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

Heading: Stock Market Price

Text: Where the evidence reveals the existence of a free and open market, characterized by a substantial volume of transactions that makes the market a fair reflection of the judgment of the investing public, a court may justifiably assign a greater weight to stock market price than to net asset value or investment value. See, e. g., Leighton v. American Tel. & Tel. Co., 397 F.Supp. 133 (S.D.N.Y.1975); Southdown, Inc. v. McGinnes, 89 Nev. 184, 510 P.2d 636 (1973); Application of Marcus, 273 App.Div. 725, 79 N.Y.S.2d 76 (1948), aff'd 303 N.Y. 711, 103 N.E.2d 338 (1951). [P]rices, in an established market in normal times, of a widely held stock bought for investment by well informed persons [are] entitled to `considerable weight'. Martignette v. Sagamore Mfg. Co., 340 Mass. 136, 139, 163 N.E.2d 9, 13 (1959). In the case at bar the appraiser recommended assigning stock market price a weight of 40%. The dissenting shareholders argue that the market for Libby common stock was, in the time period immediately preceding the tender offer, too thin to be a reliable indicator of fair value and, therefore, that the appraiser should have assigned less weight to the stock market price component of fair value. A thin market is characterized by a low volume of public trading. Courts have reduced the weighting assigned to stock market price in cases where evidence of a thin market is present. See, e. g., David J. Greene & Co. v. Dunhill International, 249 A.2d 427 (Del. Ch.1965). In the record of the present case, however, we see no such evidence as to invalidate the appraiser's 40% weighting. On the contrary, the record convincingly demonstrates that the stock market price of May 23, 1975, was determined by a substantial market of willing buyers and willing sellers. Libby was a public company, and ownership of its common stock was widely dispersed. Prior to the tender offer, 3.768 million shares were held by persons other than Nestle, constituting a sizeable public float available for trading. Moreover, those shares were widely distributed among some 15,700 shareholders of record. Trading activity in Libby stock was relatively brisk. The stock was listed on the New York Stock Exchange (NYSE), the Midwest Stock Exchange, and the Pacific Stock Exchange. In the year preceding the tender offer, more than one million Libby shares (excluding shares purchased by Nestle and its affiliates) changed hands. During the first quarter of 1975, Libby's average daily trading volume was 2,700 shares, well in excess of the daily trading volume in other cases where stock market price has been given primary emphasis in the determination of fair value. See, e. g., Application of Marcus, supra, 273 App.Div. at 728, 79 N.Y.S.2d at 78-79 (daily average of 700 shares traded on NYSE); Jones v. Healy, 184 Misc. 923, 936, 55 N.Y.S.2d 349, 360 (Sup.Ct.1945) (about 1,000 shares per day traded on NYSE). The dissenters also contend that Nestle's position as a majority shareholder prior to the date of the tender offer should have induced the appraiser to give less weight to the stock market price component. We recognize that an acquiring parent corporation which occupies the position of a majority shareholder may be able to control the timing of the decision to merge based on the parent's anticipation of a substantial increase in the subsidiary's earnings. A majority shareholder may have access to information affecting future prospects of the subsidiary corporation that is not available to the general public, and that is not yet reflected in the market price of the subsidiary's stock . . .. Thus the acquiring corporation may be in a position to induce appraisal at a time when the outsiders seeking the appraisal have little or no capacity to ascertain . . . the likelihood that the enterprise is currently worth more than its past record suggests. Brudney & Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv.L. Rev. 297, 305-06 (1974). See Universal City Studios v. Francis I. duPont & Co., 312 A.2d 344 (Del.Ch.1973), aff'd 334 A.2d 216 (1975); Endicott Johnson Corp. v. Bade, 37 N.Y.2d 585, 376 N.Y.S.2d 103, 338 N.E.2d 614 (1975). Nestle's ownership of 61% of all Libby shares prior to its announcement of its tender offer and impending merger on May 27, 1975, was of course well known to the expert witnesses and the appraiser. We find nothing in this record to justify making a further reduction of the already reduced weight of 40% accorded to stock market price by the appraiser on the basis of expert testimony. In summary, whatever weaknesses inhere in stock market price as an indicator of the fair value of Libby stock, we conclude that the appraiser's recommendation of a weight of 40% for this component reflects careful consideration of all relevant circumstances. He reduced stock market price to a minority position among the component factors, and considering the weaknesses that impair reliability of investment value and net asset value in the case at bar, the appraiser in our judgment was none too high in his assessment of a relative weight of 40% for stock market price. We accept his recommendation.