Opinion ID: 2763968
Heading Depth: 3
Heading Rank: 1

Heading: Discount for Transaction Costs

Text: ¶40 In his initial valuation, Mr. Smith reduced the gross value of URI‘s St. George real estate by 5.5 percent for anticipated broker commissions and closing costs. The district court rejected this discount for two reasons. First, it concluded that it was an impermissible marketability discount under our decision in Hogle. And second, it concluded the discount was improper because it was ―speculative.‖ The district court erred in both respects. 58 Bingham Consolidation Co. v. Groesbeck, 2004 UT App 434, ¶ 39, 105 P.3d 365 (quoting Paskill Corp. v. Alcoma Corp., 747 A.2d 549, 556 (Del. 2000)); see Weinberger v. UOP, Inc., 457 A.2d 701, 712–13 (Del. 1983) (explaining that the Delaware Block Method does not ―exclusively control‖ the determination of fair value but that courts should consider ―any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court‖); F. HODGE O‘NEAL & ROBERT B. THOMPSON, 1 OPPRESSION OF MINORITY SHAREHOLDERS AND LLC MEMBERS § 5:32 (2014) (describing the Weinberger approach of utilizing ―techniques or methods which are generally considered acceptable in the financial community‖ as the ―modern method [that] has generally supplanted a more formalistic approach of an earlier time that focused on market value, asset value, and earnings value or some combination of those factors‖). 18 Cite as: 2014 UT 59 Opinion of the Court ¶41 As to the court‘s first reason for rejecting the transaction costs discount, URI argues that the court misapplied Hogle because the marketability discount we disapproved of there was one that applied at the shareholder level, whereas here the discount was applied at the asset level. We agree. ¶42 Described generally, a shareholder-level discount ―involve[s] varying ‗fair value‘ based on the characteristics of the shares in the hands of particular shareholders.‖59 By contrast, an asset-level discount reduces the value of a specific asset because of that asset‘s particular characteristics.60 In Hogle, we followed the majority rule in holding that ―discounts at the shareholder level are inherently unfair to the minority shareholder who did not pick the timing of the transaction and is not in the position of a willing seller.‖61 We explained that [t]he American Law Institute explicitly confirms the interpretation of fair value as the proportionate share 59ROBERT A. RABBAT, Application of Share-Price Discounts and Their Role in Dictating Corporate Behavior: Encouraging Elected Buy-Outs Through Discount Application, 43 WILLAMETTE L. REV. 107, 141 (2007). 60 The Dissenters argue that shareholder-level and asset-level discounts have identical effects and that distinguishing between the two ―allow[s] an end-run around the prohibition against minority and marketability discounts.‖ To support this argument, they cite a law review article that suggests that distinguishing shareholder-level discounts from corporate-level discounts is ―tenuous at best.‖ Id. But the Dissenters overlook the fact that the article discusses corporatelevel discounts not asset-level discounts. Nowhere does the article suggest that it is improper to distinguish asset-level discounts from shareholder-level discounts. As the author notes, distinguishing corporate-level discounts from shareholder-level discounts is tenuous because ―[a]t both levels, the discounts account for the same economic realities; the difference is only in the timing of application.‖ Id. at 143. This concern is inapplicable when distinguishing asset-level discounts from shareholder-level discounts because the two do not account for the same economic realities. For instance, here the discount for transaction costs associated with selling URI‘s real estate has nothing to do with the fact that the Dissenters, because of their minority position, lacked the ability to control URI. 61 2002 UT 121, ¶ 45 (internal quotation marks omitted). 19 URI v. MTC Opinion of the Court of the value of 100% of the equity, by entitling a dissenting shareholder to a proportionate interest in the corporation, without any discount for minority status or, absent extraordinary circumstances, lack of marketability.62 We did not address asset-level marketability discounts in our decision. But the district court extended Hogle to asset-level discounts, reasoning that the ―decision did not carve out any exceptions for asset-level discounts‖ and ―Hogle‘s prohibition . . . would be largely meaningless if courts were to allow a company engaging in a stock consolidation that results in forcing out its minority shareholders to discount the value of those shares through ‗asset‘ level discounts.‖ ¶43 This was an unwarranted extension of our decision in Hogle. The marketability discount we disapproved of in that case was one that specifically affected the shares held by dissenting shareholders. Because dissenting shareholders ―are unwilling sellers with no bargaining power,‖ it would be unfair to penalize them for the lack of marketability of their shares or their lack of control.63 ¶44 But these concerns are not at issue where a company discounts the value of an asset that it intends to sell for reasonable transaction costs. URI‘s undisputed business strategy at the time of the valuation date was holding and selling its real estate. All of the appraisers recognized that it was reasonably foreseeable that URI would incur expenses in selling the real estate. These expenses include costs associated with marketing the property, broker commissions, and closing costs. And as Mr. Smith noted in his initial valuation, ―we have calculated appropriate discounts to apply to the[] [real estate assets] due to the fact that they would have an equal impact on both [parties].‖ Because the transaction costs here would have equally affected both the majority and minority shareholders, the district court erred by equating these transaction costs with the shareholder-level marketability discounts we prohibited in Hogle. ¶45 The district court‘s second rationale for rejecting the discount for transaction costs is also flawed. The court rejected use of the discount on the alternative basis that the costs were ―speculative.‖ To reach this conclusion, the court relied on three 62 Id. ¶ 45 (alteration in original) (internal quotation marks omitted). 63 Id. (internal quotation marks omitted). 20 Cite as: 2014 UT 59 Opinion of the Court cases from other jurisdictions.64 These cases hold that in determining fair value it is improper for a court to consider costs incurred after the event triggering dissenters‘ rights. For instance, in Hansen v. 75 Ranch Co., the Montana Supreme Court stated that ―if costs are incurred after effectuation of the [triggering event], those costs should not be assessed against the dissenting shareholders.‖65 But these cases are inapposite here because in each of the cases the company had no intent to sell its assets before the triggering event.66 In contrast, URI‘s undisputed business strategy of selling its real estate assets had been in place for approximately four years before the consummation of the share-consolidation transaction. And Mr. Brown testified that the company planned to sell its real estate over the course of ten years. Given this business strategy, it was appropriate for the appraisers to consider reasonable transaction costs in valuing URI‘s real estate. ¶46 In sum, the transaction costs discount applied by Mr. Smith in his initial appraisal was not an impermissible marketability discount because it did not penalize the Dissenters for their lack of control of the company. Moreover, in concluding that the discount was ―speculative,‖ the district court applied inapplicable caselaw from other jurisdictions and overlooked the fact that URI‘s undisputed business strategy was to sell its real estate. Accordingly, we conclude that the court erred in rejecting the discount as a matter of law.