In a slight departure from his standard approach, Van Essen then adjusted his multipliers downward in order to account for NJC's higher than average capital expenditures and a possible reduction in NJC's growth rate. Id. Thus, Van Essen determined that the News-Journal 's fair market value as of 10 May 2004 was $270 million. Id. at 408. Under a similar analysis, Van Essen further determined that the fair market value of Pennysaver was $36 million. Id. at 412. Accordingly, Van Essen concluded that NJC's fair market value was $306 million and that Cox's 47.5% share of that total  and thus the relevant fair value  came to $145,350,000. Id. As a check on the market approach, Van Essen also conducted a discounted cash-flow analysis of NJC. Using a projected growth rate of 6%, as in his view was appropriate to NJC's circumstances, and a normalized operating margin of 28.3%, Van Essen concluded that NJC's fair value under the discounted cash-flow analysis was $289 million. [7] R7-141, Exh. 1 at 17. NJC's expert, Robert E. Duffy is a certified public accountant and partner in the firm of Grant Thornton. He is also accredited as a senior appraiser by the American Society of Appraisers. Unlike Van Essen, however, Duffy has had little experience in valuing newspapers. His specialty is in gift taxation and complex dissolutions of marriage. Complex dissolutions of marriage account for approximately 90% of Duffy's practice. Based on this background, the district court also found Duffy to be qualified as an expert, though appreciably less so than Van Essen. R16-251 at 17-18. In assessing the value of NJC, Duffy relied on discounted cash-flow analysis  estimating the value of a company according to the present value of its anticipated future cash flow. The discounted cash-flow model has four components: (1) estimated earning capacity; (2) cash flow adjustments to the earning capacity; (3) a discount rate to discount future cash flow to present value; and (4) a long-term growth rate to reflect growth in earnings and cash flow beyond the end of the forecast period. Like Van Essen, Duffy operated from the premise that NJC should be valued as a going concern. Duffy's definition of going concern was influenced by Jonathan Kaney's suggestion that valuing a company as a going concern rests on the assumption that a company will operate in the future exactly as it has in the past. Duffy further assumed that, in a hypothetical sale of NJC, (1) the current controlling shareholder group and current business model [of NJC would] remain intact,; (2) purchase of the entire company by a strategic buyer should not be considered; and (3) no material change to [NJC's] operations, capital structure, business model or profitability would have resulted from the sale. R31 at 1171. Duffy began his analysis by estimating the future projected cash flow of NJC from 9 May 2004 onward. He then predicted, on the basis of conversations with NJC management, that NJC would operate for two-and-a-half years at its presently low EBITDA margin of roughly 12% but would thereafter operate at a higher EBITDA margin comparable to the margins the company enjoyed during the five-year period from 1998 through 2002. Id. at 1175. After accounting for an anticipated reduction in NJC's corporate contributions to $500,000 per year, Duffy determined that NJC would eventually operate at an 18.3% EBITDA margin. Id. at 1178. Based on these projections, Duffy concluded that NJC's cash flow in 2012 would be approximately $8.2 million. Id. at 1189-90. Using the Gordon Growth Model and applying a capitalization rate of 10% (subtracting a projected long-term growth rate of 4% from a discount rate of 10%), Duffy projected a future cash flow of $82 million. Id. at 1190. After discounting this amount to a present value of $61,984,000, Duffy added back the present value of the initial discrete two and a half year cash flows and concluded that the aggregate value of NJC was $72.9 million. Id. An additional $3,269,000 to account for a tax shield related to the depreciation of NJC's naming rights and another $1,150,000 for a tax shield related to building depreciation resulted in an adjusted aggregate value of $77,386,000. See id. at 1180, 1191. Based on studies of restricted stock, Duffy then applied a 20% lack of marketability discount to NJC's value, yielding a final estimated value of $61,909,000. Id. at 1198. In Duffy's opinion, the fair value of Cox's 47.5% as of 10 May 2004 was $29,410,000. Id. The district court, crediting Van Essen's testimony, adopted the fair market value/comparable sales analysis methodology for determining the fair value of Cox's shares. The court reasoned that this method is generally accepted in the financial community and protects minority shareholders. The court rejected Duffy's methodology on the ground that it would reward wrongdoing by permitting NJC to purchase Cox's shares at a bargain price. More specifically, the court reasoned that accepting Duffy's definition of a going concern would, in essence, create an incentive for those with control over corporations to violate fiduciary duties, waste corporate assets, and drive down the value of minority shares. R16-251 at 24. Instead, the court defined a going concern as a corporation [that] will be managed in a reasonably prudent manner going forward, regardless of how poorly it may have been run in the past. Id. Concluding that it would have been more appropriate for Van Essen to normalize NJC's operating margin to that of the average of similarly situated papers identified in his comparables (24.8%) rather than to that of eleven publicly traded newspaper companies (28.3%), the court recalculated Van Essen's numbers. Accordingly, the court found a fair market value as of 10 May 2004 for the News-Journal of $236 million, which combined with the $36 million fair market value of Pennysaver, yielded a total of $272 million. Finally, the court concluded that the fair value of Cox's 47.5% interest in NJC was $129,200,000. Id. at 33. On appeal, NJC challenges the district court's definition of going concern, its use of fair market value as part of its calculation of fair value, and its normalization of the News Journal 's operating margin. In its cross-appeal, Cox argues that the district court should have further adjusted its fair value determination to account for mismanagement and corporate waste, and that the court should have awarded Cox prejudgment interest for the period between the valuation date and the entry of judgment.